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The WTO and the Proposed Multilateral
Investment Agreement: Implications for Developing Countries and Proposed
Positions
CONTENTS
1: The Issue Free Access to Foreigners 2: The Implications General Implications 3: The MIA Reasons for Opposing the MIA 4: Options for Developing Countries Suggested Positions for Developing Countries
1. The Issue The European Commission (EC) is lobbying to introduce a foreign investment treaty or "multilateral investment agreement" (MIA) in the World Trade Organisation (WTO). This seems to be supported by Canada and some other Northern countries. The lobbying is at a rather advanced stage. The EC hopes to get the principle of a MIA approved in December 1996 at the first WTO Ministerial Meeting, in Singapore, or at least to get agreement to start a WTO working group on trade and investment as a first step towards negotiating an agreement. The EC version of the MIA would give rights to foreign companies to establish themselves with 100% equity in all sectors (except security) in any WTO country, without restrictions, and to be given "national treatment" (or be treated equal to or better than local firms). National policies/laws that favour local enterprises or facilities would be deemed discriminatory, and thus WTO-illegal and have to be cancelled. The EC plan has been outlined in several speeches by EC Commissioner Sir Leon Brittan. It is also most systematically set out in an EC paper entitled, "A level playing field for direct investment worldwide", that was informally circulated to WTO diplomats in Geneva. The paper proposes that multilateral rules on foreign direct investment (FDI) be set up containing three principal elements:
Free Access to Foreigners Under the issue "free access", the EC paper explains that worldwide there remains a "host of barriers that prevent foreign investors to enter the host countries freely." It gives some examples: Governments may only allow a foreign investor to set up a subsidiary or take over a local enterprise after a specific authorisation is given. Foreign investors may only be allowed to start operations in the form of joint ventures with local companies. Joint ventures sometimes cannot be majority-owned or controlled by foreigners. Foreigners can be excluded from participation in privatisations or barred access to government concessions. Performance requirements, such as export or local purchase requirements, can be made a condition for establishment. Complete sectors like transport, energy or financial services can be closed for foreign investors. (The rules above that the EC paper has quoted do exist in many developing countries, and have been set up by governments with the aim of increasing the benefits to the host countries from having foreign investments, or of enabling local companies to strengthen themselves by shielding them from the full force of competition from foreign firms.) (The paper says, however, that these barriers "clearly are costly", not only to the investor but also to the host economy, and its obvious implication is that such rules should be scrapped). The paper concedes that there are a few areas where restrictions on foreign control are reasonable, for instance, in the case of a strategically vital defence industry. But it states that the following "essential principles" should apply worldwide:
It is clear from the above principles that the EC is trying to get developing countries to accept that foreign companies should have the "right of entry and establishment" in their countries. In other words, should a foreign company want to enter and set up operations in a country, the government should not have the power to stop it from doing so, unless there are exceptional reasons (which are multilaterally agreed on). National Treatment for Foreign Firms The EC paper proposes that once they have been given entry and have been established in a country, foreign companies should then be given "national treatment". This is a term used in the General Agreement on Tariffs and Trade (GATT) and the WTO to imply that a foreign product imported into a country should be treated the same way as a local product. The EC paper makes clear what it means by "national treatment" in the context of investments. It says: "In general, the host country should treat the foreign investor and his investment operating in its territory in the same way as a domestic investor or firm." The paper adds that the national treatment principle should be complemented with the "most favoured nation standard" where host countries grant to foreign investors specific favourable conditions not available to national investors. In other words, there should not be discrimination between investors from different foreign countries. The EC's rationale for national treatment is that in the absence of this principle, the foreign investor "might find the operation of his firm hampered by discriminating measures." The paper mentions the following "typical restrictions": a prohibition to own real estate, limited or no access to government aids and subsidies (example: participation in R&D programmes), discriminatory tax provisions or an exclusion from bidding for government contracts. The paper says that most of these restrictions discriminate against foreign investors and "should be outlawed." It concedes that there can be exceptions, such as access to R&D subsidies, public order and national security. But in general, national treatment must apply. Accompanying Measures The EC paper goes further: it says the right of entry and national treatment alone are "not enough" to create favourable conditions for FDI. Multilateral rules should also cover "accompanying measures". Many examples of such measures are given: An effective mechanism to settle disputes between the source and the host country. The freedom to make financial transfers. Expropriation of a foreign investment is only possible in exceptional and internationally recognised cases and must be accompanied by adequate, effective and prompt compensation. Host countries must also have transparent