Trade and Investment: Fighting over investors' rights at WTO

Probably the most important decision of the Ministerial Conference of the World Trade Organization (Singapore, 9-13 December) was the agreement to set up a working group on "trade and investment". Will this be the start of a mere study which developing countries vow will not lead to negotiations, or will it lead to a treaty on foreign investors' rights with wide ramifications for developing countries? This article examines the background, recounts the negotiations and reports on the post-Conference differences of views on what was agreed on.

by Martin Khor

Should foreign companies be given the automatic right to set up in any country of their choice, be allowed 100% equity ownership and be treated just as well or better than local enterprises? This question was foremost in the minds of Ministers and senior officials when they grappled with the text of a seemingly innocuous and even boring paragraph on "trade and investment" at the WTO Ministerial Conference. On one side were the European Union, Japan, Canada and other rich nations that wanted the WTO to start discussions on investment issues, as a prelude (they hoped) to negotiating a multilateral investment agreement (MIA), to give just such rights to their corporations.

On the other side were developing countries that were against a MIA. They felt this would undermine their economic sovereignty and threaten the survival of their local firms, banks and farms. They were suspicious of starting any discussion in the WTO, since this may lead eventually to the MIA.

The stakes were very high, nothing less than the future shape of the WTO, the world economy and the domestic economy and society of developing countries. The tense negotiations on this issue, behind the closed doors of an "informal group", were perhaps the most important event of the WTO Conference.

And probably its most important outcome was the final agreement by Ministers to have the WTO begin a work programme on "trade and investment." This was the "new issue" that Northern countries, led by the EU, and supported strongly by Canada and Japan, had championed in the past two years as a matter of top priority for the WTO to adopt in Singapore.

Through the Ministerial Declaration, the Ministers have now agreed to "establish a working group to examine the relationship between trade and investment." The Declaration however, has placed this examination within a complex set of terms of reference, including the simultaneous establishment of a working group on trade and competition policy (thus linking the issues of trade, investment and competition), and linking the discussions to existing WTO provisions, and to the work in UNCTAD.

After two years, the WTO General Council will determine how the work of each body should proceed, and whether any future negotiations on multilateral disciplines will take place. Such negotiations, if any, can proceed only after an explicit consensus among WTO members.

The trade-investment link

The investment issue had been pushed by the European Commission which in early 1995 had (in an internal paper) proposed the establishment of a multilateral investment agreement (MIA) in the WTO to give rights of entry, establishment and national treatment to foreign investors in all sectors (except security) in all WTO member countries, as well as other "accompanying measures" favourable to foreign investors (such as total freedom for capital and profit flows, tax and company law changes, rights to property ownership and so on.)

This initiative was resisted by a significant and expanding grouping of developing countries. Their increasingly influential position during the preparatory process in Geneva had forced the proponents to dilute their proposal from a multilateral investment agreement (MIA) to only the starting of a "study process" on the trade-investment link at the WTO.

A core of developing countries, however, continued to insist that investment policy per se was the prerogative of national governments and outside the WTO's competence. They argued that should a study be needed, it should be held at UNCTAD which had a broader framework to examine investment policy in the context of development as a whole (and not just its relation to trade). They rejected the proposal to initiate a study process in the WTO, as discussions would be constrained by tensions of possible contractual commitments.

Moreover, the UNCTAD-IX Conference in May 1996 had given UNCTAD a mandate to carry out such a discussion. When the UNCTAD discussions were sufficiently mature, they could be the basis for follow-up in appropriate fora. Meanwhile, any discussion in the WTO on trade and investment should be confined to a review of the TRIMS (trade-related investment measures) agreement, scheduled to take place as part of the Uruguay Round's in-built agenda.

This position was in a joint statement by eight countries (Indonesia, Malaysia, India, Egypt, Tanzania, Uganda, Ghana, Haiti) and presented to the WTO in Geneva at the end of October. The statement's key points were that "the first WTO Ministerial Conference is not an appropriate occasion for introducing the issue of trade and investment" and that "given the lack of consensus, we urge there should not be any further consideration of this issue within the WTO until the processes envisaged in UNCTAD is sufficiently mature." The statement, when presented to WTO at the beginning of November, was supported by a few other countries from the floor.

