RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/M/4
5 June 1998
(98-2280)
Working Group on the Relationship
between Trade and Investment
REPORT ON THE MEETING OF 30 AND 31 MARCH 1998
1. The Working Group on the Relationship between Trade and Investment held its fourth
meeting on 30 and 31 March 1998.
2. The Working Group agreed that, in the absence of its Chairman,
Ambassador Krirk-Krai Jirapaet, the meeting would be chaired by the Chairman of the General
Council, Ambassador Weekes, with the assistance of Mr. Otten of the Secretariat.
3. The substantive agenda for this meeting comprised items I-III and the factual aspects of the
first indent of item IV of the Checklist of Issues Suggested for Study (WT/WGTI/M/1, Annex 1).
A. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT FOR DEVELOPMENT 
AND ECONOMIC GROWTH (ITEM I OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY )
4. The Chairman drew attention to documents relevant to this item, including contributions by
Members and by international intergovernmental organizations that had been discussed at previous
meetings and an informal note from the Chairman  (Job No. 6004/Rev.1), the first section of which
contained a list of issues identified in discussion s on this item at previous meetings of the Working
Group as requiring further study.
5. The representative of Costa Rica introduced a submission (WT/WGTI/W/31) on the impact of
foreign direct investment ("FDI") on the Costa Rican economy and on Costa Rica's investment policy.
He highlighted the considerable increase in FDI inflows to Costa Rica in recent years, both in real
terms and as a percentage of GDP, the positive correlation between FDI and indicators of human
development, which reflected the importance of the level of development of human resources as a
determinant of FDI, and the contribution of FDI to employment creation and growth of industrial
exports.  No specific FDI legislation existed in Costa Rica, as Costa Rica's policy toward FDI was
based on a constitutional principle of non-discriminatory treatment of foreign and domestic investors.
There were no requirements for prior authorization or registration of FDI in any sector or restrictions
on transfers related to FDI.  In addition to access to domestic courts, means of legal recourse for
foreign investors were provided for in international agreements to which Costa Rica was a party,including the ICSID Convention, the Interamerican Convention on Commercial Arbitration, the
United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards and a
number of bilateral  investment treaties.
6. The representative of the United States, recalling the interest that had been expressed in the
Working Group in a further examination of the role of FDI in technological development of host
countries, introduced a submission (WT/WGTI/W/27) which contained the results of an empirical
study of the effects of the operations of foreign-owned firms in the United States on science and
technology development in the United States, an issue which had received increasing attention in theWT/WGTI/M/4
Page 2
light of rising globalization.  Three key conclusions that could be drawn from this analysis were:  first,
that between 1987 and 1994 research and development spending by foreign manufacturing affiliatesin the United States had grown almost twice as much as research and development spending by all
United States firms;  secondly, that the contribution of foreign affiliates to technology development
was particularly significant in high-technology industries, as evidenced by the fact that over
three fourths of total research and development spending by the foreign affiliates was by those in
high-technology industries;  and, thirdly, that th ere had been a large net inflow of technology to
foreign affiliates in the United States from their foreign parents, as shown by data on royalties and
licence fees.
7. The representative of Mexico, referring to the relationship observed by Costa Rica between
FDI and indicators of human development, emphasized that, in analysing the contribution of FDI to
development, a comprehensive approach should be taken in order to take into account the human and
social dimensions of development.  The representative of Hong Kong, China underlined the
importance of the questions raised  in the first paragraph of the submission by the United States.
Noting that most of the analysis in this submission seemed to be based on data which did not go
beyond 1994, he asked whether more recent data were available. The representative of the European
Community pointed to the strong positive relations hip which this submission showed to exist between
FDI and technology development as a result of the research and development spending of foreign
affiliates and the net inflow of technology from foreign parents to their affiliates.
8. The representative of the OECD introduced a submission (WT/WGTI/W/26) which analysed
the relationship between FDI and economic development through case studies of six developing
countries, Argentina, Brazil, Chile, Indonesia, Malaysia and the Philippines. The key point emerging
from the analysis in this submission was that the overall policy framework in host countries was a
critical factor in maximizing the gains from FDI.  Trade policy was of particular relevance in thisregard.  Policies pursued in the past by some developing countries with large domestic markets to
attract FDI on the basis of a protected home market had lost their effectiveness as they had ran into
market saturation and foreign investors had shifted to more dynamic countries and markets.  Recent
evidence showed that trade liberalization had a positive effect on the volume of FDI inflows.  This
was due to three main reasons.  First, trade liberalization made domestic markets more dynamic,leading to higher growth and an expansion of demand in host countries.  Secondly, a reduction of
import barriers meant that multinational enterprises could import better or lower cost inputs which
made export-oriented production in the host country viable.  Thirdly, regional or multilateral
agreements implied that these exports would face fewer barriers abroad.  Successful regional
integration schemes had often provided a boost to inward investment.  Even more important than theimpact of trade policy liberalization on the level of FDI was its impact on the quality of FDI.  Several
studies had shown that FDI in a highly protected environment could have a negative effect on host
countries. Trade protection created economic rents which could be captured by foreign investors and
transferred abroad.  It also dampened the transfer of technology as the lack of competition in host
country markets made it unnecessary for a parent firm  to transfer the most advanced technology to its
affiliate.  This perpetuated the relative backwardness of the affiliate and in turn made it less likely that
the affiliate would contribute to host country exports.  Trade liberalization could reverse this processby encouraging technology transfer and exports.  In addition, given that certain restrictive FDI
policies, such as ownership restrictions and performance requirements, had often been put in place in
order to compensate for the negative consequences of trade protection on the behaviour of foreign
firms, trade liberalization called into question the rationale for maintaining such policies in the present
context.
9. The representatives of the United States, the European Community
 and Hong Kong, China
endorsed the findings of the OECD submission and identified a number of points made therein as
particularly relevant:  the contribution of FDI to  economic restructuring and to export growth and
diversification;  the role of FDI in improving the capacity of host countries to respond to the
opportunities offered by global economic integration;  the convergence between the policies of thesix countries in question toward greater openness to FDI;  the need for liberalization of FDI policies toWT/WGTI/M/4
Page 3
be an integral part of comprehensive economic reforms;  the declining effectiveness of policies aimed
at attracting FDI to protected home markets and the declining rationale and rising costs of FDI
restrictions and performance requirements in an environment of trade liberalization and increasing
orientation of FDI toward production for export to regional or global markets;  the importance of trade
liberalization in attracting FDI and enhancing the contribution of FDI to economic development;  thecounter-productive effects of certain policies pursued by host countries in the past aimed at
augmenting transfer of technology, for example through mandatory joint venture or transfer of
technology requirements;  the important role of FDI in the context of privatization, notably in
infrastructure;  and the beneficial effect of FDI lib eralization in financial services in promoting the
efficiency and the stability of the financial sector of host countries.  The point was also made that  theevidence provided in the OECD submission of the positive effects of FDI on the trade and current
account balances of host countries contradicted an argument mentioned in a submission by Japan
(WT/WGTI/W/11) that repatriation of profits from foreign affiliates to a home country could have a
serious effect on the balance of payments of a host country.
10. The representative of Australia disagreed with the point made in the OECD submission that
the presence of a screening mechanism was the most  important barrier to FDI. While an inappropriate
screening mechanism could retard investment flows, the problem in such cases was more likely to be
associated with non-transparent procedures.  A properly administered screening mechanism, however,
which provided for an expeditious assessment of an investment proposal on the basis of transparent
criteria was not a hindrance to investment flows. The representative of Egypt agreed with this
comment and noted that screening could serve important purposes, such as the collection of statisticalinformation. The representative of the United States concurred with the view expressed in the OECD
submission that the most important barrier to FDI was the presence of a screening mechanism.
