by Bhagirath Lal Das*

New Delhi, 22 Oct 99-- The World Trade Organization, in its current
preparatory process for the Seattle Ministerial meeting appears
to be considering the manner in which the investment issue should
be handled at the Seattle Ministerial meeting (30 Nov - 3 Dec)

Some developed countries, particularly the European Commission
(EC), Japan and Switzerland, are in the forefront of a proposal
that the Seattle Ministerial Meeting should decide to initiate
the negotiation in the WTO for a multilateral agreement on

Some developing countries, particularly Hong Kong China, Republic
of Korea and Costa Rica, have supported the proposal. Several
other developing countries, in particular ASEAN countries,
Dominican Republic, Egypt, Jamaica, India and Pakistan have
firmly opposed initiation of any negotiation on investment in the

The US, which has been lukewarm in the past about initiating the
negotiation on investment in the WTO, has recently come out more
clearly opposing it in the structured informal discussions in the
WTO. It has been reported as saying that it is not interested in
any investment agreement in the WTO and it does not support
negotiations in the WTO on this subject (#SUNS 4520).

The subject of investment was introduced in the WTO in the Singapore
Ministerial Meeting in December 1996, when some developed
countries wanted to start negotiations in this area in the WTO
aimed at having a multilateral agreement.

The developing countries firmly opposed it.

Finally it was decided to have a Working Group in the WTO to
study the relationship between investment and trade.

Now some countries, particularly some developed countries, as
mentioned above, say that the study process should be over and
negotiations should start; whereas some other countries,
particularly a number of the developing countries, firmly oppose
the start of any negotiation in this area, and suggest that, at best,
the study process should be continued.

The main concern of the developing countries is that the proposed
negotiation is not about enhancing investment, but for ensuring
freedom of operation of the foreign investors and protecting
their rights. Any such agreement in the WTO, they fear, is likely
to constrain the role of the host countries in channelling
investment in priority sectors, in appropriate regions and for
activities beneficial for their development process. Also it may
restrict their discretion to put conditions on the foreign
investors in respect of dissemination of technology, linkages
with domestic economic activities and transfer of funds.

Besides, investment in non-priority areas may result in
undesirable drain on their foreign exchange through the
repatriation of profits and dividends, creating balance of
payment problems.

The developing countries feel that a multilateral agreement will
not enhance the flow of foreign investment; on the other hand it
will tie them down to their commitments in the WTO from which
they cannot retract.

They think that instead of joining a multilateral agreement, they
will be able to attract foreign investment much more by adopting
appropriate domestic policies and improving their infrastructure.

Such a strategy will give them the benefits of enhanced
investment without the burden of the multilateral commitments.

The European Commission (EC) being the main proponent of this
proposal has been expressing its objectives and expectations from
time to time. It placed a proposal on this subject in the
beginning of July which appears to be somewhat softer than its
earlier pronouncements. This paper (circulated as a WTO paper on
9 July 1999) should be analyzed carefully as it gives the
indication of the EC's latest position on this subject.

Though this new proposal does have some positive elements in the
sense that it has tried to accommodate some concerns of the
developing countries, in essence it still continues to involve
the dangers which the developing countries have been perceiving
in negotiations on investment in the WTO.

The positive elements and the dangers are analyzed below.

The EC paper limits the coverage of the proposed negotiation to
the area of foreign direct investment (FDI). It appears to be an
improvement from the angle of the developing countries, as the
earlier proposals were for a wider coverage.

But this improvement may be illusory as the coverage of the FDI
itself may be broad. The paper mentions the difficulty in drawing
precise distinctions among various forms of investments and says
that the proposed framework should 'focus' on FDI, "to the
exclusion of short term capital movements". But what would be
covered under the heading 'FDI' has not been made clear, thus
leaving the door open for a broad definition.

And many expert studies have brought out that in the present
world of globalized finance and derivatives, the earlier
distinctions between FDI, portfolio, short-term flows etc are now
not so distinct and separate.

There are also some positive features in the proposed contents
of the possible rules in this area; even though there are some
important omissions. For example, the paper says that the
multilateral rules on investment should preserve the ability of
the host countries to regulate the activities of investors,
including the responsibilities of foreign investors. It keeps the
door open for the countries to lay down disciplines and
parameters of operations for the investors.

But it does not clearly envisage the multilateral rules
themselves having provisions for disciplines and limitations on
the operations of the investors, nor for home countries to assume
obligations to discipline their investors.

Thus it appears to absolve the multilateral system of the role
of directly preventing the anti-competitive practices of the foreign

The paper goes on to say that the rules must respond to the
concerns about the impact on the environment and labour
conditions. Further, it notes the concerns of the developing
countries about ensuring the compatibility of the activities of
the foreign investors with the developmental policies and

But unlike the concerns for environment and labour standards, it
does not suggest any action in the multilateral rules to take
care of the concern for development. It gives the impression of
being neutral and passive towards the developmental policies and
objectives of the developing countries.

It adds emphatically that the multilateral rules should ensure
right conditions for the international investment to be conducive
to sustainable development.

