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ICs pushing for investment negotiations at WTO

Industrialized countries are now attempting to complete the WTO study process on trade and investment with recommendations that could possibly result in negotiations on multilateral investment rules commencing at the 3rd WTO Ministerial Conference in 1999. Developing countries on their part have urged caution, stressing the potential negative effects of FDI. These views emerged at a recent meeting of the WTO Working Group on Trade and Investment.

by Chakravarthi Raghavan


GENEVA: The European Union, Japan and other industrialized countries appear to be trying to complete the WTO study process on Trade and Investment, replete with recommendations that could be injected into the preparatory process for the 3rd Ministerial Conference in 1999, and kick off negotiations at that time.

They are also seeking to expand the scope of any future negotiations on investment, by employing a very broad definition so as to include not only foreign direct investment (FDI), as originally proposed by the EC at Marrakesh and Singapore, but also portfolio investment and other "investments".

Canada and Japan - supported by the US, the EC, Costa Rica, Australia, New Zealand and Brazil - argued for a broad definition. But Korea insisted on a narrow definition, restricted to FDI. India supported this, pointing out that the background to the study, mandated by the Singapore Ministerial Conference (SMC), was exclusively focused on FDI, and that the Secretariat synthesis paper also showed that the WTO Working Group on Trade and Investment (WGTI) discussions had been conducted on the basis of FDI. Any attempt to expand the investment definition would require starting the study process all over again, from this perspective on which there was no consensus. The Association of South East Asian Nations (ASEAN) reserved its position on this issue, while the US and the EC appeared to have said they would present papers on this.

While the definition of "investment" in the MAI discussions at the OECD is very wide, and has hence attracted even more opposition, in the light of the recent Asian crisis, many leading mainstream economists have voiced some concerns on portfolio flows, including on the herd-like behaviour of institutional investors - like mutual funds, hedge funds, pension funds, banks managing securities trading for such funds, and insurance companies - and their very negative effects on host and home countries.

The attempts to expand the scope of the WTO study and to conclude it by November, with recommendations, became evident, according to participants, at the last meeting (16-17 June) of the WGTI, which was set up in 1997 under the chairmanship of Thailand's Ambassador to the WTO, Kirik-Krai Jirapet, as a result of a mandate of the SMC.

WTO study process

The next meeting of the WGTI is set for 1 October, and the chairman has indicated that the Report and possible recommendations for future work should be adopted by 23-24 November. All WTO decisions, and even more specifically any recommendations on the future work in this area, have to be by an explicit consensus decision.

While Japan has suggested consultations between the October and November meetings to agree on recommendations, Switzerland suggested that if there is no agreement on the Report of the WGTI, the chairman should present one on his own responsibility.

The SMC agreed to establish a working group to study the relationship between Trade and Investment, but that this study "shall not prejudge whether negotiations will be initiated in the future."

The WTO General Council was asked to keep under review the work of this study group, as also the one on trade and competition, and "determine after two years" how the work of each body should proceed, with the stipulation that future negotiations, if any, regarding multilateral disciplines in these areas (trade and investment, and trade and competition) will only take place after an explicit consensus decision among WTO members.

The EC has been pushing for WTO multilateral investment negotiations and, with the impasse in such negotiations at the OECD, is trying to push the pace at the WTO (where the discussions are even more non-transparent and secretive).

At the Geneva Ministerial Conference (18-20 May), under EC pressure, the WTO General Council was mandated to set up a process to prepare for the third Ministerial (to be held in the US, perhaps in the last quarter, in 1999) at a meeting to be held in September, and to enable the Council to submit recommendations on a work programme.

Though at the Geneva Ministerial, developing countries in general insisted on according priority in the future work programme to implementation and further negotiations (on agriculture and services) mandated at Marrakesh or those in the WTO accords, the EC managed to push into the preparatory process "other possible future work on the basis of the work programme initiated at Singapore."

After the Geneva meeting, developing countries put a positive gloss on the outcome, viewing the work programme (and its various indents) as a hierarchy of issues, but with nothing excluded. But the private manoeuvres inside the WTO suggest that again, within the trading system, issues of interest to the major industrial nations will be taken up and pushed, while those of the developing countries would be sidelined.