11. The representative of Argentina agreed with the findings of the OECD submission regarding
Argentina's experience with FDI.  Referring to co mments made at previous meetings on the need to
take account of the possible negative effects of FDI,  he stressed that, notwithstanding that Argentina
had a very open FDI regime, as described in th e OECD submission, it had not experienced any
negative effects of FDI liberalization.  In the latter  regard, he endorsed the view expressed in the
OECD submission that the presence of foreign firms had contributed to the stability of Argentina's
financial sector.  Referring to the different co nclusions drawn in the OECD submission and the
Secretariat Note in WT/WGTI/W/7 and Corr.1 on "The Relationship between Trade and Foreign
Direct Investment" on the question of whether the recent increase in FDI flows to Argentina was dueto domestic reforms or to regional integration, he ex plained that the relative importance of these two
factors had changed over time. During the period 1989-1994, most FDI inflows had been related to
privatization, whereas since 1994 FDI inflows had b een driven more by the effects of regional
integration, as illustrated by the rise of FDI in the automotive industry.
12. The representative of Korea recalled that at the previous meeting, when  some delegations had
pointed to the need for a balanced approach which would also take account of the negative effects of
FDI, his delegation had indicated that it would consider submitting a paper on negative experiences
with FDI in Korea, if any.  His authorities  had concluded, however, that Korea had not been
confronted with any particular problems from a development perspective resulting from FDI. Instead,
the active policy of liberalizing since the early 1980s had contributed to rectifying the structural
problems the Korean economy had faced over the past decades.  A more active and aggressive FDI
liberalization policy would have contributed more to this restructuring process.  At the initial stage ofKorea's economic development, Korea had relied heavily on foreign public and commercial loans
rather than FDI to procure investment resources and stabilize the balance of payments.  Public and
commercial loans had accounted for almost 90 per cent of foreign capital inflows throughout the
1960s and into the late 1970s. However, since the late 1960s Korea had encountered many problems
arising from foreign loans, such as the increasing burden of repayment of foreign borrowing. As aresult, since the early 1970s, Korea's basic foreign capital policies had involved more selective foreign
borrowing and greater reliance on FDI as a source of financing which did not create repayment
problems.  In the 1980s, the Foreign Capital Inducement Law had been revised to introduce a negativeWT/WGTI/M/4
Page 4
list system for FDI approval in which any industry not specified on the list was open to foreign
investment.  In the early 1990s, the Law had been amended to allow for FDI without prior approval,
upon the simple filing of a report to the relevant Ministry.  In the context of the current financial
crisis, Korea attached  high priority to attracting FDI and, to this end, was in the process of amending
its FDI legislation to facilitate FDI and capital inflow.  Under the new legislation, hostile mergers and
acquisitions would also be allowed.  Two main conclusions could be drawn from Korea's past
experience with FDI.  First, an active FDI liberalization policy contributed to economic developmentbut strong economic fundamentals as well as effective management of macroeconomic policies were
essential for investment liberalization to produce th e expected outcome.  Secondly, to maximize the
positive effects of FDI,  liberalization policies should be tailored to meet the needs and priorities of
each country's economic development policy.
13. The representative of Hong Kong, China ag reed with the conclusions drawn by the
representative of Korea.  The representative of India echoed the comment made by the representative
of Korea that FDI policies needed to be tailored to the needs of individual countries. The
representative of the European Community observed that it was significant and reassuring that Korea
had not found any negative effects of FDI on economic development and welcomed theannouncement of impending changes to Korea's FDI legislation with regard to mergers and
acquisitions.
14. The representative of Canada pointed to the sign ificant increase in FDI inflows to Canada that
had occurred over the last decade, both in real terms and as a proportion of GDP, the substantial
economic contribution of foreign firms in Canada, especially in technology-intensive industries, and
the important role of inward FDI in creating empl oyment.  In addition, significant economic benefits
resulted from outward FDI from Canada, which had recently risen to record levels.  Stocks of
Canadian investment abroad surpassed total stocks  of FDI in Canada for the first time in 1997 and
Canada was now one of the group of net capital exporting countries.   Canadian FDI abroad was
diversifying and developing countries were becoming increasingly important destinations for
Canadian investors.  Many of the investments abroad by Canadian firms, in both developed and
developing countries, took the form of cooperative ventures, or strategic alliances. Outward FDI was
important from the perspective of employment creation given that FDI and trade were strongcomplements and that trade was an important creator of Canadian jobs.  Canada's outward-oriented
firms outperformed those focused only on the domestic market in the areas of sales growth, asset
growth, capital productivity, research and development intensity and average returns on assets.   In
summary, both inward and outward FDI stimulat ed economic growth and job creation in Canada
through several mechanisms:  increasing capital formation, enhancing trade flows, enhancingtechnology flows, improving the competitiveness of Canadian firms in international markets, raising
incomes through direct investment abroad and increasing competition in markets.
15. The representative of Norway stated that FDI had played a crucial role in Norway's economic
development for more than 100 years, in particular in the development of local resources, including
hydropower, and oil and gas. Norway's experience showed that  there was a positive correlation
between the openness of international economic rela tions and inflows of FDI and that there was a
tendency towards more greenfield investment in resource-based activities than in manufacturing,where mergers and acquisitions played a bigger role.  National control had always been and remained
a hotly debated issue but it had become clear that, in general, national control was not enhanced by
discrimination between domestic and foreign economic actors.  Finally, even though Norway had
become a net capital exporter in 1994, in the same year it had established an agency aimed at
promoting inward FDI.
16. The representative of the European Community pointed to three general themes that emerged
from the contributions presented so far to the Working Group.  First, there was growing evidence that
realities had changed and that the debate on FDI regimes and the effects of FDI must be seen in a
different light than in the past. The recent submission by the OECD and earlier submissions by Korea
and Japan were particularly relevant in that they provided empirical evidence that policies pursued inWT/WGTI/M/4
Page 5
the past on grounds of infant industry protection were no longer applicable in the current context.
Secondly, there was growing empirical evidence to suggest that there was a globally positive
relationship between trade and investment.  Thirdly,  there was a close interaction between FDI reform
in several countries and generic economic reform as mutually reinforcing trends.  In commenting on a
submission from Bolivia in WT/WGTI/W/20, he said that this submission provided concrete evidenceof the benefits of FDI liberalization were measurable empirically.
17. The representative of Canada stated that Canada's perspective on the issue of the link between
FDI and economic development was close to that presented in submissions by Korea and Japan
(WT/WGTI/W/16 and W/18).  Korea had pointed out that inward FDI had a positive effect on
economic development, with positive impacts on employment, productivity, transfer of advanced
technology and the competitiveness of the domestic market.  Korea had also found that "the export
inducement effect was larger than the import inducement effect". Japan's submission pointed out that
under the era of globalization and sophisticated technological innovation which described conditions
today, restricting foreign investment leads to "t he weakening in the competitiveness of domestic
industries".  In respect of the submission by the United States in WT/WGTI/W/14, he observed that
Canada did not generally take a balance-of-payments perspective in looking at the economic impacts
of inward and outward investment on its economy.   The submission by the United States took such anapproach and concluded that foreign-owned firms accounted for 70 per cent of the total United States
trade deficit in 1994, largely due to the greater propensity of these foreign-owned firms to import.
The submission explained that the trade imbalances appeared to be driven by the parent-affiliate
relationship, as parent firms tended to export to their foreign affiliates.  It supported the assertion that
access to markets was an important motivation for foreign investors.  A significant part ofinternational trade today was carried out on an intrafirm basis, and its importance was increasing,
suggesting that FDI and trade went hand in hand.
18. The representative of the Philippines, speaking on behalf of the ASEAN WTO Members,
stated that FDI on the whole played an important positive role in transferring intangible assets to
recipient countries, especially developing countries, but that developing countries had sometimes alsobeen confronted with negative effects of FDI.   For example, foreign affiliates were sometimes
prevented from undertaking certain activities by restrictions imposed by their parents in technology
transfer agreements, which might have an adverse impact on competition and corporate development.
