Bu-lat-lat (boo-lat-lat) verb: to search, probe, investigate, inquire; to unearth facts Volume 3, Number 28 August 17 - 23, 2003 Quezon City, Philippines |
Investment
Agreement in the WTO by
Kavaljit Singh
The Fifth Ministerial Conference of World Trade Organization (WTO) would be held in Cancun, Mexico in September 2003, in the midst of several controversial issues. There has been no meaningful progress on agriculture, TRIPs and public health, “special and differential treatment” provisions of the WTO agreement. All the mandated deadlines agreed upon at the Fourth Ministerial Conference at Doha in 2001 have been missed. In this context, attempts by EU, Japan, South Korea and Canada to widen the scope of trade negotiations encompassing new issues — popularly known as “Singapore issues” — are unfortunate. Among the new issues, investment happens to be the most contentious one. Although Doha declaration stresses that negotiations on investment can commence only if there is an “explicit consensus” among the member-countries of WTO, yet the supporting countries are interpreting it as a mandate to launch negotiations in Cancun. Thus, the road to Cancun is expected to be a bumpy one. Notwithstanding
the proliferation of over 1800 binding treaties that contain provisions related
to foreign investment at the bilateral, regional (e.g., NAFTA, EU, and MERCOSUR)
and sectoral levels, there is no comprehensive multilateral agreement on foreign
investment. In the past, every country has used a variety of regulations to
control foreign investment depending on its stage of development. The
discriminatory forms of regulatory measures on foreign investment vary from
country to country. For instance, host countries often impose pre-admission and
post-admission regulations on foreign investment. It is important to stress here
that regulations are not confined to the developing and the under-developed
countries. Several developed countries (for instance, US and Japan) have
extensively imposed regulations on foreign investment in the past and many of
them still regulate the entry of foreign investment in strategic sectors such as
media, atomic energy, telecommunications and aviation. Evidence also suggests
that performance requirements such as local content requirements and technology
transfer help in establishing industrial linkages upstream and downstream and
contribute significantly towards economic development of the host country. Past
attempts to establish a multilateral investment regime through various for a
have failed miserably. The first attempt to forge a multilateral agreement on
foreign investment was made in the immediate post World War II period. In 1948,
the draft Charter to establish an International Trade Organization (ITO) was
presented at a meeting in Havana. Notwithstanding the fact that the US
government was one of the driving force behind the Havana Charter, the US
Congress refused to ratify it. Consequently, the proposal for establishing ITO
was given up and the General Agreement on Tariffs and Trade (GATT) was launched
as a temporary measure. For nearly four decades since its inception, GATT never
brought investment issues under its rubric and maintained the dividing line
between trade and investment issues. It was only at the Uruguay Round of GATT
negotiations from 1986 to 1994 that the issue of investment was brought within
its framework. The
failure to establish ITO was one of the major reasons which facilitated a shift
from multilateral to bilateral investment agreements. In the 1950s and 60s,
bilateral investment agreements were the dominant instruments of investment
agreements. In those decades, majority of bilateral investment agreements were
geared towards protecting foreign investors against the threat of expropriation
as many developing countries had undertaken nationalization measures in the
aftermath of independence from colonial rule. In
the sixties and seventies, international investment negotiations shifted to
other for a. Big capital exporting countries led by the US started initiating
discussions on investment issues at the OECD. While the developing countries
started raising investment issues with an entirely different perspective at the
United Nations in the 1970s. The UN initiatives were geared towards drafting a
Code of Conduct on Transnational Corporations to curb abuse of corporate power
and establish guidelines for corporate behavior in the host countries. Concerned
with the fact that the Code was unlikely to serve the interests of capital
exporting countries, the US persuaded other developed countries to block the
draft Code of Conduct at the UN. Consequently, the Code was not approved. UN
initiatives also lost momentum in the eighties when excessive build up of
external loans triggered the debt crisis in many developing countries. The
drying up of commercial bank lending forced indebted countries to open their
doors to foreign investment. Initiatives
at UN did not deter the US from aggressively pursuing the investment
liberalization agenda. Despite its failure to include investment in the Tokyo
Round negotiations during 1973-79, the US remained resolute in pushing a
comprehensive agreement on investment at the GATT. By incorporating TRIMs and
General Agreement on Trade in Services (GATS) in the Final Act of the Uruguay
Round, the developed countries were successful in bringing investment issues
under the ambit of GATT. To circumvent opposition from the developing countries,
the developed countries led by US also called upon the OECD to launch a
comprehensive binding investment treaty known as Multilateral Agreement on
Investment (MAI) which included heavy dose of investment liberalization,
protection of investors and a dispute resolution mechanism. Because of the
differences among the OECD member-countries on certain issues coupled with
popular opposition by the NGOs and trade unions, the MAI was finally shelved in
November 1998. After the collapse of the MAI negotiations, the Working Group on
Trade and Investment at the WTO remains the only multilateral forum where
investment issues are under discussion at present. Current
approaches advocating international investment agreements are grounded on
several myths. There is no evidence to prove conclusively that investment
agreements lead to increased foreign investment in all countries. Nor does it
boost the prospects of obtaining investment in future. Since the 1980s, a number
of developing countries have carried out wide-ranging investment liberalization
measures and have signed numerous bilateral investment agreements, yet they
receive less than one-third of total FDI flows. Further, FDI flows are highly
concentrated in a few developing countries. Bulk of portfolio investment flows
are also concentrated in a few “emerging markets.” Foreign
direct investment is not a panacea for development. There is hardly any reliable
