WORLD TRADE
ORGANIZATIONWT/WGTI/W/84
16 June 2000
(00-2410)
Working Group on the Relationship between
Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE EUROPEAN COMMUNITY
AND ITS MEMBER STATES
The following communication, dated 8 June 2000, has been received from the Permanent
Delegation of the European Commission.
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CHECKLIST OF ISSUES, AGENDA ITEM IV:  ADVANTAGES AND DISADVANTAGES
OF ENTERING INTO BILATERAL, REGIONALAND MULTILATERAL RULES ON
INVESTMENT, INCLUDING FROM A DEVELOPMENT PERSPECTIVE
“Impact of international investment rules on current national policies”
I. INTRODUCTION
1. All countries today are willing to create the most favourable conditions to attract Foreign
Direct Investment (FDI) flows.  Developed and developing countries welcome FDI as an important
factor of growth and development.  In order to  attract FDI most governments have adopted far
reaching internal reforms of their investment regime, aimed at creating a favourable climate forforeign investors.  At the same time most countries have concluded bilateral and regional investment
treaties mainly for the purpose of promoting and protecting investment flows with their partners.
2. Besides these domestic and international developments aimed at creating market-friendly
investment regimes, governments still maintain national policies intended to address specific
problems for which market-driven forces alone are not always considered sufficient.  Almost allcountries have specific economic objectives to achieve such as combating unemployment, promoting
regional and in particular rural development, filling a technology gap.  Moreover, there are often
sensitive policy areas to consider and protect: cultural heritage and diversity, improving social
conditions, protecting minorities etc.  In some cases the need to achieve a specific objective or protect
a given policy may discourage certain governments from adopting reforms or from committingthemselves to international agreements aimed at creating favourable conditions for FDI.  In general,
liberal investment regimes are more effective at achieving many of these economic objectives, largely
because growth, employment and technology transfer are more likely to occur in an open investment
environment.  Likewise, there are many ways of ensuring that such regimes do not interfere with
important domestic policies.
3. Regardless of the effectiveness or appropriateness of any specific policy, this paper intends to
open a discussion on the possible impact that international investment rules could have on some of the
current domestic policy tools.  In particular, the paper draws from the experience of some existingWT/WGTI/W/84
Page 2
agreements’ investment provisions and concludes that an investment framework agreed at multilateral
level1  can be consistent with domestic policies.
4. Moreover, it should be noted that a possible multilateral investment framework should look at
possible “flexibility mechanisms” 2 specifically aimed at development purposes.  These mechanisms,
such as the modalities of implementation and the inclusion of technical and financial cooperation,however, have not been addressed in this paper.
II. ENTRY OF INVESTORS, ESTABLISHMENT
5. Under customary international law sovereign states are free to regulate the entry and
admission of foreign investors and to establish the conditions under which they can operate.  During
the last 50 years developed countries (which constitute the bulk of capital-exporting countries) have
gradually dismantled capital controls.
3  Most countries, however, maintain specific reservations
covering certain sectors of their economy, such as transport, energy, financial services ortelecommunications.
4
6. Traditionally, a crucial developing countries’ concern after decolonization was to regain
control of their economy and natural resources in order to consolidate their sovereignty.  This implied
full control, restrictions and conditions over the entry of FDI in their territory.  Following the debt
crisis of the 1980s5, however, developing countries have gradually accelerated the integration of FDI
in their economies, in particular since FDI became the most attractive alternative to bank lending.
Most investment regulations which imposed limitations on the entry and establishment of foreign
enterprises have been substantially amended since then (even though a number of developing
countries still apply screening and authorization procedures mainly for information purposes and for
the management of balance of payments).  Some countries condition the establishment of foreigninvestors to the localization of the investment and to certain performance requirements
6, intended to
address specific development objectives.
7. Most existing international investment agreements do not require governments to liberalize
their economies vis-à-vis  FDI.  In general, although Bilateral Investment Treaties (BITs) encourage
parties to liberalize their investment regimes, they do not grant investors of the parties a right to beadmitted.  Governments retain their prerogative to control and limit, if necessary, the entry of foreign
investors.
8. Some BITs (e.g. the more recent ones signed by the United States
7) provide that national
treatment and most favoured nation treatment shall be accorded with respect “to the establishment
(...)” of covered investments.  This approach, however , foresees the possibility for the parties to lodge
specific exceptions, usually included in a list – the so-called top-down approach.
                                                     
1 See e.g. communication from Korea WT/WGTI/W/79.
2 WT/WGTI/W/77.
3 The OECD Code of Liberalization of 1961 includes the binding obligation for OECD Members to
provide non-discriminatory liberalization of capital movements, including the right of establishment to investorsfrom other OECD countries.
4 The European Community, for instance, applies limited restrictions to the entry of foreign investors in
the sectors of air transport, inland waterway, trans port services, maritime cabotage, banking activities, life
insurance services, fisheries and hydrocarbons.  The reas ons for these limitations relate mainly to the need to
consolidate the EC internal market but also to impr ove EC operators’ opportunities of access to third markets
(i.e. reciprocity).