Furthermore, some developing countries faced the risk of becoming locations for simple assembly
operations.  Referring to the analysis of possible negative effects of FDI in the contribution submittedby Japan in WT/WGTI/W/11, he observed that the instability of the balance of trade and balance of
payments on account of FDI movements was a very real risk, as could be seen in the recent
experience of some ASEAN countries, and that  there was also a risk of foreign companies exercising
undue political influence.  Foreign affiliates could also negatively impact on domestically available
financing and competition in the domestic market, including on small and medium enterprises, asdiscussed in  a submission by UNCTAD (WT/WGTI /W/8/Add.1) which had found that FDI might in
certain circumstances need to be phased in at a slower rate than the rate determined solely by market
forces.  In the face of these possible negative consequences of FDI, industrial policy, including
sectoral targeting, was a necessary element of national investment regimes in order to optimize the
benefits from, and to minimize, if not eliminate, the negative effects of FDI and as an exercise of the
sovereign right of each country to pursue development policies in accordance with its domestic needs
and priorities. Sectoral targeting had proved its effectiveness in addressing not only national but alsoregional or locational and sector-specific objectives.  ASEAN Members believed that sectoral
targeting policy should be pursued in a complementary relationship with a policy of general openness
toward FDI.  Regarding the relationship between trade and investment, while there was ample
evidence to confirm that openness was a determinant for the attraction of investments and that more
investments encouraged further openness, account should also be taken of restrictive features ofparticular business practices and strategies.  In the case of FDI which targeted the domestic market of
host countries, foreign affiliates sometimes ended up dominating the domestic market, especially
during the early stages of product and market development.  In other cases, foreign affiliates
attempted to secure  tariff and other forms of protection or were subject to restrictions on exportWT/WGTI/M/4
Page 6
imposed by their parent firms.  Thus, business strategies and practices, by themselves, had an equally
important, if not determinative, role in the flow of investments.   Therefore, the view that trade and
investment went hand in hand, reinforcing one another, and were largely determined by a host
country's degree of openness  needed  to be qualified.
19. The representatives of Egypt and India  supported the views expressed by the representative of
the Philippines.  The representative of India pointed to the need for further analysis of restrictions on
transfer of technology in transactions between parents and affiliates and the impact of suchtransactions on trade and competition.  In regard to the reference by the representative of the
Philippines to the comment in WT/WGTI/W/11 on the possible negative balance-of-payments
implications of FDI, the representative of Japan explained that this comment reflected an argument
sometimes made in economic literature but that his delegation doubted that there was empiricalsupport for this argument.  Regarding the concept of sectoral targeting, he recalled the point made in
his delegation's submission in WT/WGTI/W/18 that restrictive FDI policies based on infant industry
protection grounds would, in the current context, se riously impede technological innovation, given the
rapid pace of technological change in today's world.
20. The representative of Egypt, referring to comments made by the  representative of the
European Community, considered that the  statement that FDI policies and policies inspired by the
infant industry argument were unlikely to be effective in the present context required further
qualification and analysis  in order to determine in detail which specific policies had been effective inthe past and would no longer be relevant in the present context.  As regards the question of positive
and negative effects of FDI, he stressed that whether FDI had positive effects on the whole was not at
issue in the Working Group, as shown by the efforts of all Members to attract FDI, and that the key
question to be addressed was how host countries could minimize possible negative effects and
maximize positive effects of FDI through appropriate policies.  Examples of possible negative effectsthat had been identified related to the possibility of political interference by foreign firms and adverse
effects of FDI  on trade balance and balance of payments.  It was also necessary to take into account
factors that might limit  the potential  benefits of FDI, such as restrictions on transfer of technology
between parents and affiliates.
21. The representative of the Philippines, speaking on behalf of the ASEAN WTO Members,
distinguished sectoral targeting from the concept of infant industry protection, which he had
deliberately refrained from using in his earlier statement as his delegation did not consider that infant
industry protection was a basis for sound policies.
22. The representative of the European Community, reacting to the comments made by the
representative of Egypt, observed that the OECD submission in WT/WGTI/W/26 showed that many
of the policies discussed therein had been proved not to have worked in terms of attracting FDI or
channelling FDI to particular sectors and that even where those policies had worked in the past their
effectiveness had not lasted very long.  The European Community's own experience with sectoral
targeting and protective policies also confirmed that these policies were not effective.  Regarding the
reference made by some delegations to possible negative effects of FDI arising from anti-competitive
practices of foreign affiliates or from arrangements between parents and foreign affiliates, as in the
case of restrictions on transfer of technology, he wondered whether there was specific empiricalevidence to substantiate these concerns.  In the experience of the European Community, restrictive
practices were not a typical feature of foreign firms and were adequately dealt with through a non-
discriminatory application of competition law.  At the same time, the presence of foreign firms
enhanced competition in domestic markets and was an important factor to be taken into consideration
in the application of competition law.
23. The representative of UNCTAD drew attention to a recent study on the Asian financial crisis
which confirmed that FDI was a more stable source of financing than portfolio flows and commercial
lending.  An important theme raised by the comments made at this meeting was the changing relative
weight of particular determinants of FDI in a liberalizing and globalizing economy.  In particular,WT/WGTI/M/4
Page 7
market size had been a predominant determinant of FDI in the past but was less important in the
context of trade liberalization in a regional or global context.   Regarding the issue of positive and
negative effects of FDI, he agreed that the central question was not whether FDI on the whole was
beneficial but how to maximize the positive and minimize the negative effects.  Like all investment,
FDI had both positive and negative effects and appropriate policies were needed to ensure that, onbalance, the positive effects outweighed the negative effects.  Competition policy was particularly
important in this connection to ensure the contestability of markets.   As public restraints on FDI were
reduced, attention shifted to private anti-competitive practices.  The relationship of FDI and
competition policy had been the subject of a special study contained in the
World Investment Report 1997.
24. The representative of the European Community responded that, while it might be true that
FDI like domestic investment could have positive and negative effects, it was not clear that there were
negative effects specifically associated with FDI, including in the area of competition policy.
25. The representative of Brazil noted that the debate at this meeting had raised many important
aspects of the relationship between FDI and economic development, including the role of FDI in the
context of the Asian financial crisis, the effects of FDI on balance of payments and transfer of
technology, the appropriateness of sectoral targeting and infant industry policies, and the effect ofscreening systems.  He requested that the Chairman's note in document No. 6004/Rev.1 be revised to
reflect these points.  The representative of Mexico stated that the synthesis paper under preparation by
the Secretariat would be an important tool to advance the work on this item of the Working Group'sagenda.
26. The representative of the Philippines, speaking on behalf of ASEAN WTO Members,
proposed that the Secretariat compile an analysis of negative effects of FDI, especially in regard to
transfer of technology.  In the light of comments made on this proposal, he indicated that he would
await the synthesis paper under preparation by th e Secretariat before considering how to proceed
further on this matter.