"Non-transparency"

The discussions in the second week of June at the WGTI were open to all members, but were staffed and attended consistently only by a score or so of developing country delegations (given the fact that most developing countries are short-staffed, having to cover too many issues in too many institutions).

This makes the WTO's "non-transparency" even greater - at a time when its involvement (and that of international institutions supporting it) on these issues is drawing the hostility of public-interest non-governmental organizations of the North and the South. The documents and meetings, as well as minutes of meetings (produced by the Secretariat), which came out some weeks later, as were like other WTO documents and meetings, are "restricted", and are not available as of right either to the media or to NGOs.

But in a just-published paper of the Amsterdam-based Transnational Institute, Myriam Vander Stichele has outlined the various ways by which big business and TNCs have access to the highest decision-makers and staff of the WTO and influence the negotiations, and says: "The influence of business and, in particular, TNCs, is apparent throughout the WTO."

The discussions at the WGTI on the implications of the relationship between Trade and Investment and development and growth appeared to have considered a Secretariat "synthesis" paper based on information supplied so far by delegations and intergovernmental organizations (including those from the OECD, IMF, World Bank, and UNCTAD's division on TNCs, FDI and Development).

The presentations of the various organizations were more promotional and aimed at advancing TNC interests, than at providing all the information needed for an objective study, one of the participants complained later.

The Secretariat's synthesis paper sought to project the view that the WGTI felt that FDI had basically a positive impact on development.

While the "official" literature from the international organizations now lean over backwards to praise the role of FDI and TNCs, other academic literature, including those from mainstream economists (in the wake of the Asian crisis) and papers from the Helsinki-based WIDER institute, are beginning to take a more balanced, and sometimes even a sceptical, view as to whether liberalizing investments and opening up an economy to TNCs would bring about development and growth.

The WTO synthesis paper's view that discussions in the group had assessed positively the impact of FDI on development, was reported to have been supported by the EC, the US, Japan, Canada, Switzerland, Australia, Korea and Costa Rica.

However, the ASEAN, India, Pakistan and Egypt reportedly noted that the synthesis paper did not convey the views expressed by delegations in the discussions so far, raising also some concerns over the negative effects of FDI.

The ASEAN, supported by India, Pakistan and Egypt, wanted a paper from the Secretariat on the negative aspects of FDI. But this was opposed by the US, Japan, Switzerland, Canada and Australia as well as by some Latin American countries like Argentina, Brazil, Costa Rica and Venezuela.

Ultimately, on a suggestion from Hong Kong-China, it was agreed that the Secretariat should produce a paper on both the positive and negative aspects.

Some participants later said that, given the bias of the WTO Secretariat and of the international organizations participating as observers towards promoting the interests of TNCs, though constrained by their limited resources, they might have to produce their own paper.

Some of the negative aspects of FDI, which are sought to be brushed under the carpet, include questions about its effects on domestic savings, particularly when the foreign investor is given full access to domestic capital markets and lending institutions, problems of transfer pricing, and excess outflows from a country as a result of a web of payments for technology, services and charges for R & D and administration (located at the TNC headquarters) and tax-avoidance measures.

TNC tactics

An UNCTAD Secretariat paper, presented in September 1997, has said that the transfer-pricing issue was of serious concern to developing countries in the 1970s and, while still persistent, is of "less concern" now, since foreign affiliates can now remit profits with greater ease and income-tax rates for foreign company profits have tended to decline in most developing countries.

However, the issue of transfer pricing and tax avoidance has become sufficiently troublesome even for the major industrialized countries, home of TNCs. The OECD, which has been trying to address this issue, albeit not very successfully, through cooperation among the tax authorities of its members, brought out a publication in 1995 on Transfer Pricing, Guidelines on TNCs and Tax Administration. There have also been media reports about concerns on this issue voiced by the tax administrations of Europe and the US, including on how bilateral double-taxation avoidance agreements and loopholes in them are used by TNCs to pay no tax at all in either jurisdiction.

