A critical analysis of the proposed investment treaty in WTO

by Bhagirath Lal Das

This article by the former Director of UNCTAD's Trade Programme provides a critique of the aims and consequences of the Multilateral Investment Agreement (MIA) proposed by the EC in the WTO. The MIA will give foreign investors total rights without responsibilities, with drawbacks for developing countries. The arguments put forward in favour of the MIA (that it will attract more FDI to the South, prevent unilateral action, reduce competitive incentives) are also flawed.

BARELY a year has passed since a decade of intense Uruguay Round negotiations culminated in the ushering in of the World Trade Organization (WTO) Agreement under which developing countries assumed major obligations; and even before their cumulative effects have been well understood, intense pressures are being built up to force developing countries to assume totally new obligations in the field of investment.

Having obtained in these negotiations significant concessions for their transnational corporations (TNCs) in the area of goods, services and intellectual property monopolies, the major industrialized countries are now seeking total freedom abroad for their TNCs.

In the early stages of the Uruguay Round, the majors had in fact proposed new disciplines in the area of investment. But after testing the waters for some time, they thought it prudent to limit their expectations in this area to the traditional GATT obligations. But now that the Agreements are in operation, some of them are coming back with the very same, but significantly strengthened and reinforced proposals.

In particular, the European Commission is pushing hard for starting a process for multilateral negotiations on investment in the WTO. It is attempting to get an endorsement for the start of the process at the Ministerial Meeting in Singapore. The EU makes no secret of its intention to seek a multilateral agreement on investment within the framework of the rights and obligations of the WTO Agreement.

As far as can be made out from EU documents, the contents of the proposed multilateral investment agreement (MIA), will give full rights for foreign investors to invest and establish themselves in all sectors (excluding perhaps, defence) in any WTO member, get treatment for the Foreign Direct Investment (FDI) at least on the same level as accorded to the domestic investments, and effective implementation of the obligations undertaken in the agreement.

Thus the proposal aims at eliminating all flexibility which a country may have at present to permit foreign investment and allocate FDI to priority sectors; to discourage or stop altogether the flow of foreign investments in sectors where such investment is not considered desirable or appropriate; to provide special preferences for domestic investment and stipulate conditions for FDI, like ceiling on equity, restrictions on ownership and so on.

Investors will thus have freedom without any responsibility, except in respect of their own profits.

The implementation of the obligations of governments is sought to be ensured by locating the MIA in the WTO, so that for any perceived infringement, action can be taken against exports of the country.

Implications of FDI

Foreign investment is often welcome to countries, as it augments the country's capital and investment stocks. But the main implication of FDI is that the returns on such investments - in the form of dividends and profits, as well as many fees including license fees, management expenses and so on - are sent out of the country in foreign exchange. Hence, if the investments do not help the country, either directly or indirectly, to earn foreign exchange, the negative effects of the outflow may be serious.

The FDI can perform a direct beneficial role by producing exportable goods and services, and an indirect role by producing such goods and services which may help in producing other exportable goods and services or in replacing imported goods and services. Besides, an indirect role can also include developing infrastructure facilities which may encourage further FDI inflows.

But if the FDI is only for capturing the domestic market, it may still generate profit for the investor, but such profit may leave the country in foreign exchange.

There are two other serious implications. First, in profitable domestic consumption sectors, foreign investments may overwhelm domestic investors (which may generally not be as strong as the foreign counterparts) and in some cases may eliminate them.

Second, some critical sectors, like land, minerals and forests, where countries often like to have effective control on ownership because of social, political and strategic reasons, may, in a big way, pass under the control of foreign nationals.

Different needs of investors and host countries

Investors from industrialized countries want to come to developing countries for three main reasons. First, they apprehend that the return on capital in their home country is not adequate; second, they want to combine their capital with the cheap labour of the host country to reduce the cost of production; and third, they want to utilize the raw materials of developing countries near their source.

The host developing countries, on the other hand, are interested in: (i) development of their services and infrastructure which may help their industrialization and development, (ii) production of exportable goods and (iii) continuous technological development in their industrial production and services.

These two sets of objectives are not incompatible. And the interests of foreign investors and host governments may be harmonized. But it is critical that any FDI meet both sets of objectives.

This can be achieved if the investors decide on the viability of specific projects, and the host governments decide on the priority sectors and conditions of FDI, consistent with their economic and development objectives. Wherever the two coincide, FDI will flow.

But for FDI to have a beneficial effect, it is important to realize that the roles of both sides are significant.

An MIA is really not necessary for this purpose. What is needed is that governments have clarity of objectives, and these are spelt out clearly. Sets of transparent and stable criteria adopted and announced by governments can help the foreign investors to assess the viability of investments under those conditions. Naturally, governments wishing to encourage foreign investments will lay down criteria which will welcome the investors in priority sectors rather than scare them away.

If there is ample scope for the convergence of the interests of investors and those of the host governments and if it can be brought about by the domestic policies and measures of host governments, why is it then that some industrialized countries are pressing for a multilateral discipline?

The main reason is that they want to eliminate or, at least, constrict the powers of host governments regarding the choice of the priority sectors for FDI and imposition of conditions on such investments, so that foreign investors are able to operate unencumbered by such constraints.

The main objective of the investors naturally is to earn high profit in a short time and repatriate the profit.

And the objective behind bringing the proposed discipline on investments into the folds of the WTO Agreement is to utilize its dispute settlement process to enforce the discipline.