27. The Working Group took note of the statements made and agreed to  revert to item I of the
Checklist at its next meeting.  It agreed that th e Chairman's note in  document No. 6004/Rev.1 would
be revised to take into account additional points raised at this meeting as requiring further
examination.  At the next meeting, the Group would also have before it the synthesis paper which the
Secretariat had been asked to prepare on th e links between FDI and economic development.1
B. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT (INDENTS  1-7 OF ITEM II
OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY )
28. The representative of Turkey, in introducing a submission subsequently circulated in
WT/WGTI/W/37, described the liberalization of Turkey's FDI regime that had occurred in the early
1980s as part of the change in Turkey's economic policies from an import substitution-oriented
approach  to an outward looking development strate gy.  Turkey's current FDI legislation contained no
sectoral or ownership restrictions and provided for non-discrimination between foreign and domestic
investors, including with regard to  the eligibility of investment incentives.  Relevant international
arrangements to which Turkey was a party included a number of bilateral investment treaties, OECD
investment instruments, the ICSID Convention and the United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards.  Although liberalization of FDI policy had
resulted in a significant increase in FDI inflows, current FDI inflows were not commensurate with the
potential of the Turkish economy, having regard to the abundant availability of relatively low-paid,skilled labour; the geographical proximity to western markets and those of Central Asia and the
Middle East, the  rapid growth of internal demand and liberal trade policies.  Analysis of the role of
FDI in the Turkish economy was complicated by the lack of adequate statistical information on
                                                     
1WT/WGTI/M/3, paragraph 10WT/WGTI/M/4
Page 8
foreign affiliates' trade.  The limited data available showed that foreign firms accounted for significant
shares of sales and exports of the largest 500 firms but that their contribution to employment creationwas less significant.  Further work on the linkages between trade and investment was necessary in
order to develop a better understanding of how national trade policies and investment policies could
be made mutually supportive.
29. The representative of Cuba introduced a submission subsequently circulated in
WT/WGTI/W/35 on Cuba's experience with outward FDI.  Cuban firms had engaged in outward FDI
in a range of sectors, including seafood, cigars, nickel and cobalt, biotechnology and sugar cane.  In
many cases, such outward FDI was motivated by the need to establish channels for the distribution of
Cuban exports abroad, in which context he mentioned the impact of the embargo applied by the
United States on trade with Cuba.  There were also  examples of import-oriented outward FDI, as in
the case of certain food products.   In  the light of various existing trade and investment measures
applied by the United States, he expressed concern about possible future attempts by the United States
to take action against the operations of Cuban firms in third countries.
30. A number of specific comments were made and questions raised with regard to Secretariat
Notes on "Availability of Statistics on Foreign Direct Investment and on the Activities of Foreign
Affiliates" (WT/WGTI/W/24)  and on "The Relationship between Trade and Foreign Direct
Investment:  Foreign Direct Investment Origin ating In Developing Countries" (WT/WGTI/W/25),
which had been prepared by the Secretariat in response to a request made by the Working Group at itsmeeting in December 1997.
31. The representative of Australia considered that in view of the progress achieved in regard to
statistics on FDI and foreign affiliates trade, as summarized in paragraphs 39 and 40 of
WT/WGTI/W/24, the remaining data limitations were not a serious obstacle to the progress of the
work of the Working Group.  The representative of Egypt requested further information on the
progress of work of the Inter-agency Task Force on Statistics of International Trade in Services
mentioned in paragraph 31 of this Note and on the status of work in the OECD on the preparation of a
manual of indicators of globalization. He drew attention to the point made in the Note regarding the
limited availability of statistics allowing cross-country comparisons.  In regard to the annex to this
Note, he considered it inappropriate for the Secretariat to have formulated recommendations.  Therepresentatives of India, Mexico
 and Hong Kong, China  stressed that it was important that the manual
on trade in services that was being prepared in the Inter-Agency Task Force on Statistics ofInternational Trade in Services should cover all modes of supply covered by the GATS.
32. The representative of the Secretariat explained that the annex to WT/WGTI/W/24 was simply
intended to provide additional factual information on the ongoing work on the preparation of a manual
on trade in services by listing questions and recommendations that were under consideration in that
context.  Thus, the recommendations appearing in this annex had not been prepared by the WTO
Secretariat.  A first complete draft of the manual would be presented for consideration by the Inter-
Agency Task Force at a meeting to be held at the WTO in June 1998.  The manual on trade in services
that was being developed in the Inter-Agency Task Force was intended to deal with all modes of
supply covered by the GATS but further work was necessary to resolve specific methodological
difficulties associated with statistics on the movement of natural persons within the meaning of modefour of the GATS.  The Secretariat would contact the OECD for further information on the status of
its work on indicators of globalization.
33. The representatives of Korea, the Philippines
, speaking on behalf of the ASEAN WTO
Members, and Hong Kong, China agreed with th e conclusion drawn in WT/WGTI/W/25 that outward
FDI from developing countries was driven by th e same factors as outward FDI from developed
countries.  In this connection, they mentioned cost and efficiency considerations as explaining vertical
outward FDI and the role of trade barriers, such as  anti-dumping and voluntary export restraints, in
explaining horizontal outward FDI.  The representatives of the European Community, Korea  and
Hong Kong, China also highlighted the points made in this Note regarding the positive relationshipWT/WGTI/M/4
Page 9
between trade and outward FDI from developing count ries.  The representative of Hong Kong, China
considered that this matter required further exam ination in relation to horizontal, tariff-jumping FDI,
while the representative of Korea pointed to empirical evidence discussed in paragraphs 18-19 of his
delegation's submission in WT/WGTI/W/16 which showed that the export inducement effect ofKorean  horizontal outward FDI exceeded the import inducement effect.
34. The representative of Egypt expressed interest in a further consideration of the differences
between the patterns of outward FDI from the econom ies studied in this note in terms of their
geographical orientation, sectoral distribution and the role of small- and medium-sized firms;  the
impact of currency appreciation on outward FDI;  and the distortive effect of non-tariff barriers in
developed countries in diverting investment from developing countries.  As in the case of theSecretariat's Note on "The Relationship between Trade and Foreign Direct Investment"
(WT/WGTI/W/7 and Corr.1), his delegation did not share the basic assumption on which the analysis
in the Note seemed to be based that increased trade generated by FDI was beneficial per se .
35. The representative of the Secretariat responded to the latter comment by observing that the
request by the Working Group pursuant to which the Note had been prepared focused on the
relationship between trade and investment.  The Secretariat was not necessarily assuming that
increased trade was beneficial per se  in the sense of being welfare enhancing, although, to the extent
that it resulted from a reduction in governmental obstacles, it usually would be.
36. The representative of India, referring to the indent of item II on "the relationship between the
mobility of capital and the mobility of labour", pointed to the basic complementarity between capital
and labour as production factors and between capital mobility and labour mobility as delivery modes
for trade and investment in goods and services.  Although this complementary relationship betweencapital and labour called for a liberal, integrated approach to the mobility of labour as part of the free
global flow of capital, goods and services, in reality mobility of capital and mobility of labour had
been treated quite differently.  The GATS exemp lified the inadequate treatment of labour mobility
insofar as the supply of services through the movement of natural persons covered by its Mode Four
applied only to narrowly circumscribed categories of persons.  An examination by the Working Groupof the limitations on market access and national treatment commitments made under the GATS could
help elucidate the different barriers to mobility of capital and to mobility of labour.  The failure to
ensure mobility of labour more comprehensively as a complementary and critical factor to the
mobility of capital had far-reaching adverse economic consequences, particularly by creating labour
shortages which prevented the efficient use of capital.  It was important for the Working Group tohold discussions to explore the nature and extent of issues in labour resources faced by different
sectors.  In considering  ways to overcome the labour crunch and improve the productivity of capital
by enhancing the mobility of labour, it would be useful to focus on selected categories of labour apart
from the higher categories of personnel for which most Members had already undertaken
commitments under the GATS.  In this context,  the Working Group could suggest ways for such
selected categories of labour to move from surplus regions to deficit regions.    His delegation would
shortly present a submission on this matter.
2
37. The representative of the European Community recalled that his delegation had submitted a
communication relating to the indent of item II on "the impact of business strategies, practices and
decision-making on trade and investment" based on a study of outward FDI from the United Kingdom
(WT/WGTI/W/12).  He would welcome further discussion of this study and similar contributions
from other Members.
38. The representative of Australia  proposed that there be further analysis in the Working Group
of the trade effect of performance requirements and investment incentives.  She recalled that her
delegation had raised this issue on an earlier occasion, as reflected in WT/WGTI/W/23.  The
representatives of Switzerland, the European Community  and New Zealand  supported this proposal.
