WORLD TRADE
ORGANIZATIONWT/WGTI/W/89
9 October 2000
(00-4134)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE EUROPEAN COMMUNITY
AND ITS MEMBER STATES
The following communication, dated 6 October 2000, has been received from the Permanent
Delegation of the European Commission.
_______________
CHECKLIST OF ISSUES, AGENDA ITEM IV:  ADVANTAGES AND DISADVANTAGES
OF ENTERING INTO BILATERAL, REGIONAL  AND MULTILATERAL RULES ON
INVESTMENT, INCLUDING FROM A DEVELOPMENT PERSPECTIVE
Some ideas on flexibility and non-discrimination
I. INTRODUCTION
1. A number of arguments have been raised during the last meetings of the Working Group
according to which many questions still need to be answered before engaging in more concrete
policy-oriented work on investment.  While it is true that the Group has not exhausted the issues that
could be addressed nor even attempted to produce definitive conclusions on any item that was
discussed, such are not its aims.  This paper will try to comment on the state-of-play of the
discussions on some of the issues that have already taken place until now in the Working Group andon where these discussions are – or should be – going.  In so doing, we have chosen to draft the paper
in the form of comments to certain statements drawn from written and oral contributions that appeared
to capture particularly well an issue or a question.  These statements have been reproduced or
summarised at the beginning of each section.
1. The argument has been made that the Working Group has not drawn any definitive
conclusion on the complex relationship between trade and investment.
2. In our view the objective of the Working Group is not to reach a consensus on the conclusion
to be drawn concerning the relationship between trade and investment.  A number of written
1 and oral
presentations have been made on this subject.  Some of the opinions expressed also referred to
academic research, statistical data, empirical observation and anecdotal evidence referred to eithercountries or regions.
                                                     
1 See WT/WGTI/W/7, WT/WGTI/W/8, WT/WGTI/W/10, WT/WGTI/W/11, WT/WGTI/W/12,
WT/WGTI/W/14, WT/WGTI/W/15, WT/WGTI/W/20, WT/WGTI/W/25, WT/WGTI/W/26, WT/WGTI/W/37,
WT/WGTI/W/45, WT/WGTI/W/65, WT/WGTI/W/72.WT/WGTI/W/89
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3. In any case, it should be noted that most of the studies presented and extensively discussed in
the WGTI  show that there is a positive correlation between FDI and trade flows, and that open trade
and investment policies are mutually supportive2.
2. The argument has been made that the developmental dimension is a key issue for the
Working Group.
4. In our view the aim of the Group includes the analysis of the kind of rules that would be in
the interest of all countries.  Thus, we wholeheartedly agree with this statement.  The Group has
benefited from a number of written specific contributions on this issue, including UNCTAD’s paper
on flexibility3 and India’s communication on the developmen t dimension of international investment
agreements4.  The analytical work done by UNCTAD and the experience of India and other
developing countries have helped the Working Group to understand the needs and concerns of
developing countries.  For their part, the European Community and its Member States alsocontributed to this debate with their recent pape r on the impact of international investment rules on
national policies
5.
3. The argument has been made that developing countries need to maintain their
flexibility. Multilateral investment rules would limit developing countries’ current level of
flexibility. Thus, investment rules are not in the interest of developing countries.
5. In our view flexibility in adapting domestic policies to changing circumstances is important to
all countries, and we should accept the plea that it is particularly so for developing countries.  The
UNCTAD paper on flexibility in IIA provides a useful starting point for this debate.  More generally,
any multilateral framework of investment rules should be consistent with this need, and the
Community had tabled proposals for an investment agenda in the run up to the Seattle Ministerialdesigned to point in precisely this direction.
6. One danger in this discussion, however, is the risk of pushing the notion of “flexibility” too
far, perhaps to the point of confusin g it with the “right to discriminate”.
7. International agreements, freely entered into, nonetheless, limit the flexibility of governments
to an extent. Members of the WTO have agreed to follow certain rules, instead of acting on their own,
because they agree that it is the best way to achieve their own interests through the general interest.
Thus, the question we ought to ask is what degree of “flexibility” is desirable.  However, whatever the
chosen degree of flexibility, it is hard to justify that this should include an absolute discretion to
discriminate.  We remain unconvinced of the benefits to the general good, as opposed to private
interests, of discriminating against foreigners or among foreigners as such.  As we have pointed out in
the past, this should not be confused with differential treatment of certain investors (be they foreign or
domestic) on the basis of objective and transparent criteria linked to public policy objectives.
8. “Flexibility”, therefore, should not simply mean absence of rules. International rules – and
multilateral rules in particular – can be written with  an appropriate degree of flexibility, for instance
through  exceptions and exemptions, or through transitional periods, etc.  A framework of rules
increases predictability, which is essential for all economic operators.  At the same time flexibility is
necessary, in particular for those countries who need to implement developmental policies.Therefore, we should consider how to find the ri ght balance between predictability and flexibility.