The WTO, through its provision of cross-sector retaliation, will enable them to take restrictive measures against the developing countries which may be perceived as violating the discipline.

False arguments in favour of MIA

As it was observed during the Uruguay Round, some major industrialized countries are adopting the usual carrot and stick method to pressurize developing countries. Various types of arguments are put forth.

It is said that, firstly, if developing countries do not agree to a multilateral discipline, strong industrialized countries may take unilateral action against them. Secondly, with an MIA there will be higher FDI flows to developing countries. Thirdly, with an MIA in place, developing countries may not have to enter into competition among themselves in offering incentives to attract FDI. Finally, since an MIA is being negotiated in the Organization for Economic Cooperation and Development (OECD), it may be better for developing countries to engage in the negotiation at this stage in the WTO, rather than wait for the conclusion of an agreement at the OECD and be faced with the option of accepting or rejecting it.

Considering the vehemence with which these arguments are advanced, it is useful to examine them one by one.

* Can unilateral trade action be taken?

The answer must be a NO.

The WTO Agreement (and earlier the GATT) confers certain rights on the Members in the areas of goods, services and intellectual property. These cannot be unilaterally suspended, withdrawn or restricted. For example, if the entry of a product on the payment of certain duty is allowed in a country in accordance with its obligations under the WTO/GATT Agreement, this right cannot now be unilaterally restricted.

Similarly, if an obligation has been taken on the level of the duty on a product, the country taking the obligation cannot unilaterally increase the duty or levy any additional charge on the import of that product, generally or from a particular source. The same applies to the obligations in the areas of services and intellectual property.

There are set procedures for taking action against any country. But one point is clear: there can be no retaliatory restraining action in these areas for any perceived grievance which is external to these areas. Hence no country can penalize another country in the sectors of goods, services and intellectual property rights for not participating in the new negotiations on investments or for not undertaking any new disciplines in investment which is not a part of the WTO Agreement.

Any restraining action in respect of goods, services and intellectual property rights can be taken only in accordance with the Understanding on Rules and Procedures Governing the Settlement of Dispute (DSU) contained in the WTO Agreement. The WTO Agreement contains a number of agreements which establish the rights and obligations of the Members of WTO. Article 23 of DSU prescribes that Members, while seeking redress of violations of obligations under these agreements, shall abide by the DSU. A Member may take countermeasures against another Member, if it is established in the DSU that the other Member has either violated its obligations, or nullified or impaired the benefits of the complaining Member or has impeded the attainment of any objective of these agreements.

No Member can take action in the DSU against any other Member just because the latter has not agreed to have a multilateral investment discipline or any other discipline for that matter, if such a discipline is not included in the WTO Agreement. If a Member takes a trade restrictive measure against another Member for any extraneous consideration, it will be violating its obligation under the WTO Agreement and will be subject to action under the DSU. Thus unilateral trade action against a country refusing to negotiate a multilateral investment treaty or not abiding by a treaty outside the framework of the WTO Agreement, or dubbing the country as engaged in "unfair" trade by not providing freedom to foreign investors, cannot be taken by any Member country which has committed itself to upholding the sanctity of the WTO Agreement.

There is another side too. No special benefits in the frame of the WTO Agreement can be given exclusively to a Member that has negotiated or joined an investment agreement. Any benefit by a Member to another in the areas covered by the WTO Agreement has to be extended to all Members based on the Most Favoured Nation treatment (MFN) principle - except where a departure is expressly provided in the Agreement. No discrimination can be made between those who negotiate and join an investment treaty and those who do not.

* But will the proposed treaty enhance the flow of investments?

The answer is both YES and NO.

With the removal of all national constraints on foreign investment, the total FDI flows to a country may increase. But the increase in investment may not be in sectors where the host country would like the investment to come. On the other hand, the increase may be in sectors where foreign investment is not desirable. For example, it may come in sectors which do not directly or indirectly enhance exports, infrastructure capacity or technological capacity, and yet by domestic sales, the investment may earn profits which will be repatriated, thus reducing the foreign exchange stock. In fact the flow of FDI to desirable sectors can increase if the government itself removes all restraints on such investment in these sectors. It does not have to go through any multilateral investment agreement for this purpose.

* Will an MIA obviate the need for competitive offers among developing countries to attract FDI?

Once developing countries join the proposed MIA and agree to a totally free access for foreign investors and to full national treatment, and thus create a "level playing field" with the same rights available in all countries, incentives based on access to investors or national treatment will disappear.

But the FDI will go to countries where the investor sees the greatest benefit to itself, and not necessarily to those countries needing it. The latter will then find themselves forced to offer some other incentives to attract FDI and there will be just a new range of competitive offers of "incentives".

* Is it necessary to pre-empt the OECD exercise?

NO. Countries which are members of OECD negotiate various agreements among themselves. These are suitable among countries at almost similar levels of development. If developing countries do not consider some of these agreements appropriate, there is no reason why they must start negotiating such agreements multilaterally in the WTO. Later, if it is proposed for negotiation in a multilateral forum, developing countries may decide whether to participate in it or not. Developing countries cannot be forced to participate in any negotiation or any treaty, if they themselves are not willing to do so. Perhaps a single country may find it difficult to resist, but if a large number of countries decide not to participate in a negotiation on a new subject, there is no way of forcing it in.

(The writer is a former Director of UNCTAD's Trade Programme division during the Uruguay Round negotiations, and a former Indian Representative to the GATT. He wrote this article for the SUNS)