investoinnit

Trade and Investment: Some Issues

Presentation made by Ambassador K M Chandrasekhar, Permanent Mission of India to the WTO, Geneva

At the Seminar on Investment organsied by NGOs, Geneva 20 March 2003

1. Are there any doubts regarding legal status of discussions on Trade & Investment?

This question is repeatedly raised by the EC in particular. They tend to misconstrue the legal status of the ongoing discussions and they try to interpret the Doha decision to mean that it is part of a single undertaking.

This is not legally correct. Paragraph 47 of the Doha Ministerial Declaration says, "With the exception of the improvements and clarifications of the Dispute Settlement Understanding, the conduct, conclusion and entry into force of the negotiations shall be treated as parts of a single undertaking." Thus, only the outcome of negotiations can form part of the single undertaking.

Paragraph 20 of the Singapore Ministerial Declaration of 13 December 1996 clearly stipulates as follows: "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." As we are all aware, no decision of any kind has been taken on the basis of explicit consensus at subsequent Ministerial Conferences at Geneva (1998), Seattle (1999) and Doha (2001). Thus, the status of the discussion remains exactly the same as was decided at the Singapore Ministerial Conference. This position was reiterated in the Chairman's concluding statement at Doha which recognises the right of each Member to "take a position on modalities that would prevent negotiations from proceeding after the Fifth Ministerial Conference, until that Member is prepared to join in an explicit consensus."

2. Will a multilateral agreement on investment lead to increased investment flows? Is lack of predictability and certainty in the overall industrial environment responsible for inadequate flow of capital resources into certain countries?

Sometimes, the proponents of MAI attempt to confuse the issue by treating opposition to MAI as opposition to foreign direct investment. There is no denying the fact that a properly directed and regulated policy of encouragement of foreign investment, building on its positive elements, can contribute substantially to growth. Encouragement of foreign investment does not, however, automatically translate into support for an MAI. Not even the proponents of MAI claim that a multilateral agreement will lead to increased investment flows into developing countries. There are many other factors that impede investment flows into particular countries and there are other factors that promote such flows. In fact, our experience has been that the single most important factor is the autonomous industrial policy of the Government together with other contributing factors, such as the availability of infrastructure, labour cost, cost of capital, cost of power and so on.

Each country has its own strengths and weaknesses, based on such factors as comparative advantage in factors of production, availability of natural resources and levels of technology. Each country must, therefore, have the flexibility and policy space to follow growth patterns that would contribute to the achievement of its objectives. We have seen no convincing argument to show that a single international standard can be applied across the board in the form of a multilateral framework to all countries. In fact, historical experience of economic development also shows a wide variation in the approaches of different countries.

There is also no convincing argument yet presented which seems to indicate that lack of predictability or certainty is a constraint to investment. If this logic is accepted, then capital resources should have moved to countries which have clearly established systems, a set of transparent and definite laws and regulations and a strong, independent and reliable judicia l system. Our actual experience, however, is that investment flows into countries where there is greater anticipation of short term profit.

3. Will curtailment of policy space available to countries contribute to higher investment inflows and lead to higher growth rates?

It is generally accepted that foreign investment can have positive as well as negative effects. The positive effect would arise from long term green field investment that would add to the productive capacity of developing countries, lead to higher incomes and more employment and raise the level of technology. The negative effects could be the "crowding out" impact of foreign investment, leading to actual decline in domestic production and employment. For example, India has a large number of small scale and cottage industries, using very little capital, employing large numbers and contributing to balanced regional growth and distributive justice. A large scale foreign investment which displaces existing production in this sector by cornering the market would have disastrous human and social consequences.

The problem is further complicated by the tendency of foreign investment to move into areas where profitability is already established. This would discourage the growth of entrepreneurship in developing countries as it would be open to marauding enterprises with huge financial resources to take over established companies which may have worked hard and invested resources to develop production capacities, distribution channels and new markets. Rarely have we seen foreign investment flow into sectors where profitability has not been established.

