WORLD TRADE
ORGANIZATIONWT/WGTI/W/75
6 April 1999
(99-1367)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 1 April 1999, has been received from the Permanent
Mission of Japan with the request that it be circulated to Members.
_______________
Ensuring Transparency and Stability
One of the important effects of international investment rules is to ensure stability and
transparency in the legal systems and policies of host countries.  Such stability and transparency will
reduce costs and risks for investors, promote foreign direct investment and thereby contribute to the
economic development of host countries.  Various rules dealing with these problems are included inmany international trade- and investment-related ag reements, such as those in the WTO.  This paper
will briefly review the problems and the rôle of such rules.
I. PROBLEMS FACED BY JAPANESE ENTERPRISE
A. 
CASES
1. Through discussions with our authorities concerned, Japanese companies operating
internationally have indicated a number of problems in terms of legal systems and regulations in hostcountries.  The following is a list of examples.
− Local or municipal governments frequently issue arbitrary notifications to foreign enterprises.
For example, such notifications include a certain arbitrary assumption in calculating income
taxes on foreign nationals employed by foreign enterprises.
− A joint venture obligation forces a foreign company to find a local partner.  Investment by the
partner is predominantly in the form of land and other investment of a kind, and the value of
land is not assessed in a transparent manner.
− Although government ordinances and guidelines have been published, foreign investors
cannot take advantage of the new system because their detailed sub-regulations are not madepublic.
− Under the foreign joint venture law, companies need an approval by the authorities for
leaving the market, though this requirement effe ctively prevents compan ies from withdrawing
when necessary.
− Although some developing countries maintain as strict environmental regulations as
developed countries in regard to gas emissions and drainage, they do not apply in practice the
rules to domestic companies, obliging only foreign companies to abide by such strict
regulations.
− Although external elements such as the insufficie nt supply of electric power makes it difficult
for foreign investors to complete the original investment plan approved by the government, aWT/WGTI/W/75
Page 2
change in the investment plan which was economically reasonable has not been permitted
since the rules of procedures, or conditions for the change, have not been established.
B. PROBLEMS FACED BY COMPANIES
1. As shown by the above examples, it is pointed out that legal systems of some host countries,
in particular developing countries, are still unstable, and that laws and regulations change suddenly,
causing major problems in terms of the business operations of foreign companies.  It is also pointed
out that regulatory systems in some host countries lack transparency, so much so that foreign
companies are left to be uncertain as to which rules they should observe in their business operations.
Some of these problems, if examined in detail, may be due to inevitable reasons on the part of host
countries.  Companies themselves may be responsible for some of the problems that they face.
However, instability and the lack of transparency of  legal systems in the host countries are regarded as
significant obstacles for foreign enterprises that restrain their investment.  In addition, the very fact
that legal systems in some host countries are not sufficiently developed will frequently hinder the
smooth business operation of foreign companies.
C. IMPACT ON THE ACTIVITIES OF ENTERPRISES
1. Instability and the lack of transparency of legal systems in the host countries lessen the
predictability of enterprises in their investment and make it difficult for them to develop their business
activities based on a long-term plan.  Consequently, some of the planned investment may not be
realized, resulting in a decline in the investment amount.
2. Even if investment is carried out despite such problems, the instability and lack of
transparency in the legal systems of host countries may cause an increase in costs for foreignenterprises together with additional efforts for understanding the ambiguous legal systems and for
responding to sudden changes in the legal systems.   Such problems will affect foreign enterprises at
stages of both pre- and post-establishment.  If a host country lacks stability and transparency in regard
to its legal and administrative procedures, enterprises cannot easily obtain investment-related
approvals and thus will have to carry out additional administrative procedures in a prompt andappropriate way.  This leads to a decline in predictability and an increase in business cost.
3. There are cases where foreign companies suffer from disadvantages in comparison with
domestic companies in their business activities due to the lack of transparency in the application of
rules and regulations.  Some foreign companies are treated in a discriminatory manner in the
application of some rules, while others cannot take full advantage of the measures of local
governments enjoyed by local companies.  These problems distort competitive conditions in the
markets and lower economic efficiency.  In particular, it should be noted that such discriminatorytreatments between foreign and domestic companies would cause inefficiency, especially when such
treatments are not related to the exceptional measures to protect a certain domestic industry under
clear development policy objectives.
