I generally do not write about international law on here because (1) I have 0 training in it and any knowledge comes from my own independent study; (2) because there is a strong presumption of comity in international common law between nations such that many of the issues that I talk about, especially with finance, wind up applying internationally (with obvious notable exceptions like Venezuela). But I had heard a lot about the 2016 UN Conference on Trade and Development so when my law library received a copy of the corresponding report on investment I thought it might be worth making an unusual departure into this mysterious realm.
What peaked my interest was that the UN Conference on Trade and Development is remarkably different from most UN and international institutions that govern economic policy and regulation (the IMF, World Bank, G20 summit, etc.). It is considered to be about as Left as you can get with such an institution in the present world and countries of the Global South have had some, albeit limited, success in defending their interests there to the chagrin of the more powerful and prosperous nations (for my purposes here I am excluding China and India who now inhabit the awkward position of wanting to utilize their former colonization politically while also wanting to surpass the United States in dominating capitalism and perpetuating their own forms of imperialism, especially in Africa).
I want to focus on the fourth chapter of the report on issues of nationality in determining accountability and applicability of investors and owners. The state, in both its international and national conceptions, is a critical concept to understand for anyone seeking to overthrow capitalism. Since the 1980’s with the fall of the Soviet Union as the only real impediment, the neoliberal politicians of capitalism have sought for their corporations to transcend nationality. The nation-state still holds importance to them: they need its police to defend their institutions, its national citizenship to create an underclass of undocumented migrant labor, and its “democracy” to delude the proletariat into thinking they are responsible for the actions of the elite. This year has been full of speculation that this trend is drawing to an end by massive populist backlash, most notably with Brexit and the campaign of Donald Trump.
But this is nothing but an illusion: the popular discontent is real, but the Tories are drafting new trade agreements right now with the EU and others that may even have worst terms (while the populist cheerleaders have jumped the ship) than before and Donald Trump’s employment of undocumented labor and international business ventures make his claims about trade also ring hollow. Afraid of a proletariat more and more conscious of capitalism’s failure and the need to move beyond, the right wing has constructed a myth that the only option is to retreat to an earlier stage of capitalism. As Lenin noted, borders and nations may be redrawn, but the partition of the world is complete, and capitalism has no incentive to dis-accumulate the consequent wealth of globalization.
And while the Western politicos live out some fantasy of returning the bloody nationalism of the early 20th century, the Global South is stuck with handling the consequences of international bodies increasingly controlled by corporations. UNCTAD found that multinational enterprises (MNEs) have continued to grow as the global value chains of production have become more fragmented. For the top 100 MNEs the share of their assets in foreign countries has grown from 41% to 62% in the past decade, sales from 48% to 65%, and employment from 48% to 58%. It makes sense: as more and more people around the world become dependent on something like a smart phone which in turn must be manufactured from precious minerals extracted from a number of different locations. As is always the case, the most common means of making a profit is by undercutting the cost of labor, and MNEs are especially equipped to quickly switch contractors and bases of operation as needed by, ironically, the very migration patterns their crises and wars cause.
UNCTAD states that this development has resulted in “deeper” corporate structures, dispersed shareholdings of affiliates, cross-shareholdings, and shared ownerships. Western media mostly focuses on these in instances of tax havens, reflecting how it can only be compelled to care when it hurts the imperialist nations. There is little focus on how this development has undermined the ability of countries in the Global South to hold MNEs accountable for their wrongful conduct and allowed subversion of national rules on finance and investment, and international rules which are supposed to help nations in the Global South develop their economies. The most problematic of the MNEs when it comes to blurring nationality are cross-border ownership links between direct owner and ultimate owner which make up 41% of MNE foreign affiliates and 60% of those for the largest MNEs. There is an average of 2.5 countries in their ownership chains.
This has led, not too suprisingly, to the predominant ultimate beneficial owners in the top 100 MNEs to be 52% financial institutions only and an additional 6% of mixed ownership that includes financial institutions. But while the extent and scope of this are new, the practice is not in the least:
But the “holding system” not only serves enormously to increase the power of the monopolists; it also enables them to resort with impunity to all sorts of shady and dirty tricks to cheat the public, because formally the directors of the “mother company” are not legally responsible for the “daughter company”, which is supposed to be “independent”, and through the medium of which they can “pull off” anything. -Lenin, “Imperialism, the Highest Stage of Capitalism”
Herein the “dirty trick” is that the parent company of the MNEs are owned by “institutional investors,” usually finance, and ultimately receive the most benefit while one “daughter company” after another is set up in nations of the Global South. The largest MNEs have on average more than 500 affiliates, including 20 holding companies. And these are not franchises, with only 5.2% having control by the stakeholders or a voting coalition. About 75% are controlled through >50% equity stakes and 25% are controlled through aggregations of equity stakes adding to >50%. This has allowed MNEs to gain more coverage by international investment agreements than they would get through foreign direct investment stocks (67% vs. 60%). And UNCTAD notes that tech companies like Alphabet have been at the forefront of developing these “dirty tricks.”
The most bizarre form of this is called round-tripping. Round-tripping is when the parent and affiliate are both based in the same company but the affiliate’s direct owner is not. UNCTAD gives the example of Yankee Candle (US), which owns Yankee Candle Europe (UK), which in turn owners Yankee Candle Italy SRL (Italy), which in turn owners Emozione Spa (Italy), which in turn owns Millefiori SRL (Italy), and which in turn owns One Thousand West Inc. (US). While round-tripping shows just how ridiculous this system is, it primarily does not effect countries in the Global South. Only 11% of affiliates in Latin America and the Caribbean have an ultimate owner in that region, 8% in Africa, and 24% in Asia, versus 72% in the US and EU.
UNCTAD gives a note of hope by stating that this exploitation is being curtailed by the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting plan, the Agreement on Exchange of Information on Tax Matters (brought to wider attention by the Panama Papers), and various local actions. But it is hard for me to be optimistic when over 98 policy measures have been passed between 2010 and 2015 liberalizing ownership restrictions, most dealing with wholesale and retail trade and financial services. Further the most significant trade deal under discussion at this time, the TPP, is oriented towards this progression: 32% of the foreign affiliates that will benefit from the TPP have an ultimate owner outside of the region the TPP covers.
Perhaps that’s why UNCTAD also ends with this stark bit of reality: “Complex ownership structures call into question the effectiveness of ownership-based policy tools widely used for th[e] purpose [of maximizing sustainable development], both nationally and internationally.” I would take that a step further to say that I doubt national ownership-based policy will ever shift these dynamics. Capitalism is a totalizing system and, again as Lenin wrote, the world has been partitioned. A country seeking to utilize its resources for the good of its people, for fighting the climate change that hurts them the most, for building hospitals and parks and schools, this is a country that goes against its position as a “client-state.” And if it dares to make the ultimate breach of seizing these “foreign” affiliates built by the labor of its people and given value by the labor of its people, it will inevitably be crushed by economic coercion or war as Grenada was crushed and as Venezuela is getting crushed.
Neither international or national reform within capitalism will stop this exploitation. And even national revolutions, though they may temporarily expunge it, will ultimately fail. To direct the investment needed to develop the welfare of the Global South, what I would call long overdue reparations, we will need international socialism.