RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/M/14
30 April 2001
(01-2175)
Working Group on the Relationship
between Trade and Investment
REPORT ON THE MEETING OF 7 AND 8 MARCH 2001
Note by the Secretariat
1. The Working Group on the Relationship between Trade and Investment met on 7 and
8 March 2001 under the Chairmanship of Ambassador Demiralp (Turkey).  The Working Group
adopted the agenda proposed in WTO/AIR/1482.
A. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
FOR GROWTH AND ECONOMIC DEVELOPMENT (ITEM I OF THE CHECKLIST OFISSUES SUGGESTED FOR STUDY)
2. The Working Group discussed a Note by the Secretariat on "Foreign Direct Investment and
the Balance-of-Payments" (WT/WGTI/W/95).  In addition, the Working Group reverted to a
contribution that had been submitted by India in June 2000 (WT/WGTI/W/86).
(i) The relationship between FDI and the balance of payments3. The representative of Japan observed that, even though it was difficult to draw general
conclusions on the impact of FDI on the balance of payments, the Note by the Secretariat was
consistent with a contribution submitted by Japan in WT/WGTI/W/11 which provided evidence of the
positive effects of Japanese outward FDI on the balance of-payments of host countries.  The
representative of Hungary stated that, because of the difficulty of drawing general conclusions on the
relationship between FDI and the balance of payments , this issue should be discussed on the basis of
the national experiences of individual WTO Members.  As explained in paragraphs 17 and 18 ofWT/WGTI/W/83, FDI had improved Hungary's trad e balance by enhancing the competitiveness of
Hungarian exports and had also helped finance the deficit on the current account.  He encouraged
delegations to share their national experiences rega rding the relationship between FDI and the balance
of payments of FDI, especially if such experiences were different from Hungary's.  The representative
of Mexico stated that, notwithstanding the fact that FDI might have a negative impact on the balance
of payments in certain sectors or in certain periods in the life of an investment, the fact was that most
countries, particularly developing countries, considered that on the whole FDI made a positive
contribution to the growth of their economies and to their external situation through its various direct
and indirect effects.  Significant in this regard was the fact that the last decade had witnessed an
intensification of competition between countries to attract FDI.  The representative of Brazil stated
that empirical evidence, albeit scarce, would seem to point to an overall positive relationship between
FDI and the balance of payments, but that it was difficult to draw any conclusions given the
complexity of the factors involved and the need for a dynamic analysis.
4. The representative of Canada stated that it was important to determine the proportion of FDI
that was related to the balance of payments and to distinguish between short-term and long-term
capital movements.  With regard to long-term capital movements, transfer of funds issues were
particularly important.  Many restrictions existed in this area.  In the interest of promoting investorWT/WGTI/M/14
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confidence, there was a need to promote transparent and predictable investment regimes.  The annual
work of the IMF on capital, exchange and import restri ctions was very helpful in this respect.  As a
small open economy, Canada was highly dependant upon foreign capital, skills, technology and
markets and could not reasonably isolate itself from these trends.  Extensive research undertaken in
Canada had documented the benefits for Canada from the growth of foreign investment and theincreasing globalization of business activities.  The findings of this research pointed to the need for
governments to create the basic fundamentals of an economic infrastructure that enhanced the
economy's ability to benefit from inward and outward FDI.  Key factors included effective education
and training of workers and management, the efficiency of capital markets, the existence of
competitive domestic markets, secure access to international markets, the availability of mechanisms
to facilitate economic adjustment, and tax and regulatory policies which recognized the
responsiveness of investment to differences between countries.
5. The representative of India stressed the comple xity of the relationship between FDI and the
balance of payments which required a case-by-case analysis. Whether or not FDI had a positive
impact on the balance of payments depended upon factors such as the import intensity of the
investment, the size of FDI relative to gross domestic investment, the particular sector of economic
activity in which investment took place, the extent to which investment was export-oriented, and thesize of the domestic market of the host country.  In examining the impact of FDI on the balance of
payments it was possible to distinguish between, on the one hand, negative effects which resulted
from the import of capital goods and intermediate inputs, the repatriation of funds and transfer
pricing, and, on the other, positive effects resulting from the role of FDI in increasing exports from
the host economy and in enhancing the competitiveness of local firms.  In the latter regard, however,
he questioned whether there was empirical support for the assertion that FDI resulted in transfer of
technology to host countries.  The consideration of these various possible negative and positive effects
of FDI on the balance of payments had important policy implications.  Thus, if it was accepted that
increased exports were a key aspect to the positive contribution of FDI to the balance of payments,
countries should have the ability to apply export performance requirements.  Likewise, the fact thatthe potential of FDI to improve the balance of payments position depended upon the specific sector of
economic activity in which FDI took place, as illustrated by the difference between investment in
consumer goods and investment in infrastructure, meant that countries should have the policy freedom
to channel investment into areas of priority.  He pointed to the possible negative implications of
mergers and acquisitions as an area requiring further analysis.  On the whole, if one considered the
range of possible negative and positive effects of FDI on the balance-of-payments, the conclusion was
that, while there might not be conclusive evidence that FDI had a negative impact on the balance ofpayments, it was also not possible to state that FDI would certainly lead to an improvement of a
country's balance of payments situation.  In order for FDI to improve the balance-of-payments, it was
necessary for countries to have in place an appropriate regulatory structure.
6. The representatives of Korea, Hungary
 and the United States  agreed with the view expressed
in paragraphs 3-4 of the Note that changes in economic conditions and policy orientations, notably the
shift from market-seeking FDI in an environment of protective, import-substitution policies to export-
oriented FDI, meant that certain studies that ha d been undertaken in the 1970s on the potentially
negative effects of FDI on the balance of payments of host countries were of questionable relevance
to current analysis.  The representative of Hungary stressed the export-oriented nature of recent FDI
inflows to Hungary, and pointed to the size of th e domestic market of a host economy as an important
factor determining whether an investment was of a market seeking or export-oriented nature.  The
representative of India stated that it was important to also take account of other changes that had
occurred in the international policy environment, including the reduced scope for application of traderestrictions for balance-of-payments purposes.  The representative of the United States underlined the
point in paragraph 4 that the existence or lack of a competitive environment was a key determinantregarding the positive or negative effect of FDI on a country's balance of payments.WT/WGTI/M/14
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7. The representatives of Japan, Hungary , the European Communities , Mexico  and Brazil
underlined  the comment made in paragraph 6 of th e Note that the effects of FDI on the balance of
payments of a host economy were bound to be country specific and sensitive to the type of investment
and its age structure.  It was noted that the size of the market of the host economy and the specific
sector in which FDI occurred were also relevant in this context.
8. The representatives of Korea, Hungary , the European Communities , Mexico , Brazil and
Switzerland agreed with the view expressed in paragr aphs 6-8 of the Note that the impact of FDI on
the balance of payments needed to be analyzed from a holistic perspective, within an analytic
framework that encompassed both the direct and indirect and the static and dynamic effects of FDI,
and that grouping together selected effects of FDI on a host country's balance of payments could give
a misleading picture.  Thus, it was stated that account should be taken not only of the trade and
financial transactions of foreign affiliates but also of the trade and financial transactions of domesticenterprises and of the cumulative effect of increased economic activity stimulated by FDI on a host
country's savings-investment relationship.  In examining the trade effects of FDI, the demand for
imports generated by FDI should be analysed in conjunction with the contribution of FDI to the
growth of exports and with the import-substitution effect of FDI.  The mutually supportive
relationship that developed over time between foreign affiliates and local suppliers and subcontractorsreduced the need for the foreign affiliate to import inputs and was an important vehicle for the transfer
of technology.  More generally, it was argued that the very notion of positive and negative effects of
FDI on the balance of payments of host economies was not meaningful in that it did not take into
account the dynamic effects of FDI through the transfer of technology and management and know-
how spillover effects that were widely seen as the most important aspect of the positive contributionof FDI to development of host economies.  Such positive dynamic effects occurred through imports of
capital goods which from, a static point of view, could be seen as having a negative impact on the
balance of payments.