domestic regulations, and assure that international obligations are honoured by sub- federal and local authorities. Further, the EC proposes that rules on investment should also consider informal and structural barriers not directly linked to FDI but have consequences for investment flows. Examples include: merger control and anti-trust laws that prevent the making of an investment; private practices such as ownership restrictions in company by-laws that could discriminate against foreigners; exaggerated investment incentives that distort investment flows or lead to a "race to the bottom" between countries and regions. The paper adds that a multilateral investment instrument could also address "taxation, labour or environment policies" as these can influence the climate and conditions for FDI. The Motives In promoting its proposal to developing countries, the EC says the foreign investment treaty would lead to greater foreign investment in the South. However, concern for the interests of the South is only a pretext. The real motives of the proponents are to increase the access of their companies to resources and markets of the developing countries, as well as to have another powerful instrument that prevents the emergence of strong domestic enterprises in the South and thus block the development of potential rivals. They have already introduced other instruments or concepts for controlling rivals and decreasing their competitiveness, such as the TRIPs (trade-related intellectual property rights) agreement, TRIMs (trade-related investment measures), social clauses (trade measures linked to labour standards and human rights), and environment standards (such as in PPMs or process and production methods). But the investment treaty would be the most serious. It would be a return to a colonial era situation, where the master country governments through force enabled their companies to enter and take over the land, minerals and other resources of colonies, and took over the colonies' markets as well. The essence of independence is the reconstruction of the local economy, development of local enterprises, and retaining as much of the income and value-added in the domestic economy. This implied regulating the role of foreign companies in the economy and trying to derive as much value-added and technology transfer from them for the national economy. The investment treaty is designed to erode or significantly remove the rights of Southern governments to regulate foreign investors and reduce their ability to build up local enterprises, which will not be able to compete with the bigger foreign firms. It would also prevent local firms from developing the capacity for manufacturing exports. In the Uruguay Round, the US, the European Union (EU) and Japan tried to include the same issue (foreign investment regime per se) in the negotiations on TRIMs. Due to strong opposition by some developing countries, this aspect was removed. The present TRIMs agreement that remains is bad enough: it prevents governments from imposing conditions on investors that could affect trade conditions, such as specifying local content in domestic manufacturing and limiting imported inputs of a firm to a certain percentage of its export earnings. Having got the foot of investments into the WTO door (through TRIMs and investment measures), the North is now trying to get the main body (investment regime per se) in through the foreign investment treaty.
2. The Implications General Implications The EC proposals are certainly wide-ranging and comprehensive and would, if adopted, have very significant implications for developing countries. The issue is not whether or not foreign investment is good or should be welcomed. Most countries presently accept the importance of foreign investment and are trying their best to attract foreign investment. However, there is evidence that foreign investment can have both positive and negative effects, and a major objective of development policy is to maximise the positive aspects whilst minimising the negative aspects, so that on balance there is a significant benefit. Experience shows that for foreign investment to play a positive role, governments must have the right and powers to regulate their entry, terms of conditions and operations. The key problem is that the proposed treaty seeks to remove these government rights and powers. By doing so, the negative aspects of unregulated and uncontrolled foreign investment inflow and establishment could overwhelm the positive aspects. Most developing countries have policies that regulate the entry of foreign firms, and include various conditions and restrictions for foreign investors overall and on a sector-by- sector basis. No country at present has adopted a total right of entry policy. In some countries, foreign companies are not allowed to operate in certain sectors, for instance banking, insurance or telecommunications. In sectors where they are allowed, foreign companies have to apply for permission to establish themselves, and if approval is given it often comes with conditions. Of course the mix of conditions varies from country to country. They may include equity restrictions (for example, a foreign company cannot own more than a certain percentage of the equity of the company it would like to set up); and ownership restrictions (for instance, foreigners are not allowed to own land or to buy houses below a certain price). Many developing countries also have policies that favour the growth of local companies. For instance, there may be tax breaks for a local company not available to foreign companies; local banks may be given greater scope of business than foreign banks; local firms may be given preference in government business or contracts. Governments justify such policies and conditions on the grounds of sovereignty (that a country's population has to have control over at least a minimal but significant part of its own economy) or national development (that local firms need to be given a "handicap" or special treatment at least for some time so that they can be in a position to compete with