This document has been distributed by DG1 of the European Commission during a dialogue meeting between the Commission and non governmental organizations in Brussels on Wednesday 27 January 1999.The document was scanned and converted to HTML by Corporate Europe Observatory. Sections where this document differs from a previous leaked text by the EU Commission (Discussion Paper on Trade and Investment, intended for the EU Council's Article 113 Committee) have been marked red.
See also the background and analytical notes provided by Corporate Europe Observatory.
EUROPEAN COMMISSION DIRECTORATE GENERAL I
EXTERNAL RELATIONS: COMMERCIAL POLICY AND RELATIONS WITH NORTH AMERICA, THE FAR EAST, AUSTRALIA AND NEW ZEALAND
Directorate M - Services, investment, TRIMS, dual-use goods, standards and certification, external relations in the research, science, nuclear energy and environment fields
Investment, TRIMS, Dual-Use Goods, Standards and Certification
Brussels
I-M-2/International rules for investment and the WTO
A. Introduction
1. Since 1995[1] the Community has identified on various occasions investment[2] as one of the "new issues" which the WTO should take up for rule making. The question arises now of how to begin to shape a concrete set of objectives in this area, on the basis of which the Community can (a) build up consensus among WTO partners that these negotiations are useful and desirable, and (b) adopt its own negotiating position and strategy. The Commission believes that civil society (business, trade unions and representatives of other interests) should be fully involved in this preparatory process. This paper attempts to set out in a preliminary way some of the elements that arise in the analysis of the relationship between trade and investment and the subsequent possible negotiation of investment rules. Its aim is to foster a discussion on these issues, trying to identify some of the options available. It should not be seen as setting out a negotiating position already at this stage (all the more so as the "institutional" discussion among Member States and between them and the Commission on these issues is at a very early stage.
B. Why international rules on investment
2. Virtually all countries, regardless of their level of development, recognise the growing importance of FDI as a source of economic growth, development and transfer of technology world-wide. According to the UNCTAD 1998 World Investment Report, yearly investment outflows reached US$ 424 billion in 1997. It is also estimated that sales of foreign affiliates abroad in goods and services reached 9.5 trillion US$ in 1997, thereby topping world-wide exports (6 trillion). Forty-five thousand companies are now operating world-wide, many of them small and medium enterprises. Despite the impact that the current financial and economic crisis is having at present, Foreign Direct Investment is expected to grow further in the long term, as production processes are further integrated. Developing countries are becoming important players, in 1997 they generated around 60 billion US$ outflows, compared to 50 billion US$ in 1996. In this respect it is important to note that, while the financial crisis appears to have a dramatic impact on short-term capital flows, longer-term capital flows appear hardly affected.
3. International rule-making for investment, however, is still embryonic, and this is particularly so on the multilateral scale. Investment protection is covered by some 1600 bilateral Treaties, while more sophisticated rules on the admission of investment are confined to regional initiatives (EC Treaty, MERCOSUR, NAFTA). WTO rules cover some forms of investment ("commercial presence" for service suppliers under the GATS) or address issues highly relevant to investment (e.g. TRIMs and subsidies) but do not address for instance, investment protection. If concluded, the Supplementary Treaty to the Energy Charter Treaty would provide an example of a fairly ambitious sectoral international agreement covering most aspects of investment.
4. The European business community has made clear its position in favour of multilateral rules on investment. A decision to invest abroad, and the subsequent decision to locate an investment in a particular host country, is taken primarily on the basis of economic and market factors. Investment decision-makers, however, do indicate that the legal climate in the host country, has a strong influence on the perception of risk associated with an investment abroad. Thus, a favourable legal climate may not have a direct impact on any given individual investment decision, but it would appear to have a strong influence on the overall willingness of a firm to invest abroad and on the resources it feels able to devote to FDI. This would have a clear impact on the overall investment performance of firms, and therefore on global investment flows.
