Preemption watch.

The United States is currently negotiating an international agreement, the Multilateral Agreement on Investment (MAI), which could significantly affect states. Its goal is to reduce barriers to the worldwide movement of capital. Renato Ruggerio, the director general of the World Trade Organization, says of the negotiations, "We are writing the constitution of a single global economy."

The agreement is being negotiated under the auspices of the Organization for Economic Cooperation and Development, composed of the leading industrial nations of North America, Europe and East Asia. Negotiators expect to sign an agreement next May.

The MAI seeks to remove restrictions on the movement of capital, require foreign investors to be treated as favorably as domestic ones, and open natural resources, telecommunications and all other economic sectors to foreign investment. Performance requirements (regulations that require investors to meet certain social policy goals) would be barred. Investors would be entitled to compensation for expropriated property. In short, investors would be protected from discriminatory treatment by governments.

The MAI would be binding on American states. State laws would be subject to challenge in the MAI dispute resolution process. In contrast to World Trade Organization proceedings, an MAI challenge to a state law could be initiated by an individual firm (as well as a foreign country). The United States could be held liable for money damages if a state law is found to violate the MAI.

Proponents see the MAI as a boon to states. It could encourage direct foreign investment in the United States, as well as facilitate U.S. investments around the world. Moreover, by reducing investment barriers, the MAI could greatly improve the global economy.

Opponents worry that legitimate government regulations, taxes and economic development programs will be subject to challenge. They also fear reductions in labor, environmental and consumer protection standards, as well as pressure to lower industrial wages.

Federalism questions raised by the agreement relate primarily to the dispute resolution process. Will states be able to defend their legitimate tax and regulatory measures before dispute resolution panels? Will nondiscrimination standards be fairly applied to states? Will the agreement result in a flood of litigation? Will MAI upset the balance of federal and state authority? If states lose an MAI case will the federal government pay for damages as it has promised? In short, will MAI panels of trade experts be sensitive to the needs of America's unique federal system of government?

The U.S. negotiators have been meeting frequently with NCSL and other state groups to respond to such questions. They are confident that all potential problems can be addressed, and that states will be able to support congressional ratification of the agreement in 1998.