RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/M/15
10 August 2001
(01-3972)
Working Group on the Relationship
between Trade and Investment
REPORT ON THE MEETING HELD ON 13 AND 14 JUNE 2001
Note by the Secretariat
1. The Working Group on the Relationship between Trade and Investment met on 13 and
14 June 2001 under the Chairmanship of Ambassador Demiralp (Turkey).  The Working Group
adopted the agenda contained in WTO/AIR/1551.
A. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
FOR DEVELOPMENT AND ECONOMIC GROWTH (ITEM I OF THE CHECKLIST OF
ISSUES SUGGESTED FOR STUDY)
2. Comments of a preliminary nature were made on a Note by the Secretariat on "Merger and
Acquisition Activity and the Balance-of-Payments;  Foreign Portfolio Investment"
(WT/WGTI/W/103) which had been prepared in response to a request made by the Working Group atits meeting of 7 and 8 March.
(i) The balance-of-payments effects of mergers and acquisitions
3. The representatives of the United States, Norway
 and Switzerland  pointed to the increasing
importance of merger and acquisition (M&A) activity. The representative of Kenya noted that, as
stated in paragraph 5 of the Note by the Secretariat, in most developing countries such activity was
still negligible.
4. The representatives of Costa Rica, Hungary  and the European Communities  agreed with the
point in paragraph 6 that the analysis of the effects of M&A activity on the balance of payments
involved much the same general factors as in the case of greenfield investment. The representative of
Hungary noted, in this regard, that the information provided in WT/WGTI/W/83 on the positive
experience of his country with the trade effects of FDI was based on data pertaining to FDI generally
and was not limited to greenfield FDI. The representative of  Costa Rica described how the increase in
FDI inflows since the early 1990s had contributed to an improvement of his country's balance-of-
payments position.
5. The representative of Hungary referred to the observation made in paragraph 7 of the Note
that, beyond the initial capital inflow associated with M&A activity, its effects on the balance-of-
payments hinged largely on whether placing ownership and control of an existing enterprise in foreign
hands resulted in a significant change in its operations, particularly its imports and exports of goods
and services, and its imports of operating capital and exports of profits, royalties and dividends. As
stated in paragraphs 8 and 14, the question of whether M&A activity resulted in such changes was not
amenable to generalisations and required a case-by-case analysis. The representatives of the
United States, India  and Canada  also highlighted the difficulty of drawing general conclusions
regarding the balance-of-payments effects of M&A activity.  The representative of SwitzerlandWT/WGTI/M/15
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agreed with the observation in paragraph 10 that in the short term the import propensity might be less
in the case of mergers and acquisitions than in the case of greenfield FDI.
6. Referring to paragraph 12 of the Note, the representative of Kenya considered that the fact
that according to the World Bank about half of the M&A activity in East Asia in recent years involved
non-tradeable sectors underscored the view that mergers and acquisitions often entailed a mere changein ownership that did not generate additional production capacity.  Moreover, M&A activity was less
export-oriented than greenfield FDI, which implied that market size was a major determinant of M&A
activity and that many developing countries were unlikely to attract this kind of investment.
7. With regard to the statement in paragraph 13 of the Note that there was no obvious reason to
suggest that over the long run outflows of profits and royalties would be systematically higher in the
case of mergers and acquisitions than in the case of greenfield FDI, the representative of India stated
that it would have been more helpful if an effort had been made to examine this question on the basis
of studies on the country-specific experiences of developing countries. The representative of Kenya
considered that the inconclusive nature of this paragraph underscored the need for further study.
8. The representatives of the European Communities and Canada  agreed with the observation in
paragraph 14 that conclusions should be drawn on the basis of the overall effects of an investment on
the balance-of-payments, not on the basis of just a select few of the trade and capital flows involved.The representative of Switzerland recalled that the Note by the Secretariat contained in
WT/WGTI/W/95 had shown more generally that the analysis of the balance-of-payments implications
of FDI was complex, and that the long term effect of FDI on the balance of payments was likely to be
positive, in particular when FDI involved productiv e activities which contributed to economic growth.
9. The representative of India stated that, in addition to concerns relating to the balance-of-
payments, there were other aspects of M&A activity that merited attention from a developmental
perspective, including in particular the question of the extent to which such activity contributed to the
expansion of industrial capacity of developing countries.
(ii) Portfolio investment
10. With respect to Section II.A of the Note, the representative of Hungary stated that the concept
used in the IMF's Balance-of-Payments Manual of a "lasting interest" of an investor in an enterprise
resident in another country was important and useful as a way of distinguishing between FDI and
portfolio investment.  As described in paragraph 22, important differences existed between FDI and
portfolio investment regarding the motivations of investors and their expectations about the benefits to
be derived from their investment.  The representative of Chile stated that the Note helped clarify the
need to distinguish not only between FDI and portfo lio investment but also between different kinds of
portfolio investment.
11.  With reference to paragraph 23 of the Note, the representative of the United States stated that
it was useful for Members to bear in mind that, typically, international investment agreements covered
portfolio investment. The representative of Kenya welcomed the fact that, unlike bilateral investment
treaties, proposals currently under consideration with regard to negotiations on multilateral investmentrules in the WTO excluded portfolio investment. The representative of Norway suggested that it might
be useful for the Working Group to engage in an exchange of views on the experiences of Members
as regards the implications of the inclusion of portfolio investment in their bilateral investment
treaties.
12. The representative of the United States, Hungary , Canada   and Norway  pointed to the analysis
in Section II.D of the Note of the complementar ity between portfolio investment and FDI. In this
respect, the representative of Canada stated that both FDI and portfolio investment were economicallyWT/WGTI/M/15
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beneficial, for example, through the injection of liquidity into a host country's economy. The
representative of Kenya stated that the analysis in paragraph 38 of the role of portfolio investment in
injecting liquidity did not take into account the impact of such liquidity injection on inflation and onthe exchange rate.
13. Regarding Section II.E of the Note, which addressed concerns of host countries with respect
to portfolio investment, the representative of Hungary agreed with the comment in paragraph 42 that
in normal circumstances there was no reason to believe that foreign portfolio investment needed tobecome an unsustainable burden on a recipient country's balance-of-payments situation.  At the same
time, however, empirical evidence showed that different kinds of portfolio equity investment, albeit to
different degrees, were more variable and footloose than FDI. While foreign portfolio investment
could not be considered to be inherently volatile, the different motivations and expectations and
shorter time-horizon of most portfolio investors, and the possibility to sell equity quickly on stockmarkets could result in capital flight and thereby contribute to financial crises.  Such sudden outflows
of capital could seriously disrupt monetary, fiscal, exchange rate and overall economic policies.
Because of this potential effect of portfolio investment a realistic approach to a multilateral
framework for investment in the WTO should be limited to FDI. The representative of Japan stated
that portfolio investment might have a larger impact on the balance of payments and financial markets
than FDI and that, in light of the recent experience with the Asian financial crisis, portfolio
investment  should be treated carefully. The representative of the European Communities stated that
his delegation acknowledged that concerns existed with respect to the volatility of portfolioinvestment, but that it was noteworthy that certain types of portfolio equity investment were far more
stable than debt capital. The representative of Chile underlined the point that there was no direct
association between volatility of capital flows and portfolio investment. The representative of  India
stated that, while certain studies argued that in the long run portfolio investment was beneficial, a key
problem facing developing countries was that once balance-of-payments difficulties were triggered by
FDI or portfolio investment flows, macro-econom ic stability would be disturbed and the host
developing country would become an unfavourable  destination for FDI in the public perception.
