Wide gaps in trade/investment study group

by Chakravarthi Raghavan

Geneva, 4 June -- The gap between the major industrialized nations and the developing countries over trade and investment relationships and whether any multilateral disciplines are desirable remain unresolved, and the WTO working group on this subject will make only a "factual report" and no recommendations, according to trade diplomats at the WTO.

The WTO Working Group on the Relationship between Trade and Investment (WGTI) was set up under a study programme initiated at Singapore Ministerial meeting in 1996.

The European Union is pushing for WTO negotiations on multilateral investment rules, as part of a new trade round to be launched at Seattle Ministerial meeting, and has raised the issue in the preparatory process for Seattle at the General Council.

The study process on the relationship between Trade and Investment was initiated at the 1996 Singapore Ministerial meeting of the WTO, but discussions and exchange of information within the group has not narrowed down the basic differences.

The WGTI is to hold the next meeting on 13-17 September.

At its meeting this week, it decided to make only a "factual" report and no recommendations, on its work so far.

The WGTI discussed this week a paper by South Korea which suggested "a realistic approach" to a multilateral framework on investment based on an optimal standard of protection for foreign investments and a bottoms-up approach to liberalization.

Papers presented by India questioned the view that liberalization of foreign investments lead to transfer of technology or development, and the relationships between investment liberalization and competition policy and movement of labour.

Also discussed at this week's meeting was the issue of investment incentives - where Hong Kong suggested rules for classifying incentives into those that could be provided and those that should be prohibited -along the lines of subsidies agreement. A number of developing countries challenged the approach, while the US found problems because of the sub-federal entities and authorities.

The South Korean paper spoke of a "globalization" school and an "internalization" school in regard to foreign direct investment - with the former viewing a multilateral framework on investment (MFI) as promoting and accelerating free flows of investment at global level, and the latter in minimizing external interventions in setting national regulations and reserving maximum rights for governments to take appropriate action. In the South Korean view, any MFI would need to reflect different realities of countries - and a possible approach would be to provide for investment protection, and gradual liberalization on the model of the General Agreement on Trade in Services.

While the EU and Japan welcomed the Korean initiative, a number of developing countries - India, the ASEAN, Pakistan and Egypt among others - spoke against it very critically. These latter said they were not convinced on the need to have an MFI, and said that the approach of bilateral investment treaties (BITs) gave them the necessary flexibility to address national development problems and issues.

On investment incentives, Hong Kong's suggestion for disciplines on these met with opposition.

A number of developing countries said the mandate of the group was one of study, and not negotiations, and the study was on the relationship between trade and investment, and not investment per se.

The United States said the issue of incentives was a difficult one posing many problems, particularly in the context of disciplines on sub-federal authorities.

A number of developing countries also questioned the United States and the EU members providing incentives to the transnational corporations to invest through land and other incentives.

The ASEAN underscored the role of incentives for economic development, and questioned the idea of multilateral rules, while Brazil questioned the idea of a level playing field in this regard.

India supported the ASEAN view about incentives in government policies to promote development. On incentives, India noted that foreign investors in their investment decisions took into account a number of factors like skills, the size of the market and other considerations.

If India and St. Lucia were to offer the same incentives, it was clear that the investor would go to India, and the small countries would be at a disadvantage. But while developing countries had a reason for providing investment incentives, those provided by major industries, and their sub-federal authorities, to attract foreign TNCs, were trade-distorting. (SUNS4449)

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

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