                                                     
2 See, for instance, the notes by the Secretariat WT/WGTI/WT/65 and WT/WGTI/WT/38.
3 WT/WGTI/W/78.
4 WT/WGTI/WT/74.
5Issues such as the impact of international investment rules on national policies (including development
objectives) and flexibility, have been addressed in our last paper WT/WGTI/W/84.WT/WGTI/W/89
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This has been the case for trade and services and it should be the case for investment. If countries
want more FDI inflows and want to re-assure and attract potential investors they should be prepared
to accept basic rules to increase predictability.
4. The argument has been made that FDI can produce positive as well as negative effects
on the host country’s economy, and that we should distinguish between good and bad FDI.
9. In our view this kind of reasoning, whether or not one agrees with it, is misleading.  First of
all, in many cases any negative effects of FDI are in reality due to structural problems in the host
country’s economy.  Aside from this, however, no country is trying to impose FDI on another.  On the
contrary, it appears that every country is trying to attract FDI with all possible means.  All countries
strive to attract FDI, because they recognise th e importance of FDI to their economic growth and
development.  Moreover, from the discussions we have had in the Working Group it appears that theoverwhelming majority of studies
6 highlights the benefits that host and home countries receive from
FDI across the whole range of economic activities.  Having said this, the question of whether or not
FDI is beneficial to a host country, though very important in its own right, is somewhat beside the
point: what WTO Members ought to be interested in is to make sure that when countries decide to
open their economies to FDI, they do so under certain basic conditions of fairness and non-discrimination.
5. The argument has been made that more than 1,600 Bilateral Investment Treaties (BITs)
have been concluded world-wide. Why should we establish multilateral rules on top of all these
BITs that are working so well? There is no guarantee that multilateral disciplines would
enhance investment flows. Moreover, BITs give  a better opportunity for countries to maintain
their room of manoeuvre to pursue specific objectives.
10. In our view BITs are instruments aimed at  providing a predictable legal framework to
investors of the involved parties, in order to increase investment flows between the countries
involved.  They can, by exceptions similar to those possible under multilateral rules, also allowgovernments to pursue their internal policies (e.g. for developmental purposes).  This has been
underlined by several submissions presented to the Working Group
7 during the past 3 years.
11. Our position does not mean that we question the usefulness of BITs.  The fact that BITs are
successful does not prove that a multilateral framework would be unsuccessful, on the contrary.  As
for trade, bilateral agreements, provided they do not distort investment flows, are to be considered
favourably and should therefore be encouraged, and accommodated within any multilateral
framework..
12. We are consistently told by European-based investors that a purely bilateral approach is not
enough to ensure the kind of transparency and predictability that they need in order to feel reassured
and to invest more.  Moreover, because of today’s complex production processes, the activities of
many investors often involve more than two countries at a time, and require consistent rules world-
wide.  However, very often BITs have a limited scope, and their main aim is to establish investmentprotection rules.  This is one reason why a multilateral approach can be complementary to the bilateral
one.  In particular, the EC and its Member Sates consider that non-discrimination is the linchpin of an
open and efficient investment regime.  In this respect, WTO rules would present an undeniable
advantage for dealing with this question.  Another reason has to do with the higher degree of visibility
that multilateral rules have: everybody would know of their existence and would be able to learn
easily what they say.
                                                     
6 See WT/WGTI/WT/65 and WT/WGTI/WT/38.
7 Among others, see WT/WGTI/WT/71 by India and WT/WGTI/WT/77 by UNCTAD.WT/WGTI/W/89
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6. The argument has been made that the empirical evidence shows that the main
determinants of investment flows to any given co untry are the size of the market, skilled labour,
political stability, sound legal regime and good infrastructure and that the establishment of
investment rules will not change this.
13. In our view this is certainly true.  However, it cannot be an argument for opposing a
multilateral investment framework, which would in any case reinforce the soundness of the
international legal regime on investment.  To oppose an improved investment regime simply because
it would not be the main reason that determines investment flows is not justified.  We have always
said that countries should try to create an attr active environment for FDI through internal policies
such as education, infrastructure, transparency and stability.  A multilateral framework could
complement the internal policies but it could not solve every structural domestic problem that acountry may have.  However, under any given circumstances, it is indisputable that investors need
clear, predictable legal conditions in order to increa se their overall propensity to invest abroad.  In
fact, even though the mere existence of multilateral disciplines would not guarantee an automatic
increase of investment flows in the short term, investors clearly feel that a multilateral framework
would certainly reassure them and encourage them to invest more overall.  This is why we areconvinced that FDI flows would ev entually increase, other things being equal, should a framework of
basic investment rules be established.