4. Ensuring transparency and stability will resolve the above-mentioned problems, will reduce
costs for foreign companies and will allow a prompt development of their business, as well asinvestment and business activities, based on a long-t erm plan.  In particular, investment based on a
long-term plan will more likely result in the construction of large-scale facilities and a transfer of
important technology.
D. 
IMPACT ON HOST COUNTRIES
1. Improving the transparency and stability in investment-related legal systems is not only
important for foreign capital but also for host countr ies.  Needless to say, an improved predictabilityWT/WGTI/W/75
Page 3
for foreign companies would facilitate the promotion of investments in large-scale plants or the
transfer of important technology and would contribute to the local economy through supplying capital
to the local economy, creating demand for local companies and transferring of technology and know-
how.
2. Improving transparency and stability in the various legal systems is also beneficial to local
companies as it reduces costs and allows them to make long-term plans for business operations and to
construct important facilities.  In the case of local enterprises that supply parts and material to foreign
companies, transparency and stability will allow such  local enterprises to make stable activities based
on the long-term plan of foreign enterprises.
3. Enhanced legal stability will encourage direct investment.  It contributes overall to the
development of host countries through technology transfer, improved management creating demand,
enhancing competition through the market entry of foreign firms and a resulting promotion of localindustries.
II. PROVISIONS IN EXISTING INTERNATIONAL LAWS
1. With regard to transparency and stability on investment-related rules and regulations, there
are several provisions in existing international agreements.  Further consideration may be necessary
on the following points and existing provisions.
A. 
PUBLICATION OF RULES
1. In order to ensure the stability and transparency of investment-related regulations, it is
necessary to make public any rules that may affe ct investment activities.  In addition to the
substantive rules and regulations on investment, procedural and applicational practices and rules
should be made clearly known to the public as they affect investment.
(i) The GATT and GATS have provisions on publication:
GATT Article X:1
Laws, regulations, judicial decisions and administrative rulings of general
application made effective by any contracting party, pertaining to the classification
or the valuation of products for customs purposes, or to rates of duty, taxes or othercharges, or to requirements, restrictions or prohibitions on imports or exports or on
the transfer of payments therefor, or affecting their sale, distribution, transportation,
insurance, warehousing, inspection, exhibition, processing, mixing or other use, shall
be published promptly in such a manner as to enable governments and traders to
become acquainted with them.  Agreements affecting international trade policy which
are in force between the government or a governmental agency of any contracting
party and the government or governmental agency of any other contracting partyshall also be published.  The provisions of this paragraph shall not require any
contracting party to disclose confidenti al information which would impede law
enforcement or otherwise be contrary to the public interest or would prejudice the
legitimate commercial interests of particular enterprises, public or private.
GATS III:1Each Member shall publish promptly and, except in emergency situations, at the
latest by the time of their entry into force, all relevant measures of general
application which pertain to or affect the operation of this Agreement.  InternationalWT/WGTI/W/75
Page 4
agreements pertaining to or affecting trade in services to which a Member is a
signatory shall also be published.
B. INQUIRY
1. Even after the publication of regulations, the exact meaning of the regulations may not be
clearly understood.  Therefore, there should be a provision that ensures replies to any inquiry oninvestment regulations.
(i) The GATS has the following provisions:
GATTS III:4
Each Member shall respond promptly to all requests by any other Member for
specific information on any of its measures of general application or international
agreements within the meaning of paragraph 1.  Each Member shall also establish
one or more enquiry points to provide specific information to other Members, uponrequest, on all such matters as well as those subject to the notification requirement in
paragraph 3.  Such enquiry points shall be established within two years from the date
of entry into force of the Agreement Establishing the WTO (referred to in this
Agreement as the "WTO Agreement").  Appropriate flexibility with respect to the
time-limit within which such enquiry points are to be established may be agreed uponfor individual developing country Members.  Enquiry points need not be depositories
of laws and regulations.
C. 
PROPER PROCEDURES
1. Procedural properness is important.  The duration of time necessary to obtain a license and
permission may vary according to the sectors and to the amount of investment.  However, thelicensing process should be handled in accordance with certain procedural rules and completed within
a reasonable time period.  Such procedural properness should be introduced by taking into
consideration the differences in each country and the sector of investment.
