WORLD TRADE
ORGANIZATIONWT/WGTI/W/158
11 April 2003
(03-2010)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 7 April 2003, has been received from the Permanent
Mission of Japan.
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CONSIDERATION OF THE NECESSITY OF MULTILATERAL
INVESTMENT RULES FROM DIVERSIFIED VIEWPOINTS
I. INTRODUCTION
1. At the four meetings of the Working Group on the Relationship between Trade and
Investment held in 2002, discussion focused on the individual elements described in Paragraph 22 of
the Doha Ministerial Declaration and proposed elements in the Working Group. From now it is
necessary to continue to further discuss these elements and review outstanding points of discussion.
2. In addition to those technical points of discussion, questions were also raised concerning the
role and significance of investment rules, such as the necessity of prospective multilateral investment
rules and their relationship with development policies. Now that the first round of discussions have
just been completed, it is also important to review the issues regarding the role and necessity of
investment rules from a broader perspective again, with the considerations on such issues as the
relationship between prospective multilateral inve stment rules and other investment-related WTO
rules.
3. In the first part, this paper takes a further look at the necessity of investment rules from the
perspective of actual economic activities, taking into account the relationship with development
policies. The second part of this paper aims at considering the necessity of investment rules from the
viewpoint of overall structure of WTO system. In this wise, this paper attempt to sort out the issues
regarding the role and necessity of investment rules. It should be noted that this paper does not
prejudge the position of the Government of Japan in any future negotiations.
A. NECESSITY OF INVESTMENT RULES FROM THE PERSPECTIVE OF ACTUAL ECONOMIC
ACTIVITIES
1. Increasing role of FDI and the emergence of untransparency
4. Cross-border investment (FDI1) rapidly increased in the 1990s, and their contribution to
economies around the world is of increasing significance. The significance of such FDI and itscontribution to economic growth has already been pointed out in papers submitted by each member
country at the time of the launch of the Working Group on Trade and Investment in 1997. (See
Annex, Table 1)
                                                     
1 Throughout this written contributi on, consideration is limited to foreign direct investment (FDI).
It is only for the sake of convenience and this does not indicate Japan’s position as to what the scope ofinvestment should be.WT/WGTI/W/158
Page 2
5. Recent macroeconomic data indicates that the share of the contribution of FDI to the gross
fixed capital formation is increasing in developing countries. For instance, the above-described share
in the Asian region has jumped up from 3-4% at the beginning of the 1990s to about 10% by the end
of the 1990s2. It goes without saying that investment rules are therefore essential elements for
economic growth in each country, and for developm ent policies that underpin the growth of inward
FDI and consequently economic growth.
6. One recent analysis of great interest is the research on China undertaken by UNCTAD. In
China it is said that foreign affiliates account for half of exports, one-quarter of manufacturing
production, one-third of sales of manufactured products, and one-fifth of all tax revenues,
demonstrating the fact that FDI is greatly contributing to economic growth of China.3 (See Annex,
Figure 1)
7. On the other hand, with this sharp growth in FDI, many investors concerns about various
problems over investment issues on the part of investors, and request on urgent solution to theseissues. As was already demonstrated in the Working Group meeting of April 2002 (WGTI/W/112,
communication from Japan on "Transparency"), serious concerns are, for example, the lack of
transparency and the frequent changes of investment-related rules. (See Annex, Figure 2)
8. From the perspective of development policies in developing countries, it is necessary to make
best use of rather than limit FDI, and to this end it is essential that predictability can be secured forinvestors through the formulation of investment rules and other measures. The improvement of
predictability has a positive effect on future increases in investment in host countries. Of course, the
necessity of a flexible rule structure in order to resolve conflict between investment rules and
development policies has been pointed out in discussions in previous Working Group meetings (July
2002) (e.g. WGTI/W/124, communication from Japan on "Non-Discrimination" and W/125
"Modalities for Pre-establishment Commitments"). In other words, given the different stages of each
country’s economic development, prospective multilateral investment rules should be flexible enough
in order to respond to the specific development policies of each country. For example, it is necessary
to consider in the negotiation process a GATS-typ e approach to national treatment (NT) for pre-
establishment and development provisions for developing countries, as has been discussed in theWorking Group.