A major concern of the countries was that even if a seemingly harmless "study process" were to start in the WTO, the system and practices of the organization are such (and so greatly favour the major countries) that strong pressures would build up towards a negotiation and an eventual agreement. This, almost inexorable process has been demonstrated in previous negotiations for the then "new issues" of services and intellectual property rights prior to
and in the Uruguay Round.

Also, in early November, a meeting of Trade Ministers from the eleven countries of SADC (Southern African Development Community Conference) strongly rejected the MIA proposal and urged that a study on investment policy be conducted in UNCTAD.

The resisting countries tried to remove the issue from the Draft Declaration on the grounds that there was no consensus (in line with the principle adopted in the process of formulating reports for the Ministerial Conference in the various WTO Councils and committees). But the WTO Director-General, Renato Ruggiero, who had been entrusted by the General Council to chair the preparations for the Declaration through a so-called "informal process", nevertheless included investment and other "new issues" where there had also been no consensus (competition policy and government procurement) in a letter to Conference Chairman, Singapore Trade Minister Yeo Cheow Tong, and thus brought them, as well as the labour standards issue, up for the consideration of the Singapore meeting. Since he took office in May 1995, Ruggiero had been actively championing in public on the WTO taking up these new issues, in line with the EC and US demands.

Draft texts on investment and competition

An eve-of-Conference meeting was held in Singapore on 8 December, of about ten "core" developing countries resisting the inclusion of new issues in the Declaration. The meeting affirmed that their positions remained the same. Early in the Conference, an "informal group" of about 30 countries was set up by Yeo and Ruggiero to try to get agreement on the contentious issues, especially labour standards, investment, competition policy and government procurement.

At the start of negotiations, the draft texts on investment and competition read as follows (as in Ruggiero's 29 November letter to Yeo): "We also agree to: * Begin an examination of the relationship between trade and investment leading to a report to the General Council. In the conduct of this work we particularly encourage close cooperation with the UNCTAD Secretariat, both to make the best use of available resources and to ensure that the development dimension is taken fully into account.

* Establish an Experts Group open to all Members to study issues raised by Members relating to competition laws and policies in order to identify any areas that may merit further consideration in the WTO framework and to report its findings to the General Council. The General Council will review the work of the Experts Group at the end of one year and determine how to proceed."

At the start of the informal group's discussions, Malaysia signalled a change of position by proposing amendments to the texts on investment, competition, government procurement, and labour standards. Malaysian International Trade Minister, Rafidah Aziz, explained to the media that these amendments were to counter the Northern proposals for negotiations on these issues, and provide inputs reflecting or safeguarding interests of developing countries.

But the change of stance surprised the other signatories to the joint statement opposing an investment study process at the WTO. They had not received prior advice in private about the change, as is customary in such cases.

On 11 December, Rafidah's speech at the open plenary reflected her amendments as follows: "On the issue of the relationship of investment to trade, Malaysia cannot accept or subscribe to any move to the formulation of Multilateral Investment rules in the WTO, although work on an educative process can be supported, provided it does not lead to a negotiating process."

"Malaysia does see some merit in a WTO Working Group studying the issues raised by Members on trade-related competition laws and policies, along with anti-competitive practices and abuses of trade measures. However, it is important that such a study does not lead to negotiations within the WTO."

One of the important developing countries in the informal group also privately raised a concern with his colleagues about the possibility of a threat by major countries, that should developing countries insist on stopping a WTO study process and support only an UNCTAD process, they (the majors) would use their clout to put pressure on UNCTAD to stop any further work on the investment issue, and possibly on other issues as well. It was argued that to prevent the weakening of or damage done to UNCTAD, a parallel study process should be done in WTO.

South African Trade Minister, Alex Erwin, is known to have raised this during the SADC meeting. Both at the WTO convened meeting of ministers of the LDCs in November, and at the October UNCTAD Global Investment Forum, Erwin was described as President of UNCTAD-IX - an office that, under the UNCTAD rules, ceased to exist when UNCTAD-IX was adjourned sine die.