                                                     
2See WT/WGTI/W/39WT/WGTI/M/4
Page 10
39. The representative of the Philippines, speaking on behalf of ASEAN WTO Members,
observed that ASEAN Members regarded investment incentives as a necessary component of efforts
to attract FDI.  Incentives had an important role to play in compensating for certain distortions, for
example distortions due to domestic regulation in the field of taxation and labour laws, and were
particularly relevant to sectoral objectives of host countries.  ASEAN Members realized, however,
that in many situations the role of investment incentives was limited as compared to more
fundamental economic factors and that incentives could lead to inefficiencies.  Moderation in the useof investment incentives was therefore called for.  In regard to the proposal for further study of
performance requirements,  he suggested that such a study also examine:  how, if at all, performance
requirements had contributed to the development process of developing countries;  whether the
existence of performance requirements had a negative impact on source countries of FDI;  and  the
compatibility of the treatment of performance requirements in the WTO with those in other
arrangements.  In the latter regard, a key question concerned  the economic rationale of the more
lenient treatment of performance requirements in other arrangements, as compared to the strictprohibition under the TRIMs Agreement.
40. The representative of the Dominican Republic supported the  view that the  study to be
undertaken by the Secretariat include special consideration of the development dimension.  The
representative of Switzerland said that at some futu re stage the Working Group should also look at the
policy aspects of investment incentives.
41. The representative of UNCTAD, responding to a question from the Chair, drew attention to a
study carried out by UNCTAD and summarized in the World Investment Report 1996  of some
100 countries which had found that the use of investment incentives had increased considerably in
both developed and developing countries.  Although the granting of such incentives was sometimes
justified on the grounds that they helped to compensate for certain distortions, it was difficult todetermine whether incentives were positively contributing to development and were being applied in a
cost-effective manner.  The available evidence seem ed to suggest that in many instances incentives
were more like the icing on the cake  and that economic fundamentals were more important in
influencing investment decisions.  There was scope for rationalizing investment incentives by
granting them after investment projects had become profitable rather than up front.  The study had notlooked at the impact of incentives on trade.  On performance requirements, the
World Investment Report 1996   contained a list of the main types of such measures in the context of a
consideration of issues arising in regard to international investment arrangements but did not analyse
their economic impact.
42. The representative of Egypt, referring to the points made in WT/WGTI/W/25 and in the
submission by Australia in WT/WGTI/W/23 on the impact of trade barriers on FDI, proposed that the
Secretariat also undertake a more detailed analysis of the effects of trade measures on investment
flows.  The representatives of the European Community and the United States  commented that such
an analysis should deal comprehensively with the effect of trade protection on investment and notfocus on particular types of trade measures.
43. The Working Group took note of the statements made and agreed
 to revert to the first seven
indents of item II  of the Checklist at its next meeting.  As previously agreed, the eighth indent,
relating to FDI and competition, would be examined  at a later stage, following discussion of this
matter in the Working Group on the Interaction between Trade and Competition Policy.  The Working
Group agreed that the informal Chairman's note in document No. 6004/Rev.1 would be revised to
reflect the issues raised during the discussion on item II at this meeting.  It also agreed that the
Secretariat would consider whether it could add to its analysis in WT/WGTI/W/7 regarding the effects
on trade of investment incentives and performance requirements and the effects of trade measures on
investment,  possibly through a theoretical analys is or through a scrutiny of the material made
available to the Working Group.WT/WGTI/M/4
Page 11
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
44. No statements were made.  The Working Group agreed to keep this indent on the agenda of
its next meeting.
(ii) Bilateral, regional, plurilateral and multilateral agreements and initiatives;  implications for
trade and investment flows of existing international instruments
45. The Working Group had before it in document WT/WGTI/W/22 a Note by the Secretariat on
"Bilateral, Regional, Plurilateral and Multilateral Agreements" which had been prepared in responseto a request by the Working Group for a factual overview of existing investment agreements.
3
46. The representatives of Costa Rica and Mexico  pointed to several general conclusions that
emerged from the Secretariat's overview of existing international investment agreements in
WT/WGTI/W/22.  The representative of Costa Rica observed that existing international investment
disciplines had evolved autonomously, that it was only in recent years that investment disciplines had
become integrated in trade agreements and that, although there were important areas of commonality
between investment arrangements in regard to matters such as expropriation and compensation,national treatment, most-favoured-nation treatment and dispute settlement, none of these issues was
treated in a uniform manner. The representative of Mexico identified among the areas of convergence
between existing agreements the principle that foreign investors were to be accorded nationaltreatment but subject to exceptions as provided for in national legislation.  Areas of divergence
included dispute settlement, the treatment of balance-of-payments issues, incentives, performancerequirements, objectives, coverage and the role of promotion of development.   There were a number
of lacunae in existing arrangements, including with respect to the scope of the definition of
investment, the lack of an integral approach to development, the lack of provisions on privatization,
fiscal havens, technical cooperation, monopolies,  state enterprises and concessions, corporate
practices and technology development.
47. The representatives of the United States, Switzerland
 and Japan  introduced recent
submissions (WT/WGTI/W/29, 28 and 34) on the principal provisions of bilateral investment treaties
concluded by these countries with third countries.  In addition to highlighting specific elements of
these treaties, the representative of the United States pointed to the relationship between bilateral
investment treaties and adequate protection of intellectual property rights.  The representatives of
Canada, Japan  and Mexico  pointed to the fact that, while bilateral investment treaties concluded by
Canada and the United States required, in principle, national treatment and most-favoured-nationtreatment in regard to both post- and pre-establishment of an investment, in most other bilateral
investment treaties these standards applied only to  the post-establishment phase.  In summarizing the
results of UNCTAD's analytical work on internati onal investment agreements, the representative of
UNCTAD identified the following key themes that had emerged from this work in regard to bilateral
investment treaties:  the rapidly increasing number and diversity of countries that had concluded such
treaties;  the considerable uniformity in the broad principles of bilateral investment treaties along with
numerous and important variations in the specific formulations;  the lack of detailed information on
and analysis of the actual application of bilateral investment treaties;  the absence of evidence of a
significant influence of such treaties on investment flows, as revealed by analysis of investment flows
between parties to bilateral investment treaties;  the significance of bilateral investment treaties asevidence of a certain convergence of approaches to the treatment and protection of investment, even
though they had not given rise to the formation of new rules of customary international law;  and the
interaction between bilateral investment treaties and national laws.
                                                     
3WT/WGTI/M/2, paragraph 49WT/WGTI/M/4
Page 12
48. In regard to regional investment agreements, the representative of UNCTAD stated that such
agreements exhibited a greater degree of diversity in their content and purposes than bilateral
investment treaties.  The main objective typically pursued at the regional level was the liberalization
of restrictions to entry and establishment of FD I, followed by the reduction of discriminatory
operational restrictions.  A pattern that appeared to be emerging in recent regional agreements was to
consolidate in one instrument an expanded set of issues for liberalization and protection in
combination with procedures for the gradual reduction of investment restrictions and for thesettlement of investment disputes, including those between investors and host states.  In addition to
standards of treatment and protection of foreign investment, some regional agreements dealt with
transfer of technology, competition, environmental protection, conflicting requirements and standards
of conduct for multinational enterprises in areas such as disclosure of information, employment and
labour relations.  In respect of multilateral investment instruments, he stated that they mostly related
to particular sectors or specific issues, including services, performance requirements, intellectual
property rights, investment insurance, dispute settlement, employment and labour relations, consumerand environmental protection and competition.