While FDI and portfolio investment were not necessarily destabilizing, developing countries that were
generally vulnerable to balance-of-payments pressures should retain the right and ability to control
entry and establishment in such a way that the possible negative effects of such inflows were
appropriately managed.  With reference to these comments by India, the representative of  Korea drew
attention to a written contribution presented by her delegation at a previous meeting on Korea's
experience with foreign investment in the contex t of the Asian financial crisis (WT/WGTI/W/69).
She also observed that the discussions in this Working Group on portfolio investment should be morefocused on the relationship between portfolio investment and trade.
14. With regard to Section II.F of the Note, the representatives of the United States and the
European Communities stated that it was interesting that, as noted in paragraph 51, only a very small
proportion of the nearly 1,800 bilateral investment treaties in existence specifically allowed for a
temporary balance-of-payments derogation. The representative of India considered that, in this
respect, the Note did not adequately reflect the fundamental difference between bilateral investment
treaties, on the one hand, and other international investment agreements, on the other. Bilateral
investment treaties did not impose restrictions on the right and ability of countries to regulate the
inflow of foreign investment into their territorie s. Therefore, apprehensions about the balance-of-
payments problems would be minimal in the context of such treaties.  This explained that such treaties
did not need to include provisions relating to the balance of payments. The representatives of the
European Communities and Canada  pointed to the balance-of-payments safeguard clauses contained
in the NAFTA and in the GATS as examples of how balance-of-payments concerns could beaccommodated in international investment agreements. The representative of the European
Communities also pointed out in this context that whether or not a balance-of-payments safeguard
clause was necessary in an investment agreement depended upon the coverage and the nature ofobligations of the agreement. Thus, for example, th e fact that bilateral investment treaties were notWT/WGTI/M/15
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designed as instruments to liberalize short-term  capital flows meant that there was less need for
balance-of-payments exceptions in such treaties than in the case of some emerging multilateral
arrangements that were broader in coverage.  Regarding the reference made in paragraph 52 to
provisions in bilateral investment treaties concluded by Chile and in the Chile – Canada Free-Trade
Agreement permitting Chile to apply certain restricti ons to short-term capital flows, the representative
of Chile observed that these restrictions had recently been eliminated.
15. The Working Group took note of the statements.
B. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT
16. The representative of India introduced a written contribution on "FDI Flows and Technology
Transfer" (WT/WGTI/W/105). The possible economic benefits of foreign investment were widely
recognized, as evidenced by the widespread autonomous liberalization of investment regimes, but
since such benefits were not automatic countries gene rally wished to retain the ability to regulate the
entry of foreign investment.  In light of the nume rous exemptions sought by developed countries in
the OECD negotiations on a Multilateral Agreement on Investment (MAI), it would be naïve to
expect WTO Members, the large majority of whom were developing and least developed countries,
not to be concerned about the implications of any efforts aimed at curbing their ability to influence
investment inflows to their territories. India's contribution in WT/WGTI/W/105 highlighted the needto distinguish between different kinds of foreign investment as regards their contribution to economic
development.   In particular, FDI was preferable to other types of investment because it brought with
it capital, technology, skilled manpower and managerial skills.  Similarly, mergers and acquisitions
were less beneficial than greenfield investment because they did not always augment the stock of
productive capital and often resulted in an increase in the level of market concentration.   Whether
mergers and acquisitions had beneficial effects for host countries also depended upon whether the
investment was natural-resource seeking, market-seeking, efficiency-seeking or created asset-seeking.
The contribution drew attention to the fact that the recent increase in FDI flows had not been
accompanied by a proportionate increase in technology transfers to developing countries, and it
discussed recent studies on how various modes of technology transfer had a different impact on thedevelopment of local technological capabilities.  A key insight from such studies was that a
distinction should be made between the "know- how" and the "know-why" aspects of technology
transfer.  Multinational enterprises were very efficient channels for the transfer of "know-how" but
not for the transfer of "know-why".  On the other hand, the importation of foreign technology through
licensing arrangements and arm's length transactions was more effective than FDI in generating local
"know-why".  In the same context, the contribution contrasted the role of FDI as an important vehicle
for the transfer of operational technology with its far more limited role in the transfer of capabilities tocreate new technology.  In the latter regard, it noted the fact that, to the extent that multinational
enterprises from developed countries engaged in international relocation of their research facilities,
this mainly involved relocation toward other developed countries.  The contribution then drew
attention to several recent studies that questioned the empirical basis for the existence of positive
productivity spillover effects from FDI.  It also discussed how corporate strategies could impact onthe extent of transfer of technology and know-how. Thus, global corporate strategies designed to
reduce competition between affiliates could lead multinational enterprises to restrict access of foreign
affiliates to advanced technology. Finally, the contribution showed that export-led FDI might not
always make a significant contribution to the devel opment of local technological capabilities in host
countries. Overall, the conclusion to be drawn from the evidence surveyed in this contribution wasthat effective transfer of technology could not be achieved only through reliance on market forces and
that it was thus essential for developing countries to preserve the right to regulate foreign investment.
17. In response to the comments by India on the MAI, the representatives of Hungary and the
European Communities stated that current proposals for negotiations on multilateral investment rules
in the WTO took into account the lessons learnt from the difficulties that had arisen in the MAIWT/WGTI/M/15
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negotiations and were significantly different from the MAI with respect to coverage, market access
and dispute settlement. In reaction to these comments, the representative of Brazil stated that while
these proposals differed in some aspects from the draf t MAI, they included certain elements that had
also been considered in the MAI, in particular performance requirements and investment incentives. It
was useful for the Working Group to consider the le ssons to be drawn from the experience of the MAI
with regard to those two subjects. The represen tative of India observed that the reference in
WT/WGTI/W/105 to the MAI was somewhat incidental to the main theme of  this contribution and
simply served to highlight the fact that the MAI negotiations, which involved a relatively
homogeneous group of countries, had provoked intense domestic sensitivities.  This underscored the
need to proceed cautiously with regard to foreig n investment, which unlike trade, involved a long-
term relationship between a foreign firm and a host country with lasting implications.
18. The representative of Switzerland, referring to the factors mentioned in India's contribution as
explaining the recent increase in M&A activity, considered that such activity was a commercially
rational response to the realities of a changed global business environment, and questioned the
assertion that M&A activity was less beneficial than greenfield investment.  Thus, for example, an
acquisition by a foreign investor often helped to preserve the competiveness of a local enterprise.
19. The representative of Japan stated that Japan's experience demonstrated that the transfer of
technology associated with FDI was a necessary but not sufficient condition to ensure the successful
development of local technology in host countries.  He disagreed with India on the role of
governmental intervention in the process of technology transfer on the grounds that, as illustrated by
Korea's experience with the use of technology transfer requirements, such requirements had often
proved to be counterproductive.  The representatives of the European Communities and Korea   also
considered that the evidence reviewed by the Work ing Group in its discussions at previous meetings
on the relationship between FDI and the transfer of technology showed that technology transfer
requirements were not optimal policy tools. However, the representative of Brazil stated that it was
not possible to draw a general conclusion from the empirical evidence reviewed by the WorkingGroup that performance requirements could not be a useful policy instrument, and that this could onlybe determined on a case-by-case basis.
