RESTRICTED
WORLD TRADE WT/WGTI/M/2
10November 1997
ORGANIZATION(97-4910)
Working Group ontheRelationship
between Trade andInvestment
REPORT ONTHE MEETING OF6AND 7OCTOBER 1997
Note bytheSecretariat
1. TheWorking Group ontheRelationship between Trade andInvestment helditssecond meeting
on6and7October 1997 under theChairmanship ofAmbassador Krirk-Krai Jirapaet.
2. Thesubstantive agenda forthemeeting comprised ItemI,andanumber ofissues inItems II
andIII,oftheChecklist ofIssues Suggested forStudy, which theWorking Group hadtaken noteof
atitsmeeting inJune1997. Inaddition, theWorking Group considered requests forobserver status
byanumber ofinternational intergovernmental organizations. Under "other business", theWorking
Group considered theissue ofitsschedule ofmeetings in1998 andarrangements forareport bythe
Working Group totheGeneral Council.
A. IMPLICATIONS OFTHERELATIONSHIP BETWEEN TRADE AND INVESTMENT FOR
DEVELOPMENT AND ECONOMIC GROWTH (Item IoftheChecklist ofIssues Suggested
forStudy)
3. Asbackground material foritsconsideration ofthisItem, theWorking Group hadbefore it
papers bytheOECD, UNCTAD, World Bank, IMFandUNIDO (WT/WGTI/W/8 andAddenda 1-4),
which these organizations hadprepared inresponse totheGroup 'sinvitation atitsfirstmeeting.
Members expressed appreciation forthese high-quality contributions.
4. Inintroducing document WT/WGTI/W/8, therepresentative oftheOECD observed that,while
theimportance offoreign direct investment ("FDI") intheeconomic development ofindividual OECD
countries hadvaried greatly inthepost-war period, thepast15years hadwitnessed aremarkable
convergence ofviews among OECD countries infavour ofFDI. Thispolicy shift, which hadoccurred
mainly inthe1980s, wastheresult ofchanges ineconomic policies toreduce theroleofgovernment
andtorelymore onthefreeplayofmarket forces; institutional factors, suchastheEuropean
Community 'sSingle Market initiative, theCanada-US FreeTrade Agreement, NAFTA andtheOECD
investment instruments alsoplayed animportant role. Thisshifttowards amore favourable attitude
toward FDIhadbeenaccompanied bygreater emphasis onthecontribution ofFDItotechnology and
innovation, itsstimulus tocompetition andincreased efficiency, anditsroleinpromoting integration
intheworld economy, ascompared tothecontribution ofFDItocapital formation, taxrevenue and
thebalance ofpayments. Restrictions onFDIinmanufacturing activities hadalmost disappeared and
thepreviously widespread restriction offoreign activity inthefinancial sector hadbeen largely
dismantled. There was,however, residual sensitivity toforeign ownership incertain sectors, such
astheexploitationofnaturalresources,transportandcommunicationsandculturalindustries.Moreover,
several countries stillmaintained screening systems, buttheynowapplied toalimited range of
investments andoperated withminimum bureaucratic support. There wasalsoreticence about sharing
governmentfundingforResearch&Developmentwithforeign-ownedfirms.OECDcountriesrecognized
fullwellthateveryindividualFDIprojectwouldnotnecessarilycontributetoeconomicwelfarepositively
inadirectly measurable way. Their response tothiswasthat,first,itmight notbepossible toassessWT/WGTI/M/2
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atthetimeoftheinvestment whether theeffects aregoing tobepositive ornot;second, there was
ahighcosttogovernment intervention inindividual investment decisions; andthird, totheextent
thatregulation wasneeded, e.g.inthefield ofcompetition, thebestapproach wasthrough
non-discriminatory policies thatapplied equally todomestic andforeign investors alike.
5. TherepresentativeofUNCTADdrewattentiontoseveralpointsmadeintheintroductorysection
ofdocument WT/WGTI/W/8/Add.1 onrecent trends inFDIanditsroleintheprocess ofincreasing
integration ofinternational production. With regard totheanalysis inthenextsection oftheeffects
ofFDIondevelopment thatarose from thelinkages ofFDIwithtrade, heemphasized thatthe
conventional analysis oftherelationship between FDIandtrade interms ofwhether FDIandtrade
werecomplements orsubstitutes wasbecoming lessrelevant inaglobalizing economy inwhich trade
andinvestment weredetermined simultaneously bydecisions oftransnational corporations regarding
thelocation oftheirproduction facilities. Regarding section IIIoftheUNCTAD contribution, which
analysed theimpact ofFDIondevelopment other thanthrough itslinkage withtrade, heobserved
thattheimpact ofFDIondevelopment wasbestunderstood byviewing FDIasinvolving apackage
oftangible andintangible assets andthattherelative importance attached byhostcountries tothe
intangible assets associated withFDIhadincreased. These intangible assets included technology,
innovation, organizational andmanagerial practices andskills, human resource development, access
tomarkets andforward andbackward linkages withdomestic enterprises. FDIalsohadanimpact
ondevelopment through itseffects onmarket structure andcompetition inhostcountries, anissuewhich
wasexamined indetail intheUNCTAD World Investment Report 1997. FDIwasnotapanacea and
notthemostimportant factor indevelopment, butonbalance itcould make animportant contribution
toindustrialization, industrial restructuring anddevelopment generally. Theroleofnational policies
inenhancing thiscontribution ofFDItothedevelopment process wastwofold. First, much attention
atanational levelfocused onattracting FDIthrough theadoption ofmore liberal investment regimes.
Second, national policies were important inencouraging FDIinpriority areas fortheeconomic
development ofindividual countries, reducing thepossible negative effects ofFDIwithregard to,
e.g.transfer pricing andrestrictive business practices andfostering backward andforward linkages
withdomestic enterprises.
