WORLD TRADE
ORGANIZATIONWT/WGTI/W/33
8 April 1998
(98-1407)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM HONG KONG, CHINA
The following communication, dated 26 March 1998, was received from the Hong Kong
Economic and Trade Office with the request that it be circulated to Members.
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Identification of Differences, Possible Conflicts and Gaps in Existing
International Investment Instruments
I. INTRODUCTION
1. This submission presents Hong Kong, China's contribution to the Working Group on the
Relationship between Trade and Investment pertaining to the first indent of item IV of the Checklist
received from the Chairman.  Part II notes that existing international investment instruments containmany differences in approach, coverage, legal nature, strength of provisions and treatment of the
development dimension.  Part III explores the possible gaps and conflicts among the instruments
which may restrict market contestability, distort investment flows and reduce economic efficiency,
thus impairing the very objectives of the instruments.  Part IV underlines the importance of this
Working Group coming to a better common understanding of the differences, possible gaps andconflicts, and their possible implications in a globalized economy.  The investment instruments
mentioned in this paper are cited merely for illustrative purposes and are by no means an exhaustive
list.
II. DIFFERENCES
2. Trade and investment are inextricably linked in today's globalized economy.  Matters relating
to investment protection, promotion and liberalization are becoming more central to achieving market
access and promoting more globally-contestable markets.  Hence, the past decade has witnessed anincrease in the number of international investment instruments at the multilateral, plurilateral, regional
and bilateral levels.  Depending on purpose and context, the approach, coverage
 and legal nature  of
these instruments may vary significantly.
At the multilateral level
3. Two distinct features of interest are that:  (i) none of the multilateral instruments provides
comprehensive disciplines on investment;  and (ii) the majority of them are non-binding.
4. In the WTO, investment-related provisions are scattered over various Agreements with
different focuses, in an uncoordinated manner.  The General Agreement on Trade in Services  (GATS)
treats investment  as a mode of trade in services through the establishment of commercial presence and
movement of natural persons .  It adopts a sectoral and positive listing approach in liberalizing serviceWT/WGTI/W/33
Page 2
trade.  The Agreement on Trade-Related Investment Measures (TRIMs)  applies to investment
measures relating to trade in goods only.  It prohibits the application of trade-related investment
measures that are inconsistent with the WTO obligations of national treatment and elimination of
quantitative restrictions.  The Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS)  focuses on promoting effective and adequate protection of intellectual property rights and
ensuring that the measures do not themselves become barriers to legitimate trade.  Through provisions
on the minimum standards for protecting intellectual property, domestic enforcement procedures and
international dispute settlement, the Agreement improves the legal environment for technology
transfer and thus foreign investment.  Under the Agreement on Subsidies and Countervailing
Measures (SCM) , subsidies contingent upon export performance and domestic sourcing, which may
be regarded as investment incentives, are prohibited.
5. Other examples include the Convention Establishing the Multilateral Investment Guarantee
Agency of the World Bank (MIGA Convention)  which aims to facilitate foreign investment flows to
developing economies by providing a multilateral investment insurance scheme against
non-commercial risks in developing economies1;  the  International Centre on Settlement of Investment
Disputes of the World Bank  (ICSID)  which administers a system of conciliation and arbitration for
settlement of investment disputes between private investors and host economies.2
6. Whilst some are legally-binding, the majority of the multilateral investment instruments
encourage investment by promulgating non-binding  principles and guidelines.  An example is the
Guidelines on the Treatment of Foreign Direct  Investment developed by the World Bank  which
contain general principles to guide governmental behaviour in  the admission and treatment of foreign
investment.3
At the plurilateral and regional level
7. Unlike multilateral instruments, the majority of plurilateral/regional instruments are bindingin nature.  Another notable feature is the emergence of broader sets of rules aiming at investment,
trade and other wider economic objectives.
8. Worthy of note in the context of legally-binding instruments is the  proposed  OECD
Multilateral Agreement on Investment (MAI)  which is under negotiation.  It aims to provide a
comprehensive framework of rules for international investment, and aspires to establish high standard
disciplines on investment liberalization, investment protection and dispute settlement.  If the
negotiations are successfully concluded, the MAI will become a free-standing treaty which will also
be open to accession by non-OECD economies.
