WORLD TRADE
ORGANIZATIONWT/WGTI/W/152
19 November 2002
(02-6425)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM CHINA, CUBA, INDIA, KENYA,
PAKISTAN AND ZIMBABWE
The following communication, dated 18 November 2002, has been received from the
Permanent Mission of India on behalf of China,  Cuba, India, Kenya, Pakistan and Zimbabwe.
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INVESTORS’ AND HOME GOVERNMENTS’ OBLIGATIONS
1. The annual flows of foreign direct investme nt (FDI) have risen sharply from US$200 billion
in 1990 to US$1,271 billion in 2000 and have become an important channel of cross-border business
activity.  FDI flows can provide supplementary financial resources, technologies, managerial skills
and employment opportunities and can play a positive role in the economic and social development of
many host members, including the developing ones.  FDI flows are generally undertaken by
multinational enterprises (MNEs or in United Nations parlance transnational corporations - TNCs).
MNEs have been characterized by their large scale of operations in  many locations worldwide.  They
command enormous physical and financial resources, including proprietary technology and world-wide recognition of their brand or trade names.  Their global scale of operations give them unique
ability to respond to exchange rate movements in any part of the world, minimize their global tax bill
and circumvent financial restrictions imposed by governments, ability to minimize the political risks,
access to information on world markets and the ability to bargain with the potential host countries
from a position of strength arising from their global position.
2. Given their massive economic power and their global operations, host governments have their
limitations in regulating their conduct.  In view of their objective of global profit maximization, there
could be conflict of interests between their objectives and the development policy objectives of the
host countries and they could indulge in restrictive business practices (RBPs), manipulation of
transfer prices and other such practices.  There is therefore a need to address the negative effects ofthe FDI activities by the MNEs that they may have on the host members, particularly the developing
ones, while recognizing the positive role of the FDI.
3. In the 1970s there was a lot of discussion in international fora on the possible abuse of
economic power by MNEs leading to appoin tment of an Eminent Persons Group by the
United Nations in the early 1970s.  The Group recognized the limitations of national regulations ofhost countries, particularly the developing ones, in regulating the activities of MNEs.  Following the
recommendations of the Eminent Persons Group, the United Nations Commission on Transnational
Corporations was appointed.  Among other steps ta ken, the Commission launched the negotiations on
the United Nations Code of Conduct on TNCs.  The negotiations on the formulation of the CodeWT/WGTI/W/152
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began in 1977.  The Code was to establish, among other objectives, the standards for the conduct of
TNCs from all countries to protect the interests of host countries, strengthen their negotiating capacity
and ensure conformity of their operations with (host country’s) national development objectives.
Substantial progress was made in evolving a Draft Code of Conduct on TNCs over the protracted
negotiations.  However, the Draft Code as evolved could not be adopted because of differences amongthe developed and developing countries on the legal status of the Code, among other issues, and was
abandoned in 1992.
4. The limitations of national regulations in dealing with the operations of transnational
corporations have been recognized in other intern ational fora as well.  For instance, the UN General
Assembly Resolution 32/88 of December 1977 decided to convene a United Nations Conference on
an International Code of Conduct on Transfer of Technology to be negotiated under the auspices of
UNCTAD.  The UNCTAD Code was aimed at providing general and equitable standards forinternational technology transactions.  It also met the same fate as the TNCs Code.  There have been
other notable attempts to establish international codes relating to the behaviour and operations of
TNCs.  UNCTAD adopted the Set of Multilaterally Agreed Equitable Principles and Rules for the
Control of Restrictive Business Practices in 1980.  The International Labour Organization (ILO)
adopted the Tripartite Declaration of Principles on Multinational Enterprises and Social Policy on16 November 1977.  Even the group of developed, and hence capital exporting, countries namely, the
Organization for Economic Cooperation and Devel opment (OECD) had been prompted to adopt in
1976 the OECD Guidelines on International Investment and Multinational Enterprises (subsequently
revised in 1991 and 2000).  The Working Group on Transnational Corporations of the UN Sub-
Commission on Human Rights is currently discussing the responsibilities of TNCs to human rights,covering among other aspects, standards of consumer protection and employment practices.
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5. Although a number of steps have been taken by the international community to evolve codes
of conduct of MNEs, all existing attempts have been of a voluntary nature.  The developing countries
had sought the UN Code of Conduct on TNCs to be a legally binding one. But that could not be
adopted.  As a result the growing internationalization of corporate activities since the 1990s has takenplace without an effective global code that regulates the behaviour and operations on MNEs or to
ensure corporate responsibility and accountability.
