Dealing with the issue of foreign investment in a comprehensive way and through international cooperation has been a major preoccupation in different fora for quite long. The inclusion of the issue in the aborted Havana Charter constitutes the first indication of such interest. Within the GATT, the issue was dealt with occasionally until the Uruguay Round. Even the theoretical discussions on the possibility of developing a ‘GATT on investments’ had taken place as early as the 1970s.

During the Uruguay Round (UR) of trade negotiations, the developed countries advanced the idea of framing multilateral rules to further liberalise the foreign investment regime. But the developing countries were opposed to any such idea, primarily on the grounds that they were unwilling to embark on multilateral negotiations on investment matters under the GATT which was essentially a body devoted to trade matters.

However, eventually, the developing countries settled for negotiations agreements on four clusters of investment related matters. The four agreements under the auspices of GATT/WTO that deal with investment related matters are, Trade-Related Investment Measures (TRIMs), General Agreement on Trade in Services (GATS), Trade-Related Intellectual Property Rights (TRIPs) and the Agreement on Subsidies and Countervailing Measures (ASCM).

Moreover, countries continued to address the issue at bilateral and regional level by signing treaties containing provisions on investment explicitly or implicitly. It is worthwhile to look at all such agreements both inside and outside the WTO, not only because they can give useful lessons for a multilateral negotiations on investment but also because many of them maybe in conflict with the proposed agreement on investment at the WTO. Indeed the Doha Declaration has recognised this by including “due regard for other WTO provisions and existing bilateral and regional agreements” in it. 

Existing WTO Agreements

Among the four agreements under the auspices of GATT/WTO that deal with investment related matters, TRIMs deals with investment issues explicitly and exclusively. Negotiations on TRIMs represented an early attempt to catch up on multilateral rules governing investment liberalization. Investment measures can be divided into two groups. The laws on expropriation, nationalization, compensation, and measures to restrict or prohibit access to specific sectors of the economy, are one group. These measures are potentially applicable to all private investments within a country. The second type of measures is intended to influence corporate decisions, mainly of foreign investors, although they could be applied to domestic investors as well. They can be further subdivided into positive and negative incentives according to the impact they have on the investors. TRIMs Agreement relates to the negative incentives.

Based on the WTO rules of national treatment and elimination of quantitative restrictions, the TRIMs Agreement prohibits a number of measures mentioned in an illustrative list. It is not clear how TRIMS will coexist with a generic agreement on investment. Would it be incorporated in the proposed agreement on investment by reference? Should its scope extend to include investment measures affecting trade in services? Or should its scope of prohibited practices be modified or further clarified?

Another related question is the issue of tackling the trade and investment distortions resulting from the proliferating level of investment incentive activities, the positive measures as categorised above. They are used both in developed and developing countries and can be considered to be closely associated to the imposition of performance requirements, or the negative measures. The issue is partly addressed by the ASCM as certain investment incentives fit within the definition of a subsidy and as such are prohibited. However, the provisions pertaining to investment in the ASCM have not received adequate attention and deserve greater analytical scrutiny. The proposed agenda on investment negotiation as outlined in Doha Declaration has not touched upon the issue. But silence on this front may be broken as it is expected that attempts will be made to strengthen or broaden disciplines on performance requirements.

The GATS provisions aim to liberalise international exchange of services based on a broad definition of trade in services and represent a partial multilateral regime on investment. It involves FDI matters since many of the services can only be provided by the establishment of a local subsidiary by a foreign service provider and several provisions in the agreement regulate cross-border financial flows. In fact it is one of the ‘four modes’ of exporting services as defined by GATS. The cross-border marketing of goods also relies increasingly on commercial presence in foreign markets. Investments of manufacturing companies in wholesale and marketing or finance-related affiliates abroad are covered by the agreement if the establishment of such facilities aims at supplying a service related to marketing of goods. An affiliate concerned only with the distribution of products that have been produced abroad is not covered by the agreement. In practice, however, it is difficult to make a clear-cut distinction between those foreign affiliates that really supply a service and those do not.