6. The representative oftheWorld Bank explained thatthefirst part ofdocument
WT/WGTI/W/8/Add.2 reproduced achapter ofthe1997issueoftheGlobal Economic Prospects and
theDeveloping Countries which contained asurvey ofthetrend toward theglobalization ofproduction,
itscauses andcharacteristics anditsimplications fordeveloping countries. Inthelatter regard, the
chapter analysed howcountries thatalready participated inglobal production could increase thebenefits
theydrewfromitandwhatpolicies toimprove flows ofFDImight appropriately beadopted bycountries
thatwere notattracting much FDIatpresent. Hedrew theattention oftheWorking Group tothe
chapter 'sconcluding observations onpage21ofthedocument. Thesecond partofthecontribution
consisted ofanexecutive summary ofarecent report onforeign direct investment bytheInternational
Finance Corporation, anaffiliate oftheWorld Bank. Finally, thedocument contained aninventory
ofrelevant recent analytical studies doneintheWorld Bank.
7. Therepresentative oftheIMFobserved thattheIMF'sanalytical work described indocument
WT/WGTI/W/8/Add.3 underlined theclose interrelationship between thetrade andFDIdecisions of
firms andtheimportance ofasound andsustainable macroeconomic andfinancial environment inorder
foracountry tobeabletoattract continuing flows ofFDI. Sustained FDIinflows wereinparticular
dependant upon theexistence ofanopen trade andpayments system. Thesuccess achieved bythe
IMFinencouraging countries toremove restrictions oncurrent account transfers wasshown bythe
large number ofcountries thathadassumed theobligations under Article VIIIoftheIMF'sArticles
ofAgreement.WT/WGTI/M/2
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8. Inintroducing document WT/WGTI/W/8/Add.4, therepresentative ofUNIDO noted that
UNIDO'smandatewasprimarilytohelptheindustrializationeffortsofdevelopingcountriesandcountries
witheconomiesintransition.UNIDOwasthereforeconstantlyanalysingtheimplicationsofglobalization
andtrade liberalization forindustrial development inthose countries. There wasgrowing concern
thatglobalization oftheworld economy posed notonlyanopportunity butalsoapotential threat to
developing countries because these countries would havetofacemounting international competition
inboththeirexport anddomestic markets. Theriskwasparticularly serious forsub-Saharan African
countries andtheleastdeveloped countries. Furthermore, industrial competitiveness wasincreasingly
determined bytechnological prowess orcapability, andtherateoftechnological change wasaccelerating
inanunprecedented way. Theresult ofallthese developments wasthatanentirely newcompetitive
environment hademerged forindustrial enterprises worldwide, leading totheestablishment ofglobal
production networks andneworganizational structures ofenterprises. Inorder torespond effectively
tothese challenges, developing countries needed tofocus increasingly ontheissueofcompetitiveness
informulating andimplementing theirindustrialization strategies. These issues weredealtwithmore
extensivelyintheUNIDOpublicationentitledTheGlobalizationofIndustry:ImplicationsforDeveloping
Countries beyond 2000.1Heconcluded hisstatement bydescribing various activities ofUNIDO in
thefieldofindustrial investment promotion.
9. Several delegations expressed strong concern about thefactthatSpanish andFrench translations
werenotyetavailable andpointed outthatthisseriously impeded theirability toparticipate effectively
inthework oftheGroup.
10. Anumber ofdelegations made observations orposed questions onspecific issues raised in
thesubmissions bytheinternational organizations orintheintroductory remarks made bytheir
representatives. These observations andquestions, aswellastheresponses andcomments bythe
representatives oftheinternational organizations, arereproduced intheannex tothisreport.
11. Therepresentative oftheEuropean Community pointed totheimportance ofviewing thework
oftheWorking Group inthecontext ofthegrowing competition among governments toattract FDI
andoftheglobalization oftheworld economy, which wasachallenge forallcountries. Inthelatter
regard, therepresentative ofSwitzerland pointed toseveral problem areas among OECD countries
which illustrated thedifficulties experienced byOECD countries inadjusting toglobalization, such
asthedenial ofnational treatment offoreign investors inprivatization operations, theexistence of
legislation affecting investments byforeign enterprises inthirdcountries, thefierce competition toattract
FDIthrough thegranting ofinvestment incentives, andthedifficulties stemming fromtheapplication
tointernational transactions ofcompetition lawsthatwere essentially geared tonational objectives.
12. Therepresentatives oftheEuropean Community, Japan, Hong Kong-China, Australia andthe
UnitedStatesunderlinedtheconvergenceofthecontributionsbytheinternationalorganizationsinrespect
oftheirassessment ofthepositive contribution ofFDItoeconomic development andgrowth. Inthis
connection,someoftheserepresentativeshighlightedparticularpointsemergingfromthesecontributions,
including theshiftinattitudes ofmany developing countries toward arecognition ofthepositive
contribution ofFDI; theincreasing roleofcreated assets asdeterminants ofthelocation ofFDI, as
compared withaccess tonatural resources andcheap labour; thegrowing importance tohosteconomies
ofFDIasavehicle forthetransfer ofintangible assets, suchastechnology andmanagerial skills;
thecomplementaryrelationshipbetweentradeandFDI,andtheroleofopentradepoliciesincontributing
totheattractiveness ofcountries aslocations forFDI. Therepresentative ofJapan, referring toawritten
submissionbyhisdelegation(WT/WGTI/W/11),observedthat,whiletheeffectsofFDIfordevelopment
1Acopyofthispublication isavailable forconsultation byinterested delegations intheSecretariat (Intellectual
Property andInvestment Division, tel.7395224).WT/WGTI/M/2
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were onthewhole positive, asshown bytheempirical evidence ofthepositive correlation between
economic growth andFDIinflows andoftheimportance ofFDI asavehicle forthetransfer of
technology, therecould alsobenegative effects, e.g.withrespect tothebalance ofpayments situation
ofacountry.
13. Several delegations discussed thebeneficial effects ofFDIoneconomic growth anddevelopment
inthecontext oftheircountries 'experiences. Therepresentative ofPoland, inintroducing anon-paper
ontheroleofFDIinPoland 'srecent economic growth andtransformation from acentrally-planned
toafreemarket economy, highlighted thepositive relationship between FDIflows andGDP growth,
therecent increase ofFDIinflows resulting fromtheliberalization oftheregulatory framework, and
theimpact ofFDIonthecompetitiveness andexport performance ofthePolish economy. The
representative ofKorea pointed outthattheroleofFDIintheKorean economy hadbeenrather limited
untiltheearly 1980s butthatKorea hadrecently liberalized itspolicies towards FDI, inrecognition
ofthebenefits ofFDIinterms ofemployment creation, technology transfer andindustrial restructuring.
