Opinion of the Economic and Social Committee on the 'Global harmonization of direct investment regulations'

(96/C 153/16)

On 6 July 1995, the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an Opinion on 'Global harmonization of direct investment regulations'.

The Section for External Relations, Trade and Development Policy, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 13 February 1996. The Rapporteur was Mr Cal.

At its 333rd Plenary Session (meeting of 28 February 1996), the Economic and Social Committee unanimously adopted the following Opinion.

0. Summary and conclusions

The growing importance of foreign direct investment in the process of economic globalization and in relations between national and/or regional economies has not been matched by suitable changes in international regulations or in the way responsibilities are defined.

The Economic and Social Committee would prefer that any multilateral agreement on investment (MAI) be negotiated in the World Trade Organization (WTO); however, given that the Organization for Economic Cooperation and Development (OECD) has already started up negotiations the Committee feels that the Community and its Member States should participate actively therein without losing sight of the need for a future WTO agreement.

In the multilateral agreement on investment, the definition of investment should be broader than the current definition of foreign direct investment (FDI) so as to cover other forms of capital movements, as is already the case within the European Union (EU). The regional economic integration clause (REIC) should still allow EU Member States to continue with and further develop their process of economic integration and liberalization without being jeopardized by the most favoured nation (MFN) clause. Procedures for settling disputes should be made compatible with procedures created in the WTO and with existing instruments for resolving disputes between investors and states. Sub-federal and local bodies in the contracting states should be included in the scope of the agreement so as to remove current uncertainties in this connection. The principle of national treatment should be respected but exceptions and reservations should be made known; likewise, inverse discrimination against a country's own national firms should not be allowed as is the case, for example, with 'export processing zones'. Greater discipline should be sought when using fiscal incentives and direct incentives to attract FDI, which also has implications for financing from recipient states.

The opportunity should also be grasped to restrict attempts to attract FDI on the basis of low labour standards - not to be confused with low wage levels, which can flow from differing economic and social conditions. The OECD guidelines for multinational firms - which will be updated this year - although voluntary in nature, have been widely applied and complied with by many firms including those aspects relating to environmental and consumer protection. The principles contained in the guidelines should be incorporated in the MAI, thus making a positive contribution to future negotiations at WTO level.

1. Introduction

1.1. The growing importance of foreign direct investment

1.1.1. Total inflows of foreign direct investment (FDI) exceeded the levels reached prior to the 1991/1992 recession; in 1994 the total reached a new all-time high of $225 000 million. The estimate of total FDI outflows is slightly different because of different definitions of FDI and different accounting procedures (see appended tables with the latest data published by the United Nations Conference on Trade and Development (UNCTAD) in its 1995 World Investment Report).

The growth in FDI has been both cause and effect of the world economy's increasing integration. Over the last six years, annual average FDI has been $170 000 million, almost double the average over the previous six years ($91 000 million between 1983 and 1988).

FDI has grown at a faster rate than either the world economy or international trade; it has grown alongside the increase in bank fund flows and portfolio investment flows.

In early 1995 the stock of FDI amounted to $2 600 billion and, despite being concentrated in developed countries, the share going to developing countries has been rising rapidly.

1.1.2. The European Union is the source of almost half of and is the recipient of around 40 % of world FDI, if intra-Community FDI flows - constituting about 15 % of the world total - are included (Data for 1989 to 1994). These figures, however, have been on the decrease, in the sense that FDI in the European Union has been falling since 1990, both in absolute terms and relative to the world total. In the United States, however, the 1990 levels have been regained. FDI sourced in the EU has not reattained its 1990 levels and, more importantly, there is practically no EU-sourced FDI in the region of the world where FDI flows have increased the most: South-East Asia.

1.1.3. Despite the increasing internationalization of SMEs which are the source of a significant proportion of FDI - estimated at between 10 and 15 % of the world total - the role of multinational firms is becoming increasingly evident. Their number has mushroomed from 7 000 in the 1970s to around 40 000 in the mid 1990s. Branches of multinationals registered around $5 200 billion. in global sales in 1992, i.e. more than world trade. It is estimated moreover that around 40 % of this world trade consists of intra-firm transactions.

Employment trends have also been of great significance: multinationals directly employ around 73 million workers (corresponding to around 10 % of the world's non-agricultural employment) and it is estimated, moreover, that indirect employment is as high as direct employment.

