South countries flag development issues at WTO investment group
Several developing countries actively participated in the first meeting of the WTO working group on trade and investment, including ASEAN, India, Pakistan and Tanzania. They presented the case for priority to be put by the group to analyse the development realities and dimensions within which foreign investment policy should be considered. The South countries also put forward many issues in the trade- investment relation that should be examined.
by Chakravarthi Raghavan
GENEVA: An initial discussion and presentation of views at the WTO Working Group on Relationship between Trade and Investment brought up a wide range of issues that the participants wanted, to be studied in the area of trade, investment and development, and a number of inter-dependent issues with mutual impacts to the trade/investment nexus and macro- economic issues.
The presentations and flagging of issues, as one participant put it, sought to delineate the areas of knowledge and ignorance and prepare a proper map of blanks in knowledge that need to be studied and filled up.
Ms. Halida Miljani, Deputy Permanent Representative of Indonesia, speaking on behalf of the Association of South East Asian Nations (ASEAN), said the task of the group was to examine the relationship between trade and investment, and this implied that "we will have to undergo a gradual educative process", and one that will build confidence among WTO members if progress is to be expected within the group. It should also be a "member-driven process", the ASEAN said in an oblique reference to the efforts of the secretariats to promote a particular view of the issues and process. An effort must be made to avoid creating an environment of negotiations, the ASEAN statement said.
In a similar vein, India's Ambassador S. Narayanan, later said that some of the earlier interventions showed the extent of knowledge of the subject of these delegations, but some others, like India had some doubts and needed a meaningful study process. India quoted an economic author as saying in his book that "doubt is as important as knowledge in the design of economic and social policy", and said the group's work should handle both knowledge and doubt. The issue of relationships between trade and investment was not an easy one, and there were "vast areas of ignorance". The Indian ambassador cited another writer for the view that "ignorance is not just a blank space on a person's mental map; fashioning better maps of our ignorance is an important step towards knowledge." A number of areas for study (which the Chairman later called, the twelve commandments) suggested by him was aimed at fashioning "a better map of my ignorance... an important step towards knowledge."
The ASEAN said all issues in the trade/investment relationship should be in the context of development dimensions - the realities, conditions, needs and objectives of the developing countries. Hence for ASEAN, an appreciation of the development problems and development priorities, and the role of investment in the development process, should pervade the examination of the effects of trade on investment and of investment on trade.
Flagging possible general elements for an initial work programme, ASEAN said the first thing to be studied was related provisions in the WTO bearing on the trade/investment relationship. Also to be examined would be:
* relationship between trade and investment and its implications for development, touching, among others, on impact of the relationship between trade and investment on employment; domestic savings; income, wealth distribution and poverty; sustainable development and so on;
* impact of the structure and stability of the current and future trade policies on FDI;
* impact of investment policy on international trade flows; and
* advantages and disadvantages of FDI instruments, their role in development and experiences gained with respect to the impact of such investments on trade and FDI flows.
The Indian proposals
India's Ambassador Narayanan said that before Singapore, India had expressed its concern about the over-burdening of the WTO agenda. But it had bowed to the collective wisdom of the WTO membership in agreeing to a WTO study process, noting that the investment issue was extremely complicated and needed a careful study without predetermined conclusions. Before Singapore, even some of the developed countries anxious to bring this issue into the WTO, had themselves said on more than one occasion that they too did not have an adequate knowledge about all aspects.
India saw the primary role of the working group as one to facilitate an educative process aimed at studying the relationship between trade and investment. As such a "clear syllabus", and a sequenced one, was needed, so that all WTO members could be better informed.
The first element of the study should address the core element of the relationship between trade, investment and development. Citing the objectives of the WTO, set out in its preamble (raising standards of living, ensuring full employment and large and steadily growing volume of real income and effective demand, and to keep in focus the economic development of developing countries), Narayanan said, hence the perspective of any liberalisation should be development of the under-developed economies. Whether it be trade or investment, these issues are relevant only to the extent that they subserve the objectives of development. "...
the development dimension cannot be viewed as an 'add- on' for various elements of the work programme, but should be viewed as the basis and rationale of the work... the development perspective should be the all pervasive element of our study."
After getting an initial insight into the relationship between trade, investment and development, the group should try to understand the effects of trade and investment on a variety of economic variables - imports, exports, intra-firm trade, domestic savings, fiscal balance, balance-of-payments and so on.
A third area for study should relate to the implications of FDI for technology transfer and domestic capacity building - both, of critical importance for developing countries.