This hadledtosharp increases inFDIinflows since theearly 1990s. Therepresentative of
Hong Kong-China observed thatHong Kong'seconomic growth hadtoasignificant extent been
attributable toliberal trade andinvestment policies.
14. Therepresentatives ofIndia, Indonesia onbehalf ofASEAN Members, Egypt andPakistan
considered thatthere wasaneedformore emphasis onthedevelopment implications ofFDIandfor
abalanced approach regarding possible negative effects ofFDI. Thepointwasmade thattherelationship
between FDIandeconomic development wasacomplex andmultifaceted one,ofwhich thetrade
dimension wasonlyoneaspect. Other relevant aspects included theimplications ofFDIfordomestic
savings andconsumption patterns, finance andtechnology, ownership ofproductive andfinancial assets,
thebalance ofholdings between domestic andforeign investors andwithin various communities in
acountry, strategic anddevelopment policies atthesectoral level, macroeconomic implications and
sustainability ofthedevelopment process. Anumber ofspecific suggestions were made onthemes
tobepursued intheWorking Group inorder togivemore prominence tothedevelopment dimension:
therelationship between investment andtrade liberalization andstages ofdevelopment, inparticular,
theexperience ofcountries, including thepresent industrial countries, inthisconnection; theroleof
FDIintransferringintangibleassets,notablyinthefieldsoftechnologyandhumanresourcedevelopment
andtheimplications ofthisfordevelopment; therelationship between different types ofFDIandthe
development process; andtheexperience withsectoral targeting andtheroleofindustrial policy.
Itwassuggested thattheWorking Group request UNCTAD andUNIDO toprovide further contributions
onthese issues, notably onthetransfer oftechnology andtheroleofindustrial development policies.
Therepresentatives ofTanzania andUganda urged thatmore attention begiven inthework under
thisItemtothesituation oftheleastdeveloped countries andrequested theinternational organizations
tosubmit contributions onthisissue.
15. Referring tothecomment bytheUNCTAD representative thattrade andinvestment were
determinedbydecisionsoftransnationalcorporationsregardingthelocationoftheirproductionactivities,
therepresentative ofPakistan suggested thattheWorking Group further examine thedeterminants of
suchlocation decisions.
16. Therepresentative oftheUnited States proposed that,inconnection withthesuggested further
work ontherelationship between FDIandtransfer oftechnology, theWorking Group alsoexamine
therelationshipbetweentransferoftechnologyandstrongandeffectiveprotectionofintellectualproperty.
17. TheWorking Group tooknoteofthepoints made andissues raised andagreed torevert to
ItemIoftheChecklist atitsnextmeeting. TheChairman saidthathewould circulate alistoftheWT/WGTI/M/2
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specific issues where some delegations hadfeltthatfurther study wasnecessary.2Thelistwould not
purport tobeexhaustive orlimitative butwassimply intended tohelpMembers inpreparing their
contributions, whether written ororalforthatdiscussion. Iftheintergovernmental organizations which
hadmadecontributionstothepresentmeetingfeltthattheywouldhaveadditionalinformationconcerning
work doneintheirorganizations onthesepoints, theGroup would welcome further contributions from
them. Heemphasized, however, that, while contributions from theWTO Secretariat andother
organizationswereimportant,submissionsfromMemberswerecriticalforcarryingtheprocessforward.
B. THEECONOMICRELATIONSHIPBETWEENTRADEANDINVESTMENT(Indents1,2,
5and6ofItemIIoftheChecklist ofIssues Suggested forStudy)
18. Foritsconsideration ofthisagenda item, theWorking Group hadbefore itaSecretariat note,
"TheRelationship between Trade andForeign Direct Investment" (WT/WGTI/W/7 andCorr.1). The
Chairman noted thatsome ofthesubmissions received fromtheinternational organizations inrelation
toItemIoftheChecklist were alsopertinent tothisitem.
19. Therepresentative oftheSecretariat explained thestructure andscope oftheSecretariat 'snote.
Asunder theprevious agenda item, delegations noted thepreliminary nature oftheircomments and
concern wasexpressed withregard tothelackofaSpanish translation ofthenote.
20. Therepresentatives ofIndia andofIndonesia, speaking onbehalf ofASEAN WTO Members,
made detailed observations andposed questions onspecific aspects oftheSecretariat note.
21. With regard tothereference infootnote 2ofthenotetoastudy ontrade andinvestment
contained intheWTO Annual Report 1996, therepresentative ofIndia suggested thatitbeclarified
thatthisstudy wasnotareflection ofadebate among WTO Members. Regarding section II.1.1, he
asked whether theconcept of"ownership" asusedtherein alsocovered nationality requirements.
Referring tothediscussion inparagraphs 20and26,heraised thequestion ofwhether ownership and
internalization oftechnology advantages asoneofthefactors determining FDIflows could beconsidered
arestrictive element thatadversely affected firms indeveloping countries. Withrespect toparagraph 23,
hewondered whether labour moved freely within thedifferent units ofproduction oftransnational
corporations. Referring tothediscussion inparagraph 27oftheinternalization aspect ofFDI, he
raised thequestion ofwhether hightransaction costs associated withtransnational corporations were
another aspect ofrestrictive tradepractices andwhether thepointmade inthefootnote inthisparagraph
implied that,because ofhighswitching costsassociated withmarket transactions, market forces were
notalways adetermining factor ofFDIflows.
22. Therepresentative ofIndonesia questioned thedefinition inparagraph 16oftheSecretariat
noteofFDIinterms ofacquisition ofmanagerial control overabusiness entity inaforeign country
onthegrounds thatinmany developing countries FDIoccurred informs thatdidnotinvolve such
control.
