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Pitfalls in plurilateral path on investment talks

by Bhagirath Lal Das

New Delhi 19 Feb 2001 --  Recently a proposal has been informally mooted in the WTO circuit for initiating  negotiations and possible agreements on the two new subjects, viz., investment and competition, on a plurilateral track. The suggestion is that negotiations should start in these areas in the WTO; and whichever countries wish to participate in them should do so. Finally when agreements are reached, the countries wishing to be parties should sign them and participate in them. It is thus suggested that the others need not have any apprehension of harm, as they will be free to keep themselves out of the agreements, and even out of the negotiations, if they so decide. The proposal, put forward in this way may perhaps appear innocuous, but it involves severe problems and risks.

The proposal has been initiated by a few major developed countries on the ground that they need agreements in these two areas in order for them to undertake commitments in other areas, particularly agriculture and textiles. Some reports have indicated that they are keen on starting negotiations in these new areas, even if there is no formal launching of a new round.

Since a large number of the developing countries are opposed to taking up negotiations in these areas in the WTO, the proponents have come up with this seemingly practical approach to get around the problem. Their line of argument is that the developing countries should not block the negotiations; rather they should step aside and clear the way, if they do not like these negotiations and the resulting agreements.

Then there are some other seemingly reasonable initiatives. For example, some type of assurance has been held out that the proposed agreement on investment will not be about the freedom of entry of the investors, but only about their operations after they have entered the host country. In this manner, it is suggested that the policies of the host country for putting conditions on the entry of investment will not be fettered. Also, an assurance is made that the development objectives of the developing countries will be taken into account in the possible agreement.

There are serious flaws in the suggestion for the plurilateral route.  It might have been worth considering if the developing countries were indifferent and neutral to its being taken up in the WTO. In that situation, the advice to them to step aside and not block the process might have been relevant. But as the situation stands at present, a large number of them are strongly opposed to initiating negotiations on the new subjects in the WTO. They are far from being neutral and indifferent; they are actively opposing the negotiations and agreements on the new issues.

It is useful to consider the two subjects, viz., investment and competition, separately.

On the  subject of investment, the basic opposition to launching a negotiation on investment lies in the fact that it does not come within the functions of the WTO in accordance with the Marrakesh Agreement Establishing the World Trade Organisation (WTO Agreement). Article III of the WTO Agreement defines the functions of the WTO. It says that “the WTO shall provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the agreements” which are currently in existence. For the future subjects of negotiations and agreements, it goes on to say that “the WTO may also provide a forum for further negotiations among its Members concerning their multilateral trade relations, and a framework for the implementation of the results of such negotiations, as may be decided by the Ministerial Conference”.

The subject of investment is not a part of “multilateral trade relations”, to which the future negotiations in the WTO have been limited. Hence the negotiation on investment does not fall within the purview of the functions of the WTO.

Of course, the Agreement on Trade Related Investment Measures (TRIMs), in its Article 9, provides for a review of the operation of that agreement and says that the Council for Trade in Goods “shall consider whether the Agreement (on TRIMs) should be complemented with provisions on investment policy and competition policy”. But this provision of review appears to be too thin a peg to support the massive exercise of negotiations for an investment agreement. And, in any case, a review in the Council for Trade in Goods cannot be a plurilateral exercise, as it is a full-fledged multilateral organ of the WTO system. Besides, this provision only mandates the Council to “consider” whether the agreement should be “complemented with provisions on investment policy”. It does not appear reasonable  to stretch this to mean a mandate for launching a negotiation on investment.

If this provision is so stretched, it will straightway come into conflict with Article III of the WTO Agreement quoted above regarding the functions of the WTO, which restricts the function to “multilateral trade relations”. And in case of such a conflict, Article XVI (3) of the WTO Agreement will come into play, which says that “in the event of a conflict” between a provision of the WTO Agreement and a provision of any of the Multilateral Trade Agreement (e.g., the agreement on TRIMs), the provision of the WTO Agreement “shall prevail to the extent of the conflict”.

