RESTRICTED
WORLD TRADE WT/WGTI/W/1
30May1997
ORGANIZATION(97-2280)
Original: English Working Group ontheRelationship
between Trade andInvestment
SUBMISSION BYTHE EUROPEAN COMMUNITY AND ITSMEMBER STATES
Background
AttheSingaporeMinisterialConferenceitwasdecidedto"establishaworkinggrouptoexamine
therelationship between tradeandinvestment". TheGroup should drawuponthework oftheWorking
Group ontheInteraction between Trade andCompetition Policy ifnecessary and"also drawuponand
bewithout prejudice tothework inUNCTAD andother appropriate intergovernmental fora".
TheGeneral Council willreview thework anddetermine aftertwoyears howthework shall
proceed. Possible negotiations would onlytakeplace afteranexplicit consensus decision byWTO
Members.
Thispaper isafirstcontribution tothework oftheWTO Working Group onInvestment.
Itpresents some ideas forawork programme fortheGroup.
Introduction
Foreign Direct Investment (FDI) hasbecome animportant partofgrowth anddevelopment
inevery country. FDIhascomplemented andcreated trade. Atleast40percentofworld trade is
intrafirmtrade,soexportscanbesaidincreasinglytofollowFDI.Countrieshavebecomeinterdependent
since markets fortraded goods andservices ontheonehandandforcapital ontheother havebecome
regional orglobal.
Inthelasttwenty years, world growth ofFDIhasbeenimpressive, outperforming thegrowth
oftradebythefactor four. Inmany developing countries, FDIhasreplaced official aidandprogrammes
asthepredominant source ofcapital inflow. Few, ifany,developing countries contest theeconomic
benefits ofFDItotheirdevelopment.
FDIhasbecome anessential element intoday'scomplex world ofcorporate investment, trade
andproduction strategies. Thedevelopment ofglobal instantaneous communications, datatransfer
andfreecapital movements hasresulted inthecreation ofanearglobal market place. Theworldwide
trend towards deregulation, privatization andopening ofmarkets hasgiven further boost tothis
phenomenon.
Asaresponse tothegrowth ofFDIitisnoteworthy thatmore andmore countries havecome
toconcludebilateralinvestmentprotectionagreements.Therearetodayabout1,300bilateralinvestment
protection agreements, where there were about 600intheearly nineties. Most ofthem havebeen
concluded between developed anddeveloping countries, butagrowing number ofbilateral investment
treaties isnegotiated between developing countries. Aprimary concern hasthusbeentoattract FDI
byproviding credible guarantees forinvestments made.WT/WGTI/W/1
Page2
There arealsosome multilateral worldwide agreements dealing withspecific aspects ofFDI
liketheMultilateralInvestmentGuaranteeAgency(MIGA)andtheInternationalCentrefortheSettlement
ofInvestment Disputes (ICSID), bothofthem having around 130signatories.
IntheWTO investment hasalready beenprominently ontheagenda. TheGATS setsstandards
forcommercial presence ofaservice provider inanother GATS Member state. TheTRIMs Agreement
addresses certain measures imposed oninvestors.
Attheregional level, theEuropean Community, OECD, NAFTA andAPEC havedeveloped
disciplines intheFDIarea. Also intheOECD, negotiations arecontinuing onacomprehensive
Multilateral Agreement onInvestment, which willbeopentonon-members ofthatorganization. The
EuropeanEnergyCharterTreatyisaregionalandatthesametimesectoralagreementcoveringprotection
andliberalization ofinvestment.
TheroleofWTO inFDI
Thispatchwork ofrulesisunsatisfactory andbeing increasingly seenasaninefficient andnon-
transparent framework formaking investments andprotecting investments abroad. Treatment accorded
toinvestment indifferent countries varies greatly. Acountry mayalsodiscriminate between investment
from different countries orevenlower thelevelofliberalization achieved.
Thepresent situation isparticularly unsatisfactory forsmall andmedium-sized enterprises which
donothavethemeans tomonitor andadapt totheever-changing conditions forFDIinthehostcountries.
They arelessabletodefend themselves against adverse government measures andoften willnottake
therisktogotoarbitration incaseofaconflict. Itiswithout question thattheyhavethemosttogain
from clear andstringent multilateral investment rules.
Thissituation demonstrates theneed, fromtheperspective ofbothstates andinvestors, tostart
adiscussion onthedeficiencies oftherules governing FDIinternationally atpresent andtoconsider
questions related tothedevelopment ofalevelplaying fieldworldwide forFDI. TheWTO isina
position tobeaninstrument inanswering these needs. Itsuniversal membership isanimportant
consideration inthisrespect. Onsubstance, thefactthattrade andinvestment areclosely interrelated
should make itthecentre forglobal discussions onthese issues. Inaddition, WTO already holds
considerable experience withregard toFDIintheframework ofGATS andTRIMs.
