RESTRICTED
WORLD TRADE WT/WGTI/W/10
24October 1997
ORGANIZATION(97-4612)
Original: English Working Group ontheRelationship
between Trade andInvestment
SUBMISSION BYHONG KONG, CHINA
Thefollowing communication, dated 6October 1997, wasreceived from theHong Kong
Economic andTrade Office withtherequest thatitbecirculated toMembers.
_______________
Introduction
1. Thepurpose ofthissubmission istoassist intheimplementation oftheSingapore Ministerial
mandate fortheWorking Group ontheRelationship between Trade andInvestment. Members may
recall thatMinisters in1996 "[h]aving regard totheexisting WTO provisions onmatters related to
investment …andthebuilt-in agenda inthese areas, including under theTRIMs Agreement, andon
theunderstanding thatthework undertaken shallnotprejudge whether negotiations willbeinitiated
inthefuture", agreed to"establish aworking group toexamine therelationship between trade and
investment". Ministers further recognized that"[i]ntheconduct ofthework oftheworking groups,
…toensure thatthedevelopment dimension istaken fullyintoconsideration".
2. Hong Kong, China lends itsfullsupport toabalanced, comprehensive, holistic andeducational
policy leveldiscussion intheWorking Group. Weconsider thatbothtradeandinvestment issues should
beadequately covered. Issues ofinterests andconcern toallMembers, including thedevelopment
dimension, should bedulyrecognized. Inother words, itshould beaMembers-driven process.
Programme ofwork
3. Hong Kong, China hastaken noteofthechecklist ofissues forstudy produced bytheChairman
atthefirstformal meeting heldon2-3June1997. Wepropose thattheWorking Group lookintothe
following aspects ofwork.
I. TOSTUDY THEOBJECTIVES OFTRADE POLICY AND INVESTMENT POLICY AND
THEIR INTERRELATIONSHIP
4. Theglobaltrendtowardsliberalizationoftrade,foreigndirectinvestment(FDI)andinternational
portfolio investments reflects anemerging worldwide consensus thattradeandinvestment liberalization
areofcentral importance forthenational policy goals ofpromoting economic efficiency andgrowth.
Economic theory andempirical studies confirm thatbothtrade andinvestment liberalization arekey
elements forenhancing competition, efficient useofresources, newjobs, transfer oftechnology and
management skills, innovation, capital formation andconsumer welfare intherecipient economy.
5. Nonetheless, some investment policies/rules aredesigned bythehostgovernment torestrict
ordirect foreign investment inaparticular manner. They often impede market access andmayreduce
economic efficiency, asaresult nullifying theobjectives oftrade liberalization. Also, investmentWT/WGTI/W/10
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incentives maybeprovided byahosteconomy topromote investment above anoptimal level, resulting
inallocative inefficiency. TheWorking Group maytherefore wishtoreflect further ontheobjectives
oftrade policy andinvestment policy andtheirinterrelationship.
II. TOTAKE STOCK OFAND STUDY EXISTING WTO PROVISIONS RELEVANT TO
INVESTMENTANDINVESTMENTPOLICIES/RULESWHICHMIGHTAFFECTTRADE
Need forstock-taking
6. Duetothenon-ratification ofthestillborn 1948 Havana Charter foranInternational Trade
Organization withcomplementary trade andinvestment rules, there continues tobeadiversity of
bilateral, regional andplurilateral investment arrangements which appears sub-optimal forthegoal
ofpromoting transparent, predictable, efficient andlegally secure investment conditions. Thisleads
tothequestion ofhowtheWTO should respond totheexisting multitude ofinvestment rules and
investment barriers. Toapproach thisquestion, theWorking Group should conduct acomprehensive
stock-takingandstudyofexistingWTOprovisionsrelevanttoinvestmentpolicyconcernsandinvestment
policies/rules which might affect trade.
Existing WTO provisions related toinvestment
7. WenotethattheSecretariathascirculatedaninformalnote"WTOProvisionsonMattersRelated
toInvestment"(No.2988).ThenotecoversprovisionsinexistingWTOAgreementswhichareexplicitly
related toinvestment issues, forinstance, GATS, TRIPS, TRIMs, ASCM andGPA.
8. Apart fromtheaforementioned WTO Agreements, weareoftheviewthatthereareother WTO
provisions which mayalsohaveanimpact oninvestment, e.g.provisions ontariffs, QRs, AD,ROO
andRTAs. Indeed, theimpact ofthese traderulesoninvestment hasbeenrecognized inanother paper
produced bytheSecretariat entitled "The Relationship between Trade andFDI" (WT/WGTI/W/7).
9. Wesuggest theWorking Group takeintoaccount allrelevant WTO provisions andstudy in
depth theirrespective impact oninvestment, soastomake thestock-taking exercise morecomprehensive
andmeaningful.