A fourth area should relate to the relationships between FDI and policies of national governments towards industrialization. An important aspect of this is the examination of the impact of FDI on the freedom enjoyed by national governments to pursue their national industrialization policies, specially those designed to specific regions and sectors.
The first phase of the work should address these four elements. Thereafter, in the second phase and in a fifth element, they should draw on the deliberations of the working group on trade and competition in order to understand the relationship between investment and competition policy, at the national and international levels.
At an appropriate time, the two working groups could have a joint session to examine the issue.
A sixth element in the programme should relate to the examination of how trade and investment have been dealt with in existing WTO agreements such as TRIMs and GATS, with an opportunity to examine experiences of countries in relation to TRIMs.
A seventh element in the work programme should be on how the issue has been examined in other fora, but with the awareness that no other international forum has the unique character of the WTO, and hence the handling of this issue in other fora could only be seen as an input to facilitate the work at WTO, not as a model to be emulated.
The eighth element of the work programme should relate to experiences of a number of countries with different levels of industrial development and incomes - the strategies adopted by them to reconcile national development needs and interests of investors.
While these elements would deal with the broader aspects of the trade and investment relationships, a ninth element in the work programme should be on the implications for developing countries of the business practices and corporate strategies of TNCs, who are primarily responsible for FDI flows.
A tenth element should examine the determinants of FDI flows.
While they had basically to deal with trade and FDI, it would also be necessary to examine the relationship between various kinds of foreign investments. As has been pointed out by Mr. Peter Drucker, "Ninety percent of the financial transactions of TNCs did not serve what economists call, an economic function".
It might also be worthwhile to have an idea about the true nature of the current globalization, by looking at the mobility of different factors of production. Hence, it was necessary to examine the inter-relationship between various kinds of foreign investment and mobility of capital and of labour.
A twelfth element they should address would be the rights and obligations of home and host states and investors.
These were not exhaustive items, but could be used to design the start of a work programme, and undertake the study in an "open and non-prejudicial manner" - the phraseology used in a Japanese non-paper during the pre-Singapore Heads of Delegation process.
Pakistan's Ambassador Munir Akram said the working group's examination of issues should be within the parameters of the Singapore Declaration.
From this viewpoint, Akram suggested six elements:
* The implications of relationship between trade and investment for development - domestic capacity building in developing countries; special and differential treatment for developing countries; scope for autonomy of action by governments to pursue economic development goals. It should be seen as a framework and horizontal issue, and looking at the development dimension under each of them;
* Effects of trade policies and measures on investment - how the level, quality and distribution of investment can be influenced by trade policies and measures, in particular those relating to rules of origin, regional trade agreements and so on, on the distribution and patterns of investment;
* Relationship between investment and competition policy - both at national and international levels - and drawing on the work of the working group on trade and competition;
* Trade, investment and technology transfer issues. FDI is viewed as a vehicle for a package of resources, technology and modern managerial practices. But specific questions to be answered were: how the changing relationships between trade and investment affected the transfer of technology and what were the conditions to facilitate the process of learning by domestic firms.
In this regard, the working group could look at the UNCTAD draft code on transfer of technology.
* The implications of business practices and corporate strategies regarding FDI in a globalizing world.
Global business was operating under different conditions than 10- 15 years ago. Opportunities for using globalized system of production had increased the scope for using and exploiting transfer pricing. And TNCs with a global reach may be more interested in maximising global profits than individual country contributions. There was also a greater scope for using third country locations for dumping purposes through intra-firm trade.
There was hence, a need to look at business practices and strategies. A starting point could be an examination of the relevant provisions of the draft UN Code of Conduct on TNCs, and the UNCTAD Set of Multilaterally Agreed Equitable Rules and Principles for the control of Restrictive Business Practices (RBPs).
* The inter-relationship between investment and industrialization.
The newly industrialized economies had used active industrial policy for directing inward FDI, and these should be examined to draw lessons from this experience and also on the desirability and scope for effective industrial policy to attract and channel investment.
Tanzania's Ambassador Ali Mchumo - while taking note of the presentations from OECD, UNCTAD and the World Bank - insisted that there should be no prejudgment or presumption of negotiations for a multilateral discipline. Only after a thorough exploration and understanding of the basic elements, could they undertake an exhaustive discussion of the merits and demerits of bilateral and multilateral frameworks and whether any negotiations are necessary.
The Tanzanian went on to flag some aspects of the examination.
First and foremost was a cluster of development concerns that any examination of the relationships must focus on, particularly for most developing countries which seek investment for trade, not as an end in itself, but within the overall objective of achieving sustainable development.
Ali Mchumo said that some studies had indicated the causal link is from economic development to investment and not the other way around and this explained why the volume of investment flows to advanced countries was greater than to developing countries, and why within developing countries, more FDI went to advanced developing countries.