20. The representatives of the European Communities  and Korea
 asked for an explanation of the
distinction made by India between the "know-how " and "know-why" aspects of technology transfer.
21.  The representative of the European Communities considered that one of the main conclusions
that could be drawn from the Groups' intensive di scussions on the relationship between FDI and the
transfer of technology was that FDI was a principal vehicle for the transfer of technology and that
local conditions, especially the existence of a high level of local technological skills, a soundregulatory environment including effective protection of intellectual property and adequate
competition policies, were important determinants of the amount and quality of technology transfer
associated with FDI. The representative of Korea stated that the transfer of technology through FDI
could be seen as being part of a dynamic process.  For countries at the initial stage of economic
development, lower levels of technology would be easier to absorb.  As productivity increased andexpertise was assimilated and disseminated, the competitiveness of the domestic industry was
enhanced and higher levels of technology could be adopted.  This in turn would enhance a country's
attractiveness to FDI.  The representative of Switze rland, referring to the comparison made in India's
contribution between data on the growth of FDI fl ows and data on the evolution of international
payments for the transfer for technology, stated that the technology transfer associated with FDI
varied by sector of economic activity. FDI in services was thus likely to generate less technology
transfer than FDI in manufacturing.  Regarding the point that licensing of technology was preferable
from the point of view of the host country, he observed that the willingness of foreign firms to engage
in such licensing depended upon the adequacy of the protection of intellectual property offered by the
host country. Local conditions were also an important factor in determining the extent to which FDIWT/WGTI/M/15
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entailed a transfer of innovative capabilities.  Thus, market conditions, the regulatory environment
and the level of local technological skills had to be such as to make it attractive to foreign firms to
undertake innovation activities in a host country.  India's role in research and development activities
in the software sector provided an interesting example in this respect.
22.  In respect of the reference made in India's contribution to a study which had found a negative
correlation between the presence of foreign affiliates and the growth of productivity in domestic
plants in Venezuela, the representative of Switzerl and considered that this finding would need to be
examined in more detail in the context of th e competitiveness of the Venezuelan manufacturing
sector.
23. The representative of India stated that India did not deny that factors in the host country were
of great importance to decisions of foreign invest ors with regard to the transfer of technology.
However, as various studies indicated that foreign investors were generally reluctant to transfertechnology to developing countries, it was important for developing countries to have the flexibility to
take decisions in this area, having regard to the desirability of attracting quality FDI.
24. With reference to a written contribution presented by Canada at the meeting of 7 and 8 March
concerning a study on foreign investment barriers (WT/WGTI/W/97), the representative of
Switzerland asked for an explanation of the distinc tion made in this study between transparent and
non-transparent barriers to foreign investment. The representative of Norway stated that this study
highlighted the need to promote greater transparency of foreign investment laws and regulations,  in
which connection the WTO could play an important role.  His delegation considered that transparency
was a key theme to be considered in relation to a possible multilateral framework on investment.  The
representative of the European Communities stated that the findings of the Canadian study on the
nature of impediments to investment encountered by Canadian investors corresponded to the findings
of a survey conducted by the European Communities of problems faced by European investors. The
main categories of obstacles identified in both studies pertained to market access, transparency,
discrimination and residency requirements.  He then provided a more detailed description of specific
measures that had been identified in the two studies in each of these four categories.  As indicated inthe Canadian study, such obstacles to investment had actually negatively impacted on investment
decisions in many cases and were therefore an important subject for consideration in the Working
Group.
25. The representative of Canada stated that the study summarized in WT/WGTI/W/97 provided
a good indication of the nature of impediments faced by Canadian investors abroad, but that in
drawing conclusions regarding the quantitative importance of particular kinds of obstacles, one should
bear in mind the small size of the sample. In response to Switzerland's question, she stated that insome cases investors had reported as non-transparent barriers impediments of which they had become
aware of only after the fact, even though it was possible that the impediment might have been notified
in some form.  Another problem that had been identified by respondents concerned the lack of
transparency in respect of the actual implementa tion of measures. She agreed with the observation
that the study showed that, in general, lack of transparency was the most important obstacle facingforeign investors.
26. The representatives of Malaysia and India
 stated that the conclusions that could be drawn
from the study described in Canada's submission were limited  because of the small size of the sample
and the fact that what might appear to be a barrier from the perspective of a foreign investor could be
a legitimate policy instrument form the point of view of a host-country government.  Therepresentative of the European Communities stated in response to these comments that since countries
generally wished to attract foreign investment, it was important to take account of perceptions offoreign investors as to what constituted impediments to investment.WT/WGTI/M/15
Page 7
27. With regard to a submission presented by Canada at the meeting of 7 and 8 March on a
research programme conducted by Industry Canada (WT/WGTI/W/98), the representatives of Norway
asked the delegation of Canada to indicate which of the studies described in this submission were ofparticular relevance to the working group.  The representative of India stated that it would be useful to
have an annotation describing the main findings of the studies. In response, the representative of
Canada stated that her delegation would consider the possibility of preparing a document that would
provide an overview of the main findings of the studies and that these studies, together with briefsummaries of their content, were accessible through the web site mentioned on the first page of the
submission.
28. The Working Group took note of the statements.
C. STOCKTAKING AND ANALYSIS OF EXISTING INTERNATIONAL INSTRUMENTS
AND ACTIVITIES REGARDING TRADE AND INVESTMENT (ITEM III OF THECHECKLIST OF ISSUES SUGGESTED FOR STUDY)
(i) WTO provisions on matters related to investment
29. No statements were made on this indent of Item III.
(ii) Bilateral, regional, plurilateral and multilateral agreements and initiatives;  implications for
trade and investment flows of existing international instruments
30. The representative of Japan informed the Working Group of a regional seminar on trade,
investment and economic development held in Kuala Lumpur in March 2001 which had been
organized jointly by the Secretariats of UNCTAD and the WTO in cooperation with the Governments
of Malaysia and Japan.  The seminar had been attended by participants from some twenty countries.
It had deepened the understanding of current investment trends, existing international investmentagreements and discussions on an investment agreement in the WTO.  He also referred to a seminar
held in Kuala Lumpur in the margin of a recent meeting of senior economic officials of ASEAN,
Japan, Korea and China at which there had been discussion on the role and possible elements of a
multilateral framework for investment and the relationship between investment rules and the
development dimension.
31. The representative of Malaysia thanked Japan for having sponsored the seminars held in
Kuala Lumpur. However, his Government remained unconvinced that a multilateral agreement on
investment was desirable.  The representative of Pakistan stated that it was premature to envisage the
establishment of multilateral rules on investment and that the Working Group needed to continue itseducative process.  In particular, the questions raised by India in its contribution on FDI and the
transfer of technology merited further study in the Working Group.