Existing investment rules/policies relevant totrade
10. Asmentioned inparagraph 5above, some investment rules/policies mayhavetrade-distorting
effects. Hence, astock-taking exercise oftheseinvestment rulesshould beconducted withtheobjective
ofmaking tradeandinvestment policies moreconsistent forthebenefit ofallWTO Members, especially
theleast-developed economies.
III. TOEXAMINE THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
11. TraderestrictionsandtradedistortionsmayadverselyaffectFDIflowsandhampertheattainment
oftheobjectives ofinvestment policy. Without wishing topreempt theconclusions which theWorking
Group might draw fromthestudies, itwould occur toHong Kong, China thatsuchproblematic areas
could include thefollowing:
(i) longer-term import protection (e.g. tariffs, quantitative restrictions, technical
requirements andstandards ontrade) mayinduce FDIs to"jump theprotection walls"
soastoreapthe"protection rents" intheimporting economy. However, suchFDIs
mayturnouttobeunproductive anduncompetitive; andWT/WGTI/W/10
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(ii) eventemporary traderemedies (e.g.anti-dumping duties) anddiscriminatory regional
arrangements (e.g.preferential rulesoforigin) mayprompt sub-optimal FDIs which
theforeign investor would nothavemade intheabsence oftrade distortions.
12. Likewise, restrictive investment policies mayhavetrade-distorting effects .Forexample:
(i) investment incentives suchasrestraints ofcompetition (e.g.inthecaseofmonopoly
positions,discriminatorygovernmentprocurement)havebeenofferedbyhosteconomies
notwithstanding theirtrade-distorting effects forcompeting firms;
(ii) certainTRIMsprovisions(e.g.purchaserequirements)maydiscriminateagainstimports.
Incaseofinsufficient investment protection measures, theymaydeterMNCs andlead
tosub-optimal "trade strategies" or"licensing strategies" instead of"investment
strategies";
(iii) restrictive licensing agreements mayenable FDIs tousee.g.theirpatent rights for
preventing "parallel imports" andimpede market access (e.g.forinputs); and
(iv) some investment incentives maydistort export competition (e.g.inthecaseof"export
processing zones") andcontravene GATT/WTO rules (e.g.incaseofsubsidies for
FDIs conditional onexports).
Inthisregard,thepaperentitled"TheRelationshipbetweenTradeandFDI"(WT/WGTI/W/7)circulated
bytheWTO Secretariat should provide auseful reference.
IV. TOEXAMINE THE RELATIONSHIP BETWEEN INVESTMENT AND COMPETITION
POLICIES
Howcompetition policies mayaffect investment
13. Competition policies andpractices canaffect FDIs inmany ways. Forinstance:
(i) effective competition policies canremove market entrybarriers forFDIs(e.g.ifvertical
restraints byexisting firms foreclose access todistribution channels) andmaybeless
distortivethaninvestmentcontrolsandperformancerequirementstargetedagainstFDIs;
(ii) Article 9oftheTRIMs Agreement provides thatinthefive-year review, theCouncil
forTrade inGoods shallconsider whether theAgreement should becomplemented
withprovisions oncompetition policy. Thisimplies thatdisciplines onTRIMs may
needtogohandinhandwithcompetition rulesforFDIs. Nodoubt, thestock-taking
exercise suggested under Section IIwillprovide auseful basis foranalysis.
Howinvestment policies mayaffect competition
14. Investment policies andrules maydistort competition invarious ways. Forexample:
(i) screening procedures, sectoral restrictions anddiscriminatory regulatory barriers for
theentry andoperation ofFDIsmayreduce ordistort competition inthehosteconomy.
Theliberalizationofsuchanti-competitivegovernmentalFDIrestrictionsmay,however,
entail private RBPs byforeign investors ifthehosteconomy doesnotprotect the
contestability andproper functioning ofmarkets through liberal tradeandcompetition
policies;WT/WGTI/W/10
Page4
(ii) discrepancies among national investment incentives mayleadto"beggar-thy-neighbour
investment diversion". Themultitude ofinternational investment treaties shows that
unilateral national rules maynotoffer sufficient security toattract FDIs, justas
unilateral tradeliberalization isvalued lessthantariffbindings protected bytheWTO;
and
(iii) investment policies attracting FDIs andpromoting jointventures bythegranting of
exclusive rights mayreduce competition inthemarket ofthehosteconomy.
15. Itmaybeuseful therefore fortheWorking Group toexamine indepth howinvestment policies
mayaffect competition andviceversa.
V. TOEXAMINE THERELATIONSHIP BETWEEN INVESTMENT AND DEVELOPMENT
Hong Kong, China 'sexperience
16. Economic studies show thatliberalization ofinternational trade andinvestment policies will
fosterdevelopment,economicefficiency,growth,innovation,maximizationofproductivityandpromote
consumer welfare. Hong Kong, China ismost willing toshare withother developing Members its
first-hand experience inthisregard.
