Investment rules need investors and home government obligations

Geneva, 5 Dec (Chakravarthi Raghavan) - Any efforts at writing rules on foreign direct investment at the World Trade Organization must involve rules for enforceable code of conduct on the foreign investors as well as assuming of obligations by home governments on the behaviour of their corporations, the Working Group on the Relationship between Trade and Investment (WGTI) was told this week, in a paper presented by China, Cuba, India, Kenya, Pakistan and Zimbabwe.

The Trade and Investment issue is one of the four ‘Singapore issues’ (the others are competition, government procurement and trade facilitation). Under the Doha mandate all the four study groups have been asked to work out modalities for negotiations, and the negotiations themselves can begin only on the basis of the adoption by an explicit consensus of the modalities at the next ministerial.

In introducing the paper on behalf of the cosponsors, India told the WGTI (chaired by Ambassador Luis Felipe de Seixas Correa of Brazil) that the recent cases of corrupt corporate practices and fraud involving the biggest TNCs and the series of financial crises in developing countries as a result of highly-leveraged investment funds have reinforced arguments for such an enforceable code.

The paper mentions Enron, Worldcom as examples of corrupt practices and fraud, and the bankruptcies of some of the corporations m that have affected not only investor confidence in the US, where most of these corporations are located, but has also affected global capital markets.

The paper suggests some general principles in drawing up investors’ obligations and possible obligations of investors in the context of Restrictive Business Practices (RBPs), Technology Transfer, Balance of Payment, Ownership and Control, Consumer and Environmental protection, and disclosure and accounting.

The paper also points out that the series of financial crises in many developing countries in recent years have brought into sharp focus the speculative nature of financial markets and especially the operations of highly-leveraged investment funds, and their destabilizing and adverse effects on developing countries. For example, it points out, during the recent Asian financial crisis, criticisms were made of the lack of transparency of the workings of international financial markets, and proposals were made to make these markets and the highly leveraged funds more transparent and accountable. However, there has been very slow progress in the work on this area.

India said that the proponents of a multilateral framework on investment in WTO have been seeking binding rights of foreign investors that the host country should agree to provide. However, the rights of foreign investors have to be balanced against those of host governments and against the obligations of investors and home governments.

Speaking in support, China a cosponsor of the paper, said that as the largest developing country recipient of FDI during the past nine years, it was aware of FDI benefits, but also of its negative effects. Its sponsorship of the paper should not send the wrong signals to the investor community, because China will continue to further improve its policies and practices on FDI.

Kenya said it had cosponsored the paper because it wants to inject a balance in the discussions between the interests of the host country, the home country and the investor.

The proposal was strongly opposed by the Quad members. Japan said the proposal raised serious legal questions on extra-territoriality and Japan would not be in a position to constantly monitor and control the activities of its corporations abroad. Canada wanted the issue to be raised in the working group on competition which was dealing with hard-core cartels. The United States said it fundamentally disagreed with the approach of the paper since it would make private companies into tools of industrial policy, and that this would ‘chill’ investments and drive them to other countries. However, the US did not explain how, when multilateral rules would apply to all members, the corporations would go to other countries - unless they are not WTO members.

The US also claimed the paper over-stated the power of the TNCs, and that the Enron and Worldcom examples highlighted the need for strong domestic laws. The US also pointed to the fact that these two companies had been indicted in the US.

However, the US failed to address the issues of the wider nexus between such corrupt corporations and their fraudulent behaviour, and the vast funds they money-roll to fund elections (Congress, and the White House) and their ability to get laws written to favour them all points that are being brought out in some sections of the US media, but less so in the socalled ‘mainstream media.’

The US was seriously concerned over extending the WTO’s remit over private corporations and home governments, as well as with the proposals to allow in the WTO trade-related investment measures. The EC for its part warned that developing would someday be exporters of investments too, and thus subject to the same disciplines.

In rejecting these arguments, India in responding on behalf of the sponsors noted the view that investors obligations should be voluntary, and how binding rules could not be enforced on investors, given that the WTO is a member-driven organization. There were also comments about the limitations of the role of home governments in market economies and the implications of extra-territorial applications of law.