more powerful and better endowed foreign companies). Most developing countries would argue that during the colonial era, their economies were shaped to the advantage of foreign companies and financial institutions (belonging usually to the particular colonising country). Local people and enterprises were therefore at a disadvantage, and require a considerable time where special treatment is accorded to them, before they can compete on more balanced terms with the bigger foreign companies. This has been the central rationale for developing countries' policies in applying restrictions or imposing conditions on foreign investments. The EC proposal to liberalise foreign investment flows in so comprehensive a manner will therefore have serious consequences. For if the proposals are adopted, governments in developing countries will find that the space for them to adopt their own independent policies on how to treat foreign companies and investments will be very severely restricted. No longer will each government have the freedom to choose its own particular mixture of policies and conditions on foreign investments. The major policies would be already determined by the multilateral set of investment rules, and the choice available would be very much constrained to more minor aspects. Some Specific Implications for Developing Countries A study should be carried out on the implications of the proposed treaty (as spelled out in the EC paper) on each developing country. The following is a preliminary "checklist" of possible implications: (a) The strategy of reducing foreign share and increasing local share of equity, would be threatened. Social engineering through equity requirements would be impossible. (Countries with race relations problems would be denied a key instrument for structural reform). (b) Joint ventures would disappear. Foreign firms would most likely prefer to take the form of 100% owned subsidiaries, now that there are no longer equity restrictions. This affects the policy of encouraging or requiring joint ventures, for reasons of sharing the benefits of ownership and profit share with locals, to more easily facilitate technology transfer, and to limit foreign profit outflow. A worsening of the balance of payments item "investment income payments" can be expected. (c) The policy of requiring companies or financial institutions to locally incorporate themselves, may become invalid. More seriously, the treaty will impose extreme financial liberalisation, with foreign banks and other financial institutions given the right to operate, and with national treatment. (d) The EC proposal is that the treaty covers all sectors, excepting defence. (Even here it warns that national security or preservation of public order cannot be used as grounds for protectionism). Foreign firms and foreign individuals must be allowed to enter in all areas and treated like locals, including in land, real estate, the whole range of services including health, law, travel and transport, media and communications, finance, agriculture, mining, construction and manufacturing. If there is unrestrained foreign entry, the national economy could be overwhelmed. Developing countries have to some extent tried to slow down pressures for liberalisation in services, especially in the financial sector. National treatment and liberalisation in the present services agreement is not compulsory but is on an "on offer basis". The MIA on the other hand would have a blanket cover-all approach, that will be used to overcome what is seen as "resistance" to liberalisation in services, and other sectors as well. (e) Policies and regulations favouring local firms and businesses would have to be cancelled. Many local enterprises would have their market share cut, be deprived of preferential treatment and some might eventually close. (f) Governments would lose the use of important instruments of macro-economic policy, financial management and development planning. Equity ownership, foreign exchange inflows and remittances, and the direction of investment decisions, volume and flows, would more and more lie outside the purview of national governments. (g) Governments would be deprived of the right to regulate the terms of foreign ownership of houses, real estate and land (urban and rural). For example, various governments' restrictions on house or land purchases by foreigners, would be affected. (h) With governments deprived of discretionary powers of setting terms of entry and regulatory powers, the possibility of technology transfer (already at an unsatisfactory level) would be reduced further. (i) It would be much more difficult for governments to reduce balance of payments problems, reduce imports or to strengthen export potential. Many developing countries might fall into balance of payments (BOP) crisis, or be unable to escape from such a problem. (This critical point is dealt with in more detail in the next section.) (j) Other aspects of the economy (tax system; company laws; government contracts, awards and purchases; the industrial structure and local monopolies) would also come under scrutiny for signs of favouring locals against foreigners, and changes will be sought. (k) There would also be strong implications on culture, as the proposed treaty would not allow exclusion on cultural or moral grounds, nor for the media, communications and information sectors. Foreign companies in these sensitive areas would be allowed to enter and be treated on par with local firms. Implications of WTO and Foreign Investment Treaty on BOP and Domestic Sectors Development One of the most important effects of the proposed investment treaty would be that governments will find it much more difficult to control the BOP, and especially to take measures to get out of BOP deficit problems. To strengthen the BOP, governments require the authority and option to:
The three policy options and how they are threatened are elaborated below: a) Governments should have the authority and option to regulate the inflow, terms and operations of foreign investment. This is because foreign investment can often result in more foreign exchange leaving the country than coming in. On the merchandise trade side, foreign firms have heavy imports of capital and intermediate goods. Some (but not all) export and bring in export earnings. Even the exporters may bring in more imports than the export earnings. Overall there may be a negative trade effect from foreign investment. In Malaysia, the electronics industry is by far the main export earner, but the exports have a very heavy import content: the net foreign exchange earning from trade is much less. On the financial side, foreign firms bring in capital. But many also borrow from resident banks. They take out profits. There is a negative foreign exchange effect if foreign profits exceed foreign investment flow. More- over the stock of foreign capital builds up: it continues to earn a future stream of higher profits (resulting in higher outflow) and it can also leave. Because of the above possible serious negative BOP effect of foreign investment (on the trade and capital balance), governments should maintain the right to regulate foreign firms. For instance, governments have placed conditions that firms must use specified local inputs, or a percentage of the output value must be locally sourced (local content policy). Another condition is that imported inputs of a firm must be restricted to only a certain percentage of that firm's export earnings (balancing of foreign exchange policy). Another policy may be to restrict a commodity or product from being exported (by imposing a ban or limiting export to a percentage). All these three policy measures have been explicitly mentioned in an illustrative list and made illegal by the TRIMs agreement of the Uruguay Round, on the ground it discriminates against foreign products or foreign trade. Of course, the removal of these policy measures would make it more difficult to resolve balance of payments deficits. Developing countries have five years (from Jan. 1995) to implement this. There will be on- going negotiations to outlaw more investment measures that are not on the Agreement's illustrative list. In these negotiations, it may be possible to reopen the fairness of such prohibitions. The MIA would make the situation worse. Governments now control the quantity and quality of foreign investment, and can limit the percentage of foreign equity, preferring joint ventures so that a share of the profits is retained by locals. Some countries limit the outflow of profits. These measures would be outlawed. Inability to regulate entry will increase the foreign share of equity. Removal of joint-venture arrangements would further raise foreign equity. Together these would raise the foreign share of profits in the economy. Given international trends, corporate tax is being progressively reduced. If foreign profit outflow is too high and can threaten the BOP or reserves and financial stability, the option of limiting profit repatriation would not be available. In the WTO, there are provisions that a country with a balance of payments crisis can have recourse to some of the prohibited measures and policies to protect their BOP (under the WTO's balance of payments provision). This will only be for a temporary period. The applying country has to enter into consultations with other members in the BOP Committee. After the Uruguay Round, there will now be more keen scrutiny of the need to introduce BOP measures and conditions are more severe on relaxing and removing them. (b) Measures to reduce imports or use of foreign services and measures to increase the use of local products, services and facilities, are important policy measures to reduce BOP deficit. The enhanced disciplines in the WTO already make this more difficult. The investment treaty would make it more impossible. For instance according to the present TRIMs agreement:
Fortunately, the GATS is not a catch-all agreement and applies only to those sectors or activities that the country has put "on offer". The proposed foreign investment treaty would be a catch-all agreement, in which all sectors and activities are included, unless specifically excluded. Thus, any "affirmative action" measures that promote local industries or services (through subsidies, preferential tax treatment, specified condition for investment, even R&D subsidy) could be seen as "discriminatory" against foreigners and thus prohibited. (c) The TRIPs agreement in the WTO may also have negative effect on balance of payments and domestic development. Through TRIPs, developing countries are now obliged to introduce a level of patent and other IPRs regimes equal to that of the industrial countries. These countries did not have such a standard of laws until they had reached advanced stages of development. Thus they were able to copy and internalise up- to-date technology, which formed the basis for their industrial growth. The IPRs regimes are used to prevent developing countries from learning and adopting their own technologies, and thus they have to rely on foreign technology for which an increasing amount has to be paid in royalty or purchase price. Prices of patented products will also be jacked artificially higher because of monopoly control. The combination of higher prices and outflow of investment income due to higher profit and to royalty payments, would increase foreign exchange drain. In the next century, the fastest growing part of profitable value added of products or economies is expected to be income earned on account of IPRs protection and earnings, especially in information technology and biotechnology. This is the main reason for the North's insistence on having TRIPs. Fortunately, there is still space for negotiation on the area of IPRs for biological materials and biotechnology, where the patentability issue is still under review. The North want to have access to the South's genetic resources as raw material for biotechnology, then patent the products and re-sell to the South for astronomical profits. The South can prevent this by arguing that the knowledge for use of the materials is derived from the South and thus cannot be patented.