9. With regard to paragraph 9 of the Note, the representative of Hungary agreed that it was
difficult to disentangle empirically the effects of FDI on the balance of payments and that FDI was
seldom the most important factor influencing the balance-of-payments position of a country.  In the
case of small open economies, however, with a heavy international debt service, FDI could be a very
important factor in the formulation of balance-of-payments policy.  The representative of Egypt
considered that developing countries needed to formulate comprehensive policies aimed at improvingall aspects of their balance-of-payments position, which required an assessment of the effects of FDI
as one variable affecting the balance-of-payments.  The representative of Norway agreed with the
point in this paragraph that negative balance of payments effects of imports of capital goods and
machinery should be considered as positive from the point of view of capital formation and transfer of
technology.
10. Regarding the issue of FDI and imports of capit al goods and intermediate inputs (Section III
of the Note), the representative of Mexico noted the observation in paragraph 12 of the Note that FDI
in manufacturing tended to be more intensive in terms of imports of inputs and machinery, as
compared to FDI in agriculture and services.  The representative of Brazil stated that the view that
FDI in services was less import-intensive than FDI in manufacturing might need to be qualified in
view of the importance of imports of capita l goods in certain service sectors, such as
telecommunications.  Thus, it was possible that in certain service sectors FDI was more import-
intense than in manufacturing.
11. The representative of Japan, referring to his delegation's contribution in WT/WGTI/W/11,
observed that, while FDI increased imports, this was more than compensated for by its import
substitution effect and its impact on increased exports.  The representative of Hungary stated that
Hungary had not experienced a trade problem created by FDI as even in the initial phase of FDIinflow during the early 1990s the considerable increa se in imports attributable to FDI had been moreWT/WGTI/M/14
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than offset by increased exports.  The representative of the European Communities stated that
empirical evidence suggested that even in sectors where foreign investors were heavily dependent
upon imported inputs and where local content was low, FDI generated foreign exchange for the host
country.  Moreover, foreign affiliates that were highly dependent on specialized imported inputs
tended to create backward linkages in the host economy, and several studies confirmed that over timeforeign investors tended to rely less on imports and more on local sourcing.  The representatives of
the United States and Mexico
 also pointed to these studies.  The representative of the European
Communities further stated that comparisons of imports and exports by foreign affiliates weremisleading in that they ignored the import-substituti on effect of FDI, which was illustrated in the Note
by the case of Japanese FDI in ASEAN countries.  Moreover, the short-term negative effects on the
balance of payments resulting from imports of capital goods needed to be weighed against future
growth in income and savings.  The representative of Switzerland stated that the question of the
import intensity of FDI should be seen in the perspective of the process of globalization of business
activity which meant that firms undertook various stages of a production process in different
countries.  A country in the first stage of this process would produce most of the parts and
components, but a country at the end of this process would import and assemble parts and components
and then usually re-export them.  The representative of Egypt stated that ev idence showed that FDI
resulted in an increase in imports consumed directly  by foreign affiliates in the host country and that
this increase varied according to several factors, notably the industrial sector in which the FDI was
made, the age of the project, and the level of economic development of the host economy.  As
evidenced by the UNCTAD studies mentioned in paragraphs 16 and 21 of the Note, the trade inflows
associated with FDI had significant negative effects on the balance of payments of a host country thatcould be felt in the short- and medium-term.  He noted that the analysis in this part of the Note
covered only certain regions and requested the Secretariat to extend the coverage of its analysis to
include countries in Africa and the Middle East.
12. The representative of Norway pointed out that  in regard to the trade effects of FDI account
should be taken of the existence of intra-regional networks of FDI and trade, as described in
paragraph 18 of the Note.  The role of FDI as a vehicle for regional economic cooperation was
illustrated by Norway's experience with FDI which to a large extent had occurred within the context
of European economic integration.
13. With reference to paragraph 23 of the Note, the representatives of Hungary and the European
Communities stated that, while local content requirements were frequently used to reduce the import
intensity of FDI, empirical studies had shown that such requirements could actually reduce a country's
export potential so much as to result in a deterioration in the balance-of-payments.  The representativeof Hungary observed in this regard that there were WTO-compatible tools available for governments
to channel investment to sectors which were mostly export-oriented.  The representative of Korea
stated that Korea's experience demonstrated that domestic content requirements were not anappropriate policy tool to reduce the import intensity of FDI.  The representative of India questioned
the view expressed in the study referred to in paragraph 23 that a country's export potential might
actually be reduced by a domestic content mandate, especially in light of the statement by the
European Communities that foreign investors tended to rely on local sourcing.
14. With respect to FDI and transfer pricing (Section IV of the Note), the representative of
Hungary stated that transfer pricing was a genuine problem that required attention from a competition
policy perspective rather than a balance-of-payments perspective.  As an example of anti-competitive
conduct, transfer pricing illustrated the need to supplement a multilateral fra mework for FDI with a
multilateral framework on competition policy in the WTO which should provide safeguards against
certain restrictive business practices.  The representatives of the United States, the European
Communities and Egypt, referring to recent work by UNCTAD on this subject, drew attention to the
role of bilateral treaties on the avoidance of double taxation as a means to address concerns regardingtransfer pricing.WT/WGTI/M/14
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15. Regarding the issue of FDI and the repatriation of profits and dividends, and payments of
royalties (Section V of the Note) the representatives of Hungary, the European Communities  and the
United States stated that the outward payments of direct investment income should not be viewed in
isolation but in conjunction with other effects of FDI, including reinvestment of profits by foreign
affiliates.  The representative of Egypt considered that governments of host countries had a role to
play in regulating the practices of multinational enterprises relating to the transfer of funds and that
bilateral investment treaties provided the necessary policy flexibility in this regard.
16. Regarding Section VI of the Note (FDI, Ba lance-of-Payments Management and Financial
Crisis), the representative of Switzerland underlined the comment that a current account deficit
resulting from higher growth rates was not by itself problematic and that the key issue was how such adeficit could be financed.  In this connection, the representative of Egypt noted the statement that the
sustainability of a current account deficit over time depended importantly on the extent to which
increased export earnings became available to meet external financial obligations arising from the
foreign capital inflow.  This underscored the need for WTO Members to continue their efforts to
improve market access opportunities, especially for products of interest to the more vulnerable
economies.  The representatives of Korea, Hungary , the United States , the European Communities ,
Mexico, Norway,  Switzerland  and India  agreed with the point that FDI was a more stable source of
investment than other components of private capita l flows.  Reference was made to Annex Table 1
which provided evidence of the contrast between the stability of FDI and the volatility of other capital
flows in the context of the Asian financial crisis.  The representative of Hungary also mentioned the
fact that FDI inflows to  Hungary had not been affected by the Russian crisis of 1998.  In his
delegation's view the greater stability of FDI as compared to other capital movements meant that arealistic agreement on investment in the WTO should focus on FDI.  The representative of Mexico
drew attention to the important role of FDI in the financing of Mexico's recent current account deficit,
and observed that balance-of-payments difficulties that might arise from a liberalization of FDI could
be addressed through inclusion of a balance-of-payments safeguards clause in a possible framework
of multilateral rules in the area of investment.  The representative of Norway pointed to the problemof the concentration of FDI inflows in a limited number of host countries.  OECD countries accounted
for two thirds of FDI inflows while ten developing countries accounted for 75 per cent of the
remaining one third of global FDI inflows.  Thus , as had been reiterated in a number of UNCTAD
studies, the important question was what made countries attractive as destinations for FDI.
