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NEW 'OPT-IN OPT-OUT' APPROACH TO INVESTMENT AND COMPETITION SPELLS DANGERS FOR DEVELOPING COUNTRIES

The WTO process in Geneva is reaching its most critical stage.  Perhaps the most controversial question is whether new issues such as investment and competition will get onto the negotiating agenda.

Many developing countries have voiced opposition to the launching of negotiations on these two subjects as well as the other two Singapore issues (government procurement transparency and trade facilitation).

As a response to this unpopularity, the EU had proposed a plurilateral approach to investment and competition.  This has now progressed into a "opt in, opt out, two stage" proposal, which apparently has found favour with the General Council chairman.

The report below gives a background to this approach, and provides a critique. It is argued that the approach is dangerous for developing countries and constitutes a trap.  Suggested positions are also given.

Two important annexes are also provided.

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RECENT IMPORTANT DEVELOPMENTS IN THE WTO ON THE NEW ISSUES OF INVESTMENT AND COMPETITION

Report by Martin Khor, Third World Network (Geneva, 26 October 2001)

1. BACKGROUND

The WTO negotiations in Geneva are now at their most critical stage, before the Doha Ministerial meeting. Perhaps the most important decision is whether new issues (investment, competition, government procurement, trade facilitation) will be accepted or not accepted in Doha as subjects for negotiations towards new agreements. Most developing countries (at least in Asia, Africa and the Carribean) have voiced opposition or serious reservations.  But the EU and Japan (with US help) are putting intense pressure on them to accept.

The latest development is a formula worked out by the developed countries (especially EU) for a kind of plurilateral agreement (an agreement where not every country has to join in) for investment and competition. This is now known as the "opt in, opt out" and two-stage approach.

Their plan is that in Doha, all countries approve (in a Ministerial declaration) that there will negotiations towards agreements on investment and competition.  The negotiations will be in two stages.  In Stage One, lasting 2 years, all countries take part in discussions or pre-negotiations (on core principles and elements of the agreement).  In Stage Two (to be launched at the next Ministerial conference in 2003), negotiations will begin on the rules in the agreements for investment and competition.   At the start of this second stage, countries will be allowed to "opt out" of the negotiations,  indicating that they do not want to be part of the agreements.

(Please see Annex 1 for more details of the opt-in opt-out approach).

2. DANGERS OF THE OPT-IN OPT-OUT APPROACH

Although this approach appears to be "flexible" in allowing countries not to be part of agreements they do not like, in reality it is more like a trap. The following is likely to happen:

(a)  Many countries that are now opposed to (or not ready to have) negotiations are likely to face pressures from their developed-country partners in bilateral or regional arrangements, and from international financial institutions, to join or "opt in" to the two agreements.

(b) Those countries that are not so dependent on donors or the international financial institutions may have greater leeway to "opt out" of the negotiations.  However, they may also come under persuasion from representatives of the major countries, and pressure from the market and the media  on these countries to join the rest.  For instance, it would be put to them that if they do not join in, then creditors and foreign investors will consider them to be less credit worthy or investment worthy.

(c)  Developing countries that are reluctant to have agreements on these areas will be in a dilemma.  If they "opt out" and stay away from the negotiations, then they would be worried that in the event that they are pressuirsed to join in later on, they would not have been able to influence the negotiations and the agreement.  But if they want to influence the negotiations, they have to "opt in", and thus join an agreement that they do not want.  Thus, they will be put in a very uncomfortable position, whichever option they choose.

(d) Moreover, once this tricky device is used to bring in investment and competition issues into the WTO, a precedent would have been set.  In future the same opt-in-opt-out device can be used by developed countries to bring in other non-trade issues as well, such as labour standards, environment standards, or the need for harmonised tax systems.  They can argue that countries that do not like such topics entering the WTO system should not stop others from establishing negotiations and agreements that they like. The whole system would lose its multilateral character, and the system would also be distorted by the incorporation within it of non-trade issues that are inappropriate to be included in a trade organisation.  The entry of these non-trade issues are very likely to be against the interests of developing countries.

(e)  As stated by the trade expert B. L. Das,  a new subject can be negotiated in the WTO only if it is related to international trade (Article III of WTO Agreement of Marrakesh). Investment is not related to international trade; hence a negotiation on this subject is not permissible at present. By proposing negotiation in this area, the major developed countries are trying to imply that investment is related to international trade. If this extension is accepted and negotiation is started in this area, it will set a dangerous trend. There is a real danger that further new subjects will be brought into the WTO discipline.  "These issues will place undesirable constraints on the developing countries in their development process. The remedy lies in stopping right now all types of moves to start negotiation in areas like investment."   (See the paper by Mr. Das in Annex 2).