49. Several delegations made proposals for further work on specific themes. The representative of
Mexico considered that, compared to the wide rang e of issues dealt with in international investment
arrangements, the treatment of investment issues in the WTO was limited and unbalanced and
proposed that the Working Group undertake a systematic review of international investmentarrangements in order to determine their possible value added from the perspective of WTO
disciplines.  The representative of Switzerland identified as an area for further analysis the interaction
between the various existing international investment agreements, notably in regard to theimplications of most-favoured- nation clauses, includi ng Article II of GATS.  He also suggested, with
reference to the discussion in WT/WGTI/W/22 of the Energy Charter Treaty, that it might be useful tohave more detailed information on the supplementary treaty that was currently under negotiation.  The
representative of the European Community proposed that there be further analysis of regional
investment agreements on the basis of contributions by Members regarding their experiences with theimpact on their investment regimes of regional agreements.  The representative of Australia proposed
that the Working Group examine existing international investment arrangements from the prism of
fundamental WTO principles, such as non-disc rimination, most-favoured-nation and national
treatment, fair trade, predictability of policies, encouragement of competition, special provisions for
developing countries and transparency.  She also pointed out that it could not be assumed that the
principle of national treatment, which was well known in the WTO context, was readily transferable
to the investment context, in which connection she raised the question of whether national treatmentwould differ depending on whether it was applied to  the establishment or post-establishment phase of
an investment.  Another relevant consideration was that granting national treatment could not be
equated with a liberal investment regime in all circumstances.
50. Several delegations provided information on developments in the context of regional
agreements. The representative of Argentina, speaking on behalf of the WTO Members parties to
MERCOSUR,  summarized the main provisions of two Protocols for the Promotion and Protection of
Investment that had been concluded by the partie s to MERCOSUR in 1994.  The Intra-Zone Protocol
covered FDI originating in MERCOSUR countries and the Extra-Zone protocol covered FDI from
non-signatory countries.  The main objective of the Protocols was to create favourable conditions for
investments into MERCOSUR countries.  The Ex tra-Zone Protocol also aimed at preventing
conflicting FDI regulations in MERCOSUR countries with respect to FDI from third countries.  The
two Protocols had much in common, notably in regard  to provisions on fair and equitable treatment,
national treatment, free transfer of funds related to investments and dispute settlement.  He offered to
provide in writing a more detailed description of the provisions of these two Protocols.  The
representative of Colombia stated that cooperation on  investment matters in the framework of the
Andean Pact dated back to the 1970s with the adoption of Decision 220 which had most recently beenrevised in Decision  291 adopted in 1991.  This Decision, which was legally binding and directlyapplicable in the Andean Pact member states, ap plied to both investments from member states and
investment from third countries.  It provided fo r a framework of general rules for the conduct ofWT/WGTI/M/4
Page 13
national investment policies and the settlement of investment disputes.  The negotiation of more
detailed rules to complement this framework was envisaged.  Compared to the rules laid down by
Decision 291, the investment rules of the Treaty on Free Trade concluded in 1994 between
Venezuela, Mexico and Colombia were far more specific in that they essentially build on the model of
the investment provisions of the NAFTA.  Her delegation would shortly submit a detailed writtenexplanation of the investment provisions of these two agreements.  The representative of Venezuela
explained that Decision 291 had been implemented in  Venezuela by  Presidential Decree 2095 which
allowed for the entry of foreign investment, free transfer of funds related to investments and the
conclusion of technology agreements without the need for prior authorization but subject to simple
registration requirements.  He also referred to Decision 292 of the Andean Pact which provided forthe formation of Andean Multinational Enterpri ses.  Although aimed at the encouragement of
cooperation among investors from the Andean region, investors from third countries could within
certain limits, participate in the capital of such en terprise.  Various incentives existed for the creation
of such enterprises, such as the right to invest in any sector of the economies of member states,
including in sectors reserved to domestic investors, and the right of free transfer of funds.
51. The Chairman said it would be useful to have this information on developments in the context
of regional agreements in writing and that more generally it was important for the Working Group to
have as broad a picture as possible of the expe riences of Members with the investment rules of
regional and bilateral agreements.  He therefore encouraged Members to make contributions on this
matter.
52. The representative of Costa Rica informed the Working Group that in the context of
negotiations on a western hemispheric free trade agreement likely to be launched at a summit meeting
in April the establishment of a working group on investment was envisioned.  The mandate of this
working group would be to establish a fair and tr ansparent legal framework to promote investment
through the creation of a stable and predictable environment that protects the investor, his investment
and related flows, without creating obstacles to investment from outside the hemisphere.
53. The representative of UNCTAD noted that, in addition to its work on the analysis of existing
investment agreements, UNCTAD was elaborating a set of criteria to test the development-
friendliness of international investment agreements.  An UNCTAD expert meeting to be held on
1-3 April would examine regional and multilateral agreements from a development perspective, with
a special focus on the objectives of such agreements and their definition of investment.
54. The representative of the OECD informed the Working Group of the state of play in the
negotiations on a Multilateral Agreement on Investment.  At a high level meeting held in February
participants had reaffirmed their commitment to these negotiations and to the achievement of an
agreement which would meet the original mandate for high standards of investment liberalization and
protection, dispute settlement and openness to non- member countries.  A statement by the Chairman
of the Negotiating  Group containing conclusions of this meeting identified three important areaswhere advances had been made but where conclusions had yet to be reached.  The first area was
labour and environment, subjects which had assumed growing importance in the past year.  The
Chairman's  statement reported that there was a growing convergence of views regarding the need for
the agreement to address social concerns, and in particular environmental protection and labour
issues, and contained some observations on the nature of the provisions that were being developed on
these matters.  The second area where there was a need for further work was liberalization and
exceptions.  In this regard, the Chairman's statement identified as outstanding questions nationalsecurity, public order, regional economic integration, culture, subsidies and government procurement.
It noted that delegations were agreed on the need to  reach solutions to these issues in a way which
would preserve the quality of the agreement and achieve a satisfactory balance of commitments.
Finally, the Chairman's statement indicated that a solution to issues relating to extraterritoriality
seemed necessary to ensure a successful conclusion of the negotiations.  The Chairman's statementconcluded by referring to the commitment of participan ts to intensify their efforts to find solutions to
the outstanding issues and to pursue dialogue with interested non-member countries to facilitate theirWT/WGTI/M/4
Page 14
early participation in the agreement.  It was clear that the negotiations would not be concluded by the
time of the OECD Ministerial Meeting on 27 and 28 April, as originally planned, but that theparticipants remained committed to the negotiations .  The issue of the programme and timetable for
continuing the work would be discussed at a forthcoming meeting of the Negotiating Group in April.
55. The Working Group took note of the statements made and agreed
 to revert to these two
indents of item III at its next meeting.  It agreed that issues that had been raised at the present meeting
as requiring further consideration would be incorpor ated in a revision of the Chairman's informal note
in document No. 6004/Rev.1.
D. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY - FIRST INDENT
56. The Chairman recalled that at the meeting in December 1997 the Working Group had agreed
that, at its next meeting, it would start its work under item IV of the Checklist by considering the
factual aspects of the first indent of that item ("identification of common features and differences,
including overlaps and possible conflicts, as well as possible gaps in existing international
instruments").
57. In introducing a submission by the European Community and its member States
(WT/WGTI/W/30), the representative of the European Community stated that there were three broad
categories of existing international investment instruments to which the Community and/or itsmember States were parties:  bilateral investment treaties of the member States with third countries;
the rules on investment of the EC Treaty, the Agreement on the European Economic Area (EEA) and
the Europe Agreements;  and other regional and multilateral instruments.  A basic element common to
all instruments in these three categories was the key role of the principle of non-discrimination in
combination with a recognition of the right of governments to take measures to attain public policy
objectives.  None of the instruments provided for an unqualified right of establishment of foreign
investment but the EC Treaty and the EEA Agreemen t required non-discrimination in regard to the
establishment of investments by any company established in the EEA regardless of its nationality.  At
the same time, they preserved the powers of member States and the Community to regulate any aspect
of economic life subject to, the principle of non-discrimination.