A recent report in the financial press has brought to light how transfer pricing is now used to completely escape taxation anywhere. According to this report (Financial Times of 22 May), a US corporation having a German manufacturing subsidiary can borrow from a financial subsidiary of the same US holding company in the Netherlands. The interest on that loan is fully deductible out of the German subsidiary's profits (and companies so arrange their interest payments as to completely offset the profits). In the Netherlands, the subsidiary pays tax only on the spread between its cost of funds and the rate at which it lends to its German sister company. And no tax is paid in the US by the parent company on the German subsidiary's profits set off by the loan transactions among the subsidiaries.

The WTO Secretariat is also to produce a paper, as suggested by India, on the historical evolution of FDI policies in the developed countries.

Varied views on FDI

Several of the individual presentations of industrial countries would have it that economic growth, technology and development came to them because of their being open to FDI - a view that is ahistorical and that has been challenged by a number of mainstream and heterodox academics - who are seldom even accorded mention in the bibliographies cited by the international organizations in their reports promoting FDI and TNCs.

A balanced challenge to the rosy view about TNCs and globalization is brought out in an impending WIDER/McMillan publication on Transnational Corporations and the Global Economy, with an introduction by Robert Rowthorn and Richard Kozul-Wright. The two authors, in the introduction, and in a forthcoming article in an academic journal, rebut the view that the road to development for the poor countries is to attract FDI on a large scale (similar to that of some South-East Asian economies).

Perhaps more interestingly, even the Bank for International Settlements (generally a citadel of conservative central bankers), in its 1998 annual report, has, in just 6-1/2 pages (including five tables and one chart), succinctly and with great clarity, summed up the trade, current account balance and FDI issues, pointing out that FDI flows now are "essentially financial flows" that may or may not be related to investment in real capital, and that measured outflows are affected by movements in real interest rates, equity prices and factor- price arbitraging opportunities. The BIS report also brought out that, for example, US firms finance capital expansion by borrowing in host countries, and not by capital outflows.

Under other agenda items of the WGTI, Korea presented a paper on its various bilateral investment treaties (BITs), while India presented a paper on its bilateral investment promotion agreements (BIPAs). Canada and the EC reportedly said that the papers on BITs/BIPAs showed these accords were proliferating and that they should be integrated into a multilateral treaty.

India, however, was reported to have challenged this view, pointing out that the whole purpose of such bilateral accords is to give flexibility to a host government on foreign investment, and that such flexibility would not be possible in a multilateral agreement.

Outside experts have noted that often countries enter into BITs and BIPAs, and sometimes provide favourable terms and incentives to partners, keeping in mind the trade-offs provided by the partner country over a range of bilateral relationships - trade, economic and sometimes even political and security considerations.

No multilateral treaty can provide for these, and the arguments about "efficiency" and "inefficiency" at global level only hold in a theoretical world of perfect markets and pure economics - not in the real world of political economy, global and national.

The EC, in an effort to present itself as being in a more reasonable frame of mind, is reported to have indicated at the discussions that it is not seeking a "right to invest" and "national treatment" at the pre-investment stage, but only a "right of establishment" and "national treatment" after establishment.

The EC also argued at the WGTI that there should be a "top- down" approach (or the negative-list approach promoted for the GATS negotiations, but which was abandoned for a positive-list approach) in investment rules on national treatment and most- favoured-nation (MFN) treatment - meaning that any exceptions should be specified in country annexes. Where there is no such exception specified, full national treatment and MFN treatment would apply.

But on market access, the EC was favourable to a bottom-up approach as in the GATS.

While some developing country delegations later thought that the EC was clearly signalling that it was reducing its "ambitions" over WTO investment rules and that the EC is trying to find accommodation with the developing countries, others were more chary, and thought it was just a tactical ploy to get negotiations going, or at least for the study process to end this year with recommendations for negotiations.

One developing country expert noted that apart from merely asking for "national treatment" as treatment "no less favourable than to domestic investors", in the GATS (which allows countries to set out limitations on national treatment), for example, the EC had a provision inserted (Art. XVII.3) to the effect that "formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the Member compared to like services or service suppliers of any other Member."

The Europeans, throughout the 18th and 19th centuries, and well into the 20th (in the early inter-war years), repeatedly tried to assert the Westphalian state principles of foreigners' rights to property. But this was challenged by the Latin American jurists of those days, and virtually fell apart even under the League of Nations.