9. On the other hand, some plurilateral and regional agreements are non-binding.  Examples are
the APEC Non-Binding Investment Principles
4 and the OECD Guidelines for Multinational
Enterprises (MNEs)  and National Treatment Instrument .
10. A recent pattern emerging at the regional level is the establishment of instruments which
incorporate investment disciplines into a broader and more comprehensive framework of elaborated
                                                     
1 See WT/WGTI/W/22, WTO Secretariat:  Bilateral, Re gional, Plurilateral and Multilateral
Agreements , paragraph 66 for details of the MIGA Convention
2 See Ibid. , paragraphs 61-63 for details of the ICSID Convention
3 See Ibid. , paragraphs 57-58 for information of the Guidelines on Treatment of FDI
4 See WT/WGTI/W/9, Communication from APECWT/WGTI/W/33
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rules aiming at trade and other economic cooperation and integration.  The NAFTA  and the EC Treaty
are typical examples.  Other regional investment liberalization initiatives include the ASEAN
Investment Area (AIA), the Common Market for Eastern and Southern Africa (COMESA), and the
MERCOSUR Agreement .
11. Nevertheless, many instruments do not go that far.  Instead, they focus on investment
liberalization in a particular sector or industry, or address particular issues of concern.  In the OECD,
the Codes of Liberalization of Capital Movements and Current Invisible Operations  prescribe
disciplines on measures that impede capital flow and international financial transactions.  Likewise,
the Guidelines for MNEs  provide recommendations to help ensure that MNEs operate in harmony
with policies of the host economies. 5  Another example is the Energy Charter Treaty (ECT)  which
imposes obligations on governments concerning the protection and treatment of foreign investments
in the energy industry.
At the bilateral level
12. According to a recent report by UNCTAD6, a total of 1,330 Bilateral Investment Treaties
(BITs) were concluded as of January 1997 involving 162 economies, a threefold increase in half a
decade.  Since they were introduced in the 1950s, their approach and coverage have remained
virtually unchanged.  As compared with most regional or multilateral instruments, BITs differprincipally by their exclusive concern with investme nt.  They are usually signed between a developed
and a developing economy, although an increasin g number are being concluded between developing
economies and between developed economies and economies in transition.
13. Another notable feature of BITs is that they contain broad and open-ended definitions of
foreign investment, and cover many aspects of investment activities in an horizontal manner.  Thiscontrasts with the issue-specific approach adopted by many plurilateral and multilateral instruments.
The Compendium on International Investment Instruments  compiled by UNCTAD
7 provides a useful
reference of the prototype of BITs used by most economies.
14. A further substantial difference between bilateral and multilateral/plurilateral/regional
instruments is of course in the number of contracting parties to the instruments and hence theirgeographical coverage.  In addition, unlike some multilateral/plurilateral/regional instruments which
have an administrative body for implementation of the instruments and settlement of disputes (e.g. the
various committees under the respective WTO agreements), BITs are usually implemented by the
respective ministries or departments of the contracting parties.
15. As can be seen from the above analysis , each investment instrument tends to have its distinct
focus, approach and legal effect.  As a result, even though they may share some common features and
broad principles, their strength differs.  For exam ple, NT and MFN treatment of foreign investors are
often diluted by various derogations, exemptions and economy-specific or sector-specific
reservations.  Besides, while BITs generally avoid direct regulation of the right of establishment and
                                                     
5 See WT/WGTI/W/22, WTO Secretariat:  Bilateral, Regional and Multilateral Agreements ,
paragraphs 52-54 for information about the OECD Codes of Liberalization and the OECD Guidelines on MNES
6 UNCTAD, World Investment Report 1997:  Transitional  Corporations, Market Structure and
Competition Policy , Overview:  pp.xviii
7 UNCTAD, International Investment Instruments:  A Compendium, Volume III on Regional
Competition Policy , Overview:  pp.xviiiWT/WGTI/W/33
Page 4
subject this matter to domestic laws, some BITs explicitly extend the NT and MFN treatment
standards to the entry and establishment of foreign investors.8
16. Further, depending on the policy orientation and development needs of the Membersinvolved, investment instruments may address the development dimension in different fashions,
although it has been generally recognized that effective international instruments should
accommodate the interests of all parties involved with a view to achieving a balance of interests.  For
example, Article IV of the GATS  commits Members to facilitate the participation of developing
economies in trade in services through, among other things, negotiated specific commitments relating
to the strengthening of their domestic services capacity.