3. POSITION TAKEN BY COUNTRIES

The reason this opt-out approach is being taken now, is that the EU and other major countries realise that most developing countries are objecting to these issues entering the WTO as negotiating subjects.  To soften the opposition, they are advancing the opt-out approach, saying that countries can decide not to join the agreement.

At this moment, many countries are opposing this opt-in-opt-out approach. They include many Asian and African countries, and the least developed countries.

If enough countries continue to voice opposition to this plan, then it cannot be carried through.  However if there is not enough opposition, the plan will go through and developing countries will be faced with agreements on investment and competition in a few years and intense pressure to sign on to them.

4.  THE NEXT STEPS

The WTO chairman (Ambassador Staurt Harbinson of Hongkong) will present the second draft of the Doha Ministerial Declaration on 27 October in Geneva. It is expected that this draft will contain the opt-out approach for investment and competition, despite the rejection of this approach by many developing countries.   On 31 October,  there will be a WTO General Council meeting to hear reacctions to the draft.

5.  PROPOSED POSITIONS TO BE TAKEN

The view of many developing countries till now has been that they are not prepared to begin negotiations on investment, competition, transparency in government procurement, trade facilitation (the Singapore Ministerial new issues).   According to a WTO secretariat spokesperson, the WTO Membership is "split down the middle" on whether to have negotiations on investment and competition, as could be discerned from the statements made at the informal General Council meetings of 2-3 October in response to the initial draft Ministerial Declaration.

It is thus clear there is no consensus on these issues. The Ministers agreed at the Singapore Ministerial of 1996, that "future negotiations, if any, regarding multilateral disciplines in these areas will take place only after an explicit consensus decision is taken among the WTO Members regarding such negotiations".   As there is no consensus, there cannot be negotiations, if the spirit and letter of the Singapore Ministerial decision is to be adhered to.

Developing countries that have been opposed to or are not prepared to agree to the launching of negotiations, should maintain their position that negotiations should not begin on the new issues.  This includes rejecting the proposal for launching negotiations on investment and competition within an opt-out or two-stage approach.  The grounds for this rejection are that:

(a) The WTO is a multilateral trade organisation and should stick to its mandate as a multilateral organisation which makes and supervises multilateral rules.  It should not launch into new agreements of a plurilateral nature.

(b) The WTO is a trade organisation and should not be the seat of agreements dealing with non-trade issues including investment and competition.

(c) The opt-out approach would put intense pressure on developing countries (most of which are against or reluctant to negotiate the new issues) to join agreements which they believe will not benefit them and may hinder their development policies and restrict their economic sovereignty.

(d) The "two-stage" approach (pre-negotiations for two years, followed by full negotiations for new agreements) merely postpones by two years the launch of full negotiations.  In fact the first two years can already be considered negotiations.

(e) The opt-out two-stage approach is therefore a kind of "trap" to draw in reluctant developing countries into agreements which they do not want and which are against their interests.  They should not fall into such a trap.

Whilst rejecting this approach, the following position can also be taken:

(a) The Singapore Ministerial meeting (Dec 1996) agreed to establish working groups on investment and competition on the understanding that the work undertaken shall not pre-judge whether negotiations will be initiated in the future. In addition, the Singapore Ministerial Declaration stipulated clearly that "future negotiations, if any, regarding multilateral disciplines in these areas will take place only after an explicit consensus decision is taken among the WTO Members regarding such negotiations".

(b) The working groups have not yet completed their work as there is no consensus in the working groups on how to proceed with the issues.   Most developing countries have voiced their concern that agreements on these issues would be against their development interests.

(c) As is clear from the statements made at the current WTO process, the WTO membership is split on this issue, with many developing countries unable to accept the launching of negotiations on investment and competition.  Since there is no consensus, then in line with the spirit and letter of the Singapore Ministerial Declaration, there should not be the start of negotiations on these issues.  The respective working groups should continue their work.