17. Ourinvestment policy goeshand-in-hand withourfreeandopentrade policy. Notonlyare
wesupportive ofinvestment liberalization abroad, wealsopractise oneoftheworld 'smost liberal
investment regimes athome:
(i) weofferalevelplaying fieldforforeign andlocalinvestors andapply theprinciple
offairness andnon-discrimination vigilantly;
(ii) there arenospecial approval procedures ornotification requirements governing the
admission offoreign investments;
(iii) there isnorestriction onthetransfer ofinvestment anditsreturns; and
(iv) wedonotimpose anyperformance orlocalcontent requirements asacondition for
establishing, maintaining orexpanding anexternal investment.
18. Asaresult, wehavebeenaplace ofattraction toforeign investors, withanaverage annual
FDIinflows ofabout US$2 billion inthe1990s.1These investment flows haveovertheyears greatly
contributed tostrengthening bothourservices andmanufacturing industries, enhancing competitiveness,
developing excellent infrastructural facilities andbusiness support services, creating tremendous
employment opportunities andmore importantly, raising thestandards ofliving forourpeople. FDI
is,inthecaseofHongKong,China,amainimpetustoitseconomicefficiency,growthanddevelopment.
Astudy ontherelationship between investment policy anddevelopment
19. Some developing economies maybeconcerned about thepossible implications ofinvestment
ontheirdevelopment. Inorder toaddress theirconcerns, wesuggest thattheWorking Group conduct
anin-depth study inthisregard. Such astudy should cover, interalia,theinteraction between the
1World Investment Report 1997, UNCTADWT/WGTI/W/10
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objectives oftheirinvestment policies witheconomic growth, anti-competitive MNC practices which
maydistort economic efficiency, andthepossible roleofaliberal investment policy andeffective
competition policy inpromoting development andgrowth. Thestudy should contribute towards
redressing thedisadvantages totrade, development andgrowth which mayresult from restrictive
investment policies andanti-competitive MNC behaviours, andthushelptomaximize benefits to
investment, trade anddevelopment ofthedeveloping economies.
VI. TOIDENTIFYPOSSIBLEAPPROACHESTOADDRESSINGTHEINTERRELATIONSHIPS
BETWEEN TRADE, INVESTMENT, COMPETITION POLICIES AND DEVELOPMENT
DIMENSION
20. Buildingontheoutcomeoftheabovestudies,wesuggestthattheWorkingGroupshouldexplore
howthese interlinkages andsynergies maybeaddressed inamore consistent, coherent andmutually
reinforcing manner, including thescenario ofapossible multilateral framework. TheWorking Group
maywishtocollectively address anumber ofparallel fundamental policy questions:
(i) Does thenational policy goalofliberalizing national investment regimes callfora
similar framework ofmultilateral investment rules? Would thisbepolitically easier
toachieve asinthecaseoftrade liberalization?
(ii) Canbilateralagreements(suchasthemorethanthousandbilateralinvestmentanddouble
taxation agreements) andregional agreements beefficient substitutes formultilateral
investment andintegration rules andprocedures (e.g. inthefieldofsettlement of
investment disputes)?
(iii) Cana"stand-alone investment agreement" (i.e.notexplicitly linked toexisting
agreements oftheWTO, e.g.theOECD "Multilateral Agreement onInvestment")
among major capital-exporting andcapital-importing economies serve asanefficient
substitute foramultilateral agreement integrating trade, investment andcompetition
rules andprocedures among allWTO Members?
(iv) Dotheinterrelationships andpossible synergies between trade, investment and
competition rulescallforan“integrated approach ”,similar tothe"WTO approach"
inthetrade policy field, soastoreduce transaction costs andpromote "policy
coherence" and"rule coherence"?
(v) How should theexisting andincreasing number ofinvestment rules intheWTO
Agreement befurther developed soastopromote non-discriminatory conditions of
competition forgoods, services, intellectual property rights andrelated investments?
Conclusion
21. Hong Kong, China, being astaunch supporter ofliberal trade andinvestment, believes that
trade andinvestment policies should bemutually supportive andcomplementary inthepursuit of
economic efficiency, global economic growth andthewelfare ofpeople. Inpursuit ofthisobjective,
weconsider thatawork programme inthesixareas elaborated inparagraphs 3to20above should
facilitate adecision bytheGeneral Council induecourse onhowthework ofthisWorking Group
should proceed.
22. Hong Kong, China alsorecalls thattheSingapore Ministerial Declaration instructed, interalia,
thattheWorking Groups onInvestment andCompetition Policy should draw upon eachother’swork
asnecessary. Wesuggest thatsuchmodalities bedevised toenable thistotakeplace.