RESTRICTED
WORLD TRADE WT/WGTI/W/18
11December 1997
ORGANIZATION(97-5419)
Original: English Working Group ontheRelationship
between Trade andInvestment
SUBMISSION FROM JAPAN
Thefollowing communication, dated 8December 1997, hasbeenreceived fromthePermanent
Mission ofJapan withtherequest thatitbecirculated toMembers.
_______________
I. THE RELATIONSHIP BETWEEN TRADE, INVESTMENT AND DEVELOPMENT
1. Japan'sexperience
Intheyears following World WarII,Japan faced difficult economic conditions, finding itself
faced witharuined economy andashortage offoreign currency. Under these circumstances, the
Government adopted restrictive investment policies that,inprinciple, prohibited theintroduction of
foreign capital requiring foreign currency remittances. Afterthe1950s, however, restrictions onforeign
capital weregradually abolished intandem withtherapidgrowth oftheJapanese economy, theincreased
demand forhigher technology, andgreater economic globalization. In1973, restrictions onforeign
capital were, inprinciple, totally lifted. Asaresult, Japan iscurrently oneofthecountries intheworld
most opentoforeign capital.
2. Economic effects ofpastpolicies
Asstated above, although theJapanese Government immediately implemented afterWorld
WarIIahighly restrictive investment policy, suchrestrictions weregradually phased outinlinewith
theongoing globalization oftheeconomy, theaccelerating paceoftechnological advances andeconomic
growth. Theeconomic effects ofrestrictive investment policies intheearlier period ofpost-war history
havebeenanalyzed asdescribed below. Itshould benoted, however, thatunder theeraofeconomic
globalization, economic conditions havedrastically changed fromthose inthepast. Thus, thefollowing
analyses, which arebased upon pasteconomic conditions, might nolonger beapplicable intoday's
economic conditions.
(a) Realeffectiveness ofthepastpolicies
When restrictive investment policies werecarried out,Japan'sGDP stood atalowleveland
private firms werenotinvesting overseas asactively astheydotoday. Therefore, inthose days, foreign
firms hadlittleincentive toinvest inJapan. Thispoint raises negative views ontheactual effectiveness
ofJapan'srestrictive investment policies. Thatis,since foreign companies werethenlittleinterested
ininvestinginJapan,agreatvolumeofinvestmentwasnotinfactseeminglysubjecttoJapan'srestrictive
investment policies. Additionally, economic research hasindicated thatthere actually wasnota
significantrelationshipbetweenrestrictionsoninwardinvestmentandthevolumeofthedirectinvestment
inJapan.WT/WGTI/W/18
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(b) Possible effects ofpastinvestment policies
Asnoted above, considering thelowvolume offoreign direct investment inJapan atthattime
andthecontroversy over therealeffectiveness ofrestrictive investment policies, theoverall
macroeconomic effect ofinvestment policies hasnotyetbeen empirically proven. However, the
following hypotheses havebeenputforward regarding theireffects primarily inmicroeconomic aspects.
(i) Effect oncompetition
Someeconomistspointoutthatrestrictiveinvestmentpolicies,blockinglargeforeigncorporations
fromentering theJapanese market, hadtheeffect ofenhancing competition among Japanese companies
ofasimilar size. Incontrast, others assert thatsuchrestrictive investment policies undermined
competition inthedomestic market. These views should beexamined when theWorking Group takes
upinvestment andcompetition policy issues.
(ii) Effect onindustrial structure
Inoneopinion, considering theinternational economic environment atthattime, restrictive
investment policies helped Japanese companies (domestic capital) toachieve critical mass incapital
accumulation inkeyindustrial sectors. However, evenifthesepolicies hadsuchaneffect, itisnecessary
toexamine whether therewasdisparity ineconomic effects according towhether keyindustries mainly
were made upofforeign ordomestic capital.
(iii) Effect oninternal investment
Since there isastrong correlation between economic growth andtheamount ofinvestment,
restricting foreign investment seemingly hasadirect andnegative impact oneconomic growth. In
thecaseofJapan, however, itshould benoted thattheextremely highsavings ratehelped neutralize
suchanegative effect.