17. The representative of the United States obse rved that the Note was limited in its focus on
mergers and acquisitions as compared to several references to greenfield investment and asked
whether this omission stemmed from the limited availability of data on mergers and acquisitions andtheir impact on the balance-of-payments or was in response to a certain rationale for focusing on one
type of FDI versus another.  In addition, she suggest ed that further work on this topic could include an
analysis by the Secretariat of the economic benefits of portfolio investment, the reasons why investors
decided to invest through portfolio investment, an d the inter-relationship between FDI and portfolio
flows, which would highlight any ad vantages of attracting portfolio flows in order to increase FDI
flows.  This analysis should also examine the concerns that had been expressed by other Members
with regard to portfolio flows a nd the options that had been used in international agreements to
address such concerns.
18. The representative of the Secretariat stated that the Secretariat could try to supplement the
Note with an examination of portfolio investment and of mergers and acquisitions.  In response to the
question raised by India on the study referred to in paragraph 23, he stated that the argument in the
study cited in this paragraph was that local content requirements frequently would involve a foreign or
domestic producer purchasing higher cost inputs than would otherwise be the case, which would
reduce their competitiveness, including on export markets.WT/WGTI/M/14
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19. The representative of India stressed the need for any study by the Secretariat of portfolio
investment analysis to be to balanced regarding the positive and negative effects of such investment
flows.
20. The Working Group agreed that the Secretariat would supplement its Note with an
examination of portfolio investment and mergers and acquisitions, along the lines suggested by the
United States and India.
(ii) Comments on India's written contribution in WT/WGTI/W/86
21. The Working Group reverted to a communication that had been introduced by India at the
meeting of the Working Group held in June 2000 (WT/WGTI/W/86).
22. In recapitulating the main themes of this contribution, the representative of India stated that
his delegation acknowledged the important role of  FDI in the economic development of countries,
including developing countries, but that account should be taken of the fact that liberalization ofinvestment regimes was undertaken autonomously by a number of countries, and of the existence of a
well established network of bilateral investment treaties.  Such treaties were favoured by countries
like India because they did not require countries to  make fundamental changes to their FDI policies,
required countries to grant national treatment only in the post-establishment phase and made it
possible to vary the definition of investment in light of the particular needs of the parties to suchtreaties.  Contrary to the rich experience with bilateral investment treaties, there was no experience
with investment rules at the multilateral level ap art from the unsuccessful attempt to conclude a
Multilateral Agreement on Investment.  As had been observed by his delegation in relation to a
written contribution from Hungary (WT/WGTI/W/83), there was no basis to believe that a
multilateral framework would lead to increased FDI inflows.  Interestingly, a recent study predictedthat FDI flows would increase very  substantially in the next ten years and that this growth of FDI
flows should not be seen as a zero-sum game.  The study also indicated that the share of developing
countries in world-wide FDI inflows was not expected to change.  The broad range of factors on
which the study's forecast of FDI flows was base d, including market size, economic policies, growth
rate, input costs, geography and natural resource endowments, underlined the fact that a country'sattractiveness to FDI was determined by many factors other than its investment regime.  The example
of the industrial development policies pursued by Korea, which had permitted FDI only when other
means of accessing foreign technology were not available, demonstrated that the benefits of FDI were
related to the ability of host countries to place some conditions of FDI.  This ability to place
conditions on FDI, in the form of export performance requirements or transfer of technology
requirements, was critical to explaining the development of Korea and of some of the ASEAN
countries.  In summary, his delegation considered that not sufficient experience had been gained at theinternational level other than in the context of bilateral investment treaties, that a multilateral
framework of rules would not lead to increased fl ows of FDI, and that developing countries could
only derive benefits from FDI if they retained the policy flexibility to place certain conditions on FDI.
23. The representative of the European Communities agreed with India that investment was not a
zero-sum game, which implied that there was perhaps more scope for cooperation between
governments in this area than in other areas.  The fact that investment decisions were primarily based
on evaluations of how various economic conditions affected the profitability of an investment project
did not mean that other factors did not matter.  Governments had a role to play in establishing a
friendly climate for foreign investment, which was pe rfectly compatible with the pursuit of domestic
policy objectives.  The possible value added of multilateral rules on investment in the WTO should beseen in this light.  It had never been suggested that the establishment of such rules was key to
enhancing the attractiveness of host countries to FDI.  Rather, they would make a limited but valuable
contribution by enhancing legal certainty for investors.  With respect to the comment by India that
host country governments needed to be able to impose conditions on foreign investment, he stated thatWT/WGTI/M/14
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India's interpretation of Korea's experience would appear to be different from the conclusions drawn
by Korea.  The notion that host countries needed to be able to impose conditions on foreign
investment was in contradiction with the fact that experience had demonstrated that the imposition of
conditions on FDI was often not an effective policy instrument.  For example, available evidence
indicated that investors were reluctant to use their best technology in host countries if faced withconditions imposed upon them by host countries.
24. The representative of Argentina, referring to the comments by the European Communities,
stated that the question of the relationship of FD I and the quality of technology transferred to host
countries required further analysis.  FDI did not necessarily entail a transfer of the best technology by
a foreign investor.  Rather, depending upon the structure of the particular market, foreign investors
sometimes preferred to use less advanced forms of technology, for example in the case of captive
markets.
25. The representative of the European Communities stated that FDI was a major channel for the
transfer of technology, but that there was no mechanical relationship between the presence of FDI and
the transfer of technology.  In order to realize the potential of FDI to contribute to transfer of
technology host countries needed to develop a capacity to absorb and benefit from imported
technology.  In addition, effective transfer of technology could be impeded by certain marketconditions.  For example, the lack of competition in a protected market reduced the incentive for
investors to use their best technology.  However, the imposition of a transfer of technology
requirement in such a protected market environment was not an efficient policy instrument.
26. The representative of the United States wondered whether the reference by India to bilateral
investment treaties included the bilateral investme nt treaties concluded by the United States which
provided for national treatment and Most-Favoured-Nation treatment with respect to the pre-
establishment phase.  Concerning India's reference to Korea's experience with FDI and transfer of
technology, she recalled that in its written contribution on this topic Korea had actually argued against
the use of transfer of technology requirements.
27. The representative of Norway, referring to the observation in India's contribution in
WT/WGTI/86 that "quality FDI" brought with it not only capital but also intangible assets such as
technology, entrepreneurship, management skills and employment, highlighted the role of FDI in
various stages of Norway's industrial development.  FDI had been of major importance as a source of
capital and technology in the process of rapid industr ialization that had occurred in Norway during the
first decades of the last century on the basis of the introduction of hydro-electrical power.  The
substantial inflow of FDI during this period had resulted in a deficit on the balance of payments.
Similarly, foreign capital and technology associated with FDI had played a major role in the processof reconstruction following the second world war and in the development of Norway's oil and gas
extraction industry since the late 1960s.  Regardin g India's views on the issue of policy flexibility, he
stated that the advantages of such flexibility in enabling countries to adopt policies suited to their
individual development needs should be seen in conjunction with its negative impact in engendering
short-term policies which reflected pressures from various special interest groups.  Norway'sexperience, for example in the context of the WTO and the EEA, was that international rules could
help governments confront such pressures when economic policy changes were necessary.  Likewise,
the flexibility provided for under bilateral investment treaties might lead to a lack of predictability and
transparency and to discrimination.  In addition, handling a host of bilateral investment treaties might
create domestic as well as external conflicts.  While not contesting the value of bilateral investmenttreaties, his delegation considered that in the absence of  a broader, multilateral framework it was
difficult to ensure consistent treatment of investors.  Regarding India's observations on the issue of
performance requirements, he considered that it might be useful to address the issue of the different
perceptions of what constituted a performance requirement.  In this respect, he questioned whether
requirements with which foreign investors were expected to comply pursuant to domestic health,WT/WGTI/M/14
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environmental and safety regulation could be considered as performance requirements.  The article by
Hoekman and Saggi mentioned in India's contribution raised the important issue of whether
investment incentives should be addressed.  A key question in this context was whether subsidies and
investment incentives were comparable.  Finally, the elements that were mentioned in the concluding
section of India's contribution, including non-di scrimination, predictability, transparency, pre-
establishment and post-establishment, warranted a more focused discussion in the Working Group.
