. /.WORLD TRADE
ORGANIZATIONWT/WGTI/W/32
6 April 1998
(98-1350)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE UNITED STATES
The following communication, dated 26 March 1998, was received from the Permanent
Mission of the United States with the request that it be circulated to Members.
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FORCED DIVESTITURE
A few countries that maintain local equity requirements also require foreign investors to
reduce their equity exposure after a certain amount of time has passed.  A country might, for example,maintain a general foreign equity cap of 30 per cen t.  This discourages companies from investing in
the sectors covered by the cap.  To mitigate this problem in areas where it wants to attract investment,
the government may permit a limited number of foreign firms selling high technology products and
services in the domestic market to receive licenses with limited-term exceptions to the foreign equity
cap.  As these licenses expire or the licenses come up for renewal, government agencies requireforeign firms to demonstrate progress in meeting the foreign equity limit.  A restructuring programme
may involve taking on new local partners, giving existing local partners a greater equity share, or
floating shares on the country's stock exchange.
The original limits on foreign equity holdings and the equity divestiture requirements are
barriers to establishment and clear violations of national treatment with respect to investment, sincedomestic investors do not have to take on a foreign partner or sell equity to foreign investors.
In addition to restricting foreign investment by companies unwilling to structure their
investments in such a way as to comply with th e equity limits, forced divestiture requirements
discourage investment throughout the economy by signalling investors that the government's welcome
for such investment is strictly conditional and discretionary.  Not only must the company face an
initial screening, but it faces a second screening decision when its initial license expires.  The element
of discretion in the licensing process creates opportunities for corruption, which further worsens theinvestment climate.
The measures are clearly intended to restrict foreign competition in domestic markets and to
give preferential treatment to domestic suppliers.  They discourage foreign investment, distorting
trade and investment flows.  Foreign suppliers may not be able to export effectively to a market unless
they have a local presence, and they may be unwilling to risk losing control over their latesttechnology by transferring it to a company that they cannot control.  Although not on their face
inconsistent with national treatment in trade, these measures may have the same effect on trade as a
direct violation of national treatment with respect to a specific product.WT/WGTI/W/32
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They may reduce the competitiveness of the local economy and its ability to attract the latest
technology.  Foreign companies that hold such technology may be unwilling to enter a market unless
they have a subsidiary that they fully control in that market.
The United States believes all of these practices are inconsistent with open and fair
investment regimes and run counter to the fundamental objectives of the WTO.  In addition, thesemeasures discourage investment and hinder economic growth in the long term.
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