Doha preparatory talks show deep divisions on investment issue

by Chakravarthi Raghavan

Geneva, 1 June 2001 - Informal consultations at the World Trade Organization on including investment negotiations in a multiliateral trade round, held by the chairman of the General Council, Mr. Stuart Harbinson of Hong Kong China (HKC) brought out the deep differences and large gap in positions of key proponents and opponents which would cast a shadow over Doha, if proponents persist in trying to bring the issue on the WTO agenda, trade diplomats said Thursday.

The Harbinson chaired consultations are part of the preparatory process for a ministerial declaration at the 4thMinisterial Conference in Doha.

Though Mr. Harbinson had specified the subject of the consultations to be ‘investment’, the discussions really related to the desirability of otherwise of initiating WTO negotiations for multilateral rules and disciplines on governments of host countries relating to investment.

The consultations showed the usual proponents for investment rules - Japan, the European Community, Switzerland, Norway, Korea (the major agricultural protectionist nations) - arguing for investment negotiations for multilateral rules as part of a ‘development round’, and how such multilateral rules would be in the interests of developing countries and development.

Ranged on the other side were the opponents of investment negotiations and rules in the multiliateral trading system, including India, Malaysia, Indonesia, the Philippines, Cuba and Egypt - speaking with varying nuances ranging from clear opposition and inability to join any consensus, to arguments about their country ‘needing to be convinced’ that investment negotiations and rules is of benefit.

A third group - Australia, Singapore, HKC and South Africa - took the position that the objective of the preparations for Doha, and the Doha ministerial itself, should not be the launching of new round of negotiations, but rather to have ministers somehow take account of the concerns of developing countries and do something later.

Interventions of delegations from this group suggested a review of the mandate of the existing working group on trade and investment, and renewal of the mandate with focus on the questions and doubts.

Some of the comments, one of the participants said, seemed to be like the ‘bridging proposal’ that the South African Trade Minister, Alex Erwin, floated unsuccessfully at the Seattle Ministerial ‘green room’ consultations chaired by New Zealand, namely, to renew the mandate of the working group for two years, at the end of which multilateral negotiations would be launched.

This failed to fly at Seattle, with Idia and others rejecting it. It seems even less likely to fly now.

The United States was sceptical about the ‘value-added’ in negotiating investment in the WTO, given the divergences and the strong views on either side, and the effect that pushing the issue would have on the Doha Ministerial and the US objective of launching a round there. The US was somewhat sceptical about the investment item being dealt with in the WTO, and the value of pushing this in the WTO. But the US had an open mind and was in a ‘listening mood’. When Chile intervened to express surprise at the lack of leadership being shown by the world’s Super-power, and the most influential player in the WTO, the US responded by expressing surprise at being criticised for being flexible. All that the US was asking was what value added the WTO could make to the issue.

Another group including Argentina, Brazil, and to some extent Canada, said they were not ‘demanndeurs’, and had an open mind. Brazil in particular said it was not ‘opposed’, especially if including the issue on the agenda would bring benefits in other areas - presumably a reference to ‘agriculture’.

The discussions seemed to centre around a Japanese ‘non-paper’, presented as ‘elements for discussion’ which while speaking of ‘development dimension’ (mostly reduced to technical assistance and capacity building) - essentially flags the same ideas and views that Japan has been seeking since before Punta del Este and during the Uruguay Round under ‘Trade-Related Investment Measures’.

Among the other elements listed for rule-making in the Japanese ‘non-paper’ were GATS type approach to ‘pre- establishment’ rules, non-discrimination for post-establishment, across-the-board ‘transparency’ on investment measures, performance requirements and taking account of development needs, the WTO’s dispute settlement system (which includes cross-retaliation), investment protection like ‘unimpeded cross-border payments and transfers, protection against expropriation and compensation and protection from strife.

The ‘elements’ paper talks of ‘scope to discuss’ in the negotiations the subjects of ‘investment incentives’ and additional disciplines to complement the agreement on subsidies and countervailing duties, and the issue of obligations of investors.

While the reference to application of the WTO’s DSU for disputes on investment (and ruling out investor-state disputes) as an element, thus indicating that the home-state raising a dispute o behalf of its investors, the paper is silent on the obligations of home country (of investors), but merely talking of ‘home government measures’ to facilitate investment flows.

The counter-point to the arguments of Japan and its elements, as well as the attempt by the EC and some others to promote of the investment issue as a ‘development’ issue, appears to have come from India, which questioned attempt by the ‘demandeurs’ (EC and Japan) to project the investment issue as a ‘development’ issue, when in fact they were publicly saying elsewhere they needed investment negotiations in order to ‘sell’ agricultural liberalization to their domestic constituencies.

India, Malaysia, Indonesia and others opposing the issue, brought out this distinction by pointing out that their countries were not opposed to foreign direct investment, and in fact had ‘open’ regimes and tried to promote inward FDI; nor was the WTO discussing the desirability or otherwise of such investments, but really was focussing on negotiating WTO rules on investment, and that their countries were opposed to this.