32. The representative of Norway stated that, compared to a written contribution presented by
Singapore at the meeting of 7 and 8 Marc h (WT/WGTI/W/99), an OECD study on Policy
Competition for Foreign Direct Investment, which had been summarized in a presentation made by
the OECD at the same meeting (WT/WGTI/W/100),  provided a more critical assessment of the
advantages  and disadvantages of investment incentives.  Without drawing a general conclusion as to
whether incentives were desirable, the contribution by Singapore described how investment incentivescould have positive effects and emphasized the need for investment incentives to be an integral part of
an overall macro-economic strategy and the need for a well developed administrative capacity to
implement effectively an incentive scheme. It suggested that attention should focus on problems
relating to the use and administration of incentives rather than on possible disciplines.  In contrast, the
OECD study concluded that investment incentives had negative effects and that the best way to attractFDI was to ensure sound economic and political fundamentals, including good infrastructure,WT/WGTI/M/15
Page 8
education and well functioning markets.  His delegation considered that investment incentives were
often effective in attracting FDI, but that they could have a negative effect on the long-term
development of a country if they resulted in investment that was not consistent with the needs of a
country or a region or if they caused a diversion of public funds from more productive uses, such as
investment in infrastructure.  Since the poorest countries did not have the financial means toparticipate in incentives-based competition to attrac t investment, the use of investment incentives had
negative effects not only on the countries granting such incentives but also on other countries. The
representative of Switzerland stated that the OECD study demonstrated the complexity of the issue of
investment incentives, for example in terms of differences between countries as regards the level ofgovernment at which incentives were granted.  An interesting observation in the study was that in
deciding on the location of an investment project, investors first drew up a list of acceptable sites on
the basis of the economic and political fundamentals of alternative sites and that at this stage theavailability of investment incentives did not appear  to be an important factor. However, at a later
stage, when the investor made a choice among the sites on the short list, the availability of investment
incentives was a relevant factor. The study showed that at this stage competition between countries
through the granting of incentives was intense, as exemplified by the automobile sector. The
representative of Mexico agreed with the finding in the OECD study that policy-based competition to
attract FDI was a global phenomenon, involving both developed countries and developing countries;
that measures to attract FDI were taken at all levels of government; and that the competition to attract
FDI had become more intense as countries liberalized  their investment regimes.  She recalled that on
several occasions her delegation had stated its views on the question of the limited rationale for the
granting of investment incentives.   She noted that, after concluding that there was little evidence insupport of the view that competition to attract FDI resulted in a "race to the bottom" in the sense of a
lowering of labour and environmental standards, the OECD study observed that it was not possible on
the basis of available evidence to draw a conclusion on the extent to which competition to attract FDI
was inhibiting a socially optimal raising of such standards.  She asked for a clarification of this
observation and pointed out that empirical studies had indicated that FDI had a positive effect on theobservance of labour and environmental standards. The representative of India stated that the OECD
study seemed to encourage countries to move away from incentives-based competition for FDI in
favour of rules-based competition for FDI. Referring to the analysis in Singapore's contribution of the
policy rationale of incentives in terms of a "risk premium function", he stated that this conclusion in
the OECD study showed a lack of appreciation of the particular concerns of developing countries.
33. The representative of the OECD stated that the study on "Policy Competition for Foreign
Direct Investment" had been prepared by the OECD Development Centre, which was not strictly
speaking an OECD body, and that the study could not  be said to represent the views of all OECD
Member countries.  However, the study had attracted much attention and would be integrated into the
analytical work under way on investment incentives in the OECD's Committee on International
Investment and Multinational Enterprises (CIME).  In addition to investment incentives, other
subjects of the analytical work in the CIME were:  the benefits and economic impact of FDI, and FDI
and new technology.  The envisaged analytical work on incentives in the CIME would help deepen
the understanding of the kinds of questions raised at this meeting.  In respect of the comment by
Mexico, he stated that it was true that there was indeed little evidence of a "race to the bottom" effect
with regard to compliance with labour and environm ental standards, but that it was felt necessary to
look into this issue in greater depth.
34. The representative of Norway suggested that in view of the complexity of investment
incentive schemes, the Working Group should explore ways to enhance transparency of incentives at
national and regional levels.  This suggestion for further work with respect to the issue of
transparency in relation to investment incentives was supported by the representatives of  Switzerland
and Hong Kong, China.  In this regard, the representative of Switzerland  observed that although the
OECD study called for strengthened international policy coordination with respect to investment
incentives,  the complexity and sensitivity of this issue meant that further study was required beforeWT/WGTI/M/15
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multilateral disciplines could be envisaged.  The representative of Hong Kong, China  stated that his
delegation did not wish to pursue further its proposal for a study of the applicability of the Agreement
on Subsidies and Countervailing Measures to invest ment incentives, but that it remained concerned
regarding the unhealthy competition among governments to attract FDI through the granting of
incentives.  In this regard, he referred to the fi ndings of the OECD study on the distortionary effects
of incentives. His delegation was not suggesting that there should be multilateral rules on
transparency of investment incentives, but that the Working Group should study the costs and benefits
of various ways of enhancing transparency, as proposed by his delegation in WT/WGTI/W/90.
35. The representative of Malaysia stated that, unlike developed countries, which often provided
incentives in the form of grants, developing countries only used ex post  incentives, such as fiscal
exemptions.  Such incentives were an essential development tool, as described in Singapore's
contribution.  In response to Norway's concern regarding the lack of transparency of incentives, hestated that Malaysia granted incentives on an MFN basis, but that it differentiated between sectors of
economic activity in order to direct investment to sectors of particular importance.  Multilateral rules
on investment would remove the flexibility to use investment incentives in this manner. The
representative of Singapore stated that his delegation's submission in WT/WGTI/W/99 was intended
to contribute to a more balanced consideration of the role of investment incentives in economic
development policies and that his delegation recognized that there existed other perspectives on this
issue.  He agreed with Norway that incentives were not the only policy instruments that countries used
to attract FDI and that factors such as macroeconomic policy, quality of infrastructure and level of
education were relevant as factors determining the attractiveness of a country to FDI.  Like Malaysia,
Singapore granted investment incentives on an MFN basis. The various policy rationales for thegranting of such incentives were described in his delegation's contribution in WT/WGTI/W/99.
36. The representative of the United States recalled that in previous discussions on investment
incentives in this Working Group under Item II of the Checklist her delegation had questioned
whether this subject was a good use of the Working Group's efforts. Traditionally investment
agreements had not focused on investment incentives beyond those linked to performancerequirements.  Her delegation preferred that the Working Group concentrate its attention on
traditional investment issues such as transparency, MFN treatment and national treatment.
37. The representative of UNCTAD informed the Working Group of recent activities of
UNCTAD in the field of foreign investment.