Developing countries -- as well as developed countries when they were developing -- have used regulation of investment as an instrument to promote their national objectives. For example, many countries even today make permission for foreign investment conditional upon export of a significant portion of their total production. Some other countries impose conditions relating to ownership of capital and employment of native manpower. We have also seen countries employing an appropriate policy mix to channel investments into what they regard as priority sector. Most developed countries have imposed conditions on investment in their process of growth in order to maximise benefits.

4. Can the problems be solved through a soft MAI or through a GATS type positive list approach? Could there be a plurilateral agreement?

The general point made by at least two of the protagonists is that developing countries can retain flexibility and autonomy through a GATS type approach and that they need to agree to only such restrictions as are acceptable to them. This again fails to carry conviction.

Firstly, if countries need to give only what they are willing to give, how will it ensure the "predictability and certainty" which the protagonists desire? If the objective is to retain such flexibility with Governments, then why go for an MAI at all? Would it not make more sense to allow Governments, as they presently do, to design and implement their own investment policies in accordance with their own priorities, their own resource patterns and their own skills and levels of technology? Is it not true that even without an MAI, FDI inflows have grown from a level of US $200 billion in 1991 to over US $1 trillion by the end of the 90s?

Secondly, as our experience with services has shown, great pressure would be brought to bear on developing countries to give greater - and still greater - market access to developed countries in these areas in subsequent stages. In a recent UNDP publication, "Making Global Trade Work for People", it has been mentioned that "there is also a concern that a multilateral investment agreement could swallow GATS by incorporating mode 3 commitments into an agreement that would provide much less flexibility for developing countries. The North American Free Trade Agreement, for example, contains general obligations on investment that do not distinguish between investment in goods and services."

Problems would arise in respect of plurilateral agreements also. It could be possible to negotiate a high standard agreement initially into which developing countries can be coerced into joining subsequently.

5. What is the objective of the MAI?

From the papers submitted by the proponents, it would appear that the MAI is intended purely to protect investors. This is analogous to the TRIPS Agreement, where the intention was to protect only right holders. Today, we are trying to rectify this imbalance in the TRIPS Agreement by bringing in such concepts as sovereign authority of nations over genetic resources, as provided in Article 15 of the CBD, recognition of folklore and traditional knowledge and similar other issues. By rushing through an MAI, we could land ourselves in exactly the same position. The Ministers have clearly pointed out the need to balance investor obligations against host country rights and to provide for home country enforcement measures. India, China and some other countries have raised these issues in a separate paper. This was perfunctorily discussed in the Working Group and there was great consternation among the proponents. Developing countries have, therefore, to be particularly careful at this stage.

6. Is there agreement between Members on what should be the components of MAI?

The discussions in the Working Group have shown that there is no clarity, even amongst proponents and their allies, regarding the structure of the MAI or its components. In fact, this difference of opinion extends even to basic issues such as scope and definition. Canada, for example, has stated in their submission dated 12 April 2002 (WT/WGTI/W/113) that "limiting ourselves to an FDI or an enterprise based definition, or relying on tests of ownership and control of an investment, can be arbitrary and would not capture the way in which businesses operate. It can effectively exclude from the scope of an agreement an investment as traditional as a 9% (controlling) interest in an enterprise, let alone any of the newer forms of investment such as strategic alliances sometimes used as a means for companies to adapt quickly and compete under rapidly changing market conditions. Nor would a narrow FDI-based definition necessarily include equity or other means of financing enterprises used to finance their investments."

On the other hand, Japan, which is an equally ardent votary of the MAI, believes that disciplines on short-term capital movement are outside the WTO's mandate and that "Japan considers the use of the enterprise-based approach limited to direct investment as the most appropriate starting point of the discussion on the definition for investment in a multilateral investment framework."

In recent meetings, the US has been strongly voicing its preference for inclusion of portfolio investment in the scope of the MAI. On the other hand, paragraph 20 of the Doha Ministerial Declaration talks only of "long-term cross border investment, particularly foreign direct investment, that will contribute to the expansion of trade..." In recent months, the US has also been saying that they are totally against what they call a weak MAI. The inconclusive discussions in the OECD on MAI may be recalled.

