COVID-19: Its impact on the regulation of Multinational Enterprises

Amazon multinational enterprise

The COVID-19 pandemic has emerged as a new factor that will have lasting policy consequences over the regulation of international trade and foreign direct investment (FDI) undertaken by multinational enterprises (MNEs). The World Health Organisation describes COVID-19 as an infectious disease caused by the most recently discovered coronavirus, unknown before the outbreak began in Wuhan, China, in December 2019. COVID-19 is now a pandemic affecting many countries globally. This has had some immediate consequences on FDI flows and on state investment and trade policies. 

FDI flows are being adversely affected. According to UNCTAD, “pandemic mitigation efforts and lockdowns around the world will have devastating effects on all economies, independent of their links to global supply networks. The demand shock will thus be the biggest factor pushing down investment.”  UNCTAD predicts the pandemic may cause a drastic drop in global FDI flows of up to -30 to -40% during 2020-2021. Equally, MNE earnings have been projected to slump. UNCTAD estimates that, “[o]n average, the top 5000 MNEs, which account for a significant share of global FDI, have now seen downward revisions of 2020 earnings estimates of 30% due to Covid-19, and the trend is likely to continue”. 

Covid supermarket
Photograph: John Cameron/Unsplash

The pandemic has also affected FDI and trade policies. Notably, at least 24 countries imposed restrictions on export of essential medical supplies, such as face masks, between January and March 2020 and others have followed since and, additionally, many countries retain high import tariffs on medicines and other medical supplies. In relation to FDI, governments have introduced a range of measures designed to encourage domestic and foreign investors to increase output of essential medical equipment including the easing of administrative burdens and increasing incentives and fiscal benefits, while also using restrictive measures to avoid adverse public health impacts through tougher inward investment screening.

Furthermore, states have offered public money to bail out companies that have suffered catastrophic losses due to interrupted operations, notably in the airline business. Moreover, intellectual property (IP) protections have been eased to allow for, in the words of UNCTAD, “faster utilisation of IP-protected technologies to speed up effective R&D and to facilitate mass production of needed treatments, diagnostics and vaccines.” Some states have issued laws to facilitate the grant of non-voluntary licenses to make use of existing technologies in developing responses to the virus.

Foreign export of Covid masks restricted
Photograph: Noah/Unsplash

These policies have significant implications. In relation to trade restrictions, while these may be justified under the national security and public health exemptions under the WTO GATT Agreement, their wider implications are to restrict the free flow of essential medical supplies to the detriment of populations affected by the virus, especially in poorer states that lack the productive infrastructure to make their own supplies. Greater international co-operation in this area is needed and, as in the case of the HIV/AIDs epidemic, the WTO and other international fora should seek agreement on trade liberalisation for medicines and essential health supplies. 

As regards FDI policies, these may have adverse impacts on foreign investors who may, in response, take advantage of investor protection standards in International Investment Agreements (IIAs) to challenge any consequential losses. In particular, measures that favour domestic over foreign producers may fall foul of the national treatment standard while measures favouring one foreign investor over another could elicit a claim under the most-favoured-nation standard.

Expropriation claims could arise from the requisitioning of foreign investors’ assets needed to combat the pandemic or from forced closures of their businesses to restrict the spread of the virus. Breaches of the fair and equitable treatment standard could arise out of export restrictions while the general question of what constitutes a fair and reasonable policy in response to the pandemic is one fraught with uncertainty. Some IIAs contain clauses that protect states against claims, including general public policy exceptions and national security exceptions. However, their interpretation by arbitral tribunals in investor-state disputes has resulted in uncertainty over the extent to which such provisions can act as an effective answer to an investor claim. Consequently, the risk of investor claims under IIAs remains significant. Some restraint on the part of investors may be desirable but this cannot be guaranteed, especially if they are facing economic extinction and an IIA claim may offer the only means of recouping losses. Should there be a wave of such claims it could be met with great political hostility, further undermining faith in the system of investor-state dispute settlement.

The policy response to the COVID-19 crisis has wider policy implications, not all of which are as yet clear. The ascendancy of national policy over international co-operation in response to the crisis is one immediate impact that bears examination. It highlights the increasing tension posed by the pandemic crisis and its aftermath for economic globalisation. It builds on existing trends towards trade nationalism and the increased use of national security based FDI screening mechanisms. Some predict the end of globalisation as we know it, especially as the recession that will follow the crisis is likely to exacerbate trends towards prioritising national over international interests.

In this context, calls are being heard for the reshoring of production that has hitherto been organised around global value chains (GVCs), often with their manufacturing hub in China, whose fragility was exposed during the height of the productive disruption caused by government lockdowns and mass lay-offs. Indeed, such reshoring of jobs and investment would fit well the popular nationalist narrative of “taking back control” and “making the country great again” offering, as it does, the apparently simple solution of returning jobs to those whom globalisation impoverished in the first place, the unskilled and semi-skilled workers of the Global North.

Shipping foreign trade import Covid
Photograph: Andy Li/Unsplash

Such reshoring has been occurring already. However, this is not likely to result in greater economic or social equity due to the role played by automation which makes production in developed states cheap enough to be commercially attractive again, but which does little to alleviate unemployment among semi- and unskilled workers. Equally, it ignores the reasons for establishing GVCs. GVCs offer a cost-effective system of production that leads to lower costs for producers and consumers alike. In addition, the location of production facilities in China offers firms a foothold in what is a huge domestic market. This has been encouraged by the Chinese state and it is unlikely that this structure can be easily, or cheaply, dismantled.

Finally, abandoning “just-in-time” supply chains may prove impossible in practice due to the actual costs of duplicating such chains to ensure greater resilience. Should governments insist on such measures, the cost of doing so is likely to be borne by consumers, who, in a time of global recession, may find it hard to sustain the resulting demands on their increasingly scarce financial resources. It is a hard policy choice and one that many firms will actively resist for fear of inefficiency in production leading to possible financial ruin.

While the exact policy parameters of the COVID-19 crisis are hard to predict, it is certain that calls for the increased national regulation of global trade and investment will find stronger voice. The pandemic has added fuel to the existing national rivalries and tensions within the global economy. Much will depend on whether this moment will play out to strengthen the role of China as a leading political and economic superpower, while weakening the US, whether the current wave of economic globalisation will end, and whether international co-operation will find a new lease of life. A further variable is how the climate emergency will affect global production and, with it, future policy towards business. In this policy mix MNEs can be expected to fight for as much freedom of commercial action as they can in the face of strong national trends towards de-globalisation. MNEs can be expected to adapt as they did during the years between the two World Wars, also characterised by highly nationalistic economic policies, by creating more local and regional production networks but keeping GVC networks to the extent they can.

China trade covid
Photograph: Thomas Hawk/Flickr

More worrying is whether MNEs will take this opportunity to ignore the advances currently being made to render them more accountable for their human rights practices and for those of the GVCs in which they play a leading role. Firms must not be allowed to argue that the costs of dealing with the pandemic, and the coming recession, necessitate a loosening of scrutiny over working practices in global supply chains and the social consequences of business decisions. 

 The next few years will tell if we have indeed come to the end of the globalised economy, and of global production as we now know it or, whether, the links of global production, headed by the world’s major MNEs, will remain broadly intact. Much depends on local political choices, and futures, within nation states and regions and on global political choices, and futures, among nations and regions. MNEs will, no doubt, be involved in shaping these choices, and futures, to the extent that their power will permit, acting as one set of actors among the many who will now take the world on towards its uncertain future. 

Professor Peter Muchlinksi is Professor of International Commercial Law at SOAS.

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