1
38. The Working Group took note of the statements.
D. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY
(i) New written contributions39. The Working Group had before it in WT/WGTI/W/102 a communication from the European
Community and its Member States on technical assistance and capacity building related to FDI.  The
representative of the European Communities stated that this paper should be seen in conjunction with
other recent initiatives taken by his delegation in the field of technical assistance in light of thepriority which WTO Members had agreed to attach to this subject after the Seattle MinisterialConference. The aim of the communication was to start a debate on the possible role of the WTO with
regard to the provision of technical assistance in the field of FDI, taking into account the relevant
activities of various other international bodies such as the World Bank and the United Nations.  A
basic consideration underlying the contribution was that international investment rules would not
automatically lead to increased FDI inflows to deve loping countries as a country's ability to attract
                                                     
1 See document WT/WGTI/W/106.WT/WGTI/M/15
Page 10
and benefit from FDI also depended upon the existence of a sound enabling environment. The
contribution distinguished between, on the one hand, technical assistance aimed at improving a
country's capacity to attract, absorb and benefit from FDI, and, on the other, technical assistance
aimed at improving the capacity of developing countries to participate in the negotiation of
international investment rules and in the transpositi on of the results of such negotiations into their
domestic laws and regulations.  It raised three main questions for further discussion:  (i) whether
existing instruments were adequate;  (ii) whether existing instruments should be revised to take into
account specific needs and objectives that were not yet fully taken into account;  and (iii) whether
gaps existed in the field of technical assistance and capacity building related to investment and how
they could be filled.   With regard to the first type of technical assistance, the communication made
concrete suggestions to ensure coherence with regard to ongoing efforts  in the field of technical
assistance on FDI-related matters. With regard to technical assistance in the context of negotiations oninvestment rules, the contribution identified technical assistance needs that might arise in negotiations
on transparency, non-discrimination and market access.
40. The representatives of Hungary, Canada
 and Egypt  underlined the importance of a sound
domestic economic and regulatory framework as a key determinant of countries' ability to attract FDI,
as discussed in paragraphs 2-3 of WT/WGTI/W/102. The representatives of Hong Kong, China,
Canada, Australia  and Egypt  stated that paragraph 9 of WT/WGTI/W/102 offered useful suggestions
on specific types of technical assistance that might be undertaken in a WTO context. Therepresentative of Chile stated that technical assistance in the WTO framework with respect to FDI
could play a limited but useful role, together with the technical assistance activities in otherinternational bodies. The representatives of Canada and the United States
  observed, in this regard,
that care should be taken to avoid overlap with the activities of other competent international bodies
and that in identifying possible gaps in technical assistance offered by other organizations a key
question was whether such gaps were relevant to the WTO.   The representatives of Canada and
Switzerland also stressed the need for coordination between possible WTO technical assistance
activities with regard to foreign investment and other technical assistance activities of the WTO. Therepresentative of Egypt noted that some instruments discussed in paragraph 9 dealt with trade rather
than investment. The representative of Australia stated  that the issues identified in paragraph 9 should
be addressed as a matter of priority before consideration could be given to the subjects raised in the
second part of WT/WGTI/W/102.  The representatives of Hungary, Hong Kong, China , Japan , Egypt
and Norway agreed with the point in paragraph 10 of WT/WGTI/W/102 that technical assistance to
enhance the capacity of countries to attract and benefit from FDI needed to be demand-driven and to
be based on  the particular needs and priorities of individual countries. The representatives of Korea,
Japan and Canada   agreed with the views in paragraph 11 on how multilateral investment rules would
contribute to greater legal certainty for investors. The representative of Egypt mentioned the
PROINVEST initiative, which was described in paragraph 15,  as a useful example of a programme
that could have a direct impact in increasing inve stment flows.  He further observed that, in addition
to measures to be taken by host countries to create the necessary conditions to attract FDI,consideration should be given to measures that could be taken by home countries to promote FDI in
developing countries, for example through invest ment guarantee schemes and the dissemination of
information to potential investors.
41. The representatives of Chile, Korea
, the United States , Switzerland  and Norway  welcomed
the suggestions in the second part of WT/WGTI/W/102 on the provision of technical assistance in the
context of negotiations.  In this connection, the representative of Chile observed that it would be
useful to also consider how investment flows am ong developing countries could be promoted. The
representative of India stated that while his delegation could go along with the ideas in the first part of
WT/WGTI/W/102, the second part went beyond the mandate of the Working Group by makingassumptions about future negotiations. The representatives of Malaysia, Indonesia
 and Egypt
expressed the same view.  The representative of India also considered that the provision of technical
assistance was not an adequate solution to the basic problem that multilateral investment rules wouldWT/WGTI/M/15
Page 11
have a negative developmental impact by reducing the policy options available to developing
countries. The representative of Hong Kong, China stated that technical assistance with respect to
transparency, non-discrimination and market access should not necessarily be linked to WTOnegotiations on investment. Technical assistance and capacity building in relation to common
elements of investment instruments would help promote a more liberal and transparent globalinvestment environment, irrespective of whether multilateral negotiations on investment were
launched.  The representative of Egypt noted that, as mentioned in paragraph 30, UNCTAD was
undertaking work aimed at assisting developing countries in the negotiation of internationalinvestment agreements.  One of the major problems faced by developing countries after the Uruguay
Round was that there was no mechanism to link the implementation of obligations to the provision of
technical assistance to support developing countries.
42. The representatives of Norway, Switzerland
 and the European Communities  disagreed with
the comment that the suggestions made in the second part of WT/WGTI/W/102 were premature and
went beyond the Group's mandate.  In this regard, the representative of the European Communities
stated that these suggestions were simply intended to stimulate a process of identification of questionsthat might arise with respect to the provision of  demand-driven technical assistance in the event
Ministers decided to launch a negotiation. His delegation realized that the provision of technicalassistance by itself would not be sufficient to reach agreement on such negotiations. The contribution
in WT/WGTI/W/102 had been submitted in an attempt to respond to requests that had been addressed
to his delegation to be more precise with respect to its ideas on the role of technical assistance in the
specific context of investment.
43. In response to the statement by India that multilateral rules on investment were aimed at
preventing developing countries from realizing their development objectives, the representative of
Switzerland stated that a "bottom-up" approach to market access, as envisaged in current proposals for
negotiations on investment in the WTO, adequately preserved the policy options of individualcountries. The representative of the European Communities  stated that his delegation had on many
occasions expressed the view that international investment rules should preserve the ability of
countries to pursue their development objectives, and that the key objective of multilateral rules was
to promote FDI flows, in particular to developing countries and to enhance the capacity of countries to
benefit from FDI. The representative of Costa Rica  stated that, as a small country with sensitive
sectors and development policies that it wished to preserve, Costa Rica considered that a multilateralframework could be a very useful instrument to promote the economic development of all WTO
Members and, in particular, the weaker countries.
44. The representative of Japan  introduced a contribution on international investment agreements
and development policies (WT/WGTI/W/104).  International investment rules needed to provide for
an appropriate balance between disciplines to ensure  predictability for foreign investors, on the one
hand, and flexibility for host countries to pursue their development objectives, on the other. On the
basis of an analysis of existing investment agreements and WTO rules, the contribution in
WT/WGTI/W/104 illustrated the various ways in which an international investment agreement couldprovide for flexibility to accommodate development objectives.  It discussed examples of such
flexibility in three main areas:  the preamble and the statement of objectives of an agreement; rules
concerning the definition of investment, transpar ency, non-discrimination, performance requirements
and dispute settlement; and provisions regarding th e time-frame for the implementation of obligations
and technical assistance.   The contribution also drew attention to the question of how rights andobligations of investors might be addressed.   The concluding section of the contribution offered
concrete suggestions for questions that could be discussed in future work on this subject.