On the face of it, this stipulation appears positive; but it has
several implicit dangers.

One, the concept of sustainable development in the major
developed countries is different from what it is in the
developing countries; the stipulation about the investment being
conducive to sustainable development in this paper may not cater
to the objectives of the developing countries. This fear is
strengthened by the assertion in the paper of the link between
the investment and the growth in the "home" country.

Two, it says that the traditional frame of special and
differential treatment of the developing countries may no longer
suffice, and it suggests that the dimension of the sustainable
development should be built into the basic rules which should be
implemented by all Members.

Clearly, the implication is that the proposed rules should have
obligations on the developing countries in this regard. In the
absence of full clarity on the features of sustainable
development, there is reasonable apprehension that the proposal
envisages enhanced constraints on the discretion and burden on
the developing countries.

Three, the paper talks of ensuring right conditions for
international investment to be conducive to sustainable
development. It could imply constraining the developing countries
in respect of channelling the investment (both foreign and
domestic) in certain areas which they consider appropriate, but
which are considered by other countries as not conducive to
sustainable development.

These considerations show that the provision regarding the
sustainable development in the paper may have some serious
potential pitfalls.

By suggesting that the approach in the rules should be based on
the "positive list" model as in the General Agreement on Trade
in Services (GATS), the paper appears to initiate a constructive
approach in this area. This approach implies that the disciplines
will not be over-stretching to all sectors and all areas
automatically; on the other hand a country will be able to
specify the sectors where it will be assuming obligations and
also the types of obligations it will assume.

On the face of it, this approach appears preferable, in case the
multilateral rules do get negotiated in this area.

But the experience of the GATS has demonstrated the limitations
of the positive list approach in providing protection and comfort
to the developing countries.

During the negotiations in the GATS as also the negotiations for
the specific sectoral agreements, e.g., those in financial
services and telecommunication services, the developing countries
faced intense pressures for including wider areas and measures
into the discipline. This was despite the mandatory provision in
the GATS that the developing countries could liberalise only
fewer sectors and fewer transactions.

When the whole objective of the multilateral agreement on
investment is to ensure comparatively free operation for the
foreign investors in the developing countries, there is a natural
suspicion that even an architecture like the "positive list"
model may not be capable of providing protection to the
developing countries against pressures for high degree of
commitments in the area of investment.

The most serious part of the paper is in the stipulation that the
rules should preserve the ability of host countries to regulate
investment in accordance with the basic principles of the WTO.

While recommending the WTO as an appropriate forum for the
negotiations on investment, the paper mentions the principle of
non-discrimination and also says that the WTO has a well
established framework, including the Dispute Settlement
Understanding (DSU).

Clearly the paper is proposing to incorporate the principles of
non-discrimination, i.e., the MFN (non-discrimination as between
the home countries of the investors) and the national treatment
(non-discrimination as between the foreign investor and domestic
investor), as also the implementation mechanism of the DSU, which
implies cross-retaliation, i.e., retaliation through restraints
on goods import for perceived violation of the commitments in the
area of investment.

These are precisely the points which have been creating problems
for the developing countries in agreeing to initiate negotiation
on investment in the WTO framework.

The national treatment, even if it is applicable only post-entry,
may have severe problems for the developing countries. One, it
will take away the right of the host country to provide special
concessions and facilities to the domestic investors if these are
not simultaneously provided also to the foreign investors. Two,
it will prohibit the host country from putting discriminatory
conditions on the operations of the foreign investors, which may
be often necessary in view of the fact that they take away
profits and dividends in foreign exchange.

The exceptions presumably will have to be negotiated as in the
GATS, which will be extremely difficult.

Similarly the MFN principle will take away the right to give
preference to particular countries, which a host country often
does for various considerations, including special economic
relationships, particularly special linkages in the area of
industry, finance and technology.

And the application of the DSU is likely to keep the developing
countries under constant fear of restraints on the trade of their
goods. Defence in the DSU proceedings is complicated and costly,
as several developing countries have experienced in the last five
years of the operation of the DSU.

Finally, the paper says towards the end that difficulties in
getting knowledge of the laws and regulations of the host country
have been identified by international investors as an important
brake to their investment abroad. It appears too simplistic.

The investors get encouraged and motivated by the infrastructure,
smooth and easy approvals wherever these may be needed,
availability of trained workers and large domestic markets. These
are the factors which are within the domestic domain of a
country, and can be improved if the country has the will and the

The availability of knowledge about the laws and regulations can,
of course, be easily assured by a country welcoming investment.
A country does not have to join any international agreement for
this purpose; indeed no international rules are needed for this
purpose at all.

From what has been said above, the proposal, though appearing to
be somewhat soft and mentioning development at several places,
contains almost all the dangers inherent in negotiating
investment in the WTO.(SUNS4536)

[* Mr.Bhagirath Lal Das, a former Indian ambassador and
negotiator at the GATT and a former Director of UNCTAD's Trade
Programme Division. He wrote this article for the SUNS]

The above article first appeared in the South-North
Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief
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