Experts caution against wrong issues in new round

by Martin Khor

New York 24 July -- A seminar of trade experts on the next WTO Round ended here with several participants cautioning against new issues and with the chief convenor in concluding remarks saying it is better not to have a comprehensive new Round if it meant taking the WTO down the wrong road by adding inappropriate non-trade issues on to the trading system.

"If the price of having a new Round is to throw all kinds of inappropriate issues into it, at the expense of developing countries, then the route of unilateral liberalisation may be better," said Jagdish Bhagwati, Economics Professor at Columbia University, and the meeting's chief organiser.

The two-day seminar on "The next trade negotiating Round: Examining the Agenda for Seattle" (held at the Columbia University in New York) had brought together 50 trade experts and practitioners, including UNCTAD secretary-general Rubens Ricupero, OECD Secretary-General Donald Johnston, former WTO director-general Arthur Dunkel, Japanese International Trade Vice Minister Hisamitsu Arai, US Assistant Attorney General (Antitrust Division) Joel Klein, WTO Ambassadors S. Narayanan of India and Chak Mun SEE of Singapore, Head of the EC in Washington Hugo Paeman, Canadian High Commissioner Roy MacLaren, WTO Competition Working Group chairman Frederic Jenny and several trade academics, including John Jackson (Georgetown University), Frieder Roessler (Georgetown University, formerly head of WTO's Legal Division) and David Leebron (Columbia Law Dean).

The focus of the meeting was to examine whether it was appropriate to include new issues such as an investment agreement, competition policy, environment and labour in a new Round to be launched at the next WTO Ministerial Conference in Seattle. It also discussed the need to improve the WTO's dispute settlement mechanism, and issues relating to free trade at the border.

The meeting was characterised by a lack of enthusiasm by most speakers and participants for the proposed new issues to be brought into a new Round. Many of the experts expressed fears that overloading the WTO with non-trade issues that were not the concern of the traditional GATT trade liberalisation agenda would strain and distort the multilateral trading system.

In his closing remarks on how the next Round should be approached, Prof Bhagwati, a 'free trade' advocate and former economic policy advisor to GATT (under Arthur Dunkel) said that the traditional rules and issues, such as anti-dumping, should continue to be discussed. In reviewing the trade system, the rules should be tightened and not weakened. He expressed concern that there was bias in the structure of the WTO so that the developing countries' views were not taken into account.

He also expressed concern that if the WTO were to add on issues that the large corporations desired, there would be a reaction by social organisations demanding that their issues such as child labour should also be brought into the WTO, on the grounds that "you have created rules on behalf of business, why not for us too?".

Bhagwati raised the question whether the next Round should include and focus on the proposed new issues or whether it should stick to conventional trade issues whilst promoting unilateral liberalisation.

If the price of having a Round is to throw all kinds of irrelevant non-trade issues into it, it would be at the expense of developing countries, since it is the North that is the driving force behind the new issues, and the South had no power to put in its issues, he noted.

Referring to the "bicycle theory" (that likens the trade agenda to a bicycle that would fall if it did not go forward), Bhagwati said if a Round with wrong issues would bring the WTO down a "wrong road", then a programme of unilateral liberalisation may be better.

He added the developing countries were presently weak due to the financial crisis and had no bargaining power. Given this, he asked whether a new Round would have a design which is shared by all.

He therefore suggested that a two-track approach may be a better one, where the WTO continues discussions on conventional trade issues, whereas investment and other issues are discussed at a different forum.

This, he said, would be the wrong time to go into a trade Round with new issues, as the trading system would then be contaminated with these other issues. Trade linkages (such as to environment and labour) would be a waste of time.

He asked the basic question, "what do we want a Round for?" and responded: "We are not bound to a Round. It is just a mechanism for trade liberalisation. We can continue pushing for liberalisation without having to deal with other issues."

Earlier, in the seminar's first session that dealt with a multilateral agreement on investment, several speakers and participants spoke against introducing an investment agreement in the WTO, either on the ground that investment did not belong to the WTO, or that there would be public opposition to the move, and this would be at the expense of the WTO's overall agenda.

Although some speakers also urged that limited investment rules be brought into the WTO, the number expressing opposition to or giving "low priority" for a WTO agreement prompted the session's chairman to express surprise that "so many intellectuals like you are against an investment agreement."