45. The representatives of Costa Rica, Chile
, Hungary , the United States , Hong Kong, China ,
Norway, Switzerland , the European Communities , Korea  and Canada  considered that Japan's
contribution contained a useful overview of differ ent possible approaches that could be pursued toWT/WGTI/M/15
Page 12
take account of the development dimension in specific elements of an investment agreement and that
the issues raised in this contribution merited fu rther discussion in the Working Group, which would
not prejudge the question of whether or not negotiations on investment should be launched.  The point
was made that future discussions on this topic should also take into account a recent UNCTAD
publication on the same subject.2 The representative of the European Communities noted that, as
stated in this publication, developing countries faced the challenge of how to achieve the goals of
creating an appropriate stable, predictable and transparent policy framework for FDI while, at the
same time, retaining a margin of freedom necessary to purse their particular development objectives.
This UNCTAD publication appropriately defined the concept of flexibility in terms of whether
international investment agreements were adapted to the particular conditions prevailing in
developing countries and to the realities of th e economic asymmetries between these countries and
developed countries.
46. The representatives of India, Malaysia  and Cuba considered that the contribution by Japan
appeared to be intended to identify elements to  be included in a possible multilateral agreement on
investment, which went beyond the mandate of the Working Group. The representative of Malaysia
also considered that  this  contribution failed to take into account concerns that had been expressed
regarding the developmental implications of intern ational investment rules because it was geared to
liberalization of investment policies, subject to time-limited exceptions, and did not recognize the
need for developing countries to have permanent carve-outs. The representative of  Ecuador stated
that developing countries faced the challenge of how to reconcile the need for a stable policyframework for FDI that would attract and protect FDI with the need to retain a margin of policy
freedom to pursue their domestic development objectives, and that developing countries could notcontemplate the creation of a multilateral framework for FDI until it was clarified how such a
framework would respect their domestic development objectives and their ability to channel FDI into
priority sectors.  This basic concern had not yet been adequately addressed by the Working Group.
47. The representative of Japan stated that his delegation realized that, in addition to the issues
covered in WT/WGTI/W/104, there might be other aspects of investment rules where it would be
necessary to envisage flexibility for developing countries, and he stressed that the contribution was
not intended to prejudge a negotiating agenda. The representative of Switzerland stated that, in view
of the proposals that had been made on a GATS-type approach to multilateral rules on investment andon the various ways to provide flexibility to accommodate developmental objectives, it was not
correct to suggest that such an agreement would entail a complete liberalization of investment
restrictions.
48. With respect to the statement in paragraph 3 of Japan's contribution that FDI should be
enhanced, the representative of India considered that multilateral rules on investment would not by
themselves lead to greater FDI inflows to developing countries and that it was for host countries totake the steps necessary to create a domestic enabling environment, bearing in mind their national
priorities.  Similarly, with regard to the statement in paragraph 4 on the importance of an effective
linkage between foreign investment and domestic economic growth of developing countries, heconsidered that this could only be addressed by the host countries themselves.  In order to ensure such
a linkage, it was essential for host countries to have the necessary degree of policy flexibility which
should not be constrained in the manner suggested in Japan's contribution. The representative of
Egypt stated that, in addition to the factors mentioned in paragraph 3 of Japan's contribution including
market size, market growth potential and a stable  macroeconomic environment, investment decisions
were determined by locational advantages of countries and by the internalisation by multinational
enterprises of their ownership advantages. In view of the growing power of multinational enterprises
relative to national governments, it was difficult to see how an international investment agreement
                                                     
2"International Investment Agreements: Flexibility for Development", published in the UNCTAD
Series on issues in international investment agreements, 2000.WT/WGTI/M/15
Page 13
could attain the objective stated in Japan's contribution of striking a balance between disciplines and
flexibility and between rights and obligations of investors and host countries. The loss of policy
freedom on the part of host countries resulting from such an agreement was unlikely to be matched by
commitments on the part of foreign investors, for exam ple in respect of the transfer of technology.  As
acknowledged in paragraph 47 of Japan's contribution, an international agreement could not directlyimpose obligations on firms.  Until it was made clear how an effective balance of rights and
obligations of host countries and foreign investors could be struck, host developing countries should
retain the ability to pursue their development policies including through the use of performance
requirements.  Moreover, evidence showed that developing countries were autonomously liberalizing
their investment policies in response to the competition to attract FDI. This process contributed to
providing greater transparency and predictability for foreign investors.  While Japan's contribution
outlined elements to be included in a possible negotiation on a multilateral agreement on investment,Egypt could not  embark on such a negotiation before it had received clear answers to its concerns.
49. With reference to paragraphs 6 and 7 of WT/WGTI/W/104, the representatives of Costa Rica,
Brazil, Hungary , Norway , Korea  and Chile  agreed that a central question in negotiations on
international investment agreements was how to strike an appropriate balance between disciplines
aimed at providing legal security for foreign invest ors and flexibility to allow countries to implement
their development policies.   The point was made that the GATS  was an example that showed that
such a balance was possible and that current proposals for investment negotiations in the WTO
envisaged a framework that would provide for the same flexibility as the GATS.  The representatives
of Costa Rica, Hungary , Norway  and Korea  also agreed with the statement that the notion of
flexibility to accommodate development objectives in an investment agreement should not be
interpreted so broadly as to allow for discrimination.  The representative of Switzerland observed that
in this regard a distinction needed to be made between MFN treatment and national treatment.  Whilethe concept of flexibility could not justify discrimination between investors of different nationalities,
exceptions to the principle of national treatment would be warranted. The representative of Indonesia
agreed with the statement in paragraph 8 of WT/WGTI/W/104 on the need for appropriate flexibility
to reflect the developmental stages and development policies of each country.
50. With respect to the references in Japan's contribution to statements on the development
dimension in the preambles of various WTO agreements, the representative of India stated that
practice had shown that preambular statements and best endeavour clauses in WTO agreements hadremained ineffective and had not found expression in domestic legislation.
51. With regard to the discussion in paragraphs 17-24 of WT/WGTI/W/104 on the definition of
investment, the representative of Norway stated that in considering whether investment should be
defined narrowly to include only FDI, account should be  taken of the fact that short-term capital flows
often played an important complementary role in relation to FDI and trade. Moreover, the potential
disruptive implications of outflows of short-term capital, as evidenced by the Asian financial crisis,
suggested that such capital flows might need to be made subject to multilateral regulation. It might be
interesting for the Working Group to study the different policy responses of countries in the Asianregions to the problem caused by short-term outflows of capital. The case of Malaysia was
particularly interesting in this respect.
52. The representative of Malaysia asked for a clarification of what was meant by the notion in
paragraph 25 of WT/WGTI/W/104 of transparency as applied to the "formulation and revision
processes".  In response, the representative of Japa n explained that transparency should apply not only
to investment rules but also to the process whereby such rules were adopted and amended.  Thus,
what was envisaged were provisions similar to those contained in the Agreement on Technical
Barriers to Trade. The representative of Norway stated that the issue of transparency was closely
linked to the need for simplification of procedures relating to establishment of foreign investors. TheWT/WGTI/M/15
Page 14
representative of Indonesia stated that the issue of transparency was already adequately addressed by
bilateral investment treaties.
