Moves to expand Doha mandate on investment talks

Proposals to broaden the remit of a potential WTO agreement on investment - the need for which has been questioned by many developing countries in the first place - aim at further enhancing the investor rights to be enshrined in the accord at the expense of host countries’ policymaking options.

GENEVA: The major industrialized  nations, pushing for investment rules at the WTO, appear to be attempting to gradually expand the agenda for the “trade and investment” talks, with suggestions to bring within the ambit of the modalities for negotiations an expanded view of foreign investment such as to include portfolio investments (US) and investor-to-state dispute settlement (Chinese Taipei).

Though the Doha Ministerial Declaration mandate, in listing some subjects for focussed discussions, specifically narrows the focus to foreign direct investment (FDI) and “consultation and the settlement of disputes between members” (which implies state-to-state disputes only), a WTO secretariat note (“prepared under its own responsibility”) has discussed the investor-state dispute settlement in bilateral investment agreements.

Given the free-wheeling, non-transparent and secretive ways in which the WTO operates and functions - both in the intergovernmental processes and the secretariat (which, under the Marrakesh Agreement Establishing the WTO, has no role or right to take an initiative other than carrying out tasks assigned to it) - it is evident that at the next Ministerial meeting, the Doha mandate and remit can easily be changed (and expanded) in terms of modalities to be agreed.

The investor-state dispute settlement provisions of the North American Free Trade Agreement (NAFTA) have enabled corporations to ‘sue’ member governments over the latter’s policies that are said to have reduced or eliminated “profits, current and future,” including through the concept of “takings” (unlawful deprivation of private property, with “property” interpreted in a loose way). This has created controversies within the United States, with many jurists and even a couple of judges writing on this in academic journals in terms of its effects on the Supreme Court’s jurisdiction under “due process” clause, used by the court to deal with property “expropriation” disputes.

Though it has not been specifically raised in terms of the principle of “non-discrimination” and “national treatment”, the US from time to time has been promoting the view (not accepted in international law so far) that “national treatment” to a foreigner vis-a-vis a citizen may require “supranational” rights (meaning treatment higher than that available to nationals) to the foreigner. While a sweeping claim on this was formulated by the US, in the State Department’s “codification of international law”, it was never accepted by others. Since then, the US has been trying to push this doctrine through bilateral agreements (investment agreements, navigation and commerce treaties etc.), but it has not been accepted by others.

Taken together and in this context, the attempt to bring investor-state dispute settlement into the WTO would have some far-reaching consequences - even beyond the current (in the context of the so-called war against terrorism or Iraq and attempts to effect “regime change” there) claims of unilateral rights of the US as a Super- and Imperial Power.

FDI and technology transfer

The WTO Working Group on the Relationship Between Trade and Investment, in its meeting in the week of 16 September, also discussed FDI and technology transfer and diffusion issues. The group had before it a secretariat note which Brazil noted it had requested.

The note essentially promotes the neoliberal mainstream view (found also in the UN Conference on Trade and Development’s (UNCTAD) World Investment Reports, copiously cited or referred to positively in the WTO note) about FDI bringing in technology. However, it also makes some references to the issues of “internal” (within the corporation, principal and subsidiary) and “external” (to domestic enterprises), the concentration of research and development (R&D) in four or five countries, and in particular the innovation activities at the parent of a corporation, though it says that there are also some in the subsidiaries.

There are some footnote references to contrary views about the technology “spillovers” of  FDI, including the studies of Dani Rodrik (Harvard academic and coordinator of the G-24 technical project) and Gordon Hanson (in a G-24 study paper on FDI).

In his study, cited in a footnote (to the secretariat’s own text about the spillover effects of technology diffusion through FDI), Rodrik (1999) has said: “Today’s policy literature is filled with extravagant claims about positive spillovers from FDI ... Once again the evidence is sobering. Systematic plant-level studies from countries such as Morocco and Venezuela find little in the way of positive spillovers (...).  At the national level the effect of FDI on economic growth tends to be weak, and disappears as more country characteristics are controlled for (...). Much, if not most, of the correlation between the presence of FDI and superior performance seems to be driven by reverse causality: multinational enterprises tend to locate in the more productive and profitable economies (and niches thereof).” The WTO document also further cites Rodrik for the finding that “the literature on spillover effects sometimes refers to cases that involve conventional input-output linkages and labour training, but that do not provide evidence of the presence of non-pecuniary externalities.”