Both the OECD Secretary-General Donald Johnston and the UNCTAD Secretary-General Rubens Ricupero warned that if the proposal for an investment agreement were brought to the Seattle Conference, it would subject the WTO to protests by NGOs.

Johnston said the issue could be "ambushed" again by NGOs, whilst Ricupero warned that the clash between TNCs and civil society would grow and infect other aspects of the WTO agenda - possibly damaging the WTO's credibility. Ricupero added the timing for having investment negotiations in the WTO was bad as the conditions for doing so did not exist.

In his presentation, Johnston said there were lessons to be learnt by the WTO from the failed MAI negotiations at the OECD. He believed the pressures brought to bear on governments by civil society was the single most important reason for ending the MAI negotiations. When he discussed the MAI with politicians in many countries such as the US, Canada and France, they referred to the reactions from civil society.

Moreover, the business community was not that interested in the MAI as it was not that important to them. Most transnational companies have access to political leaders; they did not feel the need for investment rules, and thus there was not a lot of support from these TNCs for an MAI.

Asking whether the Seattle Ministerial would be the place for pursuing investment rules, Johnston said "it would be wonderful if something can be put in there, but this runs the risk of being ambushed again by NGOs." He said the investment issue would attract the same kind of opposition from civil society if it were brought to the Seattle Ministerial.

Whilst work is continuing at the OECD in analysis of substantive investment issues, it is very important that the investment issue is not seen as a transfer of the issue from the OECD to the WTO. On the other hand, much of the work had already been done at the OECD and can be drawn upon by WTO negotiators. But it should be seen as a fresh start.

UNCTAD Secretary-General Rubens Ricupero said an important issue was whether it was true a multilateral framework for investment (MFI) is needed to increase investment flows to developing countries. The evidence for this is not convincing, he said. The country attracting most FDI is China. Other considerations such as market size has more impact on FDI flows.

On the content of a possible MFI, whilst there was no problem with investment protection, problems arose when there were clauses limiting regulations such as on financial flows, remittance of funds and taxation, as well as issues such as labour, environment and dispute settlement procedures.

Ricupero said the key issue in a MFI was the notion of flexibility, or "the creation of autonomous space for policy makers, outside the rigid frame of internationally agreed disciplines.

"This appeal for flexibility or room for policy manoeuvre is by no means restricted to developing countries. An analysis of the causes of the breakdown of the OECD negotiations on the MAI shows that it was irreconcilable differences among major developed countries, some of whom wanted special exceptions from the Agreement to suit their own national concerns, that eventually doomed these talks.

"We should therefore reject any sense that this emphasis on flexibility is another case of special pleading by developing countries."

Ricupero said the broader questions of the flexibility debate relate to the power of the nation state in the face of the increasing role of TNCs in economic life and to a lesser extent the internationalisation of civil society actions. The conflicting interests of TNCs and civil society clashed openly during the MAI negotiations.

"If the talks were to move to the WTO, and the flexibility issue is not dealt with, this clash would not disappear. Having once tasted blood, the NGOs involved will not relax their bite. On the contrary the clash would grow and could end up infecting other related aspects of the WTO's agenda, such as in the area of TRIMs and TRIPs, to the detriment of the broader process of trade liberalisation, and possibly damaging the credibility of the WTO itself."

He added the timing for launching negotiations for an investment agreement is bad at present. "The dynamic and rapid changes in investment relations in any case makes it difficult to pursue the codification of international investment law at this time. "Such codification should take place when there is greater certainty among all parties as to the underpinnings and consequences of FDI and a reasonable degree of agreement among the majority of countries about the content and nature of any multilateral investment rules. Neither of these conditions exist at present."

Citing the example of Brazil, Ricupero said profit repatriation by TNCs had risen from about $600-700 million five years ago, to $7.5 billion last year. This had raised a debate in Brazil. In the developing world, questions were being asked about foreign investment and countries were afraid of having to carry high costs.

Ricupero said that developing countries expect to get two basics out of international investment agreements:

"First, they expect to get more greenfield investment (not mergers and acquisitions that can lead to asset-stripping and mass unemployment) to generate access to technology, finance, management skills and markets. Second, they expect to obtain a degree of sanctioned flexibility in dealing with FDI, because FDI is such a complex phenomenon and it is impossible to foresee what policies will be needed to deal with its consequences, positive or negative, in future."