But this created the impression that Erwin's views not only reflected his country's, but somehow also those of UNCTAD and the Southern African countries.

During the Geneva preparatory process, at some working dinners and lunches, Canada is also known to have indirectly held out the threat that if developing countries succeeded in blocking WTO work, Canada and others would block any future UNCTAD role, and the earlier threat (by some Northern countries) to close down UNCTAD could be renewed.

Majority of South excluded from the negotiations

At the first meeting of UNCTAD's Commission on Investment in November, developed countries had blocked the Commission from initiating substantive work on the investment issue. This was seen at that time by observers as a pre-emptive move to erode the strength of the argument by developing countries that the WTO should not duplicate the efforts of an ongoing UNCTAD work programme on investment.

As negotiations proceeded in Singapore, more of the countries that initially resisted the introduction of the new issues, began changing their position to accepting the inclusion of these issues in the WTO, and to trying to shape the terms of reference of the working groups, to limit their scope, or to reflect issues of interest to developing countries.

Late in the negotiations, India (the last country in the informal group to hold out) decided it could not stand alone, and joined the attempt to build safeguards and to influence the parameters of the proposed working groups on investment and competition policy.

Meanwhile, outside the select informal group, the other developing countries (constituting the large majority) were kept mostly in the dark on what was being negotiated. The Minister and senior officials of an important developing country was astounded and alarmed when told by an
NGO representative from their country about the contents of the latest negotiating text, mid-way through the Conference. Although they disagreed with the position being taken (about the setting up of working parties on investment and competition), they felt they had no way of influencing the negotiations.

Similarly, official delegates from many other developing countries were trying to get information, from media and NGO personnel, as well as from other delegates, about what was going on.

It was only late on the night of 12 December, the eve of the meeting's closure, that draft texts agreed on already by the informal group, were handed to them with a plea from the Chairman, Singapore's Yeo Cheow Tong, that the texts had been the result of long negotiations and reflected the "balance" sought and thus Members were strongly urged to refrain from opening the texts, otherwise the delicate balance would be upset.

Protests over non-transparency of WTO process After some countries voiced their protests about the non- transparency of the whole process, and promises were made by Yeo and Ruggiero to look into these complaints, the texts were endorsed. Thus, did the Northern countries succeed in prying open the first cracks in the new doors marked "trade and investment" and "competition policy" in the WTO.

In exchange for this major concession, developing countries were able to put in some safeguards in an attempt to keep those cracks as small as possible. Whether they can prevent the cracks from opening to an open door and then to a full room remains to be seen.

The final text on these issues in the Declaration (para 20) reads as follows: "Having regard to exisiting WTO provisions on matters related to investment and competition policy and the built-in agenda in these areas, including under the TRIMS Agreement, and on the understanding that the work undertaken shall not prejudge whether negotiations will be initiated in the future, we also agree to:

* establish a working group to examine the relationship between trade and investment;

* establish a working group to study issues raised by Members relating to the interaction between trade and competition policy, including anti-competition practices, in order to identify any areas that may merit further consideration in the WTO framework. These groups shall draw upon each other's work, if necessary and also draw upon and be without prejudice to the work in UNCTAD and other appropriate intergovernmental fora. As regards UNCTAD, we welcome the work under way as provided for in the Midrand Declaration and the contribution it can make to the understanding of issues. In the conduct of the work of the working groups, we encourage cooperation with the above organizations to make the best use of available resources and to ensure that the development dimension is taken fully into account. The General Council will keep the work of each body under review, and will determine after two years how the work of each body should proceed. It is clearly understood that future negotiations, if any, regarding multilateral disciplines in these areas, will take place only after an explicit consensus decision is taken among WTO Members regarding such negotiations."

