‘Opt out’ option for investment talks dangerous myth

by Bhagirath Lal Das

New Delhi, 24 Oct 2001 - Some major developed countries have floated the idea of starting negotiations on investment in the WTO on an “opt out” basis. Other variations have also been broached to start negotiations and inveigle the developing world into such talks.

The proposal of the developed countries seems to be that the negotiations should be launched and agreement should be worked out on the condition that the countries not wishing to participate in the negotiation or in the agreement will have the option of remaining out of it.

It is argued that this process will not compel any country to negotiate or undertake the obligations of the agreement. The logical suggestion is that the countries opposed to the negotiation on this subject should not block it as they will not be affected.

This is a fallacious argument. The “opt out” process is no safeguard against the damaging effects of the negotiation and agreement in this area.

The start of the negotiation on this subject at the WTO will be dangerous for developing countries and their development, and the agreement too will be dangerous even for those countries that “opt out” of the process.

A new subject can be brought on to the agenda of the WTO, and rules negotiated only if it is related to international trade (Article III of WTO Agreement of Marrakesh). Investment is not related to international trade; hence a negotiation on this subject is not permissible at present.

By proposing negotiation in this area, the major developed countries are trying to imply that investment is related to international trade. If this extension is accepted and negotiation is started in this area, it will set a dangerous trend.  There is a real danger that further new subjects will be brought up and rules written to impose WTO discipline.

In particular, the domestic taxation policy, aspects of monetary policy and even social policies may be brought into the folds of the WTO discipline. This will put undesirable constraints on the developing countries in their development process. The remedy lies in stopping right now all types of moves to start negotiation in areas like investment.

If a new subject like investment or competition policy gets into the negotiating process in the WTO, there is a danger that the subjects which are of interest to the developing countries will be crowded out of the central stage of the WTO.  The past experience of the GATT/WTO has shown that the new subjects which are of interest to the major developed countries take the central stage and the subjects of interest of the developing countries get ignored and neglected.

For developing countries, there are several areas of priority in the WTO. They would naturally like those subjects to be pursued with speed, rather than the progress there being impeded by the start of negotiations in new areas like investment and competition policy.

Further, the “opt out” approach is a myth. If an agreement on investment gets concluded in the WTO, it is almost certain that situations will be created in which no developing country will be able to remain out of it.

When foreign investors come into a country and ‘invest’, more often than not they don’t put their own cash or money as investment. There is some part of it, but a large proportion comes as ‘loan capital’ - from the principal to the subsidiary, sometimes raised by the principal and transferred and lent out through other subsidiaries for tax purposes. For such borrowings or loans, the foreign creditors add on a country-risk interest premium on a variable rate linked to the US or London Libor.

Theoretically, these premia are set on basis of credit-risks set by rating agencies, banks and creditors/by capital markets. In practice though there is a lot of inter-linkages.

If an investment agreement is concluded at the WTO and rules written, the major investors of the developed countries will try to push developing countries into joining it by charging higher interest rates for the investment in those developing countries that chose to remain out of the agreement.

This will make the investment more costly, having adverse effect on the investment into these countries. Hence a developing country, even if it has opted out of the agreement in the beginning, will find itself forced to join later.

If the developing countries want to come into the agreement later, they may have to pay a heavy price, as it often happens when a country wants to join an agreement after its entry into force.

The experiences of the developing countries joining the WTO recently are examples of this problem.

Hence exercising the option of joining at a later date is not quite practical.  Besides, if an agreement gets concluded and the developing countries decide to join later, they will be missing the opportunity of influencing the negotiating process.

Thus if the negotiation starts on “opt out” basis, that is practically of no comfort for the countries not joining the negotiation right in the beginning. As mentioned above, the situation will be created by the international investors in which these countries will have to join the agreement and again as explained above, they will have to join the negotiation right in the beginning.

It is clear that “opt out” approach provides no safeguard for the developing countries not wanting to have negotiation and agreement on investment in the WTO.

On all these considerations, a correct and proper course of action for the developing countries is to stop the negotiation and agreement on investment in the WTO in any form, whether with multilateral or plurilateral or “opt out” approach.

(*Mr. Bhagirath Lal Das is a former Indian ambassador to the GATT, and former director of the UNCTAD Trade Programmes division.) – SUNS4995

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