28. The representative of Costa Rica stated that the positive role of bilateral investment treaties
was generally recognized, but that the proliferation of such treaties in recent years had given rise to
problems of discrimination and lack of transparency which needed to be addressed in the context of
the WTO.  In addition to generating a lack of transparency and predictability for investors, existing
agreements failed to address the trend toward concentration of FDI inflows on a small number of
countries.  His delegation disagreed with the assertion that an investment agreement in the WTOwould constrain the ability of countries to pursue their development policies.  Existing WTO rules in
the field of trade in services, which also covered investment, did not limit the authority of
governments to regulate and to pursue development policies.  On the contrary, such rules provided an
appropriate framework within which such polic ies could be pursued in a transparent and non-
discriminatory manner.
29. The representative of Malaysia stated that his delegation remained unconvinced of the need
for multilateral rules on investment in the framework of the WTO and that Malaysia's interests were
best served by bilateral investment treaties.  He wondered whether the European Communities and
other proponents of multilateral investment rules were prepared to envisage the possibility of
permanent carve outs of sectors and policies from the scope of the national treatment requirement.  Inresponse to the comments by Norway on the difficulties generated by bilateral investment treaties in
the absence of a multilateral framework, he stated that his delegation viewed the benefits of such
treaties primarily in terms of the assurances whic h they offered with regard to the treatment and
protection of the investors from the parties to such treaties.  At the same time, the Most-Favoured-
Nation clauses contained in such treaties protected investors from the risk of discrimination ascompared to investors from third countries.  Thus, the concern expressed regarding the possible
discriminatory effects of bilateral investment treaties was unfounded.
30. In response to the question posed by Malaysia, the representative of the European
Communities stated that most WTO rules, with the possible exception of rules on transparency, were
subject to exceptions, and that it was obvious that a multilateral framework on investment based on
WTO principles would also contain exceptions.  The nature and scope of such exceptions were a
matter for negotiation.  The national treatment obligation of the GATT, which was subject topermanent exceptions, and the national treatment obligation of the GATS, which was applied in the
context of a bottom-up approach to specific commitments, were illustrative of different possible
approaches to provide flexibility in the application of a national treatment rule.
31. The representative of the United States stated that even the principle of transparency was
sometimes qualified, as illustrated by the provisions on confidential information in Article 63 of the
TRIPs Agreement.
32. The representative of Malaysia stressed that the question which he had raised pertained to the
possibility of permanent carve outs, as distinguished from the kind of approach embodied in the
GATS.  The concern with that GATS approach advocated by many delegations was that over time it
would generate pressure on countries to assume additional commitments in sectors in which they hadinitially not assumed obligations.  In response to the comments by some delegations that bilateral
investment treaties entailed greater costs than a mu ltilateral framework, he stated that the difficulties
currently encountered by developing countries in obtaining extensions of the transition period in the
TRIMs Agreement illustrated the kind of problems developing countries were likely to face if theirWT/WGTI/M/14
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development needs required a modification of commitments undertaken in the context of a
multilateral investment agreement.
33. The representative of the European Communitie s stated that the notion of permanent carve
outs advanced by Malaysia was a new concept that might perhaps merit further consideration, but that
the proposal made by the European Communities for investment negotiations in the WTO alreadyprovided sufficient flexibility for countries to pursue developmental and other domestic policy
objectives.  In response to Malaysia's concern about pressures exerted on countries to assume further
liberalization commitments, he stated that there was no mechanism in the WTO by which countries
could be compelled to liberalize against their will.  Rather, WTO Members engaged in new
negotiations only when they deemed it in their interest to do so.
34. The representative of Japan stated that Japan did not deny the importance of bilateral
investment treaties, as evidenced by the fact that Japan was currently in the process of negotiating
several such treaties.  However, since the content of such treaties was determined by the economic
conditions of the two parties involved, they were inadequate as a means to secure a consistent
investment environment on an international basis.  In consequence, the fact that bilateral investment
treaties were useful did not detract from the need for multilateral rules on investment to complement
such treaties.  Regarding the notion of flexibility, he stated that the importance of flexibility in the
context of investment rules was generally recognized, but that flexibility used to discriminate against
certain investors was problematic.  It was therefore necessary to ensure that flexibility was exercised
consistently with WTO rules.
35. The representative of Hungary noted that at the meeting held in October 2000 India had made
reference to a paragraph in Hungary's contribution in WT/WGTI/W/83 on the role of government
intervention in addressing certain policy challenges arising in connection with FDI.  India had
suggested that these policy challenges warranted a case-by-case screening of investment.  In fact,
however, as stated in paragraph 19 of WT/WGTI/W83, Hungary's experience was that it was possible
to address such problems without resort to the use of screening mechanisms.
36. The representative of Korea, referring to the comments by the United States and to his
delegation's contribution in WT/WGTI/W/82, stated that the conclusion from Korea's experience with
FDI and the transfer of technology was that the appropriate policy was to refrain from imposing
discretionary conditions on foreign investors and to invest in infrastructure and training.  In respect of
the issue of the advantages and disadvantages of bilateral investment treaties and multilateral rules, he
considered that a disadvantage of existing bilateral investment treaties was the lack of an integrated
approach to the pre-establishment and the post-est ablishment phase of investment.  Although it was
difficult to predict whether investment flows would actually increase as a result of the establishmentof a multilateral framework, his delegation was convinced of the potential long-term benefits of such
a framework in that it would enhance transparency and predictability and thereby lead to more stable
FDI flows and contribute to overall economic growth and development.
37. The representative of Switzerland stated that, notwithstanding that a multilateral agreement
on FDI would not lead to significant increases in FDI flows, such a multilateral framework was
preferable to the very large number of existing bilateral investment treaties.  The GATT and GATS
demonstrated how in the fields of trade in goods and trade in services multilateral rules, which
provided for flexibility to take into account the needs of individual countries, had been found to be
more efficient than bilateral treaties.  A multilateral framework of rules on investment would ensure
non-discrimination and a consistent treatment of investors.  He acknowledged that the negotiation ofsuch a framework would raise difficult questions  that required careful consideration, such as
performance requirements and investment incentives.  In respect of the view expressed in the study
referred to by India that priority should be gi ven to the GATS before considering the adoption of
investment rules, he stated that investment rules should apply not only to services but also to otherWT/WGTI/M/14
Page 10
sectors of economic activity.  In response to the question raised by Malaysia, he considered that an
investment agreement based on the GATS model of positive commitments would provide for an
appropriate degree of flexibility to accommodate the circumstances and levels of development of
individual countries.
38. The representative of Chile stated that the establishment of multilateral rules on investment
would provide for a more homogeneous internati onal framework and thereby enhance predictability
for investors.  In addition, it would reduce the considerable administrative costs to governments of
negotiating myriad bilateral investment treaties.  Such a multilateral framework could go beyond the
existing bilateral investment treaties by build ing on the GATS approach to pre-establishment
commitments to create a single, integrated fr amework for investment in goods and services.