5. The interest of investors' home countries in pursuing this objective should be obvious. As to the interests of host countries, it should be pointed out that all countries appear to have an inherent self-interest in enhancing investment flows. Investment related inflows of funds have a positive effect on the host country's balance of payments and on its growth and employment prospects both in the short term and in the longer period. There is a difference, therefore, from pure trade liberalisation, which could lead, in the short term, to a temporary deterioration in the host country's trade balance and balance of payments. Investment inflows, on the other hand, improve the export potential of the host country. A number of developing countries, particularly in south-east Asia and Latin America, have achieved substantial growth through export-led development strategies. However, the problems linked to the fact that many, if not most, developing countries continue to rely on the export of primary products for the main part of their foreign exchange earnings and their GNP are well known. Investment inflows do contribute to the increase and diversification of the recipient countries' exports.
6. International rules on investment per se would not guarantee a flood of investment flows towards all developing countries. They do appear to contribute, however, to improve MNEs' overall propensity to invest abroad, by establishing a more stable investment climate. In addition, rules on investment would also encourage transparency, thereby providing additional benefits, such as the possibility to fight corruption and tax evasion, particularly in developing countries.
7. In order to be workable in the long term, a framework for international investment rules would have to fulfil two basic conditions. First it would have to provide a framework within which all interested parties in both home and host countries can participate, directly (in the case of governments) or indirectly (in the case of civil society) in the regulation of international investment as an economic activity that is, in itself, both legitimate and desirable, but which raises a number of delicate questions as to its impact on the welfare of home and host countries alike. Secondly, it should provide greater legal certainty as to the conditions under which international investment takes place and operates, with a view to fostering greater and more stable economic growth than may otherwise be the case.
8. On the one hand, a framework of rules on investment should provide an effective protection for investors, based on the principle of non-discrimination. On the other hand the right balance needs to be struck between stability and legal certainty for international investors and right and ability of national governments to regulate economic activity within its jurisdiction. Beyond this, there are other issues that need to be factored in, such as the impact of international investment on environmental protection and labour policies, as well as its relationship with sustainable development. Arguably, a truly multilateral context is more adapted to provide this kind of framework than a patchwork of bilateral and/or regional agreements.
C. Why should rules on investment be multilateral
9. The rationale for a multilateral framework of investment rules from the point of view of an investor's home country, is above all that companies are looking for transparent, uniform and predictable rules pertaining to their investments abroad and that if these rules applied world-wide there would be less distortions in locational choices. This, in turn, would facilitate investment flows. International investors look for access to invest world-wide, on a non-discriminatory and transparent basis. Investment decisions are taken on the basis of a matrix of conditions. The favourable discount rate associated to countries with a stable and predictable legal framework for foreign investment is one important factor among those that determine a company's decision to invest abroad. The establishment of multilateral rules would encourage stability and predictability and make them more uniform across countries. The desirability to conclude an agreement on investment in the WTO, in this perspective, lies with the fact that it would cover the widest range of developed and developing countries and would be based on established trade principles such as National Treatment/MTN and Dispute settlement. Moreover, an Investment instrument in the WTO could be gradually improved and adjusted to changing conditions in future negotiating rounds.
10. From the point of view of host countries, it should be recalled that many countries have unilaterally liberalised their domestic investment regimes, having realised that this is the best avenue to attract much needed investment. In fact, it should be noted that international investment flows were increasing steadily, at least until the recent financial crisis, even in the absence of multilateral rules on investment. However, the geographical distribution of investment flows has been uneven. While this unevenness is obviously linked to the economic conditions in different potential host countries, this is only part of the story. The impact of unrestrained investment incentives, for instance, has been real, with the consequent risk of a subsidy race. From this angle host countries would benefit from more uniform rules. Also, a multilateral forum such as the WTO would appear a better one for achieving a balance between enhancing investment protection as a means of increasing investment flows and the ability to carry on domestic policy choices.