However, pointed out India, “even now many of our agreements have a direct impact on private business activity. The TRIPS agreement, for example, contains a set of provisions enforced through domestic law by countries which impinge on private business. The anti-dumping agreement and the rules of the subsidies agreement against subsidies relate to multilateral provisions impinging on private business activity in an extra-territorial manner. Even some of the provisions of Article XX (General Exceptions article) of the GATT have been imposed in an extra-territorial manner. I think, therefore, that it would be collectively possible for us to find solutions within the framework of our own multilateral system of rules.”

Referring to the argument that the issue of RBPs should be taken up under competition policy, India said that the close relationship between trade and investment and trade and competition policy was recognized even in the Singapore Ministerial Declaration. The two working groups were required under the Singapore Declaration to draw upon each other’s work if necessary. “There cannot be discussion on a multilateral framework on investment which excludes restrictive business practices.”

On the view that FDI is in the interest of host country, and not a concession to be negotiated, India pointed out that the discussions in the WGTI is not about FDI per se, but about a multilateral framework. FDI has both negative and positive effects and the endeavour of the host is to maximise the positive effects and eliminate as far as possible the negative effects.

The joint paper (WG/WGTI/W/152) refers to the sharp increase in FDI flows ($200 billion in 1990 to $1271 billion in 2000) and FDI as an important channel of cross-border business activity, the massive power and global operations of the TNCs who undertake such foreign investments, and the limitations of host governments in regulating their conduct. The objective of TNCs for global profit maximization could create conflicts of interest between their objectives and the development policy objectives of the host countries. The TNCs could also engage in RBPs, manipulation of transfer prices and other such practices. There was hence a need to address the negative effects of FDI activities on host members, particularly the developing countries, even while recognizing the positive role of FDI.

The paper also recalled the earlier efforts at the UN to evolve a code of conduct, the limitations of national regulations in dealing with operations of TNCs that have been recognized in internal fora (UNCTAD, ILO, OECD). The UN Sub-Commission on Human Rights is currently discussing the responsibilities of TNCs in human rights, covering among other aspects, standards of consumer protection and employment practices.

After referring to the corporate scandals and bankruptcies in the US, and its effects not only on the US but also capital markets globally, the paper says:

“Therefore, legally enforceable norms of investors or corporate conduct are urgently required to prevent such crises from recurring. They could also serve the useful purpose of protecting the global environment by prescribing the norms of corporate conduct with respect to environment, bring about transparency in the corporate dealings by prescribing the disclosure requirements and accounting practices, control RBS and curb the manipulation of transfer prices and thus improve global welfare.”

The proponents of a multilateral framework on investment in the WTO have been seeking binding rules on rights of foreign investors that the host member governments should agree to provide. However, not much discussion has taken place in the Working Group on what could be done about obligations on the part of investors or home governments.

Referring in this context to the Doha declaration and its reference to need for balance between host- and home-member interests, and the need to take due account of development policies and objectives of host governments as well as right to regulate in public interest, the paper said:

“Therefore, while recognizing the protection of legitimate rights and interest of investing TNCs, the right of host members to regulate foreign investors and the need for foreign investors to undertake obligations in line with host members’ interests, development policies and objectives, should be an indispensable part of the discussions in the Working Group.

“TNCs should strictly abide by all domestic laws and regulations in each and every aspect of the economic and social life of the host members in their involvement and operational activities.”

In order to ensure that the foreign investor meets its obligations in the host member, the cooperation of the home members’ government is often necessary, as the latter can and should impose the necessary disciplines on the investors. The home member’s government should therefore also undertake obligations, including obligations to ensure that the investor’s behaviour and practices are in line with and contribute to the interests, development policies and objectives of the host member.”

In other papers presented by it, India dealt with development provisions, non-discrimination and on modalities for pre-establishment treatment based on a GATS-type positive list approach. These papers emphasize the unique character of investment - ‘money is neither a good nor a service’ - and hence should not be covered by the WTO. And being neither a good nor a service, the disputes on

investments could not also be part of the WTO’s dispute settlement understanding. The Indian papers also underscored that these issues are best left to bilateral agreements and there is no need for a WTO agreement on investment. – SUNS5250

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