3. The MIA Reasons for Opposing the MIA The treaty proposal should be countered because: (a) Its contents can be very damaging to economic sovereignty and development efforts, as pointed out above. It would run counter to various UN Charters and Declarations affirming the sovereign right of states to control national resources and the right of states to economic sovereignty. (b) The treaty is to be within the WTO. Being a trade agreement, this makes it legally binding. The obligations are binding and have to be followed. National laws and policies have to be subjected to the treaty's provisions. (c) The WTO has under its umbrella a number of agreements, the main being the Agreements on Trade in Goods (including GATT 1994, Agriculture, Textile and Clothing, TRIMs), the GATS and the TRIPs agreement. The WTO is also a "single undertaking", meaning that a member has to accept all agreements. Refusal to sign on to one of the agreements means the country cannot be a WTO member, or has to leave. This makes it risky or even dangerous for new issues to be negotiated in the WTO. If there is agreement to negotiate a new issue like the investment treaty, and then a good majority of countries have reached agreement, those that do not agree would be under intense pressure. For there may be the prospect of having to leave the WTO as a whole. (d) The WTO has a dispute settlement system which has "bite". Failure of a country to follow its obligations could lead to its being brought to the WTO panel (or court). If found guilty, that country would have to change its laws, or be subjected to a trade sanction. Further, the WTO has an "integrated dispute settlement system" which connects the different aspects and agreements (goods, services, IPRs). This means that if a country is taken to court (WTO panel) and found guilty, it can be retaliated against not only within the area of dispute but also in another area, which may hurt it more, in order that the complainant gets adequate relief equivalent to the quantum of the loss it claims to have suffered. This possibility of "cross-sectoral retaliation" is very threatening. For example, if a rich country, A, has a grievance against a poor country, B, for not allowing its banks to have full access, it can bring B to a WTO panel. If B loses, then it has to change its laws and policies. If it does not, then A can ask for a suspension of concessions (or trade penalties and sanctions) equivalent in value to the loss claimed by A. This penalty will first be sought to be applied in the same sector (e.g. banking) or other sectors in the same agreement (services). But if this is not effective, then A can seek to have sanctions applied in another area where B will suffer more loss, for instance a sanction or countervailing duty on B's export goods. Thus: "If you don't grant my bank permission to set up or be given national rights, I will restrict or have countervailing duties on imports of your rubber or electronic products to my country." The threat of painful cross-retaliation is what gives WTO its clout, as this can be used effectively to discipline the weaker countries. If the investment treaty is accepted into the WTO then the pressures of having to comply could be tremendous. It is precisely because WTO has teeth that the Northern countries have chosen the WTO as the vehicle of choice to introduce this treaty and for introducing other issues into the WTO. As the EC says in its Discussion Paper on Trade and Investment: "An additional strong point in the WTO's favour (as the forum for negotiations on investment) is that it possesses an effective dispute settlement mechanism, an important consideration for the credibility of the investment regime which would emerge." Through the WTO, the North can get developing countries to comply with the policies it chooses, under pain of punishment and trade penalties to the developing countries if they do not follow. (e) The EC's proposal is that this be a "blanket" or catch-all treaty. The effects would thus be more serious as the treaty covers almost all sectors, and there would be litle ground for negotiating exclusion or relaxation of some areas. All sectors or activities would be covered, unless specifically excluded. This would be unlike the present WTO services agreement, which is on an "on offer" basis, i.e. each country offers a list of sectors/activities for liberalisation. The investment treaty would be like the WTO TRIPs (intellectual property rights) agreement, which covers all areas except a few products (e.g. medical equipment) that the treaty explicitly excludes. (f) This being an international treaty, a signatory country has to lock its national policies to the treaty's obligations for as long as the treaty stands. To amend a WTO Agreement is very difficult, as it requires either all, or three-fourths or two- thirds majority (depending on the part to be amended) and in practice it could not be done if one major trading country objects. In a way, this can be likened to the veto power in the Security Council. It would thus be almost impossible for a country to change its policies if they are contrary to its WTO obligations. The country's policies would have to be in line with the WTO treaty "forever", or at least for a long time. This would foreclose a country from having various policy options, even if it needs to change policy when the situation changes. The Current State of Play (a) The Situation in the WTO For the EC, investment is by far the most important new issue that they are pushing for acceptance to start a new round of negotiations. The EC introduced a detailed plan of their proposal in March 1995 to 17 developing countries in Geneva. They presented the rationale for the treaty on the ground it would be beneficial for developing countries as they would be able to receive more investments. Since then the EC has lobbied hard and at first seemingly did not face serious objections from most developing countries. In fact, many of these countries have had no time or capacity to study the proposal in detail. They are already overburdened with having to cope with the aftermath of the Uruguay Round and cannot deal with new issues being pushed by the North in the WTO. Over time, however, many developing countries have been studying the issue. Several have now voiced their opposition to the concept of a MIA, including at the informal WTO heads of delegation meetings in Geneva, and would not like the issue to be brought into the WTO, whilst many more have strong