53. The representative of Malaysia observed that the discussion in paragraphs 28-32 of Japan's
contribution on non-discrimination contemplated flex ibility in the application of non-discrimination
rules in the pre-establishment phase, but that it failed to acknowledge the need for developingcountries to enjoy similar flexibility with regard to the post-establishment phase. The representative of
Chile stated that one of the most important questions with respect to the issue of flexibility concerned
the modalities of negotiations on market access. A "positive list" approach allowed countries todetermine which sectors they wished to liberalize as well as the level of liberalization they wished to
consolidate and to qualify their commitments by conditions and restrictions.  The representative of
Norway stated that since many bilateral investme nt treaties already provided for an obligation to
accord MFN treatment, the multilateralization of this obligation would not pose major problems,
except that there would need to be an exception to MFN treatment for regional integration
agreements.  However, the principle of national treatment was more difficult to reflect in a
multilateral framework and would need to be  subject to flexibility to take account of developmental
concerns. A key consideration in this connection was that there should be transparency and
predictability of any limitations to national treatment, which could be achieved through a "positivelist" approach as provided for in the GATS. The representative of Indonesia considered that the
principles of MFN and national treatment should only be applied to trade in goods and trade inservices, since a multilateral agreement on investment based on such principles would prevent
countries from pursuing policies which they deemed appropriate. The representative of Malaysia,
responding to the comments by Norway, stated that  a multilateral agreement on investment could not
be seen as a simple multilateralization of provisions common to bilateral investment treaties. While
such treaties generally contained MFN obligations, there were not many such treaties that provided
for national treatment.  Moreover, a multilateral framework would remove or limit the right of
countries to pursue development objectives through the use of policy instruments such as screening of
investment, technology transfer and other requirements, and investment incentives.  In contrast,bilateral investment treaties, while providing for lega l security for foreign investors, did not affect the
ability of a host country to use such policies an d offered a framework within which countries could
act autonomously to create an enabling environment for foreign investment, as was demonstrated by
Malaysia's experience
54. In commenting on the discussion on performance requirements in paragraphs 33-37 of
WT/WGTI/W/104, the representatives of Malaysia and India
 stressed the important role of such
requirements as policy instruments that were necessary for developing countries to attain their
development objectives and considered that this subject was illustrative of how a multilateral
framework for investment would limit the ability of countries to pursue their development policies.  In
this regard, the representative of India stated that performance requirements, such as transfer of
technology requirements, export obligations and manufacturing requirements, were not onlyimportant policy tools to attain development objectives but could also play a role as a tariffequivalent. Whereas in the field of trade it had been observed that a small city state could afford to
have no tariff protection because it had no domestic industry to protect, and could promote its
economy through an efficient port, a larger economy might need to apply a reasonable tariff to protect
its domestic industry.  In the case of investment, performance requirements served to achieve welfare
gains for the economy while affording a level playing field to the local entrepreneur.  Moreover, in thecase of the city state the quality of investment might well be of an efficiency–seeking variety, whereas
in the case of a larger economy it could be market-seeking.  In that context, the host country should
retain the policy tools that were necessary to derive benefits from FDI.   The example of performance
requirements also showed that the development dimension could not be adequately understood within
the framework of the flexibility concept as developed in Japan's contribution.  The fact that manycountries had found it necessary to seek an extension of the transition period under the TRIMs
Agreement demonstrated that structural difficulties could not be effectively addressed throughWT/WGTI/M/15
Page 15
transition provisions.  Moreover, while a country had to have reached a certain level of economic
development before it could envisage the application of TRIMs, the TRIMS Agreement only allowed
for the continued use during a transition period of TRIMs that had been in place in 1994.  As a
consequence, the least-developed countries, which generally had not notified TRIMs, were prevented
by the TRIMs Agreement from applying TRIMs in the future when they would reach a stage ofeconomic development at which TRIMs might become important to their development process.  At
the same time, developed countries had benefitted from the application of TRIMs at various stages of
their development including in the 1980s and 1990s.  In this respect, the basic question that arose in
respect of the development dimension was why developing countries should be denied the benefits of
certain policy tools that developed countries had been able to use at earlier stages of their
development.
55. The representative of Brazil stated that it was difficult to see the relationship between
performance requirements and flexibility for development purposes since the TRIMs Agreement
provided little scope for development objectives to be taken into consideration. In this regard, he
suggested that it might be useful to discuss to wh at extent flexibility to accommodate development
objectives was evident in the consideration of requests for extensions of the transition period under
Article 5.3 of the TRIMs Agreement.  The representative of Norway stated that, to the extent that it
might be necessary for developing countries to use performance requirements,  they should be applied
in a transparent and predictable manner, and that a continued use of such requirements might hamper
the economic development of a country by limiting competition. A relevant element to consider in
discussions on performance requirements was that certain agreements such as NAFTA permitted the
use of such requirements if linked to the granting of incentives. It was also necessary to clarifywhether any possible disciplines on performance requirements should be of a horizontal nature or be
sector-specific.
56. The representative of Korea asked India to offer a further explanation of its views on
performance requirements as the equivalent of tariffs and on the relationship between levels of
development and a country's ability to use such requirements. The representative of the United States
observed that on previous occasions her delegation had expressed its disagreement with the views of
India on the rationale for the use of performance requirements.  In a reaction to the comment by India
that least-developed countries were prevented from applying TRIMs when they reached a level of
development at which they could effectively use such measures, the representative of Switzerland
considered that this issue  could be taken up in the context of the review under Article 9 of the TRIMsAgreement. The representative of the European Communities stressed that Japan's contribution clearly
acknowledged the need for flexibility in this area,  as evidenced by the reference in the concluding
section to the idea of permissibility of performance requirements necessary for development. It was
also noteworthy that the UNCTAD publication mentioned the TRIMs Agreement as an example of
how international investment agreements could provide for flexibility for development purposes.  In
response to the reference made by Switzerland to the review under Article 9 of the TRIMs
Agreement, the representative of Malaysia expressed scepticism that it would be possible to reach
consensus on changes to this Agreement that would be favourable to developing countries. He
disagreed with the European Communities that the TRIMs Agreement allowed for flexibility in favour
of developing countries, and in this regard he referred to the current discussions in the Council for
Trade in Goods on requests by a number of developing countries for an extension of the transition
period under the TRIMs Agreement. The representative of the European Communities stated that in
referring to the TRIMs Agreement as an example of flexibility, he had simply noted a view that had
been expressed in the UNCTAD publication on flexibility. The representative of Japan stated that his
delegation's submission described the various ways in which performance requirements werecurrently treated in existing agreements without prej udging how they should be dealt with in a future
investment agreement.WT/WGTI/M/15
Page 16
57. With regard to the suggestions in Japan's contribution on dispute settlement, the
representatives of Norway, Hungary  and Korea  stated that possible WTO rules on investment should
not provide for a right of individual investors to have recourse to international dispute settlementprocedures. The representative of Indonesia stated that a dispute settlement mechanism in a WTO
investment agreement would only benefit developed-country Members because they were the major
source countries of FDI whereas  developing countries were mainly host countries.