23. Therepresentative ofIndia, referring toastudy mentioned inparagraph 37oftrade andFDI
flows between theUnited States intheperiod 1966-1991, asked forstatistical dataoneconomic
development ofthecountries inquestion, suchaspercapita income, andforinformation onthe
investment policies pursued bydifferent European countries inthisperiod. Inrespect ofparagraph 39,
heunderlined theimportance ofthepoint made inthisandother paragraphs ontheimplications of
FDIfortradeinintermediate goods. Noting thatthestudies referred tointheexamination ofthisaspect
appeared tobeconfined todeveloped countries, heasked whether theanalysis wasalsoapplicable to
2Subsequently circulated asdocument No.6004.WT/WGTI/M/2
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developing countries. Herequested further clarification ofthedevelopment implications oftrade in
intermediate goods resulting fromFDIandofhorizontal andvertical FDI.Withrespect toparagraph 45,
hewondered whether theconclusion regarding government restrictions oncommercial distribution
andservices waslimited totheissue ofmaintaining standards alone orwhether other factors suchas
culture andnationality requirements werealsorelevant. Hestressed theimportance oftheconclusion
attheendofparagraph 52thatthenature ofinvestment wasasignificant element andrequested that
theWorking Group revert tothisissue insome detail atasubsequent meeting. With regard to
paragraph 53,heasked whether itwaspossible togetanideaofthemain import items forhome
countries andhowmany ofthese import items weregenerated byoutward FDIflows. Heunderlined
thepoint made inparagraph 54thatitwasunclear whether inward FDIwould beaccompanied by
increased ordecreased imports andsuggested thattheWorking Group examine thisissue indetail at
asubsequent meeting. Hewould alsoliketheWorking Group toexamine thestatement inthisparagraph
thatexport oriented FDI"istherefore likely tobeaccompanied byincreased imports" inthecontext
oftheimpact ofsuchimports ontheprogrammes ofeconomic development ofdeveloping countries,
especially theirbalance ofpayments.
24. Therepresentative ofIndonesia stated thattheevidence citedinsection III.3.3 assupport of
theexistence ofapositive correlation between FDIandexport performance ofhostcountries wasbased
ononlyonestudy. While suchacorrelation appeared toexistinmany countries, itwould beuseful
toconsider other studies onthisparticular aspect. Inthisconnection, heemphasized thatFDIalso
hadanimpact ontheimports ofthehostcountry. Increased imports ofparts andcomponents and
capital equipment andservices, asadirect consequence ofliberal trade andinvestment policies, had
hadnegative impacts ontrade ininvisibles andgoods andonthecurrent account ofthebalance of
payments. There wasalsoabalance ofpayment effect resulting from therepatriation ofprofits and
dividends. Similarly, theweaklinkages between multinational enterprises andsmall- andmedium-scale
industries andtheconsequent lowlevelofindigenous technology development needed tobegiven due
recognition.
25. Inrespect ofparagraph 58,therepresentative ofIndiaraised asanissueforfurther examination
thequestion ofwhether theexports orre-exports tothehome country market byforeign affiliates of
transnational corporations market wereconsistent withGATT principles. Noting thattheconclusions
inparagraph 60were, inpart,based onanecdotical evidence, hesuggested thattheSecretariat provide
more solidanduptodatedataontheissue discussed inthissection ofthepaper. With reference to
paragraph 67,heobserved that,inaddition totheshare ofcountries ininternational trade, another
factor which would appear relevant inthisanalysis wasthesizeofthedomestic market. Withreference
toparagraph 69,heasked whether more recent datacould beincluded ondeveloping countries. The
main study referred tointhisparagraph dealt withtheperiod 1970-1980, when many developing
countries werejustbeginning theirautonomous economic reform programmes. Thedatareferred to
heremight therefore notbeveryuseful forthepurposes ofanalysis intheWorking Group.
26. Therepresentative oftheSecretariat responded tosome ofthequestions raised bythe
representative andindicated thattheSecretariat would consider whatfurther empirical dataitmight
beabletoprovide onother points. Healsoobserved thatmost ofthese questions appeared tobein
thenature ofsuggestions forissues tobediscussed bytheWorking Group.
27. Therepresentatives ofCosta RicaandNorway highlighted theimportance oftheSecretariat
noteinoffering empirical support ofthecomplementary nature oftrade andFDIforbothhome and
hostcountries.
28. Therepresentatives ofCosta Rica, Australia, andHong Kong-China underlined thesignificance
ofthepoints made insection IVoftheSecretariat noteregarding thedifferent impact onFDIflows
ofopenandprotective trade policies. Inthisconnection, therepresentative ofHong Kong-China alsoWT/WGTI/M/2
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referred totheexamples mentioned inparagraph 11ofhisdelegation 'ssubmission (WT/WGTI/W/10)
oftrademeasures which could distort investment flows andproposed thattheWorking Group undertake
anexamination oftheimpact onFDIoftherelevant WTO provisions. Therepresentatives ofIndonesia,
speaking onbehalf ofASEAN WTO Members, andIndia pointed totheneedforanelaboration of
theconclusion drawn inparagraph 73ofthenotethatcountries withanopen trade regime seemed
toattract more FDIthancountries withaclosed trade regime, especially inlightoftheobservation
infootnote 50thatFDIresponded notonlytothetrade regime buttotheoverall conditions ofan
economy.
29. With respect totheanalysis insection Vofthenoteofinvestment measures andtheireffects
ontrade flows, therepresentatives ofNorway, theEuropean Community, Hong Kong-China and
Switzerland stressed theneedforfurther consideration intheWorking Group oftheissueofinvestment
incentives andperformance requirements, which wasparticularly relevant inthepresent context of
fierce competition between governments toattract FDI. Therepresentative ofIndonesia, speaking
onbehalf ofASEAN WTO Members, saidthat,although theSecretariat notestated thatincentives
andtaxbreakswerelessimportantcomparedtootherfundamentalfactorssuchasmarketsize,production
costandavailability ofnatural resources, theexperience intheASEAN region suggested thatinvestment
incentives played anequally important roleinattracting FDIandthatthelong-term benefits resulting
fromattracting FDIthrough theuseofincentives oftenexceeded theshort-term costs. Therepresentative
ofHong Kong-China drew theGroup 'sattention tothediscussion inparagraph 12ofhisdelegation 's
submission ofrestrictive investment policies thatmight havetrade-distorting effects.