reservations. The EC is attempting to push their proposal to a "consensus" position or else to a "near consensus" position so that it would be difficult for a few countries to dissent. There is a great deal of pressure, from the EC and Canada, to start the process in the WTO, through a declaration or decision at the Singapore Ministerial Conference. These proponents are being aided by the WTO Director General, Renato Ruggiero (an Italian), who is also pushing for the investment treaty to be accepted as a new issue. On 21 January, in an interview in Ghana, he was asked about the EC investment proposal. He claimed that "there is broad consensus on the need and value of such an investment treaty, except for the objections of a few big developing countries." Pressed on what the objections were, he claimed not to remember the details but added: "Some things about sovereignty." (SUNS, 24 Jan. 96) (b) The OECD's MAI Process The EU brought up the investment treaty proposal at the Asia- Europe Summit in Bangkok in early March 1996. However it met with a cool reception. According to reports, Indonesia as well as Malaysia strongly objected. The industrial countries are also having their own negotiations on an investment treaty within the Organisation for Economic Cooperation and Development (OECD). The Americans are said to prefer the OECD as a forum, for a stricter investment regime can be attained there. An OECD investment treaty could then be opened up to other countries. The EC is said to prefer the WTO as a forum because in the WTO, the EC negotiates on behalf of its member states whereas in the OECD each European country negotiates for itself. The EC also thinks the WTO's dispute settlement system would give the treaty "credibility". At an OECD-organised meeting on foreign investment held in Hong Kong in March 1996, the OECD secretariat and officials revealed that the OECD countries are negotiating a multilateral agreement on investment (MAI) which would be a multilateral treaty and not an OECD-only treaty. Once the OECD members have signed and the treaty is established, it will be opened to non- OECD countries to join in. There will be terms of accesion, but the nature of these is still not clear. OECD officials denied at the meeting that there is any intention of transferring the OECD's MAI to the WTO. The MAI will be ready by May 1997, the dateline having been set at political level by OECD Ministers at a meeting in 1995. The negotiations are already advanced, with several working groups. There did not seem to be any doubt from the OECD officials that the dateline will be met. The OECD explanation drew criticisms from most of the 12 non- OECD countries' representatives at the meeting, on both process and substance. Most countries were outraged with the OECD's intention of negotiating a multilateral treaty amongst themselves, without the participation of other countries, in order to attain "high standards". They said that they could not be expected to join an agreement, when they had not been invited to participate in the creation process. What was important was not "high standards" but the "correct standards". Most non-OECD participants also raised serious concerns about the substance of the MAI, that it would give all rights to the foreign companies and all obligations to host country governments. Moreover the benefits to developing countries were not concretely spelt out, beyond statements that joining the MAI would be taken as receiving a "certificate of good conduct", which would then presumably result in foreign investors having greater confidence in the MAI-member countries. A paper commissioned for the meeting by the OECD in fact concluded that there was scant empirical evidence on the effects of investment liberalisation on host countries. Some participants asked if this was so, why then should it be presumed that the MAI would be beneficial to developing countries, especially since there were legitimate and major concerns on the effects of FDI inflows on balance of payments and on local enterprises? These concerns were not addressed by the OECD participants. It would appear that since the OECD's MAI would be concluded by May 1997, there is no way that developing countries can influence this treaty through establishing a programme in the WTO and giving inputs from there.
4. Options for Developing Countries The EC and Canada's objective is to get endorsement of the Singapore Ministerial Conference of the WTO for trade and investment as an issue for the WTO to discuss. The meeting is held once in three years and is the WTO's highest body. The EC plan is to get this meeting to endorse the principle of a treaty and to establish a working group to negotiate its terms. If they succeed, there would be a dangerous situation, for the North is much better prepared in negotiations. Once a subject is given a "negotiating status" (or even a mere "discussion" status), it is likely that the North will have its way, given the present state of bargaining power in the WTO, and given the recent experience of the Uruguay Round negotiations on new issues (intellectual property, services, investment measures). Some developing countries have been influenced by the idea that the WTO should discuss the treaty, otherwise it would be determined by the OECD countries (without the participation of developing countries) and then thrown open to developing countries to sign on. The threat of its being decided elsewhere, is thus being used to get developing countries to agree to getting the treaty discussion on board the WTO. However, this is not a viable position, because the OECD will complete its MAI by May 1997, upon which it will open the MAI for other countries to sign on. Thus, even if the Singapore Ministerial Conference in December 1996 decides to begin a discussion on trade and investment, it would not be able to influence the OECD treaty. Moreover, it is not compulsory for any other country to join an MAI negotiated solely by the OECD countries. The imminent emergence of an OECD MAI should not be grounds for countries to agree that the WTO negotiate a similar issue. In fact this would set a dangerous precedent. In future, the OECD countries can again negotiate other issues among themselves (such as labour standards, human rights, corruption etc.) and then again put pressure on WTO Members to also start working groups on the same issues. Thus, the argument that developing countries should agree to a WTO process to avoid a worse version of an MAI through