WORLD TRADE
ORGANIZATIONWT/WGTI/W/123
28 June 2002
(02-3615)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
The following communication, dated 27 June 2002, has been received from the Permanent
Delegation of the Republic of Korea.
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NON-DISCRIMINATION AND GATS-TYPE APPROACH FOR INVESTMENT
I. INTRODUCTION
1. In the written contribution dated 6 March 2001 (WT/WGTI/W/96), Korea suggested a GATS
approach as a starting point for a multilateral framework for investment (MFI).  Specifically, theGATS bottom-up approach, where certain principles and requirements provided in the Agreement are
applied only to those sectors committed by individual Members, could serve as a starting point for the
MFI.
2. As a follow up to the earlier contribution (2 June 1999 (WT/WGTI/W/79)), this paper
includes Korea’s views as to how the non-discri mination principle – the Most Favored Nation’s
Treatment (MFN) and National Treatment (NT) - can be applied to the MFI.  The GATS is a good
guidance as to the application of the non-discrimination principle, but the differences and caveatsshould also be considered.
II. GATS APPROACH
3. The application of the non-discrimination principle in the GATS was elaborated in details in
the background paper made by the Secretariat.  Simply put, the GATS provides “unconditional” MFN
and “conditional” NT.  The “conditional” NT means that the NT is provided to only those sectorswhere specific commitments were made by the Members.  The MFN treatment, on the other hand, is
an “unconditional” obligation in the GATS.  However, certain exemptions to the MFN treatment are
permitted for only short durations of time on an exceptional basis.  This is a difference with the
GATT, in which both MFN and NT are unconditional obligations.
4. Then how can the principle of non-discrimination in the GATS be extended to the multilateral
investment rules?  What would be the differences and commonalities?  Under the GATS, investment
in the services sector is included through Mode 3, which is defined as “the supply of a service by a
service supplier of one Member through commercial  presence in the territory of any other Member.”
The “commercial presence” is normally understood as accommodating direct investment.
5. This gives one reason for applying the GATS-appr oach to multilateral investment rules.  As
the investment aspect of services sector is already incorporated in the GATS and the GATS isWT/WGTI/W/123
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regarded to provide the necessary flexibilities fo r developing countries, the most probable way to
form investment disciplines for goods would be to follow the GATS model.
6. At the same time, the GATS-approach provides necessary flexibilities to individual countries
at different developmental stages.
7. However, the new investment disciplines may need to go beyond the GATS-approach for the
reason that investment disciplines have certain natures and characteristics that were not present in the
GATS.
A. MFN  TREATMENT
8. Most of all, the major difference found between the GATS and the international investment
agreements such as bilateral and regional investment agreements (collectively referred to hereafter as
IIA) is that the investment aspect can divide into the pre- and post-establishment stage.
9. MFN is one of the most important principles in the multilateral framework in trade and
investment.  It gives investors a guarantee for equality of competitive opportunities among investors
from different foreign countries.
10. Therefore, it seems most appropriate that MFN be applied as a general obligation in MFI,
irrespective of pre- and post-establishment stages of investment.
11. At the same time, as the Secretariat’s background note on development (WT/WGTI/W/119)
indicates, “applying MFN treatment does not interfere with a developing country’s ability to impose
measures that give any competitive advantage to national producers over their foreign competitors.”
Therefore, there is no reason to deny this basic principle to foreign investors.
12. On the other hand, given that there have been certain bilateral and regional investment
agreements that provide a high level of preferential treatment on investment, the exemption may benecessary.  In this sense, the GATS MFN exemption list can be a guide.
13. However, such exemptions should be strictly limited, based on certain conditions and
timetables.  And the principle of “standstill” should be applied so as to give foreign investors
transparency, stability, and predictability of long-term investment conditions in a host country.
B. NATIONAL TREATMENT
1. Pre-establishment stage
14. The GATS provides “conditional NT”.  This was a way of balancing between the interests for
further liberalization and the interest for sovereign right for domestic protection.
15. The same would apply to the case of investment agreements. Despite the increasing necessity
and merits, the NT as an obligation of a host country, and a right to the home country is not yet
universally accepted.  In this sense, the GATS bottom-up approach seems the best way to balance the
need to facilitate investment liberalization to attr act more foreign investment and the need to retain
national sovereignty for domestic policy objectives and for support of domestic investors and
producers.
16. At the pre-establishment stage of investment, the NT would be provided to foreigners based
on specific commitments granted.  The level of  commitments could be low in the beginning,WT/WGTI/W/123
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reflecting individual domestic situations, but be gradually expanded through successive rounds of
negotiations.
2. Post-establishment treatment
17. On the other hand, as for the NT at the post-establishment stage of investment, the difference
with the GATS approach should be pointed out.
18. The GATS deals with trade in services by its nature, not investment per se .  Therefore, the
“commercial presence” in a host country, even though it includes direct investment, or the
establishment of a foreign company, mainly focuses on the supply of services.  The difference in the
pre-establishment stage and post–establishment stage is not a major concern here.  As a result, the
national treatment under the GATS applies, irrespective of pre-establishment and post-establishment
stage, only in services sectors inscribed as market access and national treatment commitments in a
Member’s Schedule.
19. Another important characteristics of the GATS is that backsliding from the existing level of
investment (or to use the GATS wording “supply of services through commercial presence”) is
possible.  First, the current investment level could be withdrawn as long as it does not fall below the
level of commitments.  Second, Article 21 of the GATS allows withdrawal and modification of the
commitments by consultations.  A “precautionary reservation” is allowed under the GATS.
20. However, in the IIAs, NT in the post-establishment stage is accepted as a general obligation,
and this approach seems more appropriate for a multilateral framework.
21. First of all, a legal entity established in acco rdance with the host country’s domestic laws and
regulations is a national legal entity, regardless of whether its parent company is foreign, or the staff is
foreigners.  There is little ground for discriminating foreign invested companies against domesticcompanies upon its relations to the parent company, control, nationalities of its stakeholders, etc.
22. Second, foreign investment incurs “sunk costs” and is not easily withdrawn in reaction to
policy changes in a host country.  Providing assurance and stable environment to foreign investors
who are willing to set up and maintain long-term business relations in a host country is a minimum
requirement, if a country aims to induce foreign investment..
23. However, even in this “unconditional NT” for the post-establishment stage, the existing IIAs
still allow for exceptions and qualifications to the rules.  There would be economic, political, and
administrative reasons for allowing certain exceptions.  Even in this case, transparency should be the
rule.  In this line, any exceptions or reservations must reflect actual regulatory situations.
24. In this context, for the post-establishment stage, a general exceptions provision may be most
appropriate.
III. CONCLUDING REMARKS
25. A multilateral framework demands flexibility in order to incorporate the interests of all
members, developed or developing, home and host countries.  At the same time, it needs all-
encompassing core principles to bind the rules together.  Therefore, a balance would be necessary
when applying the non-discrimination principle.
26. Depending on the forms and levels of the principle at the pre- and post-establishment stage of
investment, the form of the multilateral framework would be determined.WT/WGTI/W/123
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27. In this sense, the GATS approach gives ample examples on how to balance the goal of
retaining disciplines for further liberalization and the goal of providing flexibility for individual
needs.  At the same time, the commonalities and differences should be carefully examined and
reflected in the making of the multilateral investment framework.
28. In particular, this paper emphasized the different aspect in the application of the national
treatment between the pre-establishment and post-establishment stage.  The post-establishment stage
demands a stronger NT if we are to benefit from the multilateral framework on investment.
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