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) 1999.

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 investment.

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 WTO.

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 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 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 investors.

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 objectives.

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 resources.

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.

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. This article was first published in SUNS #4536, October 25, 1999.