3. Change ininvestment environment
Inparallel withtheemergence ofaglobalized economy, thevolume oftheoverall global
investment hasburgeoned inrecent years (foreign direct investment hasincreased more thansix-fold
since 1980). Asaresult, restrictive investment policies today would hardly havethesame effect as
those atthetimewhen Japan implemented suchpolicies. With theaccelerated paceoftechnological
innovation today, shutting outforeign capital from themarket willalsoshutoutanytechnological
spillover accompanied byforeign capital, leading toaweakening inthecompetitiveness ofdomestic
industries. Furthermore, given theincreasingly important rolethatmultinational corporations have
come toplayinworld trade (UNCTAD estimates thatone-third ofworld trade takes place within
multinational corporations), restrictive investment behaviour islikely toexert averynegative effect
ontrade aswell.
II. THE EXISTING GLOBAL FRAMEWORK: STOCKTAKING AND ANALYSIS
1. Performance requirements
(a) Present environments
While theTRIMs andtheGATS Agreements clearly prohibit certain types ofperformance
requirements, theyareonlylimited toafewareas. Forinstance, ineither Agreement, noregulation
exists onlocalemployment requirements orlocalfinancing ratiorequirements. Furthermore, althoughWT/WGTI/W/18
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export requirements andtechnology transfer requirements affect investment measures regarding the
trade ofgoods, neither ofthem areincluded intheTRIMs Agreement. Aswasmentioned inour
communication made atthelastmeeting (WT/WGTI/W/11), asurvey onJapanese firms identified
theexistence ofsuchperformance requirements asbeing aproblematic area,indicating thattheyhave
aconsiderable effect ontheinvestment activities ofJapanese firms (seeTable 6oftheabove
communication).
(b) Implications forfuture tasks
Inlightoftheabove, topromote freer investment flows thatleadtothedevelopment and
economic growth ofthehostcountry, itisnecessary toanalyse whatkindofperformance requirements
actually affect investment activities offirms andinwhatway,andalsotoexamine howtheregulation
ofperformance requirements canbeeffective. More specifically, itwillbeinstructive toanalyse
provisions concerning performance requirements intreaties suchastheNAFTA, theEnergy Charter
Treaty, andtheMAI, andalsotoidentify thegapsandsimilarities withtheTRIMs Agreement and
theGATS. Insodoing, theWorking Group should always payattention toactual investment behaviour
ofprivate firms.
2. Investment protection
(a) Present environments
Asmentioned inourlastcommunication (seeTable 5),astable investment environment and
predictability ofthehostcountry areimportant determinants forcompanies inmaking investment
decisions. However, theissues ofexpropriation andcompensation, repatriation ofprofits, foreign
exchange guarantees andother provisions toprotect foreign investment havenotbeenaddressed in
theWTO Agreements. Thus, currently, these issues areexclusively handled inbilateral orregional
frameworks.
(b) Implications forfuture tasks
Under suchcircumstances, sincetheapplication ofinvestment protection provisions islimited
tocertain regions andsince regional andbilateral agreements arevulnerable topolitical andeconomic
power relationships among nations, itwould beuseful toexamine ways toprotect foreign investment
under acomprehensive multilateral framework. More specifically, wewould liketorequest the
Secretariat tocategorize investment protection provisions inexisting bilateral andregional agreements,
andthen, based onthework oftheSecretariat, examine whatkindofprovisions areappropriate for
providing effective andfeasible protection toinvestment.
3. Definition ofinvestment
(a) Present environments
Existing agreements usedifferent definitions oftheterm"investment". Forinstance, inthe
MAI, investment isdefined inextremely broad terms including portfolio investment. Ontheother
hand, there areagreements thatdefine investment more narrowly.
(b) Implications forfuture tasks
Tostartexamining thescope oftheterm"investment" would beveryhelpful forbuilding a
basisforthefuture progress ofthisWorking Group. Indoing so,thefirststepshould bethestocktaking
ofthetermasitisusedinexisting bilateral andregional agreements. Then, theWorking Group shouldWT/WGTI/W/18
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identify whatkindofprovisions and/or considerations become necessary inadopting acertain definition
oftheterm. Contributions fromtheIMFandother international organizations would alsobecrucial
during theprocess.
4. Effect oftrade measures onforeign direct investment
(a) Present environments
Thesignificant effect oftrade measures onforeign direct investment wasoutlined inourlast
communication.
(b) Implications forfuture tasks
Toconduct discussions efficiently inthefuture, itwould behelpful tobegin bystudying which
ofthemany existing trade measures haveaparticular impact ontheinvestment behaviour offirms.
Itwould alsobeimportant toexamine whether themeans andobjectives oftrade measures aresimilar
enough tothose ofinvestment measures. Inother words, ifthere areenough similarities between the
two,bothshould beconcurrently treated intheWorking Group.