India and Malaysia, which made some detailed presentations (in opposition to negotiating investment rules) both outlined the autonomous policy measures by them to promote investment, and that they, and countries like theirs, took steps on a continuing basis to attract FDI.

Malaysia pointed out that it was not against a legal framework, based on traditional concepts of non- discrimination, and that it had liberalised foreign investments along with regulations in a policy-mix to suit its own conditions.  It favoured a policy-mix in rules that combined the rights of investors with obligations, and provided flexibility to developing countries to link foreign investment with their development policies.

While providing a climate of predictability was important for investors, Malaysia had found investment rules to be more effective within existing national framework. There was no evidence that multilateral investment rules would bring in additional investment or result in transfer of technology. The primary determinants of foreign investment was the ‘market’ and the investment opportunities provided by countries.

From a development perspective, bilateral agreements were preferable to multilateral, since bilaterals could be tailored to individual needs and provided flexibility. Negotiating multilateral rules may prove counter-productive. There were many political and other issues, and strong sensitivities involved, and it would not be prudent to push for investment negotiations. Any event, Malaysia would not be in a position to join any consensus on this.

The Indian intervention reportedly addressed the basic issues. In India’s view a binding multilateral agreement on investment, despite the many assurances and sweeteners offered by proponents to get the issue on the agenda, would take away the policy options available to developing countries in dealing with FDI in a way that it would promote their development.

As to the argument about adopting a GATS-type, positive-list approach, India questioned whether the proponents would completely leave it to developing countries to bind only what they wanted to.

Even in terms of the GATS, everyone was aware of what really happened during the negotiations for sectoral negotiations for agreements on financial and telecom services. While theoretically, in both cases, developing countries were only required to undertake commitments to the extent they wanted, in fact every developing countries was forced and coerced to undertake commitments well beyond what they wanted to.

This might be inevitable in the skewed international power relations of today, but proponents of an investment agreement should not try to sell the idea on the basis that the structure of an investment agreement would be similar to that of GATS. If developing countries were to be allowed absolute flexibility, there was no need for a multilateral agreement at all.

In India’s view, a multilateral investment agreement would not significantly change investment flows, and no one was arguing that by signing up to a WTO investment agreement, a developing country would get more investments.

FDI flows in 1998 had increased to about $165 billions, though most of this FDI seemed related to mergers and acquisitions. But there was no credible evidence that in the absence of an investment agreement these flows would sag or that a WTO investment agreement was needed to significantly augment these flows.

Investors had a variety of considerations in mind in deciding on when and where to invest. And while there could be varying views on the determinants of investment flows, no one could say that a multiliateral investment agreement would guarantee flows to any country.

The question before developing countries was why they should bind themselves in a WTO multilateral investment agreement, giving up their strategic policy options and flexibilities available to sovereign countries. The largest size of FDI flows went to China, which was not even a WTO member, and to Brazil which did not even sign any bilateral investment protection agreements. And many developing countries, including the least developed, who had totally liberal regimes were unable to attract sufficient investments.

In India’s view, trade and investment were two different things, even if there was a relation between them sometimes, and the extent of this relationship was still being examined in the WTO Working Group on Trade and Investment. The TRIMS agreement made clear, at least by implication, that not all investments were ‘trade- related’. If that be so, why and how is investment as such to be brought into the WTO.

India also addressed the argument, often put forward by the proponents of investment negotiations, as well as by the high officials of the WTO secretariat, who argue that investment is already included in or covered by some of the WTO agreements, like TRIMS and GATS, and hence investment is an issue already in the WTO.

Rebutting this, India challenged investment as such was covered by any WTO agreement or rules. During the Uruguay Round, India pointed out, some of the developed countries wanted to bring in disciplines on investments as such, but developing countries had refused to negotiate this. This was why the TRIMS agreement did not deal with investment per se, but only with certain trade-related investment measures contrary to GATT 1994.

And as for the GATS, Mode 3 or commercial presence, was recognized as a mode for delivery of a service, since some services could be provided only if the service provider of that service had a commercial presence in the host country. This was not a ground to argue that this was a mismatch between the treatment given to investment in the services sector and that in the goods sector. Some services could not be provided without commercial presence in the host country, but this was not true for goods.

On the EC, Japan and other proponents’ arguments that they favoured GATS approach to investment, India pointed out that GATS did not have any prohibitions on ‘performance’ requirements in services and envisaged limitations on national treatment. But the elements and papers of proponents showed that they disliked intensely performance requirements for investments and did not want to envisage the possibility of limitations to national treatment for foreign investors.

As for the offer to include only FDI in an investment agreement, and exclude short-term capital flows, in practice it would be difficult to provide a precise definition of FDI. And one or two years down the line, the argument would be advanced that it would difficult to make a distinction between FDI, short-term capital flows and portfolio investments for the purpose of multilateral disciplines.