the OECD, is not valid. It is possible to say "No" to initiating a WTO process, as well as to attempts to transplant an OECD's MAI into WTO, as well as to have a choice of joining or not joining the OECD's MAI. The South has important choices to make in the preparation of the Singapore meeting. The EC and Canada would like the Singapore Conference to refer to the need for NEGOTIATIONS on trade and investment or on a MIA, in the Ministerial Declaration or a Ministerial Decision. If this is not possible, the preference may then be for establishing a WORK PROGRAMME through a WORKING GROUP on trade and investment (similar to the present programme for trade and environment). If this is not possible, there might then be a reference to the need for an EDUCATIVE PROCESS, which presumably may mean the establishment of something like a "study group". It is not clear whether in practical terms there will be any difference between this and a working group. Seeing that there is growing resistance to initiate negotiations on a MIA or even on establishing a working group, the MIA proponents might opt instead for getting a Ministerial decision to begin an "educative process" in the WTO, with no commitment that there be negotiations for an agreement. It is, however, unclear what an "educative process" would be like. There is a strong possibility that once the issue is accepted as within the competence of the WTO, even for an educative process, there would be strong pressures that this process would proceed into working groups, negotiations and treaty. The pressures within the WTO towards rule-making make the WTO an unsuitable forum for an educative process, since there would be an atmosphere of tension, fear and suspicion. A more open forum for discussion and an educative process would be the UN, where the issue can be seen in its many facets, and not only from the perspective of rule making and the trading system. At the UNCTAD-9 Conference in Midrand in May 1996, the United Nations Conference on Trade and Development (UNCTAD) was given the mandate to discuss the issue of trade and investment and the implications of a MIA, at intergovernmental level. Thus, for the next few years, discussions and an educative process could take place at this forum. Arising from such a process, the role of the trading system can be better clarified. In any case, the WTO is already scheduled to review the TRIMs agreement in the next several years. Should any country want to bring up the trade and investment relation, this can be done in the context of the TRIMs review. This option also has the advantage that TRIMs is geared towards trade-related measures and aspects of investments (which is a more legitimate area of WTO competence), rather than investment regimes per se. Finally, the Singapore Trade Minister has put forward a suggestion that before any new issue is brought into the WTO for negotiations, it should be able to meet three criteria: that it be substantially trade-related, that the WTO (and not some other agency) is the appropriate forum, and that the issue is already "mature." On all three counts, the MIA or "trade and investment" fails to meet the test. (See next section, point 11 for an elaboration.) Suggested Positions for Developing Countries It is suggested that the following positions be taken by developing countries: (1) The WTO is a trade organisation. Its function should be restricted to trade issues. Moreover, issues it takes up should not only be substantially trade related (because there are many issues that are trade related) but also can be shown to be trade distortive, and thus impose an unfair situation on certain Members. It is not within the WTO's area of competence or jurisdiction to deal with investment issues per se or with rules and policies regulating foreign investments as such. (2) Issues that link investment measures to trade are already covered by the TRIMs agreement in the WTO. The acceptance of this agreement in the Uruguay Round was already a major concession by developing countries. (TRIMs for instance prohibits countries from having a local content policy for their industries, thus restricting the South's development potential.) The WTO should stick to having TRIMs and not broaden its scope by incorporating investment regimes as a whole. There will be a process of reviewing the TRIMs agreement in the next few years. This review process is the appropriate place in the WTO for a discussion of the need and possibility of broadening the trade and investment issue. There is no need to start a working group on this issue. (3) The proposed foreign investment treaty would deprive developing countries of a large part of their economic sovereignty. This goes against various UN charters and declarations. It removes the right of states and the powers of governments to regulate foreign investments and investments in general as well as other key elements of macroeconomic policy, financial management and development planning. The treaty is a throw-back to colonial-era economics. It cannot have a place in the present world where developing countries have the legitimate right to regulate investments, develop their own domestic economy and to strengthen their own enterprises. (4) There is an important role for foreign investments in developing countries. But this role can be positively fulfilled only if governments retain the right to choose the types of foreign investments and the terms of their entry and operation. Thus, the objection to the treaty is not out of any bias against foreign investment per se. Rather, it is because of the successful experience of those countries that have made use of foreign investment that there is realisation of the importance of the need of government to have decision-making powers and policy options over the entry, terms of equity and operations of foreign investments. For example, Malaysia has had a very sophisticated system of combining liberalisation with regulation in a policy mix that can be fine-tuned and altered according to the country's economic condition and development needs. The ability and right to have options for flexible policy was especially needed to redress social imbalances among ethnic communities in the country. Thus, from this experience, it is clear to us that developing countries need to maintain the right and option to regulate investments and have their own policy on foreign investment, instead of an international investment regime that would take away those rights. Giving total