Differing interpretations

After the Conference closed, sharply different interpretations of this text had already emerged, accompanied by reports of different perceptions of the various actors of what had happened and what they had or had not achieved. At a press conference on 13 December afternoon, Indian Commerce Minister B.B. Ramaiah said in a statement that the initial proposal of developed countries to start an educative process and establish a working group as a prelude to negotiating a MIA had not been accepted by the Conference. He stressed that it was "in accordance with existing WTO provisions, including the TRIMS agreement", that the two working groups should study the relationship between trade and investment and trade and competition policy.

"However, even in respect of such work by the working groups, India insisted on certain important safeguards. These safeguards were added and received substantial support even in the face of opposition by some developed countries." "The Conference has now made it clear that the work done by the working groups shall not prejudge the question whether negotiations will be initiated in the future and that it would be clearly understood that future negotiations, if any would take place only after an explicit consensus decision among the WTO members regarding such negotiations."

He noted that the Ministers had also welcomed the work underway in UNCTAD and encouraged cooperation between WTO and UNCTAD and other relevant fora. "While India has been able to persuade Member countries to reject any reference to a MIA or to begin an educative process in that regard, India is unhappy that parallel studies are being initiated in the WTO without waiting for the completion of UNCTAD's work on this subject." he added.

"However, well before the end of the Conference, almost all other delegations had agreed that as long as it is assured that no automatic negotiations on the subjects of investment and competition policy could be started, and a fresh decision to do so would be required, they would have no objection to the commencement of studies of these subjects through two working groups."

"This being the case, India did not consider it either appropriate or worthwhile to block the general consensus to commence studies on these subjects in accordance with the existing WTO provisions, particularly so when it has been explicitly mentioned that the study shall continue for at least two years, whereafter progress will be reported to the General Council of the WTO."

In response to questions, Indian Commerce Secretary Tejendra Khanna referred to a report in the Singapore daily, The Straits Times, which stated that "the WTO will now study the investment issue as part of a review of Trade-Related Investment Measures (TRIMS) coming up in end-1999 under the specific guarantee that the study will not lead to negotiations. This is a compromise from the earlier intention of having a working group study a multilateral investment pact like that being discussed in the OECD."

(This report's interpretation was similar to that given by WTO spokesman Keith Rockwell at a press briefing just after an informal heads of delegations plenary meeting, late on the night of 12 December, the eve of the Conference's closing. Asked by a journalist whether the decision on the study on investment would be in the TRIMS framework, Rockwell said: "Yes, it will be in the framework on TRIMS.") Khanna said there was a fear that the Conference would mandate a working group to discuss a MIA in the WTO as this was a clear agenda of developed countries. "We made it clear no mandate can be given to a study of a MIA. This is not permissible even in the two-year period. If it ever comes to that stage, even then, we will block it. Investment does not belong to the WTO in our considered view."

At another press conference, the Indonesian Trade Minister said, the Conference was carried out satisfactorily in the spirit of compromise. Regarding the working groups on investment, competition and government procurement, he said that "after this Conference, we have to see what is the impact of what we have agreed to, and we have to follow the studies that will be done."

According to a Malaysian daily, The Star, Malaysian Trade Minister Rafidah Aziz told reporters after the Conference that the WTO will never again be troubled by any attempts to make it discuss non-trade issues and that is Malaysia's big achievement. "We came here with a number of specific objectives and we have achieved them." Earlier, The Star reported that Malaysia had won a "massive victory at the WTO Conference when its hard lobbying won the support of developing and developed countries," and that after four days, "the advanced countries backed down from their tough stand at 8pm, accepting Malaysia's position on how the WTO should deal with labour standards, government procurement procedures, investment rules and competition policy."

The US, which has not been keen to push investment in the WTO (preferring to complete the multilateral agreement on investment in the OECD), came out with a short post-Conference response. "The US is satisfied that the WTO work program on investment will not endanger the OECD investment negotiations in Paris, which are scheduled to conclude in May 1997. The purpose of the OECD negotiations is to obtain a high-standard multilateral investment agreement that will protect US investors abroad."