The working group should hence examine whether investments were attracted merely by liberalising the investment regimes or there was something more than that to be done to attract investment, particularly into a Least Developed Country (LDC).
By the same token, the development dimensions of investment also should be examined. Could this be achieved in a bilateral or multilateral setting?
What is the impact of trade and investment on income, employment, wealth distribution and poverty as well as the relationship with environment and sustainable development?
Investment would be positive if it is conducive to technology transfer and domestic capacity building. "And unless the supply side and structural constraints facing developing countries, specially the LDCs, are adequately addressed, no investment regime, however liberal, will lead to substantial increase in investments," the Tanzanian ambassador declared.
Another issue was the impact of FDI on national industrial policies, especially of LDCs in the face of some evidence that FDI can have a deindustrialization effect and can erode local technological and industrial capacity.
Apart from the positive and negative effects of FDI, there was also a need to look at portfolio capital flows that had expanded very rapidly in recent years. These flows have been causing macro-economic management problems in some developing countries.
The working group should hence look at the relationship between portfolio capital flows and trade, and how this impacts on development objectives of different countries, particularly the LDCs.
A second major cluster that should be examined was the trade and investment nexus and its implications and effects on fiscal balance, domestic savings, and on balance of payment (BOP) of host countries.
While the WTO's 1996 annual report concluded that FDI had the possibility of having net benefits to an economy that would exceed the cost of any BOP problems, there were other studies that showed that FDI could have a negative overall effect on BOP, especially when a recipient country lacks strong trade effects to offset negative de-capitalisation effects that may accompany an FDI inflow.
The third cluster of issues that would need examination related to national policy autonomy of host countries which is cherished for national sovereignty reasons. Are such concerns irrelevant in a globalizing world economy? Are host countries better served by not clinging to these rights and power to determine national investment policies and leaving it to investing TNCs?
In this area, the working group would need to study the experience of those industrialized, newly industrializing and developing countries, specially the "tigers". And a necessary consideration would be whether and how such an experience is relevant to the age of globalization and liberalization.
The fourth cluster of issues that Tanzania wished to be studied was the balance between rights and obligations of host states and of home states and of the investors. What were those rights and obligations in each category and were best realised by all and to the best advantage of all within a bilateral or a multilateral framework?
A number of other developing countries of Africa - Ghana, Uganda and Egypt among them - made oral interventions and comments, supporting several of the elements listed in earlier presentations of developing countries.
Argentina emphasized that the group was far from the stage of considering whether negotiations were needed, but it was not foreclosing such an option if considered necessary.
Japan, in what it called "suggestions", called for a compilation of investment-related WTO provisions; a review of investment agreements (multilateral, plurilateral, regional and bilateral); comparison of WTO provisions and "generally prevailing" investment disciplines; and identification and compilation of investment measures not covered by the WTO agreement.
Under "economic study", Japan also wanted two issues to be studied: economic effects of various investment measures on trade and investment flows, including possible trade/investment distortions; and the correlation between trade and investment through trade- and investment-creating effects of investment which increases along the sequential processes referred to in the World Investment Report 1996.
Interestingly, the Japanese delegation stayed away from the analysis and implications of the East Asian Development Strategies and studies which Japan itself had funded (and undertaken with help of eminent economists at UNCTAD, but of another division than its one to promote TNCs). Those studies showed that a selective approach to FDI was followed in East Asia.
Canada cited the world economic forum's report on "global competitiveness" as providing a business perspective.
However, such reports about country competitiveness have such poor theoretical basis or objective criteria, that serious economic journals and analysts have begun to compare the WEF report (and that of the other Lausanne based management institute report) as like the world beauty competitions where the enterprises in the beauty business set out subjective criteria about "beauty" (hip, breast and other measurements and accoutrements).
Canada insisted FDI is an integral part of the international trading system, but was only partially integrated into the WTO framework, leading to a mixed bag of arrangements and adding to the complexity of the trading system.
Canada called for study of trade/investment linkages, but bespoke of complementarity of the two in the decision-making process of firms; the intra-firm trade phenomenon and trade measures affecting investment flows.
Other issues suggested by Canada included growth and development through trade and investment, the international competition for FDI, stocktaking of existing WTO rules in areas related to investment and comparison with other existing arrangements. It cited in this regard, the investment working group for the proposed Free Trade Area of the Americas Agreement (FTAA), and the discussions at APEC.
Interestingly in this area, the Canadian text did not mention NAFTA. (TWE No. 163, 16-30 June 1997)
Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.