2. Changes in Investment Patterns and the Role of Investment Rules
9. With regard to the role of investment rules, it  is necessary to discuss the following two points
in relation to the dynamic changes of actual FDI activities.
10. The first point is that the increasing role of  FDI in an environment with diversity of FDI
activities is increasing. In the paper "Investors' and Home Governments' Obligations" (WGTI/W/152)
discussed in the Working Group in December 2002, basic discussion was made on the assumption
that the FDI activities are made mainly by multi-national enterprises (MNEs) which have strong
market power. However, in reality, FDI trends are changing in a global market. Many companies, not
only MNEs are now actively engaged in FDI. Fo r example, in the first half of the 1990s,
approximately half of the Japanese manufacturing companies engaging in FDI were small and
medium enterprises (SMEs).
4 These SMEs do not necessarily have highly advanced information
gathering capacities concerning the investment envi ronment in the host countries. Accordingly, the
                                                     
2 UNCTAD World Investment Report 2001,  p.24, Fig. 1.13.
3 "CHINA: WTO Accession and Growing FDI Flows", UNCTAD, 11 December 2002.
4  "White Paper on Small and Medium Enterprises in Japan, 2000".
   The survey uses the definition of SMEs of Article 2 of Small and Medium Enterprise Basic Law
(Japan, as of 1973): company of which total amount of its capital is 100 million yen and under / company or
person that employs less than 300 full-time employees.WT/WGTI/W/158
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formulation of investment rules and the creati on of an investment environment with greater
predictability for investors is essential for small and medium sized investors. In addition, from the
perspective of the host countries also, the formulation of investment rules would bring about greater
diversity in inward FDI in the future and could pr ove to be of benefit linked to enhancement of the
industrial base or job creation in the host countries themselves.
11. The second point is the argument that investment rules are necessary in order to respond to
the structural changes in FDI patterns in each co untry. At the Working Group in July, Hungary made
a most interesting comment concerning the possibility of capital importers becoming capital
exporters: " In the process of economic transformation that had begun at the end of the 1980s,
Hungary relied heavily on FDI.  However, after a decade Hungary had become the second largest
exporter of FDI in Central and Eastern Europe after Russia." (WGTI/M/18, p.22, para. 89). Such
comments will encourage host countries of FDI.
12. Many developing countries as host countries of FDI, while understanding the positive effects
of investment rules to increase inward FDI, on the other hand may feel that disciplines on domestic
rules imposed by prospective multilateral investment rules would create too much burden for them.
However, considering those actual examples as the changes that have taken place in Hungary,
developing countries should focus also on the long-term effects that come from multilateral
investment rules. That is to say, not only would prospective multilateral investment rules have apositive effect on increasing inward FDI, it is also necessary for developing countries to consider that
the rules would provide an important tool for future outward FDI activities of themselves. As a matter
of fact, it is already the case that the country in certain sectors could be a capital exporter although a
developing country as a whole nation is a capital importer.
13. As a concrete example, it is a fact that five out of the world’s top 100 transnational
corporations in 2000 were corporations from developing countries.
5 In China, the capital importer in
the world, while the great amount of inward FDI flow is continuing, outward FDI has doubled from
2000 to 2001, mainly in natural resources sectors6. In addition, according to macroeconomic data,
although it is the case that FDI from Japan to China is very large, there are already cases to be seen
whereby Chinese companies are investing in the Japanese manufacturing sector. Moreover, theinteresting case that Telekom Malaysia has suffered  damage in Ghana indicates that establishment or
improvement of predictability is also important for FDI activities of developing countries
7.