D. Issues particularly relevant to a multilateral framework for investment in the WTO
11. The nature of WTO membership, in all fields, offers opportunities, but also raises its own specific problems. An important aspect of this, obviously, is the particular situation of developing countries. With regard to the issue of investment, however, the traditional differentiation of interests between the developed and developing countries makes room for a more complex situation. For instance, it cannot be said that developed countries' interests are primarily as home countries to international investors, whereas developing countries are essentially concerned with their role as host countries. Such a characterisation is still partly valid, but it would clearly give an incomplete and misleading view of the situation. First, practically all developed Countries are both home and host to international investors. Secondly, many developing countries are playing a growing role as home countries for international investors, although this is still a fledgling trend. The result of this is for instance, that many developed countries are also extremely concerned about preserving their domestic regulatory authority, and that many developing countries are more relaxed towards a liberal investment regime than it was the case in the past. In fact, the objections and uncertainties of many developing countries appear often to be linked more to the relationship between investment flows and speculative capital movements than to the issue of international investment as such.
12. All the same, the question of a development dimension of multilateral investment rules would be a crucial one for the WTO. If an investment agreement were to be negotiated in the WTO, clearly the question of special and differential treatment for developing countries would arise. Yet if the discussion in the WTO Working Group on the Relationship between Trade and Investment (WGTI) is anything to go by, this would somewhat miss the point. The issue has been raised in fact of how to ensure that such an agreement would in itself be "development-friendly". This means taking into account the specific situation of developing countries in the drafting of some of the key provisions of an investment agreement, as opposed to making an allowance for a lesser ability to implement, for instance through exemptions from the rules and/or longer transitional periods. The issue of how to isolate speculative capital movements from investment transactions is a case in point. This is a difficult issue, in factual and conceptual terms, and one in respect of which the strength of a country's financial infrastructure is an important factor in determining how comfortable that country may feel with one or another technical solution to the problem.
13. At the opposite end of the spectrum, so to speak, scepticism has been expressed in some quarters as to whether the WTO can arrive at "high quality" investment rules. The expression itself, "high quality" is not particularly enlightening. Clearly there would be "quality" in having, on the one hand, a realistically ambitious set of multilateral investment protection rules that apply throughout WTO membership; and, on the other hand, to balance them with provisions that ensure, for instance, the preservation of a host country's regulatory authority, compatibility with environmental protection or development policies, etc.
14. Investment relevant issues are already covered to some extent in other WTO Agreements: "Commercial presence" under the GATS covers both the issues of admission of an investor and the treatment of the investment afterwards in services sectors. The WTO Subsidies Agreement covers investment incentives, at least once the production of goods by an investor has begun. The TRIMs Agreement covers certain performance requirements imposed on investors. The issue of overlaps and relationship with the existing WTO body of Agreements will need to be tackled. One solution could be to have a comprehensive and separate investment agreement, which would "absorb" all or some of the investment-related provisions that are now scattered in various WTO Agreements. An alternative option could consist in a co-ordinated approach, with a core investment agreement containing only certain key elements, with other elements left in other WTO Agreements.
G. Next steps in the WTO process
15. The WTO General Council has adopted in December 1998 the report of the WGTI that, in its descriptive part, fully reflects the views expressed in the Group, the majority of which have underlined the positive benefits of investment for developed and developing countries, as well as the presently "patchy" state of play of rule making on investment world-wide. The report has further recommended to the General Council to decide that the WGTI should continue its "educational" work, without prejudging any decision that could be taken by the WTO Ministerial on the initiation of eventual negotiations.
16. At the same time, UNCTAD will pursue its own discussion on these issues, and it is to be expected that the good cooperation and exchange of information between the two bodies will continue in 1999 as it has in 1997-98.
Footnotes
1. See Commission Communication COM(95) 42, "A Level Playing Field for direct Investment World wide".
2. Investment in this paper is understood to include Direct Investment, characterised by a longer-term investment horizon including a degree of influence by the investor on the management of the enterprise, and portfolio investment (e.g. equities), but excludes capital movements that are mere financial transactions for speculative purposes or loans not directly related to an investment. This definition appears the most suitable and reflects discussions in the WTO Working Group on Trade and Investment.
3. UNCTAD, in particular, has been doing much useful work on this issue. It is also useful to recall that the Secretariats of both UNCTAD and the WTO have been cooperating closely on investment issues and that, as a result, the WGTI has benefited from substantial input from UNCTAD in its discussions.
Index of MAI-related documents on the CEO website CEO home page This page was installed on 3 February 1999