6. The glaring absence of an enforceable global code of corporate conduct has been highlighted
by the recent spate of cases of corrupt corporate practices and fraud involving some of the biggest
MNEs such as Enron, WorldCom.  The bankruptcies  of some of these corporations have affected
investor confidence not only in the United States, where most of the companies concerned were
based, but has also affected the global capital markets.
7. The series of financial crises in many developing countries in recent years have brought into
sharp focus the speculative nature of financial markets and especially the operations of highly-
leveraged investment funds, and their destabilizing and adverse effects on developing countries.  For
example, during the Asian financial crisis, criticisms were made of the lack of transparency of the
workings of international currency markets, and proposals were made to make these markets and thehighly-leveraged funds more transparent and accountable.  However there has been very slow
progress in the work in this area.
8. Therefore, legally enforceable norms of investors’ or corporate conduct are urgently required
to prevent such crises from reoccurring.  They could also serve the useful purpose of protecting the
global environment by prescribing the norms of corporate conduct with respect to environment, bringabout transparency in the corporate dealings by prescribing the disclosure requirements and
                                                     
1 See http://www.unhchr.ch/html/menu2/2/sc.htmas for more details.WT/WGTI/W/152
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accounting practices, control restrictive business practices and curb the manipulation of transfer prices
and thus improve global welfare.
9. The need for effective inter-governmental agreements and measures aimed at corporate
responsibility and corporate accountability has been most recently recognized by the World Summit
on Sustainable Development held in Johannesburg in August/September 2002.  The Plan ofImplementation adopted by the Summit states:  "Actively promote corporate responsibility and
accountability, based on the Rio Principles, including through the full development and effective
implementation of inter-governmental agreements and measures, international initiatives and public-
private partnerships, and appropriate national regulations, and support continuous improvement in
corporate practices in all countries."  The Working Group should therefore as a matter of priority take
on the task of examining legally-binding measures aimed at ensuring corporate responsibility and
accountability relating to foreign investors, incl uding measures that clearly spell out investors'
obligations and the obligations of their home governments.
10. The proponents of a multilateral framework on investment in the WTO have been seeking
binding rights of foreign investors that the host member governments should agree to provide.
However, not much discussion has taken place in the Working Group on what could be the
obligations on the part of foreign investors or the home governments.  The Doha Declaration indicatesthe need for balance between host- and home-member interests.  It also underlines the need to take
due account of development policies and objectives of host governments as well as their right to
regulate in the public interest.  Therefore, while recognizing the protection of legitimate rights and
interest of the investing MNEs, the right of host members to regulate foreign investors and the need
for foreign investors to undertake obligations in line with host members’ interests, developmentpolicies and objectives, should be an indispensible part of the discussions in the Working Group.
MNEs should strictly abide by all domestic laws and regulations in each and every aspect of the
economic and social life of the host members in their investment and operational activities. Further, in
order to ensure that the foreign investor meets its obligations to the host member, the cooperation of
the home member’s government is often necessary, as the latter can, and should, impose the necessarydisciplines on the investors.  The home member’s government should therefore also undertake
obligations, including to ensure that the investor's behaviour and practices are in line with and
contribute to the interests, development policies and objectives of the host member.  It is important
that the Working Group addresses the issue of investors' and home governments’ obligations in a
balanced manner.
11. Some possible general principles that would need to be kept in view while drawing up any
investor obligations could be as follows.
1. General principles
12. These could cover the following broad principles:
•
 foreign investors would respect the national sovereignty of host member and the right of each
member government to regulate and monitor their activities;
• non-interference in internal affairs of the host member and in its determination of its economic
and other priorities;
• adherence to economic goals and development objectives, policies and priorities of host members,
and working seriously towards making a positive contribution to the achievement of the host
members’ economic goals, developmental policies and objectives;WT/WGTI/W/152
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• adherence to socio-cultural objectives and values, and avoiding practices, products or services that
may have detrimental effects.
2. Restrictive business practices
13. There has been evidence on involvement of MNEs in anti-competitive arrangements with
other firms such as horizontal international marketing and price-fixing cartels, vertical international
distribution systems and restraints on parallel imports.  It is argued that competition policy at thenational or international level will take care of the anti-competitive practices.  However, no
multilateral framework on investment would be complete unless it covers provisions to deal with the
RBPs associated with FDI.