30. Regarding theanalysis insection VIoftheimplications ofregional arrangements forFDI
flows, therepresentative oftheEuropean Community saidthat,inexplaining theevolution ofintra-EC
FDI, account hadtobetaken notonlyoffreetrade within theCommunity butalsoofother aspects
ofeconomic integration, including thespecific investment-related provisions oftheECTreaty. He
drew attention tothetrend towards amore integrated treatment oftrade andinvestment inregional
arrangements, which wasbestexemplified bytheECTreaty butwasalsoevident inotherarrangements.
Therepresentative ofAustralia considered thattheimplications ofregional arrangements forFDIwere
animportant subject forfurther analysis intheWorking Group andinthisconnection referred tothe
observation inparagraph 96oftheSecretariat noteontherelative importance ofdomestic policy reforms
andregional integration inexplaining therecent increase ofFDItotheMERCOSUR countries. The
representative ofSwitzerland expressed aninterest inpursuing theissue ofrules oforigin andFDI
inthecontext ofregional trading arrangements.
31. Therepresentative oftheEuropean Community summarized themainpoints ofasubmission
bytheEuropean Community anditsmember States (WT/WGTI/W/12). Thesubmission, based on
thefindings ofastudy onoutward FDIintheUnited Kingdom, which corresponded totheresults of
similar research carried outinother member States, addressed thecomplementary nature ofexports
andoutward FDI, thedifference between firms indifferent sectors withrespect towhether FDIwas
preceded byexports, therationale fortheinvestment decisions andobstacles facing foreign investors.
Therepresentative ofJapan drew theattention oftheWorking Group toempirical datapresented in
hisdelegation 'ssubmission (WT/WGTI/W/11) which wasbased onacomprehensive survey ofmajor
Japanese firms andwhich showed thatthetrade effects ofFDIwerepositive bothforhome andhost
countries. Healsohighlighted themainpoints made inthesubmission regarding thedistortive effects
onFDIflows ofcertain types oftrade policy measures, theintegration oftrade andinvestment in
corporate strategies, theprincipal determinants ofcorporate decisions regarding thelocation ofFDI,
barriers toFDI,andtheimplications ofthese issues interms oftheneedforinternational disciplines.
32. TheWorking Group tooknoteofthepoints made andissues raised andagreed torevert at
itsnextmeeting tothefourindents ofItemIIconsidered atthepresent meeting. Italsoagreed totake
upatthenextmeeting threeother indents ofItemII,namely theimpact ofbusiness strategies, practicesWT/WGTI/M/2
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anddecision-making ontrade andinvestment, therelationship between themobility ofcapital andthe
mobility oflabour andcountry experiences regarding national investment policies, including investment
incentivesanddisincentives.TheChairmannotedthatthecontributionsoftheinternationalorganizations
(WT/WGTI/W/8 andAddenda 1-4)tosome extent dealtwiththefirstofthese three indents while the
othertwoindents werebestdealtwithonthebasisofsubmissions byMembers. Given thattheWorking
Group ontheInteraction between Trade andCompetition hadscheduled adiscussion onFDIand
competition policy foritsthird meeting in1998, hesuggested thatthisWorking Group defer its
consideration ofthelastindent ofItemIIuntilalaterstage.
33. Several delegations expressed aninterest inaSecretariat noteonaspects ofthesixthindent
ofItemIIthattheSecretariat hadnotbeenabletofullyaddress within thelimited timeavailable for
thepreparation ofitsnote. Some other delegations considered itpreferable todecide onwhether the
Secretariat should undertake thiswork atthenextmeeting.
C. STOCKTAKING AND ANALYSIS OFEXISTING INTERNATIONAL INSTRUMENTS
AND ACTIVITIES REGARDING TRADE AND INVESTMENT (Item IIIoftheChecklist
ofIssues Suggested forStudy)
(i) WTO provisions onmatters related toinvestment
34. TheWorking Group considered thismatter onthebasis ofaninformal notebytheWTO
Secretariat onWTO provisions onmatters related toinvestment (No.2988) which hadbeenthesubject
ofapreliminary discussion atthemeeting heldinJune.3
35. Therepresentative ofIndia recalled thatattheprevious meeting hisdelegation hadmade
comments onparagraphs 12and13oftheSecretariat note.
36. Therepresentatives ofCanada, Costa Rica, theEuropean Community, Argentina andthe
United States identified whattheyconsidered tobeproblems arising from thelackofcoherence and
limited scope oftheinvestment-related provisions inWTO agreements. Examples mentioned ofissues
requiring further consideration inthisrespect were: thedisparity between thetreatment ofgoods and
services under theGATS andtheTRIMs Agreement; theabsence ofrulesoninvestment protection;
thelimited scope oftheTRIMs Agreement ascompared withthewiderange ofmeasures thathadbeen
under consideration intheUruguay Round negotiations onTRIMs; theabsence ofrulesonperformance
requirements intheGATS; thelimited reach ofthetrade-oriented disciplines oftheAgreement on
Subsidies andCountervailing Measures withregard toinvestment incentives; andthedifference between
WTOandinternationalinvestmentagreementsinrespectofthecoverageofportfolioinvestment.Interest
wasalsoexpressedincomparingthe"positivelist"approachusedintheGATScontextwiththe"negative
list"approach usedinsome investment agreements andenvisaged inthecurrent MAI negotiations.
These delegations proposed thatamajor taskoftheWorking Group, which should receive thesame
degree ofpriority astheworkunder Items IandII,wastoidentify andassess deficiencies inthecoverage
ofcurrent WTO provisions related toinvestment inthelightofprovisions oninvestment inother
international agreements. Inthisrespect, asuggestion wasmade bythedelegation ofCanada thatthe
Working Group begin aprocess ofanalysis andstocktaking ofexisting international agreements more
specifically concerned withinvestment onthebasis ofabackground notebytheSecretariat.