39. The representative of India stated that it was clear from the debate that it was generally
acknowledged that a multilateral framework of rules on investment would not guarantee an increase
in FDI inflows into developing countries.  In a ddition, the implications of such a framework for the
balance-of-payments positions of countries were complex, and there were divergent views among
Members on whether a positive relationship existed between FDI and the transfer of technology.  It
thus appeared that the main arguments advanced in favour of a multilateral framework on investment
pertained to the contribution that such a framework could make to enhancing transparency andpredictability.  In the view of his delegation these arguments were not compelling.  Given that there
was ample information available on bilateral investment treaties, the existence of a large number of
such treaties could not be considered to have caused a problem of lack of transparency that would
warrant the creation of multilateral rules.  Similarly,  bilateral investment treaties adequately provided
for predictability for the investors of the parties concerned while taking into account the specificcircumstances of individual countries, which would be difficult if a uniform, multilateral approach
were adopted.  On the other hand, while the alleged advantages of multilateral rules on investment in
the WTO in terms of enhanced transparency and predictability were questionable, such rules would
certainly entail costs by exposing countries to the risk of WTO dispute settlement proceedings.
40. The Working Group took note of the statements and agreed
 to revert to Item I of the Checklist
at its next meeting.
B. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT (ITEM II
OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY)
(i) New written contributions
41. The representative of Canada introduced a contribution (WT/WGTI/W/97) which
summarized the findings of a recent report on foreign investment barriers that had been undertaken by
the Canadian Chamber of Commerce in partnership with the Department of Industry.  She recalledthat at the meeting held in October 2000 the Eur opean Communities had informally circulated the
results of a similar survey of attitudes of European firms toward international investment rules and of
obstacles to foreign investment experienced by European investors.  Based on a survey of responses
from some 70 Chamber of Commerce member companies, the report provided detailed information
on the kinds of impediments or barriers encountered by businesses, the regions involved andindustries affected, the transparency of the implementation of the barrier, the degree of restriction to
Canadian investors and the importance of safeguarding Canadian investments abroad.  The main
findings of the report were that 28 per cent of the respondents had faced restrictions in one form or
another over the past five years; that 38 per cent of the barriers identified had resulted in the
investment being cancelled or suspended;  and that 43 per cent of these barriers had resulted in theterms of the investment being altered.  The report had also found that 71 per cent of the identified
barriers were in countries outside of the OECD;  that 56 per cent of the restrictions were transparent
barriers, while 19 per cent of the restrictions involved non-transparent barriers;  and that 25 per centWT/WGTI/M/14
Page 11
of the restrictions involved discretionary decision-making on the part of host country governments.
The report concluded that for Canada, with an in ternationally-oriented economy, the creation of a
commercial environment that was based on rules, transparency, openness and predictability was
critical for future economic prosperity.  In response to a question by the representative of India, she
stated that the report, which was available on th e Government of Canada's investment website,
provided extensive information on the nature of the barriers covered by the survey.
42. The representative of Korea highlighted the findings in the report that 56 per cent of the
restrictions involved transparent barriers, that 38 per cent of the barriers had resulted in the investment
being cancelled or suspended, and that 43 per cent had resulted in the terms of the investment being
altered. These figures illustrated the substantial costs engendered by investment restrictions.
43. The representative of Canada also introduced a written contribution (WT/WGTI/W/98)
describing the Industry Canada research programme that had been conducted over the last several
years.  Through its micro-economic research programme, Industry Canada had been in the forefront in
efforts to promote an understanding of the nature and the effects of FDI, including FDI of foreign
firms in Canada and FDI by Canadian firms in other countries.  The results of these research
undertakings were quite extensive and were documented in several volumes in the Industry Canada
research series as well as in a number of Industry Canada working papers, discussion papers andoccasional papers.  While the research programme had been undertaken in the context of Canada's
economic experiences, its results were instructive more generally and might be helpful in the
analytical and educative work of the Working Group.
44. The representative of Switzerland stated that the research programme described in
WT/WGTI/98 was highly relevant to the work of the Working Group in that it covered a broad range
of aspects of Canada's experience with FDI as well as a number of important theoretical subjects.
(ii) Investment incentives
45. The representative of Singapore made a statement on the benefits of investment incentives.1
The debate in the Working Group on investment incentives should be more balanced and not be
focused only on the alleged trade- or investment-distortive effects of incentives.  His delegationdisagreed with the proposal made at a previous meeting by Hong Kong, China for a Secretariat study
on the applicability of the Agreement on Subsidies and Countervailing Measures (ASCM) to
investment incentives.
46. The representative of India stated that his delegation was still reflecting on the issue of
investment incentives.  A fundamental question was whether incentives could distort FDI flows, and,
if so, whether there was a willingness to contemplate disciplines.
47. The representative of Canada considered that there were a number of questions that might
usefully be explored with regard to investment incentives.  Over the past few decades international
investment flows had increased dramatically and both developed and developing countries had
become more conscious of the importance of investment for their economies.  Governments had come
to value the role of international investment as an engine of growth and job creation and a source of
competitiveness, including through the introduction of new technologies and managerial skills.  At thesame time, more and more governments appeared to compete to attract investment.  As noted by
Singapore, such competition could have beneficial effects by inducing governments to strengthen
economic fundamentals, improve infrastructure and reduce the restrictive and discriminatory elements
of their investment regimes.  On the other hand, however, global competition for FDI might also have
unforeseen and negative effects.  For example, bidding wars could have a particular negative impact
                                                     
1Circulated in document WT/WGTI/W/99.WT/WGTI/M/14
Page 12
on smaller economies which did not have the resources to compete.  There might also be a
distortionary impact on the allocation of capital.  For these reasons, Canada believed that the area of
incentives merited further discussion and analysis by the Working Group with regard to the range of
issues that had been raised.
48. The representative of the European Communities stated that the ASCM applied to investment
incentives to the extent that incentives were subsidie s, but that because of its focus on trade effects the
Agreement was not effective in avoiding distortions to investment flows.  Referring to the questions
raised by India, he considered that available evidence indicated that investment incentives had the
potential to distort investment flows and that international disciplines were therefore warranted.
While various policy reasons could be advanced in favour of the use of investment incentives, as
argued by Singapore, there were also many reasons  why disciplines on the granting of incentives were
necessary, including the "race to the bottom" effect, the disparities between countries in terms of theirfinancial capacity to grant such incentives and the inefficient resource allocation resulting from
incentives.  Whether such disciplines should be similar to those contained in the ASCM was a matter
for further consideration.  An underlying principl e of the ASCM that could usefully be applied to
disciplines on investment incentives was that disciplines on the trade-distorting effects of subsidies
needed to be accompanied by a recognition of the role of subsidies in the pursuit of domestic policy
objectives.
49. The representative of Argentina agreed with the views expressed by the European
Communities.  The capacity to grant incentives varied greatly among countries, including among
developing countries.  The case of the automobile sector amply illustrated how incentives could
distort trade.
50. The representative of Australia stated that in Australia's experience incentives definitely had
the potential to distort investment flows and her delegation therefore wished to explore this subject
further, especially with regard to the question of  whether incentives were trade-distorting subsidies
and their effects in distorting competition.  Her delegation supported the right of each government to
develop and use the policy tools it deemed appropriate to attract investment, but it also agreed thatcertain disciplines were necessary to avoid distortions.
51. The representative of Hong Kong,China recall ed that on previous occasions his delegation
had emphasized the importance it attached to further work on the issue of investment incentives.  In
particular, further study was necessary to determine under what conditions the use of incentives had
undesirable effects.  In this respect, he reiterated the proposal made by his delegation at previous
meetings for a factual study by the Secretariat on the applicability of the ASCM to investment
incentives.  The Group's discussion on the balance-of-payments implications of FDI illustrated howsuch a study by the Secretariat could stimulate debate among Members.  Because the Working Group
was a forum for educational work and was not engaged in a negotiation, he disagreed with the view
that its work should be based only on contributions by Members.  While Members could, of course,
provide their own contributions on the scope of the ASCM in relation to investment incentives and its
drafting history, a study by the Secretariat would be more neutral and objective.  The preparation ofsuch a study was entirely consistent with the practice of the WTO, in particular in light of the fact that
Secretariat background notes were sometimes even used in the context of negotiations.  In any event,
a note by the Secretariat along the lines suggested by his delegation would not constrain Members'
ability to grant incentives.