B. NECESSITY OF INVESTMENT RULES FROM THE VIEWPOINT OF OVERALL STRUCTURE OF WTO
SYSTEM
1. Imbalance between service and non-service sectors
14. In the previous section the necessity and role of investment rules was discussed from the
viewpoint of actual economic activities, yet there ar e concrete examples of various investment-related
rules inside and outside the framework of the WTO.
15. Within the WTO rules a point of particular importance for the prospective multilateral
investment rules is the relationship with GATS. The fact that GATS has already been equipped with
substantive disciplines on FDI in the service sector under Mode 3 is important, from the perspective
of the coverage regarding FDI activities in each industrial sector under WTO Agreements.
                                                     
5 UNCTAD World Investment Report 2002, p. 99.
6 CHINA：WTO Accession and Growing FDI Flows, UNCTAD, 11 December 2002, p. 23.
7 See following websites on details:  Ghana Online ( http://www.ghanaonline.com );  BBC NEWS
(http://news.bbc.co.uk/2/hi/business/2632509.stm).WT/WGTI/W/158
Page 4
16. More than half of FDI is carried out in the non-service sector. In particular, approximately
70% of FDI towards developing countries is in th e non-service sector. However, given that there are
no disciplines in such areas in which FDI activities are conducted, we can say that the current WTO
system is insufficient. (See Japan’s written contribution "The Relationship between the Future
Investment Multilateral Rules and GATS" (WT/WGTI /W/156), regarding the detailed perspective on
the relationship between GATS and prospective multilateral investment rules).
17. From this perspective, many voices in industrial circles are therefore calling for investment
discipline in non-service sector. For example, Nippon Keidanren (Japanese Business Federation)
issued a proposal in March 2002 concerning the necessity for investment rules.8 (See Annex, Table 2)
2. Maximizing the Benefits of Trade Liberalization in the WTO
18. Furthermore, from a broader perspective, multilateral investment rules are important because
of maximizing the benefit which WTO can bring to the global economy.
19. To be more precise, the balance in the progress of liberalization both in trade and investment
is important, taking into account the synergy effect of liberalization in both fields. More specifically,
in the previous rounds of the GATT/WTO, liberalization progress has been made in trade aspects,
such as reduction or as appropriate elimination of tariffs, as well as non-tariff barriers. However, in
order to make the WTO system more effective, it will not be enough merely to liberalize existing
aspects of trade, but rather what is called for is the liberalization of investment as well.
20. Regarding the above-described point, the an alysis of UNCTAD World Investment Report
2002 is useful. Firstly, for developing countries in which domestic investment is limited by financial
constraints, capitals and technologies and trade expansion brought about by FDI is crucially
important. Secondly, it is important to host countr ies that the reception of FDI by MNCs brings the
access to their global network, such as customers worldwide. Concerning the second point, the reportpoints out that "an estimated one-third of world trade consists of intra-firm trade," and indicates how
great is the role of MNCs played in the world trade
9. In this manner, developing economies can
receive much greater benefit attained by trade liberalization, through their improvement of export
competitiveness and market expansion arisen from inward FDI. Therefore, investment liberalization is
also important in order to maximize the outcome of trade liberalization.
21. In fact, there is an analysis indicating that the elimination of FDI-related barriers has a
significant impact on economic growth and import/e xport. For example, in APEC, although rules are
non-binding, both trade and investment liberalization are being pursued in tandem. In 2002, model
analysis was undertaken, combined with the impact analysis of trade liberalization, regarding the
impact of the elimination of FDI-related barriers on economic growth and import/export. Result ofthis analysis indicates that these investment liberalization would increase GDP by 0.3% and increase
exports would increase by 0.5% in the APEC region. (See Annex, Figure 3)
22. The same perspective was echoed in the report published by the World Bank in January 2003
"Global Economic Prospects and the Developing C ountries 2003". It has been pointed out that if
negotiation on prospective multilateral investment rules and negotiations on liberalization in other
sectors are mutually advanced, they will bring about merits for developing countries.