14. In this context the provisions of the UNCTAD’s Set of Multilaterally Agreed Principles on
RBPs could be incorporated.  These principles require that enterprises refrain from RBPs defined to
include price fixing, collusive tendering, market or customer allocation arrangements, allocation of
sales or production quota, concerted refusal to deal or supply to potential importers, collective denialto access to an arrangement.  The MNEs are also required to refrain from abuse of market power in
the form of predatory behaviour, discriminatory pricing or terms, joint ventures, M&As, and refusal to
deal, among other provisions.  Although the UNCTAD’s Set exists, it is currently not a legally
binding instrument and hence is not enforceable.  Inclusion of its provisions into a legally binding
investors’ obligations with corresponding obligations on the part of home members to shareinformation would help in their effective enforcement.
3. Technology transfer
15. Technology is one of the most important resources that developing host  members seek from
FDI.  Obligations of investors from developed members could aim to contribute to the strengthening
of the scientific and technological capacities of developing members in general, and be required inparticular to:
• contribute to technical and managerial training of citizens of host members;
• restrain from imposing restrictive clauses in techno logy transfer contracts with their affiliates and
licensees that prevent absorption and assimilation of technology transferred.
16. As a pre-requisite for all members, especially the developing ones, to assess, select, develop
and utilize technologies, international exchange on technical information and relevant guidance and
training should be promoted and increased (especially concerning data on availability of substitutetechnologies).  MNEs should provide data on various aspects of the technologies to be transferred,
such as provisions of information needed for tech nical, institutional and financial assessment of the
transactions, so that appropriate arrangement can be made in the host members to ensure that the
technology transfer is meaningful and on most appropriate terms and so that inappropriate transfer or
unnecessary turn-key transfers are avoided.
4. Balance of payments
17. The operations of foreign enterprises are likely to affect the balance of payments of their host
members in several ways vis-à-vis  imports of equipment, raw materials, by exports of output and by
remittances of dividends, royalty and other fees.  Host member governments must be entitled to
institute, as necessary, policies and measures to guard against the adverse effects on the balance of
payments and to promote positive effects, resulting from foreign investment.  This is to ensure that
foreign investment contributes towards a healthy balance-of-payments situation, which is a majoreconomic goal of the host member.  Foreign investors should therefore be obliged to follow theWT/WGTI/W/152
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policies and contribute towards this goal.  There is evidence suggesting that MNEs often impose
trade-related restrictions on their affiliates that restrict the sources of their imports and affect their
ability to export adversely.  They are also know n to transfer funds through manipulation of transfer
prices.  Furthermore, MNEs may also affect the balance-of-payments situation of host members with
short-term financial borrowings or other financial transactions with their affiliates.  There have beencases of MNEs applying their home governments’ pressure to remit funds even though the host
members may be facing extreme balance-of-payment difficulties thus perpetuating the liquidity
problems.  In light of this, there should be discussion on obligations on the investors, including to:
• adhere to policies and measures instituted by the host member governments aimed at safeguarding
the balance-of-payments and at strengthening the balance-of-payments position;
• contribute to promotion and diversification of exports and to increased utilization of goods,
services and other resources available locally;
• cooperate with the host governments in periods of balance-of-payments crisis by delaying
remittances of profits and by phasing out divestment proceeds;
• desist from engaging in short-term financial operations or intra-corporate transfers in a manner
that would increase currency instability and balance-of-payments difficulties
• apply fair pricing policies in intra-corporate trade and curb transfer pricing manipulations.
5. Ownership and control
18. It is important that the MNEs give appropriate attention to the developmental needs of host
countries through provisions of sufficient autonomy to their subsidiaries in the host members as well
as to respect and adhere to policies of host countries relating to local ownership and participation.  To
be specific, among other things, the MNEs should:
• delegate as much as possible the power of decision making to their entities, so that the latter can
contribute positively to the economic and social development of the host members;
• should work together with the governments and citizens of host members to realize the national
objectives of local equity participation and effective exercise of control by local partners in
accordance with contractual terms of equity or non-equity arrangements or with the terms of
control as established by the laws of those members concerned;
• exercise their personnel policies in light of host member national polices, laws and regulations to
the effect that priority is given to local nationals in recruitment, training and promotion to posts of
managerial and leading nature so as to enhance the effective participation of local citizens in the
process of decision-making.