52. The representative of the United States stated that before it could support the proposal for a
factual study by the Secretariat her delegation wished to have further discussion from the perspective
of Members.  In addition, her delegation considered that discussions in the Working Group should
focus on more traditional investment issues, such as transparency and Most-Favoured-NationWT/WGTI/M/14
Page 13
treatment and national treatment.  Investment agreements traditionally had not focused on investment
incentives beyond those related to performance requirements.
53. The representative of Mexico stated that studies that had been reviewed by the Working
Group and several contributions submitted by individual Members provided evidence of the potential
of investment incentives to distort trade and investment flows, especially when incentives weregranted in the context of competition between countries to attract investment.  It was therefore
necessary to explore what kind of multilateral disciplines could address such distortive effects.  She
reiterated her delegation's support for the proposal by Hong Kong, China for a study by the Secretariat
of the applicability of the ASCM to investment incentives.  With regard to Singapore's argument that
investment incentives served useful policy purposes, such as to correct for poor economic
fundamentals or to direct investment to particular regions of a host country, she considered that, as
explained in her delegation's contribution in WT/WGTI/W/64, investment incentives were oftensecond-best policy instruments which in most cases did not attain the stated objectives.  Instead of
attempting to compensate for the effects of market failures, policies should be aimed at the causes of
such failures.  For example, if the objective was to enhance the attractiveness of a particular
disadvantaged region to FDI, the optimal policy was to invest in infrastructure.  In addition to being
sub-optimal policy instruments, investment ince ntives generated significant costs in terms of
discrimination against small firms and domestic investors, rent-seeking behaviour and inefficient
allocation of capital which had a negative impact on the host country's comparative advantage.
54. The representative of Japan stated that whether incentives had a distorting effect depended
upon how one defined the meaning of distortions in this context.  His delegation did not consider that
investment rules should regulate all possible distorting practices.  The appropriate definition of whatconstituted a distortion that needed to be addressed in such rules should be determined in negotiations.
55. The representative of Hungary agreed with the views expressed by the European
Communities, Argentina, Australia, Mexico and Hong Kong China.  His delegation supported Hong
Kong China's proposal for a Secretariat study.
56. The representative of Poland stated that the subject of investment incentives was very
important and required further deliberations in the Working Group.  She noted that competition
between governments to attract FDI occurred especially in relation to greenfield FDI which had
remained stable, as distinguished from FDI in the form of mergers and acquisitions which had
increased substantially in recent years.  Recent studies suggested that investment incentives perhaps
had more positive than negative effects and that they  influenced the relative attractiveness to foreign
investors of countries within the same region but did not affect choices by investors between countries
that were located in different regions of the world.
57. The Working Group took note of the statements and agreed  to revert to Item II of the
Checklist at its next meeting.
C. STOCKTAKING AND ANALYSIS OF EXISTING INTERNATIONAL INSTRUMENTS
AND ACTIVITIES REGARDING TRADE AND INVESTMENT (ITEM III OF THE
CHECKLIST OF ISSUES SUGGESTED FOR STUDY)
(i) WTO provisions on matters related to investment
58. No statements were made on this indent of Item III.WT/WGTI/M/14
Page 14
(ii) Bilateral, regional, plurilateral and multilateral agreements and initiatives;  implications for
trade and investment flows of existing international instruments
59. The representative of the European Communities drew attention to two regional seminars that
had been organized by his delegation.  The first had been held in Santiago de Chile in November 2000
and had been co-hosted by the Government of Chile.  The second seminar had been held in CapeTown in February 2001 and had been co-hosted by the Government of South Africa.  The seminars
focused on four possible subjects for negotiation in the WTO:  investment, competition, environment
and trade facilitation.  The aim of the seminars was to provide for informal discussion with capital-
based policy makers in the two regions concerned.  Representatives of the business community and
academic experts had also participated.  Care had been taken to present the full spectrum of differing
views on these subjects.  Specifically with regard to investment, the debate at these seminars had
revealed that there was wide support for the view that stability, transparency and non-discriminationplayed a role as one of the factors that determined the attractiveness of host countries to FDI.  The
importance of the degree to which countries were integrated into the international economy had also
been emphasized.  The need for a gradual approach to investment liberalization had been highlighted,
especially in respect of capital movements.  In respect of investment incentives, it had been remarked
that they were already covered to some extent by  existing WTO rules and that they could adversely
affect the interests of the poorer developing countries.  At the same time, it had been argued that there
was a need for developing countries to retain the capacity to provide certain incentives.  Another
theme that had attracted attention was the need for special and differential treatment of developing
countries in the design of international investment rules, which should not simply be in the form of
exemptions.  In the case of the African seminar, attention had been drawn to the problem of theexistence of risk perceptions that were not in line with actual economic conditions and to the role of
multilateral investment rules in bridging this gap between perception and reality.  However, it had
been acknowledged that international rules could not  solve problems of lack of political stability and
other structural problems.  The risk of investment policies being captured by special interests of
powerful foreign or domestic investors had been highlighted, in which connection it had been arguedthat multilateral rules could help countries resist pressure from such interests.  A very prominent
theme of discussion had been the issue of the need for flexibility for developing countries.  Finally,
the specific needs of developing countries for technical assistance in an investment negotiation had
been discussed.
60. The representative of Japan stated that an APEC regional seminar on investment had taken
place in Manilla in November 2000, organized by the Government of the Philippines and the
Government of Japan, and that a bilateral seminar on investment had been held in Beijing in February2001.
61. The representative of the OECD made a st atement on recent OECD work on investment.
2
62. The representative of UNCTAD made a stat ement on recent UNCTAD work on investment.3
63. The Working Group took note of the statements made and agreed to revert to Item III of the
Checklist at its next meeting.
                                                     
2Circulated in document WT/ WGTI/W/100.
3 Circulated in document WT/WGTI/W/101.WT/WGTI/M/14
Page 15
D. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY
(i) New written contributions
64. The representative of Korea introduced a written contribution on the GATS and its
implications for an investment agreement (WT/ WGTI/W/96).  He emphasized that, in accordance
with the educational character of the work of the Working Group, the sole purpose of this contributionwas to facilitate discussions in the Working Group without prejudice to any Member's views.  The
contribution identified major elements of investment rules:  MFN treatment and national treatment;
progressive liberalization and free transfer of payments; provisions on transparency and standstill and
on expropriation and compensation and other investment protection measures;  provisions on
performance requirements and investment incentives; and special provisions on developing countries
and technical assistance.  In view of the flexibility provided for in the GATS, the importance of
developmental considerations in the GATS and the fact that the GATS already contained most of theabove-mentioned major elements of investment rules, Korea considered that the GATS could serve as
a benchmark in formulating multilateral rules on investment in the WTO.  However, it was necessary
to address certain issues that were dealt with in other international investment agreements but not in
the GATS, including expropriation and compensation and performance requirements.  In considering
how the GATS model could provide a basis for multilateral rules on investment, the Working Groupcould usefully discuss a number of questions at a technical level:  whether the services sector should
be included in new investment rules or whether su ch rules should apply only to non-services sectors;
how to bridge the differences between the definition of investment in a multilateral framework and the
concept of "commercial presence" in the GATS;  how to treat and define the scope of specific market-
access commitments in the GATS;  how GATS provisions relating to transparency and domesticregulation, monopoly suppliers, business practices and safeguard measures, transfers of funds and
balance-of-payments measures should be applied in a multilateral framework;  in particular, whether
they should apply equally to the pre-establishment and the post-establishment phases and whether
they should be defined as conditional or unconditional principles; and how to address other elements
of investment rules not dealt with by the GATS, such as incentives, performance requirements andexpropriation and compensation.