freedom and rights to foreign firms and foreigners may lead to the disappearance of many local enterprises, higher unemployment, greater outflow of financial resources, and therefore to balance of payments problems. It may also worsen social imbalances within society, thereby causing social instability which will offset economic prospects. (5) The industrial countries are pushing for this treaty to strengthen their companies' access to Southern countries' markets and resources. It is not for altruistic purposes of helping the South. Developing countries should not be taken in by arguments that this treaty is formulated for their interests. (6) On principle, it cannot be accepted that the issue of "multilateral investment rules" is an area to be discussed within the WTO as it is not in the purview or area of competence of the WTO. It should therefore not be included as an agenda item in the WTO Ministerial Conference in Singapore. It should also not be mentioned as a legitimate issue for negotiations, a working group or even an "educative process" in the Ministerial Statement in Singapore, or in any decisions of the WTO Council or its Committees before the Singapore Conference. (7) Should the OECD countries want to negotiate an investment treaty among themselves in the OECD, it is their right to do so. Should they extend their MAI to other countries to join, each country can make its own decision as to whether or not to acede. However, the fact that the OECD is negotiating an MAI should not be used as grounds that the issue should also be negotiated in the WTO. (8) If there is a need to discuss the inter-related issues of investment needs, rights of investors and obligations of investors, the forum should not be a negotiating venue like the WTO, but a more open and neutral body such as UNCTAD, which has the general mandate to discuss policies within the development context. Through UNCTAD-9, UNCTAD also has been given the specific mandate to discuss at intergovernmental level the implications of an MIA. Thus an educative process can be conducted at UNCTAD in the next few years, and there is no need to begin a similar process in the WTO. (9) The Singapore Ministerial Conference should focus on its original mandate of reviewing the problems arising from implementation of the Uruguay Round. It should in particular review problems faced by developing countries from having to meet their WTO obligations. The various problems need to be collated, and steps be taken collectively to study which of the provisions of the WTO treaties are causing the problems, and whether and how to review and amend these sections. This is an urgent task, and would require a lot of attention and resources. Moreover, the Ministerial Conference would also require time to focus on the in-built agenda, and trade and environment. It should not be distracted by controversial debate over new and contentious issues. Countries are already over-burdened from having to study and implement their Uruguay Round obligations. They cannot be overstretched further in dealing with new issues such as labour standards, investment treaty and competition policy. There should therefore be a moratorium for the time being on the inclusion of yet more new issues. The Northern countries should instead focus their energies into helping the South to review the Uruguay Round results and to take measures to amend the agreements where needed, taking into account the need to consider the equity aspect of the rules (i.e. the equitable sharing of benefits and costs arising from the Uruguay Round and from the present trade rules). There should also be serious discussion and decisions on provision of extra concessions, aid or compensation to those developing countries (especially the least developed countries) who have suffered losses resulting from the Uruguay Round. (10) If there are to be new issues to be discussed, they should be legitimately and clearly distortive of trade, such as the impact of fluctuating exchange rates on the South's trade and the effects of low commodity prices and continuing debt on the South's trade earnings and balance of payments. Unless these genuine problems are resolved, the North should refrain from adding more of their issues on the agenda as this would put even more unfair pressures onto their Southern trading partners. (11) The Singapore Trade Minister has put forward a suggestion that for a new issue to be brought into the WTO, there should be three criteria, namely:
The MIA does not meet the three criteria: (i) Trade relatedness: An issue should not only be trade-related (because almost any issue has a link, and many issues have a substantial linkage to trade); priority should be given to an issue that is "trade distortive". In the case of trade and investment, the relevant aspect of trade-relatedness and trade distortiveness is already dealt with under TRIMs. Any review of rules and further discussion of the trade and investments issue can be done under the process of reviewing TRIMs, which is part of the WTO's built-in agenda for the next few years. (ii) The suitability of forum: Trade and investment, and in particular the implications of a MIA, is extremely complex, involving developmental, economic, social and even political issues of great import. An agency like UNCTAD has a more suitable body of knowledge, technical expertise and history of discussions, to examine the many facets of the implications of investment liberalisation and the balance of rights and obligations of investors and host states. The UNCTAD-9 Conference has given a detailed mandate to UNCTAD (the intergovernmental forum and the secretariat) to study and discuss this issue. Just as the ILO is the appropriate forum to discuss trade and labour standards, the UNCTAD is a suitable forum to discuss the trade and investment linkage, which is still a new area. Conclusions can later be drawn at the WTO for any implications for trade rules. (iii) Maturity of issue for negotiations: Given (i) and (ii), the issue is not mature for negotiations. There is a significant and growing number of countries that are opposed to and wary of the MIA proposal, and thus a consensus to begin a working group is absent. Since the issue is not ripe (and perhaps not suitable at all) for negotiations in the WTO, and since the WTO is primarily a rule-making and negotiating body, an educative process would better be carried out in another more suitable forum like UNCTAD.
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