Another footnote refers to the Hanson study as submitting that the statistical studies using micro-level data undermine the empirical support for the existence of knowledge spillover effects from FDI, but notes that “these results are for the direct impact of FDI on domestic enterprises in the same lines of activity. It is possible that FDI raises the productivity of domestic agents through indirect, general equilibrium effects, such as backward-forward linkages or productivity spillovers common to all industries.”

Brazil in its comments said that the working group should continue discussions of this subject even if it was not covered in the group’s Doha mandate.

The US said that the report highlighted the importance of adequate intellectual property protection in attracting technology, while Japan said that there is no “one size fits all” in technology transfer as it is difficult to replicate success from one country to another.

India said that the report highlighted the very low share (4%) of developing countries in world research and development, adding that studies have shown that rising FDI flows are not necessarily accompanied by transfer of technology. China said that the domestic framework has great impact on technology transfer. Indonesia complained that developing countries only get low-level-type technology. The EC said that less restrictions, such as joint-venture requirements, on FDI will encourage more technology transfer.

Various views on investment accord

On the issue of “exceptions and balance of payments”, papers from Japan, Korea, Chinese Taipei and Canada all acknowledge that a possible WTO investment agreement would need to contain exceptions from disciplines when the host country faces a balance-of-payments (BOP) problem. Japan said that existing GATT principles such as non-discrimination and avoidance of unnecessary damage to other partners on BOP safeguards should be taken into consideration. Korea said that the special role of the IMF in BOP cases in the WTO should continue. Chinese Taipei warned that exceptions should not be used as invisible barriers to investment. Canada said that this subject would be an important part of a future WTO agreement. Egypt said that financial instability is a major concern for developing countries, stressing that they need “safety valves” during crises. It suggested linking this subject with the discussions in the new WTO Working Group on Trade and Finance.

Mexico and Norway said that they would support BOP exceptions patterned after that of the General Agreement on Trade in Services (GATS).

Pakistan said that it remained unconvinced of the need for an investment agreement in the WTO, adding that such an agreement would weaken the bargaining position of host countries vis-a-vis investors. It said that current GATT BOP exceptions are inadequate for developing countries.

The EC said that it supported incorporation of flexibility for host countries in an investment agreement. The US said that the right of free transfer of capital is crucial, and that BOP restrictions are a “self-defeating strategy” in the long term.

On the dispute-settlement issue, Japan, Chinese Taipei, the EC and Canada (in their papers) supported coverage of a future investment agreement in the WTO dispute settlement system.

Chinese Taipei said  that  there should be consideration of provisions for investor-state disputes in the WTO through a dispute  settlement mechanism patterned after the Independent Entity scheme for  WTO preshipment inspection disputes.

Several delegations (including India, Malaysia, Hungary, New Zealand and Hong Kong, China) objected to this on the ground that it went beyond the Doha mandate.

India said that investment is not a trade issue, therefore it does not belong in the WTO. It said that it had considerably liberalized its investment regime but would not be willing to “bind” this under a WTO agreement. It argued that an agreement would in fact discourage investment liberalization in developing countries.

Pakistan said that it would be “premature” to discuss dispute settlement when members are not even close to an agreed definition of investment. It said that a WTO investment agreement would only add to the existing imbalance in the WTO against developing countries.

Indonesia said that investment disputes are being taken care of in bilateral and regional trade agreements, and should not be brought to the WTO.

Japan said that there is no exception to the remit of the coverage of dispute settlement in the WTO’s Dispute Settlement Understanding, and thus any investment agreement should likewise be covered.

The US proposed that portfolio investment should also be covered by a prospective investment agreement for a number of reasons, including its vital role to economic growth and development. Such investments are also the  key to financial market deepening, covering as they do a broad range of investments (shares and stocks, bonds, debentures, turnkey contacts, leases, mortgages, etc.) that are in common use worldwide.

Malaysia said that portfolio investment should be excluded from an investment agreement because of its speculative and uncertain character. Mexico said that members should focus on FDI instead of portfolio investment considering the short time remaining before the next Ministerial Conference (which is scheduled to take place in Cancun, Mexico in September next year).

India said that portfolio investment is not mentioned in the Doha mandate for the working group. Brazil said that it would prefer limiting discussions to FDI. China said that it is ready to explore the possibility for negotiations after the next Ministerial but it cannot agree on the inclusion of portfolio investment.

The EC presented a paper arguing that a GATS-type agreement on investment would provide  the maximum policy flexibility for developing countries. India  however  said  that  no  investment agreement would give developing  countries maximum flexibility. (SUNS5196)

From Third World Economics No. 290 (1-15 September 2002)