37. Therepresentative ofAustralia proposed thattheWorking Group undertake work aimed at
identifying theeffects onFDIoftrade policy measures, focusing onsixareas: hightariffs andtariff
escalation asdeterminants ofinvestment flows; theeffects oninward FDIoftheinvocation ofthe
3SeeWT/WGTI/M/1, paragraph 6.WT/WGTI/M/2
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WTO balance-of-payments provisions; therelationship between protection ofintellectual property and
transfer oftechnology; theimpact ofpreferential rulesoforigin onFDI; theinvestment implications
ofactions byfirms toescape theapplication ofanti-dumping measures; theimpact ofsubsidies on
trade andinvestment flows. Representatives ofJapan, Hong Kong-China, Egypt andIndia supported
thistypeofwork. Inthisconnection, therepresentatives ofJapan andHong Kong-China referred
tosimilar proposals contained intheirwritten contributions. Therepresentative ofIndia proposed
thattheWorking Group takeuptheissue oftransfer oftechnology, limitations oncommitments with
respecttoinvestmentasrevealedbyschedulesofspecificcommitmentsundertheGATSandthetreatment
accorded under theGATS tothemovement ofnatural persons. Regarding theproposals made for
anassessment ofthesufficiency ofinvestment-related provisions ofWTO agreements, heemphasized
theneedtotakeintoaccount thedevelopment dimension inthiscontext.
38. Following anobservation bytherepresentative oftheEuropean Community thattheissues
raised byAustralia were bestaddressed under ItemIIoftheChecklist, therepresentatives ofJapan
andAustralia indicated thatfurther work inrelation toWTO provisions under ItemIIIshould include
bothacomparison ofWTO provisions withprovisions ofinternational investment agreements andan
analysis ofthepotential effects oninvestment oftheimplementation ofWTO provisions. They noted
inthisrespect thatItems IIandIIIoftheChecklist wereclosely related, particularly inregard tothe
fourth indent ofItemII,andsuggested thattheGroup 'sfuture work onWTO provisions under ItemIII
takeintoaccount relevant indents ofItemII.
39. TheWorking Group tooknoteofthepoints made andissues raised andagreed torevert to
theissueofWTO provisions onmatter related toinvestment atitsnextmeeting. TheChairman stated
that,inorder toassist delegations inpreparing forthenextmeeting, hewould circulate alistofthe
issues raised bydelegations forfurther study.4
(ii) Activities andinitiatives inother international fora
40. TheWorking Group hadbefore itaSecretariat note(document No.2843) which hadbeen
considered atthemeeting inJuneandwhich provided information onongoing activities inthecontext
ofAPEC, ASEAN, theEnergy Charter Treaty, theFreeTrade Area oftheAmericas initiative, the
IMFandtheUnited Nations. Anaddendum recently circulated indocument No.5279 contained
informationonongoingactivitiesinseveralotherfora(theAndeanCommunity,theAsia-EuropeMeeting,
theCommon Market forEastern andSouthern Africa, theEuropean Bank forReconstruction and
Development,theSouthernAfricanDevelopmentCommunity,theUnitedNationsIndustrialdevelopment
Organization andtheUnited Nations Economic Commission forWestern Asia). Anumber of
organizations which theSecretariat hadrequested toprovide information ontheiractivities hadyet
torespond. Inaddition, theWorking Group hadrecently received asubmission from theAPEC
Investment Experts Group. Finally, documents WT/WGTI/W/4-6 contained information presented
byrepresentatives oftheOECD, theWorld Bank andUNCTAD atthefirstmeeting ofthe
Working Group.
41. Therepresentative ofAustralia, speaking onbehalf oftheAustralian Chair oftheAPEC
Investment Experts Group, tookthefloor tointroduce thepaper submitted bytheExperts Group
(subsequently circulated indocument WT/WGTI/W/9).
42. Therepresentative ofUNCTAD informed theWorking Group ofrecent meetings thathadtaken
place oninvestment intheframework ofUNCTAD. AnExpert Meeting onInvestment Promotion
andDevelopment Objectives, heldon24-26 September 1997, haddiscussed promotion ofinward and
4Subsequently circulated asdocument No.6004.WT/WGTI/M/2
Page10
outward FDIandinvestment incentives. Ameeting oftheCommission onInvestment, Technology
andRelated Financial Issues on29September-3 October hadfocused ontheissue oftherelationship
between FDIliberalization andcompetition policy andthecriteria toevaluate the"development
friendliness" ofinternational investment agreements. Hedrewtheattention ofdelegations totheagreed
conclusions ofthese meetings, which hadbeenmade available inthemeeting room. TheCommission
hadrecommended thatexpert meetings beheldin1998onfourtopics: existing regional andmultilateral
investment agreements andtheirdevelopment dimension; environmental accounting; competition law
andpolicy; andthegrowth ofdomestic capital markets, particularly indeveloping countries, andits
relationship withforeign portfolio investment. Thepolicy implications oftheresults ofthesemeetings
would bediscussed atameeting oftheCommission likely totakeplace inSeptember 1998.
43. Therepresentative ofCosta RicasaidthattheFTAA Working Group onInvestment, which
waspresently chaired byhiscountry, hadrecently concluded aphase ofpreparatory analytical work,
inwhich ithadidentified commonalities anddivergencies between investment regimes intheAmericas
andhadundertaken acomparative analysis ofinvestment agreements intheWestern Hemisphere.
Asaresult, theissue ofinvestment wasconsidered ripeforasubsequent stage ofmore negotiation-
oriented work. TheCosta Rican Vice-Minister ofForeign Trade hadrecently metwiththeChairman
oftheWorking Group andwiththeWTO Secretariat toconvey theFTAA Working Group 'sinterest
inestablishing aworking relationship withtheWTO Working Group.5
44. Therepresentative oftheEuropean Community, referring totheinformation intheSecretariat
noteonASEM, noted thatithadrecently beendecided toestablish anInvestment Experts Group, the
mandate ofwhich specifically required theGroup tobesupportive ofthework intheWTO.