10
                                                     
8 Nippon Keidanren website:  http://www.keidanren.or.jp/english/policy/2002/042/index.html ).
9 UNCTAD World Investment Report 2002, p. 153.
10 "…participating in international investment agreements may have benefits over and above unilateral
reforms if those agreements are accompanied by recipro cal market access in areas of importance to developing
countries." (p. 118).WT/WGTI/W/158
Page 5
II. CONCLUSION
23. Investment rules are essential when considering the positive impact of investment
liberalization on the global economy.
24. In the service sector, GATS has already exists as a discipline on FDI, and there is a need to
correct this imbalance considering the importance of FDI in other sectors.
25. In addition, so as to further enhance the merits of the progress of the liberalization that has
been made through negotiations in previous GATT/WTO rounds in the trade sector, a vital challenge
is to promote investment liberalization through the formulation of investment rules. If both trade and
investment liberalization are established and promoted, great benefits will be accrued to both
developing countries and developed countries.
26. In conducting concrete review of investment ru les, it will be necessary to review not only
GATS, but also related rules in WTO system, bilateral and regional investment-related rules. And in
doing this it will be necessary to consider the flexible structure of rules in a way that enables them tobe adopted by developing countries at different stages of development and enables members to enjoy
greater benefits.WT/WGTI/W/158
Page 6
ANNEX
Table 1:  Empirical Analyses from Members
Hong Kong, China October 1997
WT/WGTI/W/10"FDI is, in the case of Hong Kong, China, main
impetus to its economic efficiency, growth and
development."
Poland December 1997
WT/WGTI/W/13"10 per cent increase in the flow of FDI gives
0.54 per cent growth of GDP."
Columbia December 1997
WT/WGTI/W/15"In Latin America, there has been empirical
evidence of a positive relationship between FDI
and per capita GDP."
Republic of Korea September 1997
WT/WGTI/W/8"The share of FDI’s contribution to Korea’s GDP
growth in the manufacturing sectors was 19.5 per
cent during 1970-1990."
Figure 1. Indicators of importance of foreign affiliates in China, 1999-2001
(Unit: %)
1996 1997 1998 1999 2000 2001
Share of foreign affiliates
in total manufacturing
sales15.1 18.6 24.3 27.7 31.3 -
Share of foreign affiliates
in total exports of China40.7 41 44.1 45.5 47.9 50
Share of foreign affiliates
in total industrial outputs15.1 18.6 24 27.8 22.5 -
Share of foreign affiliates
in total tax revenues11.9 13.2 14.4 16 17.5 -
Excerpted from UNCTAD "CHINA: WTO Accession and Growing FDI Flows" Table 5.
(Source:  UNCTAD, complied from various tables in World Investment Report 2002 and MOFTEC, Statistics
on FDI in China, 2001)WT/WGTI/W/158
Page 758.6
53.0
49.3
42.6
33.5
29.6
26.8
20.7
18.5
15.061.6
55.0
48.7
40.6
31.0
22.9
30.3
17.0
14.4
14.852.6
48.9
50.4
46.7
38.5
43.0
20.0
28.1
26.7
15.60 1 02 03 04 05 06 07 0
Non-transparency in investment related rules
Instability in investment-related rules
Restriction on free transfer of payments
Lack of investment-related rules
Discriminative treatment against foreign
investors
Restriction on the ratio of stockholdings
Export requirement/Restriction on sales in
the host country
Requirement to hire a given level of
nationals
Requirement to establish a joint
venture with domestic participation
Local content requirementThe Whole (n=406)
Manufacturing (n=271)
Non-manufacturing (n=135)
n=number of responsesFigure 2. Investment-related problems faced by Japanese companies in host countries
(Source) A survey by JETRO, Dec. 2001WT/WGTI/W/158
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Towards for the Creation of International Investment Rules
and Improvement of the Japanese Investment Environment
16 July 2002
Nippon Keidanren (Japan Business Federation)Table 2. Proposal from Japanese
Business Federation
Need for International Investment Rules
Accelerating globalization /g224 Cross-border investment becomes as essential to the international business of Japanese companies as trade in goods and service s.