Investment incentives was now provided in both developed and developing countries, many developing countries provided incentives to encourage investments in disadvantaged regions and under-developed sectors. Any move to discipline such incentives, would take away the freedom currently enjoyed by governments to promote development objectives.

As for the argument that while big countries did not need an investment agreement and could always attract investments without an agreement, whereas small countries needed one and would have difficulties in negotiating bilateral agreements, India said that if there was a WTO investment agreement applicable to all members uniformly, and investment incentives were not permitted, small countries would be worse off.

In the absence of any other differentials, investors would go to the big markets rather than small ones. Nor would it be correct to believe that in a multilateral investment agreement there would be less pressure on small countries. Since the completion of the Uruguay Round, major developed countries had been demanding acceptance of obligations, far beyond those in the WTO, from many countries big or small. The TRIPs agreement was a clear example. Also, many of the Uruguay Round agreements closely reproduced the domestic laws of some major players. Once investment negotiations were under way, there would be similar pressures, and the belief that the smaller countries would be able to ward off pressures did not seem to be justified from past experience and current realities.

On the argument, raised by the EC and others, about ‘globalization’ and the changing character of the world economy, India said that in many ways the globalizing economy of today resembled that of the 19th century, excepting for the fundamental difference now of labour flows being constrained unlike in the 19th century. The 19th century phase of globalization was characterised by integration of markets through exchange of goods, facilitating movement of capital and labour across frontiers. The current phase is of integration of production with wider and deeper linkages for everything except labour movement.

What was being sought under investment rules seemed to be ‘legitimacy’ for an institutional framework for globalization, with some striking asymmetry.  National boundaries are not to matter for trade flows and capital flows, but clearly demarcated for technology and labour flows. Developing countries are expected to provide access to their markets without a corresponding access to technology and accept capital mobility without corresponding labour mobility.  This asymmetry between free movement of capital and prohibition on movement of labour is sought to be legitimised and perpetuated through an investment agreement in the WTO.

India could not accept such a situation where investment flows are sought to be dealt with in isolation, delinked from technology flows and labour flows.

As for the expressions of proponents about their sensitivity to interests of developing countries and taking account of development dimension, this seemed to mean for some delegations technical assistance and capacity building to help benefit from new rules.

This was difficult to understand.

Developing countries were being asked to agree to rules that would take away their strategic policy objectives and options in dealing with FDI, and then they are told they would get technical assistance and capacity building to take benefit from new rules.

It was a strange argument asking developing countries to accept rules not in their interest in the expectation that technical assistance would enable them to benefit from it.

The positions of proponents was not also clear about the obligations of investors - such as on restrictive business practices, transfer pricing etc. It would be unfair to ask developing countries to accept multilateral rules on investment, if the rules did not impose disciplines on investors.

But a more important question was whether there would be any disciplines on the home countries of investors? In a WTO investment agreement, the home country of an investor could take the host country to a dispute on ground of failure to observe obligations. But in a reverse case, if an investor violated domestic laws and regulations of the host country, or resorted to restrictive business practices or transfer pricing in the hose country, the host country would be asked to deal with it in terms of its own domestic framework, but could not bring the home country before the dispute process to deal with the investor in the home country.

Any WTO investment agreement would create an inherent imbalance between rights and obligations of governments of host countries.

The six-year experience of the WTO and the Uruguay Round agreements had brought into focus the reality of many developing countries struggling to absorb and survive the impact of their commitments. It was unreasonable to ask them to undertake more commitments, notwithstanding the rhetoric about development dimension. The real objective is to give protection to investors of home countries and take away the policy options of developing countries.

Even developed countries were finding it difficult to deal with sensitivities associated with foreign investment, India underlined, pointing to the Australian Treasury intervening in the interests of ‘energy security’ against a foreign investment, and the problems generated by the French public sector enterprise, Electricite de France (EDF) purchasing shares in the Italian industrial holding company, Montedison. These showed that the political implications and sensitivities of investment liberalisation were much more complex and complicated than political implications and sensitivities of trade liberalisation.

A multilateral investment agreement in the WTO would be negotiated o a ‘one-size-fit-all’ approach, where bilateral and regional agreements gave greater flexibility.

India also noted that the EC and Japan, the main proponents of investment negotiations in the WTO, had been repeatedly saying in public that they needed this in order to sell agricultural liberalisation domestically. Before Seattle they used the jargon ‘comprehensive’ round for this purpose, and now they used the term ‘broad-based’. The attempt to introduce investment into the negotiations had thus nothing to do with development or the interests of  developing countries. The logic of introducing investment had nothing to do with merits of the subject or the interests of developing countries, but a response to the domestic compulsions and political needs of some powerful delegations to engage seriously in mandated negotiations on agriculture. – SUNS4907

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

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