6.   ATTACHMENTS:

Attached are the following documents:

1.  Details of the proposed opt-in opt-out approach

2.  Paper by Mr B.L. Das analysing the dangers and traps of the opt-out approach.

ANNEX 1

EXPLANATION OF THE OPT-IN OPT-OUT TWO STAGE APPROACH

The following is a report of an oral explanation of the "deferred opt-in opt-out two stage negotiations" approach on investment and competition, as presented by the Chairman of the WTO General Council, made at an informal meeting during the week starting 22 October.

The main features of the suggested approach are:

1. Agreement that negotiations in these two areas are open to all Members.

2. There would be two phases in the negotiations.  The first phase would be until the Fifth Ministerial conference, and would be used on clarification of elements.  This could be considered either a pre-negotiations phase, or be taken as part of negotiations already.

3. The second phase would entail full negotiations, aimed at establishing a framework of rules in these two issues.  This phase would involve only those Members which notify their intention to opt in.  This notification would be done either at the Fifth Ministerial or later.

4. Those Members that opt in can later change their minds and opt out.

5. The approach would be "multilateral" with substantiave obligations, as far as possible, to be made available on an MFN basis even to Members that have opted out.

6. This would be part of the single undertaking and would provide the link with the rest of the negotiating agenda.

ANNEX 2

DANGERS OF "OPT OUT" PROPOSAL ON INVESTMENT AND COMPETITION

BY BHAGIRATH LAL DAS,  21 OCTOBER 2001

Some major developed countries have floated the idea of starting negotiations on investment in the WTO on "opt out" basis. Their proposal is that the negotiations should be launched and agreement should be worked out on the condition that the countries not wishing to participate in the negotiation or in the agreement will have the option of remaining out of it. They argue that this process will not compel any country to negotiate or undertake the obligations of the agreement. The logical suggestion is that the countries opposed to the negotiation on this subject should not block it as they will not be affected.

This is a fallacious argument. The "opt out" process is no safeguard against the damaging effects of the negotiation and agreement in this area. The start of the negotiation on this subject will be dangerous and the agreement too will be dangerous even for those countries that "opt out" of the process, as explained below.

A new subject can be negotiated in the WTO only if it is related to international trade (Article III of WTO Agreement of Marrakesh). Investment is not related to international trade; hence a negotiation on this subject is not permissible at present. By proposing negotiation in this area, the major developed countries are trying to imply that investment is related to international trade. If this extension is accepted and negotiation is started in this area, it will set a dangerous trend. There is a real danger that further new subjects will be brought into the WTO discipline. In particular, the domestic taxation policy, aspects of monetary policy and even social policies may be brought into the folds of the WTO discipline. This will put undesirable constraints on the developing countries in their development process. The remedy lies in stopping right now all types of moves to start negotiation in areas like investment.

If a new subject like investment or competition policy gets into the negotiating process in the WTO, there is a danger that the subjects which are of interest to the developing countries will be crowded out of the central stage of the WTO. The past experience has shown that the new subjects which are of interest to the major developed countries take the central stage and the subjects of interest of the developing countries get ignored and neglected. For the developing countries, there are several areas of priority in the WTO. They would naturally like those subjects to be pursued with speed, rather than the progress there being impeded by the start of negotiations in new areas like investment and competition policy.

Further, the "opt out" approach is a myth. If an agreement on investment gets concluded in the WTO, it is almost certain that situations will be created in which no developing countries will be able to remain out of it. The major investors of the developed countries will try to push them into it by charging higher interest rates for the investment in the developing countries which have chosen to remain out of the agreement. This will make the investment more costly, having adverse effect on the investment into these countries. Hence a developing country, even if it has opted out of the agreement in the beginning, will have to join it later.

If the developing countries want to come into the agreement later, they may have to pay a heavy price, as it often happens when a country wants to join an agreement after its coming into force. The experiences of the developing countries joining the WTO recently are examples of this problem. Hence exercising the option of joining at a later date is not quite practical.

Besides, if an agreement gets concluded and the developing countries decide to join later, they will be missing the opportunity of influencing the negotiating process.

Thus if the negotiation starts on "opt out" basis, there is practically no comfort for the countries not joining the negotiation right in the beginning. As mentioned above, the situation will be created by the international investors in which these countries will have to join the agreement and again as explained above, they will have to join the negotiation right in the beginning. It is clear that "opt out" approach provides no safeguard for the developing countries not wanting to have negotiation and agreement on investment in the WTO.

On all these  considerations, a correct and proper action for the developing countries is to stop the negotiation and agreement on investment and competition in the WTO in any form, whether with multilateral or plurilateral or "opt out" approach.

 


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