The significance of GATS for the developing countries is that its central features suggest that a development-oriented approach to FDI is possible in any future discussion on multilateral investment rules and standards.  However, here again, it is not clear how the provisions on the treatment of commercial presence in the GATS can co-exist alongside a comprehensive generic agreement on investment. GATS involves quite a broad definition of investment and hence a narrower definition that most developing countries would prefer in a potential agreement might be in conflict with GATS. Similarly, an agreement without a pre-establishment commitment may bring conflict of principles with GATS as it establishes both pre- and post-establishment rights.

If the proposed agreement on investment focuses solely on measures affecting trade in goods, leaving the GATS intact, then the questions arises what kind of impediments would the agreement address, given that an overwhelming majority of investment restrictions arise in services industries rather than in manufacturing? The list of reservations lodged under the NAFTA and the aborted OECD MAI indicates that some 80-85 percent of them arise in services. Indeed the bulk of the discriminatory measures affecting foreign investment today are maintained in the services sector and foreign investors in manufacturing are often given better than national treatment. Adopting different standards of investment liberalization in goods and that in services may also create complicated situations as, very often, the distinction between investment in goods and that in services may be blurred and such possibilities are increasing with the advancement of technologies.                                                  

The TRIPs Agreement has a bearing on FDI matters in that the definition of these rights and the adherence to the international standards and procedures constitutes part of the framework within which foreign investment takes place. The impact of the agreement on the flow of foreign investment is of course not very clear. While FDI inflows may increase as result of a more reliable legal environment and a better investment climate, lack of IPRs may also encourage FDI. A firm that wants access to market where IPRs are not adequately enforced, may have to rely on FDI to ensure control over the proprietary information. Lack of IPRs may also increase FDI in marketing activities that partially substitute the enforceability of knowledge by establishing closer ties to consumers. However, the developing countries were made to believe that it was necessary for them to attract greater flow of FDI along with advanced technology.

Bilateral Investment Treaties

The last decade has literally seen an explosion in the signing of Bilateral Investment Treaties (BITs). By the end of year 2001 there were 2,099 BITs in force. The initiative for the conclusion of these treaties was taken by major capital exporting countries. Later, a considerable number of such treaties were concluded by the capital importing countries, economies in transition and the developing countries.

BITs usually include provisions regarding the area of application, admission and promotion of investment, general treatment and regulations on specific issues, including expropriation, losses as a result of armed conflict and other forms of non-commercial risks, transfer, operating conditions of investment, subrogation, and settlement of disputes. Less traditional provisions cover restrictions on performance requirements and transparency.

Although BITs are essentially similar in nature, there are significant differences between their specific provisions. Mainly, there are two BIT models: the US model and the European model. In general, given the sort of provisions usually found in each type of BIT model, it can be said that the disciplinary provisions in the US model are of higher level than the provisions in the European model. In the European model, which is more traditional, the host country permits FDI to enter its territory subject to its laws. This implies that stated standards apply only at the post investment stage.

The US model establishes the right of the investors to set up a business in all sectors except in those mentioned as ‘reserved’, which implies the application of the national and most favoured nation treatment at entry and afterwards as well. In addition, this model contains treatment provisions for a series of specific and practical issues, such as performance requirements, the temporary entry of investors and certain categories of personnel, and the nationality of the members of the boards of directors. Moreover, the US model takes a broader definition of investment.

The main reason for the success of BITs in most countries is that they usually follow the European model. They do not place any restrictions on host countries’ policies regarding admission of FDI. BITs’ provisions address the protection and equitable treatment issues of FDI after the investment has taken place in conformity with the host country’s laws and regulations.