58. Concerning the issue of flexible treatment of  developing countries in the implementation of
investment agreements and the issue of technical assistance, raised in paragraphs 42-44 of
WT/WGTI/W/104, the representative of Brazil stated that the basic structure and principles of the
GATS  were inspired by the desire to provide for flexibility for developing countries. While Japan'scontribution only mentioned Article IV of the GATS, other relevant features of the GATS in this
context were the use of a "positive list" approach, the right of countries to schedule limitations thatwere related to performance requirements, and the provisions of Article XIX of the GATS pursuant to
which developing countries were permitted to schedule limitations in addition to the limitations listed
in Article XVI with a view to achieving the objectives of Article IV of the GATS.  The representative
of Chile considered that many WTO agreements contained provisions for longer transition periods for
developing countries and for technical assistance, but  that in the context of a possible multilateral
framework for investment such provisions needed to be reviewed and to be made more effective. The
representative of Norway considered that it was li kely that an investment agreement would provide
for a mechanism for gradual liberalization at a level to be determined through negotiations, taking into
account the mutual interest of parties. Concerning the concept of grace periods as mentioned in
Japan's contribution, he wondered whether in determining the length and availability of such periods adistinction should be made between different developing countries in terms of their level of
development.   Exemptions of a permanent nature would need to be provided for as was the case in
bilateral and regional investment agreements with respect to natural resources, health, culture and the
environment. With reference to the view expressed by Malaysia that developing countries needed
permanent carve-outs, he wondered in which other areas such permanent carve-outs might bewarranted. In response,  the representative of Malaysia stressed that such permanent carve-outs should
enable countries to discriminate, if necessary, and should cover both sectoral measures and measuresof horizontal application such as screening of inve stment, the channelling of investment into specified
sectors of economic activity and the application of requirements with respect to transfer of
technology.
59. With respect to the discussion in paragraphs 45-47 of Japan's submission on activities of
foreign investors, the representative of Norway considered that there should be a clear balance
between the rights and obligations of host countries and foreign investors. A basic consideration in
this respect was that international guidelines were of a non-legally binding character and that, since
foreign investors were subject to the laws of host countries, the proper way to achieve such a balance
was through the application of  transparent and predictable legislation by host countries.
60. With respect to a question that had been raised at a previous meeting on whether proponents
of an investment agreement modelled after the GATS regarded the GATS as a starting-point or an
endpoint, the representative of Switzerland stated that  an agreement on investment along the lines of
the GATS  would already  be a significant achievement. The representative of Japan stated that his
delegation considered that the GATS was a useful reference point in the consideration of possible
multilateral rules on investment. The representative of Malaysia considered that no clear answer had
been provided to the question of whether proponents of an investment agreement regarded the GATS
as a starting-point or as an endpoint. The representative of the European Communities stated that the
argument of some delegations that proponents of an  investment negotiation should clarify whether the
GATS constituted a starting-point or an endpoint for such a negotiation was in contradiction with the
view of the same delegations that it was premature to consider the parameters of possible investmentWT/WGTI/M/15
Page 17
negotiations in this Working Group. In any event, the position of his delegation on a GATS-based
approach to investment negotiations in the WTO was well-known.
61. In response to comments made on the advantages of bilateral investment treaties, the
representative of Korea stated that, as compared with the more than 1,800 existing bilateral
investment treaties with widely varying provisions, a multilateral framework would ensure greater
transparency by providing a single reference point . The predictability that such a framework would
provide would benefit economic operators, including small- and medium-sized enterprises that
accounted for a growing share of FDI. Such a framework would also contribute to the stability of
domestic policies by helping governments resist protectionist pressures. The representative of Japan
stated that his delegation regarded bilateral investment treaties and multilateral rules on investment asbeing complementary.  Bilateral investment treati es were aimed at achieving a high standard of
liberalization on a bilateral basis, while multilateral rules would provide for more basic rulessupported by a dispute settlement system.   Since bilateral investment treaties were concluded in light
of the particular conditions of the parties to such treaties, they could not ensure a consistent
international environment for foreign investment.  Moreover, to create a complete network of bilateral
investment treaties among all WTO Members would be time-consuming and administratively
burdensome. The fact that Japan itself was now in the process of negotiating bilateral investmenttreaties with several countries was consistent with this notion of a complementary relationship
between bilateral investment treaties and multilateral rules.
(ii) Further discussion on contributions presented at the meeting in March 2001
62. The representative of Korea responded to several questions posed at the meeting of 7 and
8 March on a submission by his delegation on the GATS and its implications for an investment
agreement (WT/WGTI/W/96).3  In response to a question raised by India on the meaning of the notion
of the GATS as a bottom line, he stated that with respect to  market access, the GATS should be taken
as a starting-point while in respect of transparency and other subjects that were addressed in the
GATS in a limited manner or not at all, the GATS could be considered as a reference point.   If India
was concerned that an investment agreement might envisage a process of progressive liberalization,such concern could be addressed through the inclusio n of provisions such as Article XIX of the GATS
which would need to be tailored to the situation faced by Members, particularly developing countries.
In response to a question as to whether paragraph 11 of WT/WGTI/W/96 was intended to suggest the
need for amendments to the GATS, the TRIMs Agreement and the Agreement on Subsidies and
Countervailing Measures, he stated that this paragraph was only intended to raise issues that would
deserve consideration at a future time with a view to ensuring coherence between different sets of
WTO rules rather than to suggest that certain agre ements would need to be amended.  With reference
to questions by India and Malaysia on the level of ambition of the proponents of an investment
agreement in the WTO and on the flexibility that such an agreement would provide for developing
countries, he stated that it was premature to define precisely what kind of framework for investment
his delegation envisaged because such a framework w ould need to reflect the various interests of all
Members. The aim of the communication in WT/WGTI/W/96 was to identify parameters which couldshape a possible framework agreement that promoted the interests of all Members.  The process of
liberalization under such a framework would take account of national policy objectives and the level
of development of individual Members, both overall and in individual sectors.  Appropriate flexibility
for individual developing-country Members to open fewer sectors would be allowed, which would be
facilitated by the adoption of a GATS-based approach.  In response to a question by Brazil on whatwas intended by the question raised in paragraph 11 of WT/WGTI/W/96 of how to treat and define
the scope of the specific market-access commitments in  the GATS, he stated that this referred to the
need to consider whether all three types of speci fic commitments provided for in the GATS (market
access, national treatment and additional commitments) should be included in a possible investment
                                                     
3 See WT/WGTI/M/14, paras. 64-75.WT/WGTI/M/15
Page 18
agreement.   In particular, account should be taken of the fact that specific commitments that had been
made under GATS Article XVI were  concentrated on the commercial presence mode of supply.
63. The representative of Norway stated that the questions raised by Korea in WT/WGTI/W/96
merited further consideration not only because they showed how the "bottom-up" approach of the
GATS could accommodate developmental concerns in an investment agreement, but also becausethey highlighted the need to ensure coherence between existing WTO agreements and possible new
rules on investment.  Of particular relevance in th is regard was how such rules would relate to the
commercial presence mode of supply in the GATS.
64. The Working Group took note of the statements.
E. DATE OF THE NEXT MEETING
65. The Working Group agreed to hold its next meeting on 3 October 2001, the main purpose of
which would be to consider, on the basis of a draft to be prepared by the Secretariat, a factual, annual
report (2001) to the General Council, and to discuss any new written contributions.
__________