The US tried to reassert this doctrine of foreigners being entitled to a higher standard of justice (in property rights) than a national, and in 1965, through the codification of its foreign relations law, said as a "prevailing rule that such national treatment is not always sufficient, and that there is an international standard of justice that a state must observe, even if the standard is inconsistent with its own law."

Development dimension

However, the UN Charter, the UN codification of international law, as well as the General Assembly declarations put an end to this doctrine.

But during the Uruguay Round, in the services and trade- related investment measures (TRIMs) negotiations and other areas, this doctrine was sought to be resurrected, but got short shrift from the developing world.

The UNCTAD Secretariat's TNC division made a presentation on "the development dimension" in international investment treaties. The intervention, by Mr. Karl Sauvant (Director in that division), outlined the UNCTAD division's work in this area and the "dialogue" it was trying to promote with "civil society", the "training courses" for junior diplomats and government officials, and the regional seminars (including one to be held in July in New Delhi, to develop a catalogue on developmental issues), as well as discussions at UNCTAD itself.

While the EC viewed such a catalogue as a "useful reference point", Pakistan stressed that any such catalogue had to be applied in a practical way to the multilateral rules of investment.

India said that a development dimension was extremely important, since an MAI would take away the ability of countries to address this flexibility available to developing countries to tailor their foreign investment policies to their development strategies. UNCTAD must show how an MAI would not take away such flexibility from developing countries. Any catalogue of issues should not be "added on" to multilateral rules, but be fully integrated into such rules. Pakistan is reported to have advanced a similar view.

But Japan and the EC felt it was more important for countries to have "investment-friendly" policies, rather than "development-friendly" policies, since an "investment-friendly" policy would automatically lead to development.

UNCTAD, responding to India, said that any multilateral agreement would necessarily restrict sovereign rights, but that it would look at the structure of any proposed agreement, especially its guiding objectives, in formulating the development dimension.

Some developing country delegations said later that instead of focusing on a multilateral framework (as UNCTAD has been mandated to do) with a development focus, this will result in taking up the OECD and other proposals and objectives, and then trying to inject development exceptions. This approach, tried in the GATT, and its Part IV, had proved to be empty of content either as rights or as exceptions for the developing world.

Of guidelines and codes

The OECD presented a paper on its Guidelines for Multinational Enterprises (MNEs). But India, Egypt, Hong Kong and Brazil pointed out that these were mere guidelines and not legally binding. The OECD responded that MNEs would be governed by national laws, but the guidelines would be a good reference point.

India wanted the UNCTAD Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices (RBPs), the Draft UN Code of Conduct on TNCs and the Draft (UNCTAD) International Code of Conduct on Transfer of Technology to be attached to the OECD guideline document, and issued as a WTO document of the study group.

The US reportedly objected to this, but the WGTI Chair said that UNCTAD would provide the three documents, which had already been listed in an earlier compendium.

Pakistan sought information on the differences between the OECD Guidelines for MNEs, and the UN Code of Conduct on TNCs.

UNCTAD reportedly remarked that the OECD code was a "package" while the UN code was comprehensive. But both were voluntary.

The UN code, in addition, also covered issues such as human rights, adherence to the social and cultural characteristics of the host countries, and provision for review and dispute settlement.

The OECD then reportedly intervened to say that its guidelines were a code for enterprises, and not for governments. The code did not also define MNEs.

In the other discussions in the WGTI, Australia intervened to say it favoured an approach similar to that in the GATS for any multilateral rules on investment. Hong Kong said that eventually any such MAI would have to be based on a least- common-denominator approach. But the EC did not support this.

The next meeting of the WGTI is listed for 1-2 October. The Chairman has said that the group would have to make a report to the General Council, and towards this end, it should adopt a report by 23-24 November (the last meeting set for the WGTI in 1998). He indicated that the report could have two parts - one a description of the work done, and the second possible recommendations for future work.

Switzerland reportedly said that if there was no agreement on a report, the Chair should present one on its own responsibility, while Japan wanted informal consultations between the October and November meetings.

Since the issue had been brought up under "other business", India said any decision could only be taken at the next meeting. India also noted that under the SMC mandate, the WGTI had time up to 13 December to provide a report to the General Council, and the educational process should continue till then. (Third World Economics No. 189, 16-31 July 1998)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.

 


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