cross-country empirical evidence to support the claim that FDI per se
accelerates economic growth. In the present circumstances, it is quite difficult
to establish direct linkages between FDI and economic growth if other factors
such as competition policy, labor skills, policy interventions and comprehensive
regulatory framework are not taken into account. Further, in the absence of
performance requirements and other regulations, many of the stated benefits of
FDI would not occur. Liberalization
of investment by itself cannot enhance growth prospects because it is a complex
process, subject to a wide range of factors. If one tries to match the periods
of investment liberalization with the economic performance of countries, the
results may appear contradictory. Growth started deteriorating around 1970s when
many countries moved towards liberalized investment regimes. The 1980s and the
1990s witnessed sharp deterioration in economic performance of many countries,
both developed and the developing ones. The worst decadal-growth performance
occurred in the 1990s. Restrictions on investments have not necessarily led to
poor economic performance. Many countries enjoyed high growth without
liberalizing their investment regimes. Japan, China and South Korea are some of
the examples. To
a large extent, the quality of investment determines the growth and productivity
rates. Since most portfolio investments have tenuous linkages with the real
economy and are speculative in nature, it would be naïve to theorize on their
contribution to economic growth. Besides, bulk of portfolio investment is prone
to reversals. Sudden withdrawal of capital can negatively impact on the exchange
and interest rates. Several episodes of financial crisis in Mexico, Southeast
Asia and Turkey in the 1990s point to the preeminent role of unregulated
short-term portfolio flows in precipitating a financial crisis. In
the last two decades, the attributes of FDI flows, known for their stability and
spillover benefits, have also changed profoundly. FDI is no longer as stable as
it used to be in the past. The stability of FDI has been questioned in the light
of evidence which suggests that as a financial crisis becomes imminent,
transnational corporations indulge in hedging activities to cover their exchange
rate risk which, in turn, generates additional pressure on the currencies. Since
bulk of FDI flows are associated with cross-border mergers and acquisitions,
their positive impact on the domestic economy through technological transfers
and other spillover effects has been significantly diluted. The
oft-repeated argument that a multilateral investment agreement is always a
better bet than scores of bilateral ones also carries little conviction.
Notwithstanding the establishment of a multilateral trade regime under WTO, the
US and European Union have signed several bilateral and regional trade
agreements in recent years. It is not without significance that the bilateral
free trade agreement signed by the US with Jordan, Chile and Singapore includes
aggressive safeguards for intellectual property rights, which go well beyond the
benchmarks set in the WTO's trade-related aspects of intellectual property
rights (TRIPS) agreement. With rich countries and big corporate groups
consistently seeking higher standards of market access and investment
protection, it would be naïve to assume that MIA would put a stop to investment
agreements in future. The
existing frameworks of investment liberalization are highly biased in favor of
protecting foreign investors' rights while constricting the policy space of
countries to intervene in public interest. Take the case of North American Free
Trade Agreement (NAFTA). Private corporations from NAFTA member-countries have
exploited the provisions of the agreement to challenge those regulatory measures
that infringe on their investment rights. The growing conflicts between private
corporations and regulators are the outcome of the investment provisions under
Chapter 11 of the NAFTA which entails non-discriminatory treatment to foreign
investors. With
emphasis on enlarging and protecting foreign investors' rights, MIA could
constrict the policy space of countries to maneuver investment policies in
accordance with their developmental priorities. Although the EU favors the
adoption of a GATS-type approach on investment allowing countries to select
sectors which they wish to liberalize, there is no guarantee that it would
provide adequate policy space to member-countries. By “locking in” reforms,
the GATS approach generates additional pressure on countries to undertake wider
commitments over the years. Likewise, an agreement covering many but not all
countries may prove problematic as it would induce developing countries to
become part of the agreement at a later date. Furthermore,
it is difficult to fathom the relationship between a prospective investment
agreement at the WTO and the existing over 1800 bilateral and regional
investment treaties. What would be the fate of these agreements if a
multilateral agreement at the WTO comes into force? Would existing investment
agreements become null and void? Till now, the Working Group on Trade and
Investment at the WTO has not contemplated on this important aspect. Another
problematic issue pertains to the liberalization of capital account. At present,
balance-of-payment issues in the WTO are restricted to current account
transactions. But an investment agreement at the WTO would necessitate
liberalization of capital account. In the aftermath of Southeast Asian financial
crisis, there has been a rethinking on liberalizing capital account. Since
the mandate of WTO is confined to trade in goods and services, it is debatable
whether WTO is an appropriate venue for negotiating an investment agreement. In
fact, MIA carries little support among WTO's member-countries. Out of 146 WTO
member-countries, more than 60 member-countries belonging to the developing
world have articulated their opposition to launch negotiations at Cancun. While
not even a dozen member-countries have backed MIA. What is perplexing is that
supporting countries are pushing their agenda for launching negotiations at
Cancun, without even arriving at a consensus on basic issues such as scope and
definition of investment. It remains to be seen how long the developing
countries are able to resist attempts to bring investment issues under the ambit
of WTO. # References:
1.
Kavaljit Singh, Multilateral Investment Agreement in the WTO: Issues and
Illusions, Policy Papers No. 1, Asia-Pacific Research Network, Manila, 2003. 2.
Kavaljit Singh, “Keep Investment Pacts off Cancun's Agenda,” Financial
Times, July 7, 2003. Kavaljit
Singh is Director, Public Interest Research Center, Delhi. Address for
Communication: kaval@vsnl.com July
25, 2003 Bulatlat.com We want to know what you think of this article.
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