(i) The GATS has a provision on this properness:
GATTS VI:3Where authorization is required for the supply of a service on which a specific
commitment has been made, the competent au thorities of a Member shall, within a
reasonable period time after the submission of an application considered complete
under domestic laws and regulations, inform the applicant of the decision concerning
the application.  At the request of the applicant, the competent authorities of the
Member shall provide, without undue delay, information concerning the status of the
application.
D. 
NON-DISCRIMINATION TREATMENTS
1. The Articles on National Treatment and Most-Favoured-Nation (MFN) treatment prohibit
discriminatory measures.  There are cases where the rules are applied in a discriminatory manner
under unclear and unstable regulations.  Therefore, such provisions should be elaborated and carefully
applied.  If a provision is adopted to ensure national treatment in a pre-establishment phase, the hostcountry is obliged not to introduce restrictions in the sectors that the host country has opened to
foreign investors.  The introduction of national tr eatment in an international agreement will enhanceWT/WGTI/W/75
Page 5
transparency and stability, even if the introduction does not provide for the elimination of all
restrictions and may only give a binding nature to existing domestic rules and regulations.
2. An example of an Article on MFN and National Treatments in one of Japan's bilateral
investment treaties:
Investors of either Contracting Party shall within the area of the other Contracting Party be
accorded treatment no less favourable than that accorded to investors of any third party with
respect to investments, returns and business activities in connection with the  investment.
E. STANDSTILL
1. One of the rules provides that once a country abolishes a certain restriction on investment it is
prohibited from reintroducing it regardless of the reservations it makes in regard to the investment
liberalization obligation.  Such a rule is very effective in providing stability to the legal systems of
host countries.  However, it is pointed out that such a rule imposes a severe restriction on regulatoryactivities of host governments and makes it difficult for them to change their legal systems in sectors
which are being liberalized.
F. 
OTHERS
1. Like National Treatment and Most-Favoured-Nation treatment, a limitation of performance
requirements will also contribute to stability.  Host countries will be prohibited from imposing newrestrictions on investment in sectors where they have committed themselves internationally, and
foreign investors will be less likely to have new performance requirements imposed on their
investment.
2. Many investment agreements include provisions on expropriation.  The provision on the so-
called "de facto expropriation" requires host countries to provide an appropriate level of compensationfor a measure that has the same effect as expropriation.  Investors may be able to submit a claim and
maintain that some new regulations of a host country are inconsistent with the provision if the
regulations effectively make it extremely difficult for investors to continue business activities.  Thus,
such a provision has the effect of providing stab ility by preventing the introduction of extremely
inappropriate  regulations.  However, it should be noted that such a provision usually consists ofrather generic words, and one of the important questions is to determine what sort of measures fall
under the "de facto expropriation".  It is thus impor tant for an agreement to have a stable dispute
settlement mechanism.
3. An appropriate dispute settlement mechanism is indispensable for making provisions of
transparency and stability work effectively.  Since dispute settlement is an important issue and should
be dealt with separately, we do not intend to discuss this in detail.  We would merely like to mention
that it is desirable for a dispute settlement mechanism to function in a stable and equitable way inorder to ensure transparency and stability in legal systems.
III. IN ORDER TO ENSURE TRANSPARENCY AND STABILITY
1. Improving transparency and stability in legal systems is one of the basic needs of investors,
and should be regarded as one of the core issues to be dealt with in improving the environment for
investment.  As mentioned above, some of the rules included in existing international investmentagreements contribute to it.
2. However, including such rules in interna tional investment rules will increase the
administrative cost for implementing legal systems in  host countries, and may deprive the countries ofWT/WGTI/W/75
Page 6
some of their policy tools that provide necessary protection to their domestic industries.  Particularly,
developing countries need to be given sufficient time for preparation before introducing some of the
rules as they only have limited human resources for administration.
3. The introduction of provisions on transparency and stability itself does not necessarily deny
existing rules and regulations in host countries, nor does it make it difficult for host countries toimplement development policies.  Such rules, as sociated with other measures to improve the
investment environment, such as the development of infrastructure and human resources, will, rather,
contribute to sustainable development.
__________