All this suggests that conducting negotiations on investment in the WTO would require an amendment of Article III of the WTO Agreement, which is a very basic and fundamental provision

If the WTO is now expanded to cover investment, the next candidate for entry may be the domestic taxation policy, and further down the line the domestic macroeconomic policy. Some other subjects, like security policy, social policy etc. may not remain far behind. In this way, there will be no end to the expansion of the WTO and its remit.

If the developed countries pushing this proposal are really serious about having a multilateral discipline on investment, they should sponsor it in some more appropriate forum, e.g., the United Nations.

Apart from the fundamental and basic problem discussed above, there is also a practical problem arising out of the past experience in the GATT/WTO. If the new subjects like investment and competition are taken up for negotiation in the WTO, whether on a plurilateral or a multilateral track, the old subjects of interest to the developing countries will be crowded out of the priority work. This has been invariably the experience so far, and there is no reason to expect that the situation will change in near future. The developing countries have put forth a number of proposals for the removal of deficiencies, imbalances and inequities in the current agreements. These proposals have emerged out of their experience of the working of the WTO for the past five years. This is of the highest importance to them at present.  Then, there are also the mandated negotiations in agriculture and services, where the developing countries have put forth a number of important proposals.

All these are likely to get derailed if the WTO system is saddled with negotiations on further new subjects.

The proposed negotiation on investment is not for enhancement of foreign investment in the developing countries, but for the protection of the rights of investors. It is very much on the lines of the Agreement on TRIPS which is for protecting the rights of the intellectual property holders. The developing countries have very few intellectual property holders; and thus that agreement is almost exclusively for the benefit of the developed countries. The developing countries have still fewer investors to invest in foreign countries.  Mostly it is the investors of the developed countries that invest outside. Hence the proposed negotiation for the protection of the investors’ rights is mostly for the benefit of the developed countries.

The proposed negotiation and agreement on investment is also against the principle of having “reciprocal and mutually advantageous arrangements” as mentioned in the Preamble to the WTO Agreement.  Reciprocity and mutuality of advantage will just not be possible in such an agreement. As mentioned above, it will be the developed countries that will be mostly gaining and the developing countries will have no benefit. In fact as is explained below, the developing countries will be put to risks and dangers by such an agreement.

The developing countries see no reason why there should be this extraordinary step of including for negotiation a subject like investment in the WTO which is not within its current functions. The main proponents say that it will make it possible for them to make some moves (of liberalisation and improved market access) in the areas like agriculture and textiles. In respect of textiles, it is totally wrong inducement, even verging on being misleading. Already there are commitments of the developed countries in the areas of textiles and clothing and they have to implement them. The developing countries do not have to make further concessions to ensure the implementation of these commitments.

In the areas of agriculture, this type of hope and linkage is misplaced. The negotiation has already been started in this area, as called for in the Agreement on Agriculture. The course of this negotiation will have its own momentum and dynamics.

The experience of the Uruguay Round has shown that the major developed countries liberalise their agriculture, mainly on the basis of their internal pressures and because of the mutual pressures among them. The main proponent of the negotiation on investment, i.e., the EC, is likely to be guided in the agriculture sector negotiation by the differing views of the various countries which it represents and also by the amount of pressure which the US puts on it. This is precisely what happened in the Uruguay Round. Pressures and persuasion by other countries and the concessions made by them had hardly any role in motivating the EC to liberalise agriculture trade.

Moreover, the main proponents are grossly distorting agriculture trade by high tariffs, high domestic subsidy in various forms and high export subsidy. It is only fair that they remove these distortions. It is grossly unfair of them to expect the developing countries to make concessions, e.g., by accepting to negotiate investment and competition agreements in the WTO, for an offered hope of their reducing agricultural trade distortion. Past experience shows that it will be totally futile for the developing countries to make concessions in other areas to encourage some major developed countries to liberalise their agriculture. It will be an entirely misplaced sacrifice on the part of the developing countries.