45. Therepresentative ofIndia posed several questions withrespect totheSecretariat informal
noteNo.5279. Inrespect ofparagraphs 2and5,heasked foralistofthemember States ofthe
ANDEAN Community andofthecountries participating intheASEM process. Henoted that
paragraph 2mentioned thefactthatDecision 291oftheAndean Community referred toexceptions
totheprinciple ofnational treatment provided innational legislation andrequested further information
onthenature ofthose exceptions. With respect tothedescription insection IIIofactivities inthe
context ofASEM, heasked ifthere wasanyinformation onwhether theASEM Investment Expert
Group hadanalysed thetrade dimension ofinvestment. Regarding theCOMESA Treaty (section IV
ofthenote), heasked ifinformation could beprovided ontherights ofhostcountries asreferred to
inparagraph 9andunderlined thesignificance ofthefactthatthisTreaty alsoaddressed thequestion
offreemovement ofpersons andlabour. Inregard totheEBRD (section V),heasked whether the
development dimension wasfactored intointheactivities oftheEBRD andwhether theadvice ofthe
EBRD wasbinding onrecipient countries. With regard toSADC (section VI),heasked ifthere was
information onwhyAngola hadnotsigned thetradeprotocol mentioned inparagraph 16andrequested
aclarification ofthecontext within which theprotocol mentioned thegoalofanopen cross-border
investment regime.
46. Therepresentative oftheUnited States observed thattheefforts under waywithrespect to
investment inavariety offorahadmoved investment totheforefront ofpolicy consideration andthat
theWTO should build ontheseefforts. Alltheseefforts, inwhich many WTO Members participated,
confirmed thecomplementary andpositive relationship between tradeandinvestment. While itcertainly
wasgoing totaketimetoconclude thatopen, fair,transparent andliberal investment regimes were
inallcountries 'interest, theUnited States waswilling towork withtheGroup toexamine anyconcerns
5Thedelegation ofCosta Ricahasmade available twostudies prepared inconnection withthework ofthe
FTAAWorkingGroup:InvestmentAgreementsintheWesternHemisphere:ACompendiumandForeignInvestment
Regimes intheAmericas: AComparative Study .Interested delegations arekindly requested tocontact the
Intellectual Property andInvestment Division (tel.7395224).WT/WGTI/M/2
Page11
thatremained. Hisdelegation sawthisWorking Group asanopportunity atsome point tonegotiate
rulesthatsupported suchregimes. TheUnited States wasparticipating ininvestment negotiations at
abilateral level andinthecontext oftheFTAA andMAI andwasready tonegotiate intheWTO
when Members decided todoso.Theeducative process inthisWorking Group wasauseful process
towards thatend. Therepresentative ofIndia commented thatthemandate provided intheSingapore
Ministerial Declaration made itclearthatthework inthisGroup wasofstrictly educative nature and
thattheissue ofwhether ornottoengage infuture negotiations required aclearconsensus decision.
47. Therepresentative ofCuba, referring toacommunication from hisdelegation circulated in
document WT/L/228, made astatement ontheimplications ofapossible incorporation intheMAI
ofruleswhich werebeing negotiated bilaterally between theUnited States andtheEuropean Community
inaneffort toresolve theirdispute overtheHelms-Burton legislation. Therepresentative ofIndia
looked forward toexamining theissues raised byCuba inlightoftheOECD process under way.
48. TheWorking Group tooknoteofthepoints made andissues raised andagreed torevert to
thesecond indent ofItemIIIatitsnextmeeting.
49. Inrelation toaproposal made byCanada under thefirstindent, therepresentatives ofEgypt,
seconded bytherepresentative ofIndia, observed thatanalytical work bytheSecretariat aimed at
identifying gapsininvestment-related provisions oftheWTO Agreements would notbeappropriate
because itpresupposed agreement among Members ontherelevant WTO provisions tobeexamined
andonthecriteria forassessing thesufficiency ofthose provisions. Inresponse, therepresentative
ofCanada clarified thathisdelegation 'sproposal onlyenvisaged afactual, non-judgemental comparison
ofexisting investment agreements. TheWorking Group agreed thattheSecretariat would prepare
afactual overview ofexisting investment agreements. Theneedtomake optimal useofinformation
available from other international organizations wasemphasized.
D. OBSERVERSTATUSOFINTERNATIONALINTERGOVERNMENTALORGANIZATIONS
50. Following informal consultations, theWorking Group agreed thatfurther informal consultations
would takeplace onpending requests forobserver status received fromtheEnergy Charter Secretariat,
OAS, OAU, OECD, SELA andUNIDO. TheWorking Group alsoagreed thattheOECD andUNIDO
would beinvited toattend thenextmeeting onthesame basis asatthepresent meeting.
E. OTHER BUSINESS
51. TheWorking Group heard asuggestion bytheChairman onapossible schedule ofmeetings
for1998andagreed toholdinformal consultations onthismatter before thenextmeeting. TheWorking
Group agreed toaproposal bytheChairman onarrangements forthesubmission ofafactual report
bytheWorking Group totheGeneral Council.
Next meeting oftheWorking Group
52. TheWorking Group agreed toholditsnextmeeting on8and9December 1997. TheChairman
noted that,inaddition toreverting toItems IandIIIoftheChecklist, theWorking Group would decide
atthatmeeting howtotakeupItemIVoftheChecklist atitsfirstmeeting in1998, asagreed atthe
meeting inJune, andthatheexpected thismatter tobediscussed attheDecember meeting onthebasis
ofspecific proposals presented bydelegations.WT/WGTI/M/2
Page12
ANNEX
Specific Points Made attheMeeting on6and7October withRegard totheContributions bythe
International Organizations Under ItemIoftheChecklist
1. Inresponse toaquestion bytherepresentative ofIndia ontheroleofcompetition policy in
regulating FDI, therepresentative oftheOECD stated thatthere were undoubtedly cases inwhich
application ofcompetition lawhadadirect impact onFDIprojects. Heemphasized, however, that
hispoint wasnotthatFDIshould beregulated through competition policy butrather that,iftherewere
problems relating to,e.g.theexistence ofconcentration inaparticular sector, whether fromadomestic
source orforeign source, theanswer should beinageneric strengthening ofcompetition law,perhaps
inconjunction withcooperation withauthorities responsible forcompetition lawinforeign countries.