The differences of views between Members on virtually all aspects of the MAI have been brought out in the Working Group's annual report for 2002 and also in the minutes of various meetings. TWN has already done some work in this area and has identified some of the areas of difference.

7. Is WTO the appropriate forum for an MAI?

The core competence of the WTO lies in trade in goods and services. Article III.2 of the Marrakesh Agreement establishing WTO makes it clear that "WTO shall provide the forum for negotiations among its Members concerning their multilateral trade relations."

Investment is a financial flow, that in no way resembles flows of goods and services. There is no tangible, direct link between buyers and sellers. Money, by its very nature, is more fluid, less transparent, in its movement. Even the source of an investment flow cannot in today's global economy be clearly identified since it flows through many channels before it reaches a particular destination, from which it could flow out again in another form. Investment can come in as a green field long-term investment, get spun out in the form of derivatives, assume a totally different form and change ownership with bewildering rapidity.

The following extract from the UNDP publication that I referred to earlier is also revealing:

"Almost a decade ago, a World Bank study illustrated the changing nature of foreign direct investment in the context of financial liberalisation (Claessens, Dooley and Warner, 1993). It argued that 'bricks and mortar' investment can easily be converted into liquid assets and remitted out of a country. The study stated that: 'Because direct investors hold factories and other assets that are impossible to move, it is sometimes assumed that a direct investment inflow is most stable than other forms of capital flows. This need not be the case. While a direct investor usually has some immovable assets, there is no reason in principle why these cannot be fully offset by domestic liabilities. Clearly a direct investor can borrow in order to export capital and thereby generate rapid capital outflows.' "

We are aware of the many problems that developing countries have faced in recent years on account of erratic flows of capital. Financial flows in most countries are dealt with not by Ministries of Trade but by Ministries of Finance and Central Banks. It would undermine the character of the WTO to bring such an issue within its ambit. Trade negotiators are unequipped to deal with this issue. Developed countries will of course not be similarly handicapped because they have the resources to strengthen their Delegations by bringing in experts on financial matters. Developing countries, on the other hand, cannot afford this luxury.

8. What are the implications of inter-linkages between the four Singapore issues?

On the face of it, the inter-linkages are not obvious. However, when it comes to actual implementation, the inter-linkages may surface in such manner that we would, in totality, have undertaken far more than what we thought we gave on each issue. For example, transparency in Government procurement seems innocuous. However, a particular regulatory regime in one area (as for example, a provision for preferential purchase by Government) could be countered by another provision in another agreement, such as post establishment national treatment in an agreement on investment. Thus, what would appear to be transparent announcement of a policy, without market access commitments, could in fact lead to actual negation of the policy. While the inter-linkages may not be clear to us at present, there is no doubt at all that if and when the final package is worked out, there would be hooks put in place in particular agreements which could impinge on other agreements.

9. Are we ready for expansion of the WTO agenda?

So far as developing countries are concerned, we have already taken on ourselves a huge range of commitments under existing agreements. We are struggling to cope with even our present commitments. In actual implementation, we have come across a large number of shortcomings which we have put forward as implementation issues and our proposals on special and differential treatment. We have realised that developed countries are in no mood at present to look at any of the issues that we have raised. The argument is that since we have subscribed to the agreements, we must comply with them and they cannot be re-negotiated at any cost. It would be extremely dangerous for developing countries to take on a range of additional commitments at this stage which would further complicate issues as far as we are concerned.

10. What is the road ahead?

In the light of the foregoing analysis, we are of the view that we do not want an MAI in the WTO. The position remains as unclear today as it was at Singapore. No convincing arguments have yet been put forward. Differences of opinion still abound, even amongst proponents. Further commitments in such a major area could prove to be disastrous for developing countries. The WTO should focus on its area of core competence, namely trade. We have been discussing trade and investment or close on 7 years now without convincing ourselves that an MAI is necessary within the WTO framework. Ours is a small, busy organisation dealing with issues of day-to-day importance to all Members. We should not waste further time on this issue. The best way forward would be to drop further discussion of this issue after Cancun.

Lähde: Third World Network

13.05. 2003