65. The representative of Switzerland stated that regarding the pre-establishment phase his
delegation agreed with the views of Korea on the desirability of a bottom-up approach as the basis for
multilateral investment rules.  With regard to the post-establishment phase, attention needed to be
paid to performance requirements, investment protection, investment incentives, and the relationship
of multilateral investment rules in the WTO to the GATS, the TRIMs Agreement, the ASCM,
bilateral investment treaties and other international agreements.  The questions posed by Korea at theend of its contribution would help facilitate a more focused discussion in the Working Group.
66. The representative of Hungary, referring to his delegation's position on a realistic approach to
multilateral investment rules in the WTO, agreed  with Korea that the GATS, which covered FDI
through its commercial presence mode of supply, could serve as a model for an agreement on
investment in the WTO.  The GATS covered many important issues that should be included in suchan agreement, provided a considerable degree of flexibility and had operated to the satisfaction of
Members.  In respect of paragraph 4 of Korea's communication, he noted that the national treatment
provision in the GATS was not only conditional on the existence of specific commitments in a
particular sector but was also subject to conditions and qualifications set forth in schedules of
commitments of individual Members.  The obligation in GATS Article III:1 regarding the promptpublication of all relevant measures of general application pertaining to, or affecting, the operation of
the GATS was not absolute as Article III:2 provided that, if publication of such information was not
practicable, Members were required to make it otherwise publicly available.  He also drew attention to
the requirement of Article III:3 of the GATS that Members inform the Council for Trade in Services
of the introduction of relevant new laws, regulations and administrative guidelines and of changes toWT/WGTI/M/14
Page 16
such laws, regulations and guidelines.  In respect of the comments in Korea's communication on
standstill provisions in the GATS, he noted that the GATS required Members seeking to modify or
withdraw a commitment to enter into negotiations with a view to reaching an agreement on any
necessary compensatory adjustments, and that Memb ers were required to endeavour to maintain a
general level of mutually advantageous commitments.  Most of the questions posed by Korea inparagraph 11 of its communication would become relevant after a decision had been taken at the next
Ministerial Conference to establish a mandate for negotiations on investment, but at this time it was
perhaps premature to consider these questions in detail.
67. The representative of the European Communitie s shared the view that the GATS was a very
useful model for a possible investment agreement in the WTO, especially in regard to issues such as
market access, but that it would be necessary to go beyond the GATS in respect of certain subjects not
addressed in the GATS, including performance requirements and investment incentives.  Heconcurred with Hungary that the questions posed by Korea in paragraph 11 of its communication were
very pertinent but that they could only usefully be addressed once a decision had been taken to
negotiate investment rules in the WTO.
68. The representative of India stated that his delegation was concerned that Korea's
communication went beyond the mandate of the Working Group, and in this respect he welcomed
Korea's statement that this communication was without prejudice to the views of any Member.  With
respect to paragraph 4 of Korea's communication, he observed that a central feature of the GATS
which provided flexibility to developing countries was that national treatment was not a general
obligation but applicable only to the extent Members had made specific commitments, which were
subject to conditions and qualifications inscribed in a Member's schedule.  One fundamental problemwith Korea's communication stemmed from the notion of the GATS as a bottom-line or starting-point.
This seemed to imply that the objective was to achieve a higher level of ambition over time and that
developing countries that had entered into a negotiation in good faith on the basis of certain
parameters would eventually face pressures to assume higher levels of obligation.  Another basic
concern with Korea' communication arose from the fa ct that the questions in paragraph 11 seemed to
contemplate a consideration of possible amendments to the GATS, the TRIMs Agreement and the
ASCM, which would have far-reaching implications.  In sum, his delegation considered that Korea's
communication failed to provide a precise indicat ion of the level of ambition sought by the
proponents of investment negotiations in the WTO.  Rather, it raised additional questions and
concerns by referring to the GATS as a bottom line or starting point and by suggesting that an
investment negotiation might engender amendments to existing WTO agreements.
69. The representative of Brazil considered that an approach based on the GATS was consistent
with the idea of a realistic approach to a possible multilateral framework on investment in the WTO
because of the extensive flexibility provided for in  the GATS through the positive list approach and
through the exemptions from MFN treatment.  He seconded the comments by Hungary and India on
the statements on national treatment and transparency in paragraph 4 of Korea's contribution.  The
flexibility enjoyed by developing-country Members with regard to the scheduling of specificcommitments enabled them to apply conditions aimed at achieving the objective of Article IV of the
GATS to increase the participation of developing coun tries in trade in services and to include in their
schedules provisions on performance requirements and investment incentives.  Referring to the
comments by India, he observed that, if the objective was to develop a realistic approach, one should
be careful in using the concept of the GATS as a starting point.  He agreed with previous speakers thatthe questions in paragraph 11 were important but that addressing them at this time might be
premature.  He asked Korea to explain what was meant by the question raised in the third bullet in
paragraph 11 of how to treat and define the scope of market-access commitments in the GATS.
70. The representative of Chile stated that the GATS was a good model for an investment
agreement in so far as it provided for liberalization on the basis of a positive list approach, but that inWT/WGTI/M/14
Page 17
other respects further consideration was necessary of whether the principles applied to trade in
services could also be applied to investment.  The questions in paragraph 11 of Korea's
communication could only be addressed at a later stage once it had been decided to negotiate on a
multilateral framework on investment and having regard to further negotiations in the framework of
the GATS.  She noted that in most countries regulations applicable to investment did not distinguishbetween services and non-services sectors.  Referring to the comments by India she observed that,
while it was true that national treatment in th e GATS was not a general obligation, account should
also be taken of the fact that most Members were parties to bilateral investment treaties in which
national treatment was a general obligation in the post-establishment phase.  Regarding the comments
made on Korea's reference to the GATS as a starting-point, she observed that for her delegation the
starting point in an investment negotiation in the WTO would not be the GATS as such but rather the
specific commitments made by Members in respect of the commercial presence mode of supply.
71. The representative of the United States recalled that at previous meetings, especially the
meetings held in 2000, her delegation had expressed its views on the general notion of the GATS as a
model for an investment agreement.
72. The representative of Japan agreed with Korea that the Working Group was an educational
forum and that the work in the Group was not intended to prejudge the positions of Members on the
issue of the negotiation of a multilateral framework on investment.  He shared Korea's view that the
GATS could be refered to as a benchmark when formulating investment rules in the WTO.  He agreed
with previous speakers that the questions posed  in paragraph 11 might be somewhat premature.
73. The representative of the European Communities, responding to the comments made by India,
stated that the GATS could be regarded as a bottom line in the sense that many questions that had
been discussed in this Working Group were not addressed by the rules of the GATS, including
investment protection and subsidies.  He agreed with India that a negotiation on investment rules
should not give rise to amendments to existing WTO agreements.  Thus, in the case of the GATS, any
amendments could only result from the ongoing process of negotiations in the framework of the
GATS.  On the other hand, an investment negotiation would necessarily have to deal with thequestion of how to ensure coherence between possible investment rules and existing WTO agreements
in areas such as services, subsidies and TRIMs.