He said three recent international initiatives in this area (TRIMs and subsidies in the Uruguay Round; the IMF's attempt starting Sept 1996 to amend its Articles to encourage capital account liberalisation, and the OECD's MAI negotiations) have attempted to limit flexibility in national policy making.

"One could question the purpose of such restrictions, ask whose interests they are intended to serve, and wonder aloud whether their realisation would in fact lead to the achievement of the sought-for objectives."

He concluded that "so far there is no empirical evidence to suggest that developing countries are necessarily better off in terms of attracting and retaining quality FDI within the confines of multilaterally agreed disciplines in investment."

"What is evident though is that the existence of investment rules will do little to tackle the problem of distribution of the potential gains from trade and FDI. Investment tends to concentrate where capital is already present. Thus, imbalances between and within countries -- imbalances that have been sharply exacerbated as a result of globalisation and liberalisation -- will not be affected by the absence of investment barriers, as some of its proponents have suggested."

The WTO's trade and finance division director, Richard Eglin, speaking in his personal capacity, said the collapse of the MAI, apparent lack of US interest in the subject, only lukewarm support from international business and opposition from several influential developing countries suggest that bringing FDI into the WTO may be an "uphill battle."

A lesson from the OECD experience is that if there is to be negotiation on this issue in the WTO, the purpose of multilateral rules for FDI must be made crystal clear and must appeal to the full range of WTO Members. Otherwise the negotiations risk losing momentum and direction and become an easy target for criticism.

He said it was not enough to point to the gains of replacing bilateral investment agreements by a standard multilateral agreement; and most damaging of all is to argue that the aim is to increase foreign investor confidence as this infuriates those who believe the sovereignty of developing countries is already under threat and it is of little interest to the majority of WTO members who are only hosts (and not home) to FDI.

Eglin said the case for FDI rules in the WTO should be built on two points: that doing so would contribute to achieving the WTO's core trade-related objectives, and that WTO members should continue developing the "architecture" of the trading system so it can help them coordinate their domestic policies effectively.

He added there were benefits in an agreement that covered only FDI (or productive activity) that aimed at increasing trade opportunities and avoid trade restrictions and distortions, and that puts in place rules on transparency, non-discrimination and liberalisation. The aim would not be to force liberalisation where it is not wanted. It would be to enhance conditions to open up to FDI like what was done for trade.

The agreement could put in the seed of FDI now, and later expand it to rules on rights and obligations of investors. He suggested a GATS approach (where there is a basic set of rules coupled with a flexible country-by-country approach to liberalisation commitments) and said countries should be allowed to regulate the entry of foreign investments but also lock in the policy reforms now in place.

India's WTO Ambassador, S. Narayanan said it was not desirable to have investment disciplines in the WTO. There was no proof that an MAI would alter the pattern or change the quality of FDI growth. The role of an investment agreement would be "very minimal" in determining investment flows.

By having an investment agreement in the WTO in a new Round, India did not see any trade off, unlike in the Uruguay Round where developing countries had an interest in textiles and agriculture.

He understood the developed countries had an interest in liberalising investment flows, but developing countries' concerns about restrictions on labour and technology flows were not being addressed.

He said it was being argued that in order for certain countries (such as the EU) to yield in agriculture in future negotiations, they would need an investment agreement so that they could "sell" agriculture to their public. "This kind of argument is not fair from our point of view" said Narayanan.

He recalled that in previous negotiations on investment, such as on the Code of Conduct for TNCs, the developed countries had insisted there should not be binding disciplines on investments.

Narayanan asked why the same countries now want developing countries to accept a binding agreement on investment?.

As for a GATS-structure approach to investment mentioned in recent EU and Japan papers in the WTO (which indicated a change of position from the former demands for pre-establishment rights for investors) Narayanan said many basic difficulties would still remain.

He disagreed that the proliferation of bilateral agreements was an argument for an international agreement. Investment disciplines, if put in the WTO, would not simply multilaterise bilateral agreements which are only limited to promotion and protection of investments. In the WTO, the proponents want market access, including pre-establishment and national treatment rights for investors.

Qualitatively, trade and investment were different, including from a political viewpoint. Investment, from a political perspective, is totally different. Especially when viewed from the perspective of a country's colonial history, it was impossible to treat investment and trade on the same basis.