- TheWTOcouldusefullyexaminehowthestability,transparencyandpredictabilityofinvestment
regimes ofitsMembers canbeenhanced;
- There isarolefortheWTO toencourage allitsMembers irrespective oftheir level of
development toenact andapply atransparent investment regime;
- TheWTO could usefully examine which arethecoreprinciples ofinvestment regimes of
different countries andinternational organizations;
- TheWTO could explore whether itisfeasible toforesee theadoption byconsensus ofcertain
common binding principles onFDIinthefuture;
- TheWTO could assess theeffects ofFDIontrade andeconomic growth.
Developing countries haveaspecial interest inthedebate ontrade andinvestment. Withonlylimited
resources forscarce FDIattheirdisposal, thepromotion ofaworld-wide levelplaying fieldmayhave
aparticular appeal. Developing countries mayfacespacial difficulties withrespect tointroductionWT/WGTI/W/1
Page3
ofinternational rules; hence special consideration should begiven totheirparticular problems and
concerns. Inthiscontext, itshould benoted thatUNCTAD decided atitsMinisterial meeting inMidrand
(1996) tostartwork ontherelationship between investment anddevelopment. However, itwillbe
important tofoster thework ofUNCTAD notinisolation butcoherent with, andsupportive ofthe
WTO process.
Trade andinvestment policy perspectives
Many considerations influence decisions howtotrade andwhere tomake aninvestment.
However, stability, transparency andpredictability create aclimate conducive toFDI. Measures in
theFDIfieldtendtobeinfluencedbydifferentnationaltraditions,economicandadministrativestructures
andpolicies. Butdifferent legalandpolitical measures oradministrative procedures regulating FDI
sometimes alsocreate asituation fortheinvestor inwhich theoptimal decisions aredifficult tofind.
Economic, legalandpolitical stability inthemselves donotgivetheinvestor enough security
andprotection. These should beprovided bythebilateral investment protection agreements. However,
theirbilateral nature contributes often toalackoftransparency.
Globalization creates theneedforatransparent andpredictable environment fortheinvestor
worldwide. Thelarge variety ofdifferent rulesapplicable toinvestment indifferent countries creates
serious problems forinvestors intaking theinvestment decisions, inparticular forthesmall andmedium-
sized enterprises.
FDIinvolves anumber oftangible andintangible globally scarce assets, which explains the
international competition toattract FDI. Increased competition could leadtoaracetothebottom using
investment incentives toattract investment. Thismight undermine thebenefits countries tendtoexpect
fromforeigninvestmentintheirterritories.Therefore,theroleofvariousincentivestoattractinvestment
needtobeaddressed inorder tolimitcut-throat competition inthisarea.
Governments could alsohave aninterest tobalance afavourable investment climate by
encouraging good corporate citizenship offoreign investors.
Elements forawork programme
TheEuropean Community anditsMember States support agradual andprogressive work
programme fortheWorking Group onTrade andInvestment. Indefining itswork programme, the
Working Group should takeintoaccount work being doneinother fora, inparticular UNCTAD.
Inparticular, theEuropean Community anditsMember States areinterested todiscuss with
theirWTO partners thefollowing issues ontherelationship between trade andinvestment:
- Theeffects ofinvestment oneconomic growth, including increases inproductivity andshift
tohigher value-added industries asaresult oftransfer oftechnology andmanagement skills,
theimpact onnational balance ofpayments. Study ofempirical examples fromdeveloped and
lessmature economies isparticularly relevant inthiscontext;
- Thecomplementary nature oftradeandinvestment. Particular attention should bepaidtoany
special circumstances oftheleastdeveloped economies;
- Theeffects ofinvestment measures ontrade andtheeffects oftrade measures oninvestment,
including theeffects ofinvestment ontheeconomic structure ofbothhome andhosteconomy;WT/WGTI/W/1
Page4
- Examinetheeffectsofinvestmentincentivesoninvestmentflows.Thediscussionwillencompass
national investment policies, withparticular attention forthose designed toattract investments,
aswellasexisting barriers toinvestments;
- Assess thecurrent effect ofthelarge number ofbilateral andregional arrangements on
investment andtrade flows;
- Theidentification ofcommon elements andkeydifferences inexisting international agreements
withinvestment-related provisions, commencing withexisting WTO provisions which address
investment issues;
- Thepossible merit ofenhancing goodcorporate citizenship offoreign investors inaglobalized
economy;
- Major determinants ofcorporate decisions affecting theallocation offoreign direct investment.
Atalaterstage intheprocess, theWorking Group could, onthebasisofitsfindings, identify
keyissues fortheprospective development ofrelevant rights andobligations related toFDI.