74. The representative of Malaysia noted the statement by Korea that its contribution was without
prejudice to any Member's position on the need for investment rules in the WTO.  The references to
the possible inclusion of rules on performance requirements and investment incentives and possible
amendments to the ASCM and the TRIMs Agreement reinforced the view that what was envisaged
was to use the GATS as a building block to construct a more ambitious agreement.  In this respect, thecomments by the European Communities had not alleviated his delegation's concerns regarding the
concept of the GATS as a bottom line.  Referring to his remarks earlier at the meeting on the need for
permanent carve outs for developing countries, he stated that the Korean communication focused on
liberalization without addressing the need for flexibil ity for developing countries.  If it was intended
to arrive at a consensus in this Group on a negotiating mandate from Ministers, it was incumbent uponthe proponents of investment negotiations in the WTO to assure other Members that a GATS
approach would adequately accommodate the developmental policies and programmes of developing
countries.  The questions in paragraph 11 of Korea's contribution should only be discussed when the
Group was given a new mandate by ministers to negotiate an investment agreement.
75. The representative of Korea, referring to the comments that had been made on paragraph 4 of
WT/WGTI/W/96, stated that because this paragraph was intended to provide a succinct description of
the main investment-related provisions of the GATS certain details might have been omitted.
Regarding the notion of the GATS as a starting-point or bottom line, he agreed with the comments by
the European Communities, Chile and Japan, and stated that these terms should be understood in theWT/WGTI/M/14
Page 18
sense of the GATS as a reference point.  In response to the view that the questions raised in paragraph
11 were premature, he stated that the primary objective of his delegation was to encourage thinking
about questions that would inevitably arise in case the GATS model were used to design investment
rules for non-services sectors.
(ii) Further discussion of contributions submitted in 200076. The representative of the European Communities recalled that in June 2000 his delegation had
introduced a communication (WT/WGTI/W/84) which showed that international investment rules,
especially multilateral rules, need not be incompatib le with the pursuit of domestic policy objectives.
The issue addressed in this communication of flexibility to accommodate domestic policy objectives
was important for all countries and should be distinguished from the particular flexibility that might
be necessary with respect to developmental concerns.  The communication analysed how provisions
of existing international investment rules in the ar eas of market access, the standards of treatment
applicable to the post-establishment phase of inve stment and the preferential treatment of foreign
investment enabled countries to pursue domestic policy objectives.  Regarding market access, existing
rules provided for varying degrees of flexibility, with  the highest degree of flexibility provided by the
bottom-up approach which his delegation proposed to use in negotiations on an investment agreement
in the WTO.  On the issue of standards of trea tment, the analysis in the paper concluded that
international investment rules need not affect domestic policies in the area of employment and
environmental protection because such policies could effectively be applied by countries on a non-
discriminatory basis.  Finally, if countries wish ed to grant preferential treatment to foreign
investment, this could be accommodated through exceptions to non-discrimination rules.
77. The representative of Hong Kong, China, referring to the discussion that had taken place at
the meeting in October 2000 on a communication by his delegation on transparency of the investment
environment (WT/WGTI/W/90), stated that past deliberation in the Working Group had revealed that
Members generally recognized the importance of a transparent global investment environment to
international investors, but that views diverged on the costs and benefits of new international
initiatives in this area.  This difference in view warranted further work aimed at achieving a betterunderstanding of the costs and benefits of new international measures to promote transparency of the
investment environment.  In this respect, he offered several considerations for further discussion.
First, benefits of possible new international initiatives to promote transparency should be weighed
carefully against their costs.  Second, there had to be an assessment of the needs of potential
beneficiaries of new transparency measures.  Third, possible new transparency rules should provide
sufficient guidance to Members on how they should comply with such rules.  For example a standard
form designed in connection with a notification requirement would help Members focus their effortson gathering essential information.  Fourth, the development dimension had to be at the core of
transparency provisions with respect to foreign investment.  Sufficient flexibility and capacity
building for certain categories of Members would need to be explored to accommodate the special
needs and concerns of developing countries. Finally, new transparency measures should not be
introduced unless full compliance was assured.   In this regard, there were useful lessons to be learntfrom the experience with notification requirements of the existing WTO agreements, notably the
ASCM.  Given the high costs of non-compliance, new transparency disciplines should be supported
by a strong collective will to fulfill the obligations involved.  He concluded by saying that Hong
Kong, China had no preconceived views on whether and how best to pursue more transparency on
investment policy in a WTO context and that the purpose of his intervention was only to identifyrelevant considerations concerning the costs and benefits of measures to promote transparency.
78. With regard to the issue raised in the contri bution by Hong Kong, China of the administrative
costs of measures to enhance transparency, the representative of Chile stated that such measures
would perhaps be less burdensome than sometimes  suggested because many countries had already
unilaterally taken steps to enhance the transparency of their investment regimes.WT/WGTI/M/14
Page 19
79. The representative of the European Communities stated that European investors had indicated
that one of the main problems they faced when in vesting abroad was the difficulty of acquainting
themselves within a reasonable period of time and at a reasonable cost with all relevant regulations
affecting the establishment of foreign investment and its treatment in the post-establishment phase.
This lack of transparency was mainly due to an in sufficient institutional capacity of host countries to
identify what particular kind of information was relevant to foreign investors and to disseminate such
information.  This capacity problem often resulted in risk perceptions that were not in line with
economic realities.  Consequently, while WTO provisions on notification and collective monitoring
would be useful, the issue of transparency of investment regimes should be addressed in a manner that
went beyond the traditional WTO approach.  In this connection, consideration should be given to the
possible role of the WTO with respect to technical assistance activities aimed at enhancing the ability
of host countries to analyze their investment re gime with a view to disseminating all relevant
information to foreign investors.  Referring to th e specific questions raised by Hong Kong, China in
WT/WGTI/W/90, he stated that all countries and investors would benefit from increased
transparency; that rules on transparency should apply to all levels of government; and that procedures
for the notification of legislation prior to its adoption would be useful but that it was unrealistic to
require such procedures in all cases.  He agreed with Hong Kong, China that the opportunities createdby new technologies such as the Internet to facilitate the dissemination of information should be taken
into account in the efforts by WTO Members individually or collectively to enhance transparency in
the area of foreign investment.  With regard to the question raised by Hong Kong, China concerning
possible exceptions to transparency provisions, he considered that this should be distinguished from
the question of the protection of confidential information.  There should be no exceptions to theprinciple of transparency of laws and regulations, but the question of the most practicable means to
ensure such transparency merited further consider ation, in particular in order to minimise the
administrative burdens on developing countries.  A strong commitment to provide technical assistance
would be necessary in this respect.
80. Regarding a written contribution introduced by Japan in October 2000 on the issue of the
definition of investment (WT/WGTI/W/92), the representative of Hungary stated that the definition of
investment in international agreements was always a matter for negotiation because this definition hadto reflect the particular objectives and ambitions of the parties to the agreement.  It was therefore not
possible to arrive at a single definition of investment in the Working Group outside the context of a
negotiation.  The analysis in Japan's contribution reinforced his delegation's view that a realistic
multilateral framework on investment should focus on foreign direct investment.  The representative
of the European Communities stated that for the purposes of the educational work in this Working
Group his delegation found particularly useful the distinction between FDI on the one hand, and
capital movements, particularly short-term capital movements, on the other.  This was a concept,
rather than a definition.  The refinement of this concept into an operational definition could only take
place in the context of negotiations on the nature of the substantive disciplines to which that definition
would apply.
81. The Chairman suggested that it was perhaps useful to consider the possibility of a more
structured debate at the next meeting along thematic lines.  One theme that might merit a more
focused discussion was the issue of how investment rules could provide for flexibility to
accommodate domestic policy objectives.
82. The Working Group took note of the statements made and agreed to revert to Item IV of the
Checklist at the next meeting.WT/WGTI/M/14
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E. DATE OF THE NEXT MEETING
83. The Chairman recalled that at its meeting of 16 November the Working Group had agreed
that its second meeting in 2001 would be held on 13 and 14 June and that at that meeting in June it
would take a decision on when to hold further meetings in 2001.
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