RESTRICTED
WORLD TRADE WT/WGTI/W/23
9January 1998
ORGANIZATION(98-0049)
Original: English Working Group ontheRelationship
between Trade andInvestment
COMMUNICATION FROM AUSTRALIA
Thefollowing communication, dated 15December 1997, hasbeenreceived fromthePermanent
Mission ofAustralia withtherequest thatitbecirculated toMembers.
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On21October 1997, theChair circulated anoteonspecific areas where some delegations
feltthatfurther study wasnecessary. Thiscommunication deals inapreliminary waywithsome of
theissues raised inthatnote.
Treatment ofperformance requirements under theTRIMs Agreement andtheGATS, andthose
performance requirements notcovered bythese Agreements
Performance requirements remain anissue indecisions toinvest andintheoperation of
investments, buttheydon'tgivethecomplete picture. Many delegations havenoted thattheTRIMs
Agreement andtheGATS dealwithsome ofthem, butthereareothers worth looking at.More broadly,
Chapter VIofthe1996World Investment Report listsalargenumber ofmeasures relating toadmission
andestablishment,ownershipandcontrol,andoperations.TheWorkingGroupcouldusefullygothrough
thelistofthese measures withaviewtoidentifying those thathaveagenuine impact ontrade. The
obverse ofrestrictions isincentives. TheAgreement onSubsidies andCountervailing Measures already
contains aframework forthehandling ofsubsidies within theWTO. Nevertheless, there isastrong
caseforenquiring astowhattypes ofinvestment incentives mayhaveanimpact ontradeperformance.
"Negative list"and"positive list"approaches
Therelative merits ofnegative listsandpositive listswere discussed extensively during the
Uruguay Round negotiations onservices. Little canbeadded towhatwassaidinthese discussions,
buteachapproach hasitsadvantages incertain circumstances. Theprincipal advantages ofnegative
listsarethattheyputallexceptions ornon-conforming measures onthetable. Inthisway,theypromote
transparency ofregulation, andtheyalsopermit theidentification ofmeasures thatmaybeamenable
togradual liberalization. Negative listsareusually accompanied byacommitment nottoaddfurther
items afteracertain date. Positive listshavetheirusewhen confidence-building measures arerequired.
Participants areonlyrequired tolistalimited range ofmeasures, andtheymayaddothers asthey
become more familiar withtherelevant issues. Positive liststherefore require continuous updating
iftheyaretoassist transparency andsupport theaimoftradeliberalization. Itispossible thatpositive
listings dolittletoprevent theemergence ofnewnon-conforming measures, butageneralized judgement
isnotpossible.
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Page2
Differences between investment agreements andWTO instruments asregards thecoverage ofportfolio
investments
While andexamination ofthedifferences between investment agreements andWTO instruments
asregards thecoverage ofportfolio investments maybeuseful inproducing some insights relevant
tothemandate oftheWorking Group, wedonotthink theseinsights would intheendbeamajor factor
inthewaytheGroup handles itsfuture work. Portfolio investment isgenerally assumed tobeaholding
oftenpercentorlessofafirm'sequity. Holders ofportfolio investment aretherefore oftenprecluded
fromexercising direct control ofthefirmunless theother equity holdings arequitefragmented. This
suggests thatportfolio investors apply some investment criteria thatdiffer fromthose usedbyinvestors
seeking acontrolling interest. Portfolio investment alsoismore mobile thandirect investment. On
thewhole, itislikely thatportfolio investment israther more related tointernational capital movements
thantothepromotion oftrade, andweseenoneedtoexamine thisissue inanygreat detail.
Theeffects ofvarious types oftrade measures onforeign direct investment (e.g.hightariffs andtariff
escalation, BOPs safeguards measures, preferential rulesoforigin, anti-dumping measures, subsidies,
regional trade arrangements andtheprotection ofintellectual property)
Firms invest inother countries formany reasons. Weconsider thatthisWorking Group should
examine some ofthese reasons, especially where theyarerelated totrade. High tariffs andtariff
escalation mayinduce afirmtoinvest inlocalproduction facilities because itmight otherwise dolittle
business there. Itistherefore worth examining theextent towhich decisions caused bythese factors
areinfactsecond-best. The1996 WTO Annual Report ,forexample, notes thatthegains fromusing
hightariffs tendtobelimited, andthatforeign direct investment attracted toprotected markets tends
totaketheform ofstand-alone production units, geared tothedomestic market andnotcompetitive
forexport production. Thisisofcourse something wewould expect. Awell-established principle
among tradenegotiators isthatcountries tendtohavefewexport interests inproducts where theyapply
highimport tariffs.
Theformation ofregional tradeagreements presents another interesting aspect oftheinteraction
between trade andinvestment. Ifthetariff barriers between thepartners andthirdcountries arehigh,
theresulting situation willresemble tosome extent thesituation occurring under conditions ofhigh
tariffs ortariff escalation inasingle country. Oneimportant difference may, however, bethatthe
creation ofafree-trade areaoracustoms union willengender itsowndynamic effects astradediversion
occurs. These dynamic effects mayinturnleadtonewinvestment from third countries. Butthe
activities ofthese firms maystillonlybedirected atsupplying theinternal market. Obviously, a
free-trade areathatleads togenuine trade creation could result inaconsiderably enhanced inflow of
newinvestment.
Preferential rules oforigin areasubset oftherelationship between trade andinvestment in
regional tradeagreements. Theyfurther constrain afirm'sability tomake thebestinvestment decision.
They mayalsoresult inhigher overall costs fortheeconomies concerned asfirms again havetofind
thesecond-best solution forconducting theirbusiness. Added tothisisthecostofadministering
preferential rulesoforigin. Thiswould havetobetaken intoaccount byafirmmaking aninvestment
decision, butthesubject might bebetter dealtwithelsewhere within theWTO structure.
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