2. Inresponse toaquestion fromthedelegate ofPakistan ontherelevance todeveloping countries
oftheroleofinstitutional factors, therepresentative oftheOECD saidthatexperience showed that
liberalization ofinvestment policies oftenoccurred morerapidly ifgovernments moved together within
aframework ofshared objectives andcommon rules; there were, ofcourse, plenty ofexamples of
countries thathadsuccessfully liberalized investment policies onaunilateral basis. Inresponse toa
question fromthedelegate ofPakistan onwhether remaining sensitivities among OECD countries with
regard toFDIliberalization incertain sectors wereduetoeconomic ornon-economic factors, hesaid
thattheanswer varied fromcountry tocountry andfromsector tosector andoften involved amixture
ofboth. Forexample, some countries would consider thatreluctance toadmit foreign investment in
thecultural sector wasaneconomic phenomenon, whereas forother countries thiswasentirely non-
economic.
3. Referring tosuggestions forfurther historical analysis oftheevolution ofinvestment policies
inthecourse oftheprocess ofeconomic development ofindividual countries, therepresentative of
theOECD observed thatitmight bepossible todrawonanumber ofcountry studies donebytheOECD.
Atthesame time, ithadtobeborne inmind that,overtime, countries hadchanged theirmind over
these matters notnecessarily because oftheirstage ofeconomic development. Theother difficulty
wasthatanexamination ofpolicies adopted inthe1960s and1970s might notbeuseful asguidance
forpolicies inthepresent different world economy aspolicies thatwerevalidinthose decades might
needtobeassessed more critically intoday'sinternational economic environment.
4. Therepresentatives ofPeruandVenezuela asked therepresentatives oftheOECD andtheWorld
Bank whatpolicy conclusions might bedrawn from therecent developments infinancial markets in
South EastAsiabycountries withliberal investment policies, particularly inregard totheissue of
volatility ofportfolio investment flows. Therepresentative oftheOECD referred totheanalysis in
section VIIoftheOECD contribution andobserved thatthemost important conclusion from the
experience ofOECD countries wasthatliberalization worked bestwhen accompanied bypolicies to
strengthen thedomestic financial infrastructure andwhen economic fundamentals, stable growth and
sound monetary andfiscal policy, were inplace.
5. Responding toaquestion fromtherepresentative oftheEuropean Community onwhatsteps
might betaken bydeveloping countries toimprove thepolicy environment forFDI,therepresentative
oftheWorld Bank referred tothepoint made intheIFCreport that,while many factors influenced
theflowofFDItodeveloping countries, themost obvious onewasoften overlooked, namely the
willingnessofdevelopingcountriestoallowit.Thereportmentionedinparticularrestrictionsoninflows
ofFDIandnoted thatonlyfairly recently hadanumber ofdeveloping countries reduced these
restrictions. Thereport alsomentioned theimportance ofbroader policy elements, suchasaliberalWT/WGTI/M/2
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trade andpayments system andtheroleofthestateintheeconomy. These issues werealsodiscussed
inthesection onpolicy implications inthechapter oftheGlobal Economic Prospects report.
6. Therepresentative ofIndia asked therepresentative oftheWorld Bank whether, apart from
government policies, therewereotherfactors restricting competition interms ofFDIflows, inparticular
whether restrictions onsharing oftechnology andonmovement ofnatural persons bytransnational
corporations could alsobeconstraints onFDIflows.
7. Inresponse toanobservation onthewidedifferences between countries regarding theshare
ofFDIasapercentage oftheirGDP, therepresentative oftheWorld Bank referred tothepoint made
intheIFCreport thataprincipal explanation liedinthepolicies adopted bycountries toward foreign
investment. Countries ofverydifferent sizes andatdifferent stages ofeconomic development had
beenabletoattract FDIworth more than5%oftheirGDP. What these countries hadincommon
wasanevolving policy framework thatwasattractive toforeign investors.
8. Therepresentative oftheIMF, responding toaquestion posed bytherepresentative ofBrazil,
informed theWorking Group ofdevelopments atrecent meetings oftheIMFInterim Committee
regarding aproposed amendment oftheIMFArticles ofAgreement thatwould make theliberalization
ofcapital movements oneofthepurposes oftheFund, andextend, asneeded, theFund'sjurisdiction
through theestablishment ofcarefully-defined andconsistently applied obligations regarding the
liberalization ofsuchmovements.
9. With reference toacomment ontherelationship between investment liberalization andFDI
inflows, therepresentative ofUNCTAD stated thatliberalization ofFDIpolicies wasimportant inorder
tocreate anenabling framework forFDI, butthatevidence showed that,once suchanenabling
framework wasinplace, other factors became more important indetermining thelevelandkindof
FDIattracted, notably sizeofthemarket, growth ofthemarket, availability ofinfrastructure, and
availability ofcreated assets. Regarding references totheneedforfurther examination ofpotential
negative effects ofFDI,hesaidthattherewasadownside toFDIastoanyotherinternational transaction.
Consequently, ifacountry wanted tobenefit fromFDIithadnotonlytomaximize itspositive impact
butalsotominimize itsnegative impact. Anumber ofthese negative impacts hadbeenidentified in
theUNCTAD contribution. TheWorld Investment Report 1997highlighted theissueofFDIinrelation
tomarket structure andpointed totheimportance ofstrengthening competition policies toensure that
regulatory barriers werenotreplaced byprivate barriers. Withrespect totheleastdeveloped countries,
hesaidthathiscomments onthedeterminants ofFDIalsoapplied tothose countries. Most ofthese
countries hadmade considerable efforts toliberalize thelegalframework forFDIandwereundertaking
promotional activities. Theinternational community hadaresponsibility withrespect totechnical
assistance andinvestment promotion activities toensure thatthese efforts resulted inincreasing FDI
inflows.
10. Regarding thesuggestions forfurther contributions from UNIDO ontransfer oftechnology
andindustrial policy, therepresentative ofUNIDO noted thatthese matters had,tosome extent, been
addressed intheUNIDO publication TheGlobalization ofIndustry: Implications forDeveloping
Countries beyond 2000.Chapter Vofthisstudy dealtwithnewtechnologies andcompetitiveness
while Chapter VIaddressed thechanging roleofindustrial policy indeveloping countries. However,
UNIDO would consider, subject toavailability ofresources, anyrequest from theWorking Group
forstudies onspecific aspects oftechnology transfer orindustrial policy.