7. The argument has been made that there is no clear definition of FDI.
14. In our view this is one of the issues on which the Working Group has spent quite some time.
A number of written submissions have also been presented
8.  We have many examples of definitions
of FDI and the choice to be made is essentially a policy choice.  However, in our view the question of
definition cannot be solved in isolation, but must be seen in the light of the disciplines and obligations
that would attach to it.  Some Members have suggested, for instance, that different definitions of FDI
imply a range of different obligations even in a single overall agreement.  In any case, it appears thatthe Working Group broadly agrees that our work s hould focus on FDI to the exclusion of short term
capital movements and we believe that this is a good working basis to develop.
8. The argument has been made that Developing countries might need to regulate FDI. For
instance, quality FDI should be positively discriminated.
15. In our view whatever measures and policies a country decides to apply to investment, we do
not see the reason for additional, discriminatory regulation on FDI.  Any given policy on investmentshould be applied to all investors, domestic and foreign.  Some countries might need to control the
access of foreign investors for domestic reasons.  An approach based on positive commitments sector-
by-sector would allow these governments to maintain their control on FDI entering their economy
without discriminating between investors on the basis of their nationality.
16. Whatever the criteria may be to distinguish between “high quality” and “low quality” FDI,
governments already adopt domestic policies to encourage the kind of FDI that they believe they
need.  We do not believe that a multilateral agreement should try to define the kind of FDI that
countries should or should not accept.  Instead, a multilateral framework should make sure that
governments apply their preferred internal policies without discriminating among investors on the
basis of their nationality.
                                                     
8 See WT/WGTI/WT/43, WT/WGTI/WT/49, WT/WGTI/WT/60, WT/WGTI/WT/61 and
WT/WGTI/WT/80, among others.WT/WGTI/W/89
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9. The argument has been made that Developing Countries need to apply performance
requirements to FDI. These measures can play a very positive role.
17. In our view the immediate reaction to this argument is that we have heard several countries,
including at the last meeting of the Working Group, who experienced the opposite.  However, adistinction should be made between those measures that distort investment decisions and discourage
foreign investors (for instance from developing a cust omer base in the host country, or to transfer a
specific technology) from policies that are applied in a non-discriminatory manner and do not distort
the market.
10. The argument has been made that should a multilateral framework be established, the
costs of adjustment for developing countries would outweigh the benefits.
18. In our view it is mainly up to each government to create the most appropriate conditions that
attract foreign investors and to maximise their potential as host countries.  However this should not be
done by setting up incentives or “selling out the economy to foreigners”.  Beside “natural
endowments” such as fertile land, natural resources, ease of transportation, etc., the most powerful
competitive advantages that a host country can have are a transparent and reliable domestic legalframework as well as sound policies on education and infrastructure.  Signing up to some basic
principles agreed at multilateral level would only reinforce the attractiveness of such a country as
potential host to FDI.
19. Clearly, in this as in all other fields, the timescale for the adoption of new WTO rules would
be negotiated with a view to enabling all WTO members, especially LDCs, the time needed for properimplementation.  The Community is very conscious of this, and has laid heavy emphasis in recent
months on the need also to ensure appropriate technical assistance for those who need it during the
implementation phase, in order to build the capaci ty of domestic institutions to deal, not only with
multilateral rules, but with domestic regulation of FDI as well.
11. The argument has been made that before getting involved in multilateral negotiations on
investment we should make progress in the lib eralisation of trade in goods and services. We
should also explore the potential of GATS rath er than seeking to negotiate general disciplines
on investment.
20. In our view it is not entirely convincing to argue that companies who provide services should
benefit from non-discriminatory treatment when they invest, while others who simply manufacture
products do not deserve the same treatment.  In any case, GATS mode 3 only provides for rule-basedopening sector by sector, so that coverage so far is uncertain.  Moreover, often the same companies
provide services and manufacture products at the same time.  On the contrary, the example of GATS
should be used to improve the treatment of all investors whether they are service providers or not.
21. In-depth studies prepared for the World Bank, such as “Multilateral rules on Foreign Direct
Investment: the Developing Countries’ stake” by James Markusen of the University of Colorado,clearly conclude that developing countries have a strong interest in adopting multilateral
commitments on FDI.
22. That said, the GATS model of progressive liberalisation within a known framework of
principles that apply as sector-specific commitments are made, may prove a helpful precedent.WT/WGTI/W/89
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12. The argument has been made that the question of foreign investors’ obligations is very
important.
23. It is the EC’s view, as first Member to pres ent a paper to this Working Group on the question
of investors’ responsibilities9, that it is extremely important that all investors, foreign as well as
domestic, take their responsibilities as good corporate citizens.  We have actively taken part in the
recent review and strengthening of the OECD Guidelines on MNEs.  We also favour the development
of effective codes of conduct adopted by investors at corporate and industry level on a voluntary
basis.  It should be clear, however, that the activity of every investor is firstly regulated by the
national laws of the country in which it operates.
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9 WT/WGTI/WT/81.