III. POSSIBLE GAPS AND CONFLICTS
17. While the growing importance of investment  as an engine of economic growth and
development has been generally recognized, given the absence of a set of structured and coherentinvestment rules at the multilateral level, gaps ar e evident.  For instance, in the WTO, commitments
for the liberalization of foreign investments are of a sectoral and limited nature, provisions on
performance requirements remain limited, direct disciplines protecting investments from
expropriation are lacking, and the dispute settlement system applies only to a limited extent to
disputes over foreign investments.  As a result, investment barriers still abound, reducing thecontestability of markets and impeding the free flow of investment.  There also appears to be gaps
between the stated aims and actual benefits conf erred by the instruments, and discrepancies between
the benefits conferred and the needs for a liberal, transparent and predictable investment environment
in a globalized economy.  Moreover, an economy may sign on to various investment instruments
containing provisions with different standards and disciplines.  This may pose additional confusionand uncertainties to multinational corporations conducting businesses and making investment
decisions on a global scale.
9
18. In addition, some investment instruments which are designed to address the priorities andconcerns of the parties involved without proper regard to the potential negative impacts on third
parties may result in conflicts.  The vicious comp etition to offer investment incentives to attract
foreign investment is a case in point.
19. Also, many investment instruments have failed to recognize fully the close relationship
between trade and investment in a globalized economy.  As a result, some investment instruments
may sanction restrictive measures which hinder market access and reduce economic efficiency, thus
impairing the objectives of trade liberalization.  Likewise, certain restrictive trade measures may lead
                                                     
8 UNCTAD , World Investment Report 1996:  Investment, Trade and International Policy
Arrangements , p.134.
9 An empirical research by Japan (see WT/WGTI/W/11, p.4) identifies that predictability is one of the
four principal determinants for corporate investment decisions.
Another survey on outward investment undertaken in the UK (see EU submission
WT/WGTI/W/12, p.5) reveals that, among other things, the most important factor in creating an attractive
climate for investment is strong and sustainable growth , supported by macroeconomic and political stability, and
transparent, predictable and open trade and investment  policy regimes.  Also, it recognizes the need for
predictable and liberal framework for investment is underlined by the globalization of markets.
Canada (see WT/WGTI/W/19, p.3-4) also states that the proliferation of bilateral agreements
has led to a complex web of investment agreements, which may result in a confusing framework for
international investment.WT/WGTI/W/33
Page 5
to unproductive and uncompetitive investments, hampering the attainment of the objectives of
investment policy.10
IV. CONCLUSION
20. Hong Kong, China considers that this Working Group has a comparative advantage and
unique opportunity to discuss and come to a better common understanding of the  differences,
possible gaps and conflicts among existing international investment instruments, and their possible
implications in a globalized economy.  We believe that such an understanding, particularly with
regard to the last two aspects, is essential for the Working Group to further explore the interaction
between trade and investment under the remaining indents of item IV of the Checklist, with a view to
facilitating a decision by the General Council in due course on how the work of this Working Group
should proceed.
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10 See WT/WGTI/W/7, WTO Secretariat:  The Relationship Between Trade and FDI ,
paragraphs 61-100 on the impact of trade measures on investment and vice versa.
See also submissions from Australia (WT/WGTI/W/23), Japan  (WT/WGTI/W/11 and 18) and
Switzerland (WT/WGTI/W/2) regarding the effects of various types of trade measures on investment flows and
the need to examine the impact of investment measures like performance requirements and trade flows.  Other
Members like Poland (WT/WGTI/W/13), ASEAN  (their statement at the first meeting of the WGTI) also
suggested the need to study the influence of trade policies on investment flows and vice versa.
See Hong Kong, China's submission (WT/WGTI/W/10) paragraphs 11-12 on the relationship
between trade and investment policies.