58. The representative of the United States introduced a submission (WT/WGTI/W/32) on the
issue of forced divestiture, whereby some countries that maintained limitations on foreign equity
ownership also required investors to reduce their equity interests after the passage of a certain amount
of time.  His delegation considered that this practice was inconsistent with an open and fair
investment regime, ran counter to the fundamental objectives of the WTO, discouraged investment
and hindered economic growth in the long term.
59. The representatives of Hong Kong, China and Canada , referring to submissions by their
delegations (WT/WGTI/W/33 and 36), pointed to the diversity of existing bilateral, regional and
multilateral investment agreements and the absence of a coherent set of rules at the multilateral level;
the need for a more integrated treatment of trade and investment in international agreements;  the
limitations of current WTO provisions related to investment;  the potential for conflicts arising from
investment agreements that were designed to address the priorities and concerns of the parties
involved without proper regard to the potential nega tive impacts on third parties;  and the fact that,
although there was a large degree of commonality between existing instruments in terms of basicprinciples, specific rights and obligations varied.  In this connection, the representative of Canada
underlined the close relationship between items III and IV of the Checklist and proposed that the
Secretariat Note in WT/WGTI/W/22 also be used as the basis for consideration of the first indent of
item IV.
60. The representative of Canada also considered that the Working Group's mandate required the
Group to examine the rationale of international inve stment rules and that, in view of the extent to
which WTO Members had already embarked on extensive rule-making at bilateral and regionalWT/WGTI/M/4
Page 15
levels, the key question to be addressed by the Working Group concerned the desirability of
multilateral rules.  His delegation believed that a comprehensive set of consistent rules among all
WTO Members would allow for a stable, transparent and consistent environment for firms operating
in the global market, whatever their ownership structure or place of incorporation.  A multilateral
approach should also provide benefits to governments and the peoples they represent.  The complexityfor governments of administering a multitude of investment agreements, possibly with different
standards for investors from different investment  partners, and many with most-favoured-nation
treatment commitments incorporated into them, wa s another strong argument for multilateralizing
rules.  Finally, implementing the central WTO principle of non-discrimination in international
economic relations provided yet another argument.
61. The representative of Japan, referring to his delegation's submission subsequently circulated
in WT/WGTI/W/34, proposed that the Working Group examine common elements of existing
international investment instruments in order to determine whether or not such elements should be
incorporated into future multilateral treaties.  The third section of his delegation's submission
contained suggestions for specific questions to be addressed in such an examination.
62. The representative of Switzerland noted that the contributions presented by various Members
and the Secretariat Note in WT/WGTI/W/22 revealed certain common patterns.  For example, there
was no right to invest and guarantee of market access, except in the case of agreements like the EC
Treaty and the EEA Agreement, and screening procedures existed in many countries.  The principle of
non-discrimination was well established at national and bilateral levels but few obligations of a
multilateral nature existed in regard to national treatment.  There was a certain reticence to adopt at
the multilateral level what had been commonly accepted at national and bilateral levels.  As discussedin the submission by Hong Kong, China, gaps in the existing legal framework were particularly
evident at the multilateral level.  The representative of  Australia underlined the points made in the
submission by Hong Kong, China that the majority of multilateral agreements encouraged investmentthrough non-binding principles and guidelines, wher eas most plurilateral instruments were legally
binding, and that many investment instruments had failed to recognize fully the relationship betweentrade and investment in a globalized economy.  She also endorsed the point made in that submission
that it was essential for the Working Group to explore the relationship between trade and investment
in terms of existing instruments.  The representative of Costa Rica agreed that, although at the level of
basic principles there were commonalities between existing investment instruments, there was a lackof uniform treatment of these issues and inadequate  reflection of the relationship between trade and
investment.  Further consideration was required of the limited manner in which investment issues
were dealt with in the WTO.
63. The representative of Australia wondered how the observation made in the submission by the
European Community and its member States (WT/WGTI/W/30) that the distinction between
establishment and post-establishment treatment of an investment may not be very meaningful andfeasible could be reconciled with the importance of  this distinction in bilateral investment treaties
concluded by member States of the European Community, which reserved the right of the parties to
regulate the entry of foreign investment.
64. The representative of the European Community responded that the relevance of the
distinction between establishment and post-establishment treatment of investment depended upon the
scope of the definition of investment.  This distinction originated in investment agreements that
defined investment narrowly in terms of the establishment or acquisition of enterprises and was morerelevant in that setting than in more recent agreements which defined investment in terms of a wide
range of assets.   In addition, the fact that bilateral investment treaties concluded by member States of
the European Community reserved the right of parties to regulate the entry of foreign investment was
of little practical significance insofar as the member States had very open investment regimes to third
countries, and any foreign company established in any Member State had the right to invest anywherein the Community by virtue of the EC Treaty rules on freedom of establishment.WT/WGTI/M/4
Page 16
65. In a preliminary comment on the submission by the United States on forced divestiture, the
representative of Malaysia said that the promotion of economic development was a basic policy
objective of his country and that although FDI contributed to this objective, it also had other
implications.  The issued raised by the United Stat es should be seen from the perspective of the need
to ensure a general  application of rules designed to serve important public interests.
66. The representatives of Switzerland, the European Community  and Costa Rica  echoed the
views expressed by the representative of Canada regarding the benefits of multilateral investment
rules, while the representative of Korea agreed th at the issue of the desirability of a multilateral
framework was a key theme for future consideration by the Working Group.  The representative of
Pakistan drew attention to a statement in the submission by the European Community and its member
States (WT/WGTI/W/30) that "the picture to emerge from the analysis reveals that it is possible tohave in place an extensive framework of far-reaching rules on investment, while at the same time
striking a fair balance between the different, and sometimes seemingly conflicting, policy objectives
of host countries".  Significantly, this statement referred to "far-reaching" rather than "multilateral"rules.  The fact that a range of instruments existed which, as stated in this submission, met the basic
objective of striking a balance of rights and obligations for States and investors, might be interpreted
as an argument for maintaining the status quo rather  than striving for a multilateral framework.  With
respect to the submission by Hong Kong, China, he considered that, while it was true that, as observed
in paragraph 17 of the submission, predictability was an important consideration in investmentdecisions, it was not obvious that a multilateral set of rules was necessary to ensure such
predictability.
67. The representative of the European Community responded that the statement quoted by the
representative of Pakistan should be viewed in its proper context of a factual analysis of existing
agreements, as the submission did not deal with the issue of possible multilateral rules.  Moreover, thestatement purported to characterize the investment regime of the European Community and its
member States, which was based on the uniquely far-reaching rules of the EC Treaty and the EEA,
supplemented by the bilateral investment treaties of member States with third countries.  The
representative of Hong Kong, China stated that his delegation's submission did not argue that a
multilateral set of rules was necessary to enhance predictability for investors.  It contained an
assessment of gaps in the existing internati onal framework but did not draw any conclusions
regarding the need for multilateral rules.  The re presentative of Japan recalled the views of his
delegation on predictability as an important determinant of FDI decisions, as discussed in particular in
his delegation's submission in WT/WGTI/W/11 and on how a multilateral framework could help
secure such predictability. The representative of Hungary observed that lack of predictability did
indeed constitute an impediment to investment flows.