Although the US has been insisting that the proposed agreement on investment at the WTO will take a broader definition of investment, it will be very difficult for the developing countries to accept that. As per the Doha Declaration the proposed investment agreement will take a GATS-type positive list approach as against the negative list approach adopted by the US model of BIT. Hence in terms of provisions or stringency, the proposed agreement at the WTO is likely to lie somewhere between the European and the US models of BIT. 

Thus the proposed WTO agreement on investment will be in conflict with both types of BITs that are in force. As per the current discussions there is no indication that the BITs will be withdrawn in case a multilateral agreement is signed. But if they exist side by side there will be serious complications as to which agreement may be applicable in a particular case.

Regional Agreements

At the regional level, liberalisation of investment regime tends to have materialised in certain number of initiatives taken mostly in the 1990s, notably the amendments to the Andean Group’s instruments on foreign investment and transfer of technology in 1991; the North American Free Trade Agreement (NAFTA) of 1992 among Canada, Mexico and the United States; the Energy Charter Treaty adopted by 50 countries, which contains important provisions on investment liberalisation and protection; the 1994 APEC Non-Binding Investment Principles; and the Pacific Basin Charter on International Investments.

Similar trends can be identified in interregional agreements, such as the Fourth Lome Convention between the European Community and a large group of African, Caribbean and Pacific States, as well as in the association agreements concluded after 1989 by the European Community with countries of central and eastern Europe, and north Africa. This trend mainly reflects the recognition by Governments that FDI is attracted by large markets. In fact, today’s regional agreements are really no longer only free trade agreements but, more and more, free investment agreements as well.

The extent to which and the manner in which, these issues are incorporated in specific regional instruments vary considerably, as does the rigour with which they are addressed. However, there is no doubt that most of these agreements will be in conflict with the proposed WTO agreement on investment.

Of course it may be argued that the investment agreements that were signed as a part of regional integration process will not pose so much problem as the regional agreement will take precedence over the multilateral agreement and there are institutional mechanisms at regional levels to deal with such issues. However, the same cannot be true for the BITs or the interregional agreements as there are no institutional mechanism to enforce these agreements. Moreover, even the regional agreements may pose problems as there might be cases where a third party that is not a part of the regional bloc is involved.

Conclusion

The proponents of a multilateral agreement emphasise that a comprehensive framework for investment within the WTO may be necessary if the issues of globalisation of the world economy and liberalisation of the trade and FDI regimes are to be effectively tackled. Indeed the capital exporting countries attempted to adopt a comprehensive multilateral framework for quite long. However, it could not be established due to the resistance from the developing countries who believed such rules will probably serve the interests of the rich (capital exporting) countries.

In this context, signing of BITs became part of capital exporting countries’ strategy to create a more investor friendly legal environment in host countries. They also got some other instruments both at regional and multilateral fora aimed liberalising foreign investment. Thus significant liberalisation has occurred even in the absence of a multilateral framework – a fact that is being used both the proponents and opponents of a multilateral investment agreement to put forward their views.

The opponents argue that since significant liberalisation has occurred even in the absence of a multilateral framework such framework is not necessary would serve very little purpose. The proponents however argue that such agreement would reduce conflicts between countries’ norms and poor allocation of resources caused by the great number and variety of regulations and contribute to the continuity of investment related policies promote common and more stable rules and disciplines.

There might be some justification for adopting a comprehensive framework for investment within the WTO. But adopting such an agreement keeping the existing investment instruments both within and outside the WTO intact is unlikely to meet its desired objectives and may even complicate the situation further. If “due regard for other WTO provisions and existing bilateral and regional agreements” in the Doha Declaration is interpreted as all such provisions or agreements taking precedence over any future multilateral agreement on investment then there will be limited scope for its application.

 Thus the negotiators need to take note of all such existing instruments, review or even scrap many of them in the event the agreed to sign a multilateral agreement to make it really effective. It may also be noted that a multilateral framework on investment will have bigger implications for the world community and hence, it needs to be ensured that it is more balanced than the existing instruments that are in force today.