5 UNCTAD World Investment Report 1996, p. 155.
6 Within the limits imposed by existing WTO provisions.
7 See submission WT/WGTI/W/77 by UNCTAD.WT/WGTI/W/84
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9. The GATS provides a realistic approach of how the admission of foreign investment can be
dealt with.  Under the GATS governments have to provide market access and national treatment with
respect to the services and modes (such as “commercial presence”) on which they have undertaken
specific commitments – the bottom-up approach.
10. A top down multilateral agreement that would pr ovide for the liberalization of FDI among its
parties would require governments to remove their entry controls and restrictions at least in sectors
not included in the list of exceptions.  Following this approach certain countries could feel deprived of
an important policy tool.  A bottom-up multilateral agreement would also require the removal of entry
controls and restrictions, but in sectors included in a positive list.  This would permit a more
progressive approach which some countries may be more comfortable with.
III. STANDARDS OF TREATMENT
11. International investment agreements often provide that once a foreign investor is established,
it should be granted a certain standard of treatment by the host country.  Many BITs (such as those
concluded by EC Member States with third countries) contain obligations on host governments for the
treatment of investors once admitted.  These obligations typically include National Treatment 8 or
MFN, whichever is more favourable, and a general treatment clause incorporating international law
standards ("fair and equitable treatment" or similar clauses).
12. A realistic approach for a multilateral investment framework would assume that the general
objective of such framework would be on the one hand to improve the treatment of foreign investors
by providing for non-discrimination (NT/MFN) and on the other hand to allow each country to pursue
its necessary domestic policies.  This is likely to require an approach which would enable all countries
to pursue their internal policies aimed at differ ent objectives, along the lines of the GATS model.
13. Governments that conclude BITs which provide for NT/MFN treatment to foreign investors
often include (limited) exceptions relating to certain sectors (e.g. taxation) 9 or allowing preferential
treatment based on regional integration, cultural and historical ties, geographic proximity and
reciprocity.  The purpose of these exceptions is the protection of specific sectors or policies that are
seen as particularly important by the potential host countries.
14. When countries’ seek economic objectives such as the generation of employment and the
enhancement of its quality, they resort to a variety of policy tools which depend on their level of
development, their industrial strategies, their education and training system.  Governments can adopt
policies such as fiscal incentives or differentiated wage tiers, targeted to encourage labour intensive
investments in specific areas where unemployment is more serious.  If the objective is the upgrading
of employment, for instance, governments encourage employee training programmes by adopting tax
deductions schemes on companies’ training expenditure.  Companies can also be involved in thetertiary education of local personnel.  Policy tools aimed at creating and upgrading employment
would not need to be amended or removed as a co nsequence of a multilateral investment framework
which would basically require governments not to discriminate investors according to their
nationality, and to justify transparently any possible exception, provided these policies are applied in a
non-discriminatory manner.
15. Similarly, as regards policies aimed at the protection of the environment it is not clear that the
impact of foreign firms is significantly different from that of domestic firms.
10  Therefore, a different
treatment for domestic and foreign investors could only be justified, if at all, in a very limited number
                                                     
8 See EC submission WT/WGTI/W/30.
9 See India’s submission WT/WGTI/W/71.
10 See UNCTAD WIR 1999, p. 306.WT/WGTI/W/84
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of situations.  Whether a country requires a prior environmental impact assessment to investment
projects in certain sectors or not11, today it tends to do so regardless of the nationality of the firms
involved.  It appears, therefore, that a non-discriminatory multilateral investment framework would
not have an impact on domestic environmental policy tools. Measures to pursue environmental
objectives should be applied equally to all investors.
IV. PREFERENTIAL TREATMENT
16. Host countries may seek to attract FDI through financial contributions and other monetary
and non-monetary advantages aimed at the developmen ts of certain parts of the country or of the
economy.  These benefits may be provided in special legislation of the host country or in contractual
arrangements with the investor.  It should be not ed that this kind of policies, are not exclusively
applied by developing countries but also by developed countries.  However, it is clear that they must
be compatible with WTO rules.
17. Although most BITs do not specifically address the granting of benefits and incentives it
could be assumed that through the MFN clause thes e advantages should be extended to investors from
all third parties.  Exceptions to this rule, including  the eligibility to subsidies, are usually explicitly
mentioned.
18. Some of the more recent BITs include specific obligations to apply MFN in respect of
incentives12, or simply include provisions aimed at avoiding practices which subject the carrying out
of foreign investments to certain restrictive and possi bly distortive conditions, or as a condition to be
eligible for certain benefits.
19. Besides the legitimate questions arising as to the economic soundness of these instruments or
the compatibility with the spirit if not the letter of existing GATT commitments, a realistic framework
on investment would need to find the ways to address these issues in a flexible manner.  Increased
transparency and international cooperation, as a starting point, would have the advantage of
improving predictability for international investors while allowing countries to pursue their domestic
policies according to their needs.
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11 Special schemes should be devised to assist developing countries’ SMEs which could find
difficulties in providing environmental impact assessments.  See WIR 1999 p. 308.
12 WT/WGTI/W/77.