He said the WTO should continue with its existing trade and investment work programme, as there would be many difficulties if it was converted to negotiations for an agreement.

Frieder Roessler, Visiting Law Professor at Georgetown University and former director of Legal Affairs at GATT, commented that investment should not be a priority for the Seattle Conference. There was no strong political support to make it a priority item and even the TNCs did not want it whilst governments were not satisfied with the issue. There was also no clear evidence yet on the costs and economic benefits of foreign investment.

Another participant (an economist in an international organization) warned that whilst the GATS approach may be good for an investment agreement, there should also be caution because one aspect of GATS was the pressure for increasing foreign equity rights in relation to commercial presence. For example, the end- game of the WTO financial services agreement was dominated by the issue whether some financial companies would be given greater equity rights in Southeast Asian countries.

Another expert said even if one assumed that investment was like trade, he still doubted there was justification for an investment agreement. There might be some advantages to harmonisation (as it was hard to negotiate thousands of separate bilateral agreements) but that was the only "objective need" he could think of for an international investment agreement. He questioned whether there were really distortions caused by domestic investment policies that must be overcome.

A Swiss legal expert said it was the notion of the need for "non- discrimination" that was used in an unqualified way that led to the problems in the MAI negotiations.

The representative of an international NGO pointed out several reasons against having investment rules in the WTO: that investment was different from trade and could not be treated similarly in a trade organisation; that due to the complex costs and benefits, foreign investment had to be treated in a sophisticated way that a multilateral agreement would not allow; and that standard rules would prevent or reduce the national policy space needed for such sophisticated investment policies.

Moreover, to state that an agreement would only cover FDI was not realistic as productive forms of FDI could not be distinguished from other forms of foreign investment (for example, mergers and acquisition, portfolio investment and credit, especially in the reinvestment phase of FDI).

Also, foreign investment policy was not only about economics but affected national social and political stability.

The GATS approach now being advocated by investment agreement proponents would still cause problems as it would still limit national policy-making space, place immense pressures on developing countries to liberalise, bind present policies and add on pressures for expansion of the subject to other aspects of investment rules in future (such as pre-establishment and national treatment rights).

University of Maryland Economics Professor, Arvind Panagariya, said he did not agree that investment is like trade and should be treated similarly, as they constituted different elements.

"In trade, you gain access to my market and I to yours. But in investment, there are source and host countries, which will derive different rates of benefits from having international investment rules."

In a response to questions, Ricupero said that there was a difference between investment and trade in that investment is done by non-residents outside the country. This posed problems for a sovereign nation.

Even the US, which was the most liberal country and had insisted on a high-standard MAI, investment became a source of difficulty in the Helms Burton Act that sought to prohibit investments in third countries. There were strong political reasons that show that investment and trade were not the same. Even in certain developed countries, the government may block the acquisition by foreign investors of certain companies, due to sovereignty reasons, even if the investors are from politically closely allied countries.

Ricupero said he had nothing against the entry of foreign investments but he found difficulty when investment rules restrict countries from regulating investment. In Latin America, a very high proportion of foreign investment went to the non- trade sector such as telecoms and electricity in Brazil. Although they may be helpful, they added nothing to export capacity and created additional pressures on the balance of payments.

The only exceptions in Latin America where FDI went to the export sector was in mining and petroleum.

Empirical evidence in Brazil showed that many acquisitions in Brazil led to the closure of research and development not because of efficiency reasons but because the strategy of the acquiring foreign companies were not in favour of technological development in these countries. In such a case, shouldn't developing countries have the right to do something about this? He said very few developing countries would be willing to give up their rights to regulations on the investment issue.

In concluding remarks, the chairman of the session, Noboru Hatakeyama, Chief Executive Officer of JETRO (Japan External Trade Organisation), who himself was for investment rules, said he was surprised that so many intellectuals like the participants in this workshop, were against an investment agreement. (SUNS4485)

The above article first appeared in the South-North Development Monitor (SUNS) . Martin Khor is the Director of Third World Network.

[c] 1999, SUNS - All rights reserved. May not be reproduced, reprinted or posted to any system or service without specific permission from SUNS. This limitation includes incorporation into a database, distribution via Usenet News, bulletin board systems, mailing lists, print media or broadcast. For information about reproduction or multi-user subscriptions please contact < >