For the developing countries, a WTO agreement on investment, which is really for the protection of the investors’ rights, involves danger without benefits. The danger lies in the agreement most certainly constraining the role of the host country in various ways. At present, the host country has the right to: channel and guide the foreign investment in support of its development, to prevent the investment which can disturb its economy, to provide guidelines to the investors in their operations so that these are not injurious to the country, to ensure that the foreign investment enhances the local economic activities, to give special treatment to domestic investors over foreign investors, etc.  The insistence on having an agreement on investment in the WTO is aimed at constraining these options of the host country.

Assurances have been held out that the entry stage of investment will not be covered by the agreement and it will be limited to the post-entry phase. But it does not help much. There will still be the danger that the host country’s options for guiding the post-entry operations of the investment will be constrained. And it can have injurious effect on the development process.

All this indicates that there are serious apprehension of losses for the developing countries through the negotiation and agreement on investment in the WTO.

And there are no real benefits to the developing countries from such an agreement in the WTO. The proponents say that it will enhance foreign investment into the developing countries. The current experience, however, does not bear out this proposition. It is well known that a large number of countries, having totally free entry for investment and absolutely no restriction on its operation, have not attracted much investment; while some countries having restrictions and controls on investment, have got high levels of investment. Experience shows that investment is  attracted mainly by the infrastructure,  facilities and other conveniences as well as opportunities in the host country, rather than by total liberalisation of entry and operation. In any case, if a country assesses that liberal entry and operation rules and processes will encourage investment, it can do so on its own by adopting appropriate domestic regulations and procedures. An agreement in the WTO and a commitment in the WTO is not necessary for that purpose. The problem with such a commitment is that it binds a country for all times, and it loses its options and flexibility.

Thus,  having a WTO agreement on investment is a “no gain-only loss” proposition for the developing countries

The subject of competition may come technically within the folds of multilateral trade relations. Hence, unlike the situation with investment, starting a negotiation and concluding an agreement in this area will not be considered as violating the WTO Agreement’s provision on the functions of the WTO. However, most of the other elements of risks mentioned above apply also to starting a negotiation on competition in the WTO.

Being a new subject of negotiation, sponsored by the major developed countries, it is also likely to crowd out the consideration of the other subjects which are of interest to the developing countries. The main aim of the sponsors to start negotiation in this area is to have an agreement which will facilitate the entry and operation of the foreign firms in the developing countries. In the name of free competition, it is likely to put constraint on the developing countries in their policies of supporting their domestic firms. It is very much unlikely that the agreement will put any enforceable burden on the major developed countries for the control of anti-competitive actions of their firms in the developing countries. Also it is unlikely that it will be controlling the anti-competitive nature of the wave of mergers in the world.

Thus there is a serious apprehension that the negotiation and agreement in the field of competition will put constraints on the developing countries in their path of development without giving them benefits.

The developed countries use various methods to push the developing countries to follow their line. Sometimes, they apply bilateral, regional and multilateral pressures; while on other occasions they apply persuasion through inducement. The current proposal by some major developed countries has been put in a persuasive form. But as has been explained above, whatever the form of persuasion, the proposal involves risks for the developing countries without any benefits. The plurilateral route does not make the proposal innocuous and acceptable, as has been explained above. There may also be an effort to suggest that the developing countries should just agree to start the negotiation without any commitment at this stage to have an agreement.  But the past experience has shown that a process of negotiation started at the initiative of the major developed countries generally ends with agreements in accordance with their aims.

As has been explained above, the negotiations and agreements on investment and competition in the WTO involve serious risks for the developing countries without any gains. There are no benefits, there are only dangers. Further, initiating negotiation on investment will need amendment of the WTO agreement to expand the functions of the WTO.  An added danger is that it may give rise to pressures for inclusion of other areas in the WTO in future, e.g., domestic taxation, macroeconomic policy, etc.

It is advisable that developing countries not start negotiations on investment and competition in the WTO. - SUNS4840

(*Mr. Bhagirath Lal Das is a former Ambassador and Permanent Representative of India to the GATT and former Director of International Trade Programmes in UNCTAD)

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