 (1) No multilateral investment rules exist /g224 Discussion at the Working Group on the Relationship between Trade and Investment toward negotiations on investment rules in th e Doha
Development Agenda (DDA). (2) Rapid increase in BITs (Bilateral Investment Treaties), which amount to 1941 as at the end of 2000, and investment-inclusi ve FTAs.  Japan has only 10 BITs and 1 FTA.
 /g224 Japanese companies disadvantaged against other countries’ companies in terms of protection and liberalization of investment in  host nations
Multi-Faceted Approach
(Utilization of All Available Channels)Creation of WTO investment rules in the new round
We strongly urge that investment rule negotiations be launched at the Fifth Ministerial in September 2003 on the
basis of explicit consensus, and completed by the deadline for the DDA (January 1, 2005). To encourageparticipation by all members, due account should be taken of the development policies of developing members
and priority placed on transparency  and liberalization acceptable to developing countries.
Active conclusion of bilateral and regional investment agreements
(1) ASEAN: Japan should conclude BITs with all 10 ASEAN nations as soon as possible. Over the medium-
term, conclude wide-ranging Economic Partnership Agreements (EPAs) which encompass investment.(2) China: The current BIT with China, which entered into force in 1989, should be revised up to a higher level.(3) Other regions: Japan urgently needs to form investment-inclusive FTAs with the Republic of  Korea andMexico. Should also consider FTAs or other cooperative frameworks with the US, Canada, Australia, the EU,
etc.(1) Investment definition and scope  (2) Transparency
(3) Investment protection (expropriation, compensation, freedomof remittance), (4) Liberalization (MFN treatment, national
treatment*, market access*), (5) Exceptions
(6) Development provisions, (7) Dispute settlement procedures(8) Relation to BITs
(1) Investment definition and scope  (2) Transparency,(3) Investment protection (expropriation, compensation,
freedom of remittance), (4) MFN treatment, (5) National
treatment, (6) Performance requirements, (7) Key personnel, (8)Dispute settlement proceduresModel Agreement
* GATS-type positive list commitment
The Japanese Government should improve the domestic investment environment to secure the freedom of corporate business
activities./g224 Resulting increase in plant and equipment investment by Japanese companies, as well as encouragement of investment from
abroad, will stimulate the Japanese economy.
  Specific measures:  (1) lower costs for energy, distribution, logistics and telecommunications, and formation of social capital;
(2) tax reforms, including a lower effective corporate tax rate; (3) simpler and swifter administrative procedures; (4) support  for
local government efforts, including special regulatory reform zones; (5) simplification of customs clearance procedures;and (6) expansion of external PR activities.Also important to facilitate movement of key personnel accompanying investment. /g224 Simpler and swifter entry and sojourn
procedures.Improvement of the Japanese Investment EnvironmentInternational Investment Rules sought by Japanese Business
Ratio of foreign direct investment to GDP 
0%20%40%60%
Japan US UK Germany France CanadaWT/WGTI/W/158
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Figure 3. The Benefits of Trade and Investment Liberalization and Facilitation
(Unit %)
Real GDP Exports Imports
World 0.1 0.2 0.2
APEC total 0.3 0.5 0.5
Chile 2.1 2.4 1.8
China 1.0 0.9 0.8
Hong Kong, China 0.1 0.2 0.1
Indonesia 3.1 3.8 3.1
Japan 0.0 0.1 0.2
Korea 0.1 0.2 0.2
Malaysia 1.7 1.4 1.3
Mexico 1.9 1.7 1.6
Philippine 0.9 1.1 0.6
Singapore 0.5 0.6 0.6
Chinese Taipei 0.1 0.1 0.2
Thailand 2.4 2.5 2.0
USA 0.1 0.2 0.2
Viet Nam 1.5 2.0 1.3
Europe 0.0 0.0 0.0
Source:   APEC Economic Committee report, August 2002.
"The Benefits of Trade and Investment Liberalization and Facilitation in APEC"
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