6. Consumer protection and environmental protection
19. There is evidence that MNEs often follow  double standards with respect to consumer
protection, environmental and employment practices  in their home and host members.  There have
been cases that MNEs were selling products and medicines that were banned in their home members,
were misinforming the consumers about their pro ducts (as in the case of baby food), adopting
different environmental standards or norms of treating their employees.  The Bhopal tragedy is
typically illustrative in this context.  A discussion on possible investor obligations may need to
address the following:WT/WGTI/W/152
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MNEs should be required to:
• respect the rights of consumers in host members and pay due regard to effective consumer
protection and ensure the safety and quality of the goods and services they provide and not to
produce, market or advertise potentially harmful products;
• adhere to environmental and safety practices and requirements to ensure that the health, safety
and environment of people in the host members are properly protected;
• take steps to protect the environment and to rehabilitate the environment when there is damage
caused by the investor;
• respect the right of the host member population to know the names and types of dangerous
chemicals used in the production process and size of their inventory, the undesirable effectsresulting from their use and their accidental consumption and possible remedial measures to be
taken in the event of an accident.
7. Disclosure and accounting
20. The Working Group could also discuss the scope of investor obligations in terms of
disclosure and accounting in relation to operations not only within the host member but with reference
to all other transactions of the MNE which may impact in some way or another on host members'
operations.  This could include:
• acceptance to provide a disclosure on the financial as well as non-financial information on the
structure, policies and activities of MNE as a whole, as well as that of the local affiliate;
• providing details of transactions with the affiliated parties such as parent or other group
companies outside or inside the host member;
• transparency with regard to transactions in financial markets that have a speculative effect on the
currency or financial markets of the host member.
8. Home governments’ obligations
21. The home governments’ policies do have authority and influence over the behaviour of MNEs
originating in their territories, in relation to th e overseas operations of these MNEs.  This authority
and influence can be used in ways that have positive or adverse effects on the interests and
development objectives of the host countries.  Home governments should undertake obligations:
(1) to refrain from policies or measures that influence MNEs originating in their territories to haveoperations or behaviour in host members that are adverse to the interests of the host members;  (2) to
institute measures that influence and oblige MNEs originating in their territories to behave and
operate with full corporate responsibility and accountability in their operations in host members, and
to fulfil their (MNEs') obligations to the host member and government, in accordance with the
objectives and policies of the latter.  As pointed out earlier, it should be recognized that in order toensure that the foreign investor meets its obligations to the host member, the cooperation of the home
member's government is often necessary, as the latter can and should impose the necessary disciplines
on the investor.  The home member’s government should therefore also undertake obligations,
including to ensure that the investor's behaviour and practices are in line with and contribute to the
interests, development policies and objectives of the host member.  The home member obligationsshould thus be an integral part of the Working Group's discussions.  It is important that the Working
Group examine obligations of the government of the home member of the MNEs, including the
following:WT/WGTI/W/152
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• accepting obligations to enact legislation prohibiting foreign corrupt practices of their
corporations and requiring them to follow in their overseas operations proper norms of consumerprotection and environmental protection;
• undertaking to provide information regarding th e involvement of MNEs in any questionable
dealings and other information on their background that may be useful for the host government atthe time of approval as well as subsequently;
• undertaking to cooperate with the host governments in control of RBPs, transfer-pricing
manipulation, financial speculation and other unethical, irresponsible or unaccountable practices
of MNEs, and in recovery of the liabilities of MNEs resulting from their mis-conduct in host
members;
• undertaking to refrain from measures and policies that oblige or influence their corporations in
their overseas activities to behave or operate in a manner that is detrimental to the interests of the
host members;
• undertaking to institute measures and policies that oblige their corporations to meet their
obligations to behave in a responsible and accountable manner in the host members, and that
oblige their corporations to contribute to fulfilling the needs and development objectives of the
host members;
• undertaking to refrain from policies and measures to restrict their MNEs on transfer or diffusion
of technologies to their partners in the host members, including on the pretext of security reasons.
22. This paper has outlined some of the key issues that could usefully be discussed with respect to
investors’ and home government obligations in the light of the evidence on corporate behaviour andinitiatives taken by the international community.  The recent disclosures of corporate fraud and other
malpractices have only underlined the need for greater disciplines on MNEs to bring about greater
corporate responsibility and accountability.  What is of serious concern to developing members is to
ensure that the operations of foreign investors have positive effects and contribute to the meeting of
national goals and development objectives of host member.  Towards this end, governments of the
host members must have sufficient regulatory powers and adequate policy space in relation to foreign
investment, and the foreign investors should be obliged to respect the sovereign rights of host memberstates and contribute to their national and development objectives.  Similarly, home member
governments should undertake obligations to ensure the responsible behaviour of their corporations.
23. This paper is an initial reflection of views of the co-sponsors of this paper with regard to the
issue of balance of interests between home and host members in the field of the relationship between
trade and investment as emphasized in the Doha Ministerial Declaration, without prejudice to theirright to further elaborate on all the relevant issues in this regard.
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