68. The representative of India stressed that it had been agreed that the consideration of the first
indent of item IV at this meeting would be confined to its factual aspects and that one should
consequently refrain from value judgments as to the desirability or otherwise of rules.  A common
theme that emerged clearly from the information presented so far to the Working Group and that was
relevant to the factual examination of the first indent of item IV was that no country was presently
providing for a free right of investment.  Given that in discussions on investment prior to theSingapore Ministerial Conference  the achievement of a right of establishment had been proposed as
an objective of multilateral work on investment, it was significant that the study process in this
Working Group had helped to clarify that in practice no country granted such a right.  Also significant
as a common element identified by the contributions presented to the Working Group was the fact that
national treatment was not provided in regard to the pre-establishment phase of an investment.  As far
as differences between existing instruments were concerned, it seemed that prima facie there were
wide variations in the definition of investment.  While it had been argued that the distinction between
pre- and post-establishment might be less relevant  in the context of a wide definition of investment
was adopted,  he recalled that proposals made in the preparation for the Singapore Ministerial
Conference for the launch of work on investment in the WTO had specifically focused on foreigndirect investment.WT/WGTI/M/4
Page 17
69. The representative of Canada pointed to the existence of a right to invest and national
treatment as central elements of a large number of existing investment agreements, including all
bilateral and regional agreements to which Ca nada was a party.  He wondered whether the
representative of India perhaps meant that the righ t to invest and national treatment were sometimes
subject to exceptions and limitations.
70. The representative of India responded that the statement that certain agreements provided for
a right to investment and national treatment upon establishment, but subject to exceptions and
limitations, confirmed that there was no automatic right to investment and automatic grant of national
treatment in the pre-establishment  phase.  The large number of  reservations  proposed in the ongoing
negotiations on a Multilateral Agreement on Investment highlighted the fact that even developedcountries were not in a position to allow for an automatic right to invest.
71. The representatives of Brazil and Colombia
 stated that there was a tendency in the Working
Group to discuss existing investment regimes and instruments in terms of overly broad
generalizations.  In this connection, the representative of Brazil observed that Brazil did not have any
procedure for prior authorization of foreign investment, contrary to the suggestion that all countrieshad some form of screening mechanism, and di d not distinguish between establishment and pre-
establishment of foreign investment.  The representative of Colombia mentioned the need for a more
careful analysis of the treatment in existing instru ments of issues such as national treatment, most-
favoured-nation treatment, exchange matters and dispute settlement procedures.  The representative of
Switzerland observed that there was perhaps merit in clarifying, at some stage, the precise meaning of
the concept of screening of investment.
72. The representative of Australia proposed that the Working Group undertake a detailed
examination of the definition of investment in a range of existing investment agreements.  The
representatives of Pakistan, the European Community , Brazil , Colombia , India , Switzerland  and the
United States agreed with this suggestion.  The representative of Australia  suggested that this work
could aim at identifying capital movements that would not be of interest from a WTO perspective.
The representative of Brazil identified as an important issue to be explored the relationship between a
broad definition of investment and the need for exceptions and safeguards, for example with regard to
the balance of payments and portfolio capital movements, and pointed to the relevance of work on the
definition of investment to the issue raised by Canada on the need for a more specific identification of
development aspects of FDI issues.  The representative of Pakistan endorsed the suggestion made in
submission by the European Community and its me mber States for a detailed discussion by the
Working Group of the philosophy and content of the OECD Guidelines for Multinational Enterprises.
It would be especially instructive to study to what extent these Guidelines were actually observed by
multinational enterprises from OECD countries;  what  were the impediments to the Guidelines being
transformed into legally binding rules;  and how the Guidelines compared to the draft Code of
Conduct for Transnational Corporations that ha d been formulated in the framework of the
United Nations.  He also expressed interest in information on UNCTAD's work on the formulation of
a set of criteria to test investment agreements from a development perspective.
73. The representative of Canada stated that the reference made by the representative of Pakistan
to the work in UNCTAD on the development-friendliness of investment agreements raised the
fundamental question of how to take into account the development dimension in the context of
international investment agreements.  While his delegation believed that the analysis under items I
and II of the Checklist had shown that FDI flows were growth and development enhancing per se , it
appeared that some Members were of the view that , aside from the role of investment agreements in
promoting investment flows, there were particular  subjects arising in regard to the development
aspects of FDI that required specific attention.  If so, such subjects should be identified and raised for
discussion in the Working Group.   He wondered whether the statement  made by the representative of
India under item B on capital mobility and labour mobility should perhaps be seen in this light.WT/WGTI/M/4
Page 18
74. In response to the reference made by the delegation of India to restrictions on FDI in the
context of the ongoing negotiations on a Multilateral Agreement on Investment, the representative ofthe OECD explained that there was an understanding  among participants to these negotiations that
there would be no exceptions to provisions on the protection of investment which corresponded to the
rules typically found in bilateral investment treaties and applied to investments once made
(e.g. general treatment, expropriation and compensation, protection from civil strife).  However, it
was also understood that there could be exceptions with respect to the establishment of investment.The recent discussions of this matter had proceeded on the basis of exceptions lodged by participants
which they considered necessary to protect measures that did not conform to the envisaged
requirements in areas such as  national treatment, most-favoured-nation treatment and performance
requirements.  There was a discussion of principle on the extent to which those exceptions would be
accommodated in the agreement.  One kind of exception involved the grandfathering and acceptance
of a standstill commitment in regard to existing non-conforming measures.  A second kind of
exception involved areas where countries were not prepared to accept a standstill requirement.  Therewas intense debate on whether this second type of country-specific exception should be allowed or
whether it was perhaps preferable to have general exceptions addressing the underlying policy
objectives.  In addition to this debate on principle, discussion on exceptions also took place on a
bilateral basis and in a technical group established to facilitate the comparison of exceptions proposed
by participants by analysing exceptions lodged in in dividual sectors.  In regard to the issue of the
definition of investment, he stated that this matter had not been the subject of much discussion
recently.  As reflected in the consolidated text of the draft agreement, participants had agreed to adopt
a very broad definition covering all forms of investment.  They had also agreed that this broad
definition necessitated inclusion of a safeguard clause for balance-of-payments difficulties.  This
clause would operate subject to a surveillance mechanism in which the IMF would play a prominentrole.
75. The Working Group took note of the statements made and agreed
 to revert to this indent at its
next meeting, at which it would also take up the other indents of item IV, as had been agreed at the
meeting held in December 1997.  The Chairman's note in document No. 6004/Rev.1 would be revised
to take into account the issues raised at the pr esent meeting as requiring more specific examination.
The Working Group also agreed to request the repr esentative of the OECD to provide information
prior to the next meeting on the Guidelines for Mu ltinational Enterprises, including the experience
gained with their implementation, and to request UNCTAD to provide information on the progress of
its work on the development of criteria to test the development-friendliness of investment agreements.
The Working Group further agreed that at its next meeting it would have a detailed discussion of the
definition of investment.  The Chairman invited delegations to make contributions on this issue.
76. Following suggestions by the representatives of Switzerland and Mexico , the Working Group
also agreed that in advance of the next meeting the Secretariat would issue an annotated agenda which
would explain how specific agenda items would be  dealt with and include a list of documents
circulated.
E. OBSERVER STATUS FOR INTERNATIONAL INTERGOVERNMENTAL ORGANIZATIONS
77. The Chairman recalled that at its meeting held in December 1997 the Working Group had
considered requests for observer status from a number of international intergovernmental
organizations and had agreed to revert to these requests at a later stage in light of the ongoing
consultations in the framework of the General Council.  At that meeting, the Working Group had also
agreed that those organizations that had been invited to attend that meeting be invited to attend the
next meeting on the same basis.  Given that the co nsultations in the framework of the General Council
were still ongoing, he suggested that the Working Group maintain the status quo by taking the same
decision as at the last meeting and that it agree to re vert to this matter at its next meeting in the light
of any developments in the consultations being held in the framework of the General Council.   It was
so agreed.WT/WGTI/M/4
Page 19
F. OTHER BUSINESS
78. The Working Group took note of the text of a statement that would be made by its Chairman
at the meeting of the General Council scheduled for 24 April 1998 to update the Council on the work
accomplished in the Working Group since December 1997.
Next Meeting
79. The Chairman recalled that it had been agreed at the meeting in December 1997 that the
second meeting in 1998 would be held on 16 and 17 June.
__________