However, the EU had a clearly different view than developing countries of the significance of what had happened on investment. In a revealing article in its post-Conference edition of 14 December, The Straits Times (Singapore), under the headline "EU wants investment at top of WTO agenda" reported as follows: "The European Union appears determined to put the contentious issue of investment on top of the WTO agenda in coming months, calling it the most important theme for the future of the world economy. An EU statement yesterday declared that "on investment...we have at last put WTO on the map. Investment indeed seems to me the top priority for WTO in the years ahead."

"This stance, however, contrasted sharply with the perception of several key developing countries. India, among the last to compromise on the issue in the WTO discussions, said it had refrained from blocking a study process only because the TRIMS provisions of the WTO mandated such a study. `We have corralled the horse and stopped it from roaming free' said Indian Commerce Secretary Tejendra Khanna, referring to the issue.

"However, statements from WTO Director-General Renato Ruggiero and the EU seem to suggest that the Ministerial Declaration on the issue would take it in a different direction...European thinking seemed to assume that the Declaration would pave the way for a multilateral investment regime."

"Mr Ruggiero, referring to the next round of trade liberalization negotiations due to start at the end of 1999 noted, for instance, that "by then, perhaps studies on investment and competition will be ready for negotiations... Challenging the view of many influential developing nations that the investment issue belongs really to UNCTAD, not WTO, to study, Sir Leon said the issue, was primarily a WTO matter."

The Straits Times report was referring to the post- Conference statement by EC Vice-President and trade commissioner Sir Leon Brittan which said: "On investment, the most important theme of all for the future of the world economy, we have at last put WTO on the map. Investment indeed seems to me THE top priority for WTO in the years ahead...It is also an issue which is primarily for the WTO because it involves the development of an appropriate framework of binding rules. We should be under no illusion that all firms, whatever their size, prefer to invest in large and secure markets."

"Bigger countries have no problem attracting funds. But many small and medium-sized countries need a secure legal environment to attract their fair share of investment capital. WTO rules will help provide the necessary underpinning." The clear message from the EU is that the Declaration opens the road to a multilateral "framework of binding rules" and that it will argue, once again, that this is necessary for foreign investments to flow to developing countries.

Multilateral Investment Agreement

During the preparatory process for the Singapore Conference, many developing countries had argued that the MIA had been proposed by the developed countries for the benefit of their corporations (by giving them all the rights but no obligations to the host countries); that an MIA was unlikely to result in extra investments to poorer developing countries; and that the Northern argument that the MIA was meant to benefit developing countries was only a smokescreen to disguise the real intention of opening up Third World resources and markets for Northern-based corporations.

It seems likely from the contrasting statements of EU and India that the pre-Conference debates on the MIA will cross over to the working party on investment, unless developing countries succeed in confining the discussion to within the context of exisiting WTO provisions, including TRIMS, as laid out in the chapeau of the Declaration's para 20 on investment and competition. Now that the "trade and investment" door has been established and the crack has opened, the battle in Geneva will be mainly between:

* The MIA proponents who will push hard for the door to open beyond the hard-won crack to the half-way stage of negotiating for investment rules and then fully into a binding agreement. Brittan's post-Conference statement has given notice that this is the EU's intention.

* The opponents of an MIA in the WTO who will make use of the safeguards they placed in the Declaration to restrict the discussions to existing WTO provisions and TRIMS, to push for the discussions to fully take into account the development dimension (and not just the trade aspect), and to ensure that there is no explicit consensus to bring the discussion to the stage of negotiations for rules.

Unless developing countries organize themselves well, on both substance and the tricky processes of the WTO system, the "examination" of trade and investment in the working group could well prepare the ground for "negotiations" for investment rules. Given the skill and capacity of the majors to manoevre within the WTO system and its "informal processes", aided by the WTO Director-General, as shown once again at the Singapore Conference, their ability to produce an "explicit consensus" for negotiations should not be underestimated. The issue of trade and competition policy took a lower profile than investment, but will nevertheless be open to controversies in interpretation in the Geneva follow-up process. (SUNS3894)

Martin Khor is the Director of Third World Network.The above first appeared in the SUNS of which Chakravarthi Raghavan is the Chief Editor.