1.1.4. Outside the OECD area, FDI has been concentrated in China (with around 40 % of investment outside the OECD in 1994), Singapore, Malaysia, Mexico (which has in the meantime joined the OECD), Argentina, Indonesia, Thailand, Hong Kong, Hungary and Brazil; the top five recipients account for around 63 % of FDI channelled to non-OECD member countries, and the top ten for more than 77 %, while the 45 least developed countries in the world received barely 1 % of the total FDI channelled into all developing countries. Moreover, FDI from the Asian countries, particularly Hong Kong (which accounted for around 21 thousand million in 1994), has been increasing over the past few years, being channelled mainly into other countries in the same region.

1.2. International FDI rules

1.2.1. Internationally, the World Trade Organization (WTO) is responsible for some aspects which relate directly and indirectly relating to FDI (under the GATS - General Agreement on Trade and Services - or TRIMs - Trade Related Investment Measures). However, despite proposals along these lines, it has not yet been agreed that the WTO should tackle questions relating to FDI.

1.2.2. The OECD, which comprises 26 of the world's most developed countries, has three instruments for regulating foreign direct investment: two liberalization codes, one on capital movement, the other on current invisible operations - which are designed to do away with those restrictions on current capital operations and current invisible operations, set out in the codes' specific lists - and the so-called national treatment instrument.

The liberalization code on capital movements deals with the pre-establishment phase, laying down rules on non-resident investors' access to economic activity in the recipient country. Member States undertake not to introduce more restrictive measures than those set out in the relevant appendices to the code (appendices by country); they also undertake to strive towards gradual abolition of existing restrictions on capital movements, wherever these relate to FDI.

Once non-resident firms are established, Member States' treatment of them is regulated by the above-mentioned national treatment instrument; this also covers new investments by firms already established. This instrument enshrines the principles of national treatment and gradual abolition of exceptions thereto without, however, being binding the way the codes are.

1.2.3. In the absence of a multilateral instrument guaranteeing a high level of protection for investors and their investments, many countries have concluded bilateral agreements for the promotion and reciprocal protection of investments; there are currently around 900 of these between 150 countries across the globe.

These agreements contain binding measures aimed at creating the right conditions for investment by investors from one of the signatory states in the territory of another, thus securing, through reciprocal arrangements, most favourable treatment for investors and a guarantee of protection and complete security for investments already made. This includes rendering it impossible for any of these states to nationalize, expropriate or take any other similar measures, except where they a) are in the public interest, b) provide prompt, adequate and effective compensation and c) comply with the relevant procedure laid down in the domestic legal system.

Also included are clauses relating to the transfer of capital and settlement of disputes between contracting parties and between investors and one of the contracting parties.

1.2.4. The European Energy Charter, a sectoral agreement signed by 51 countries and the European Union, constitutes the first multilateral agreement encompassing a body of provisions relating to the promotion and protection of investments.

The Energy Charter Treaty, the first treaty to implement the European Charter, grants foreign investors already established the more favourable of two treatments: national treatment or most favoured nation treatment. The provisions also cover aspects of hiring key personnel, transfer of capital and compensation for expropriation and losses resulting from wars or other conflicts.

The Treaty also imposes a 'best effort' obligation, with the purpose of granting national treatment to bodies which intend to make investments. However, the obligation to grant national treatment on an unlimited basis for the placement of foreign investment has been left for a later stage (to be concluded by the end of 1997).

1.2.5. The process of economic integration has been advancing in many regions of the world, and there are at present around 60 regional agreements; these have not only established conditions for trading within the areas concerned, but have also laid down conditions for foreign direct investment between participating countries.

For EU and the African, Caribbean and Pacific (ACP) countries, there is also a chapter in the Lomé Convention which specifically deals with the promotion, protection and funding of investment capital flows, payments and the establishment of operations. This also lays down most favoured nation treatment.

2. General comments

2.1. The 'two-track' approach

2.1.1. In April 1995, the European Union's Council of Ministers 'recognized the value to the Community and its Member States of striving actively for the establishment of multilateral rules involving high standards of liberalization and protection for foreign direct investment'.

To this end, it expressed the hope both that 'negotiations will start at the OECD forthwith, with the participation of the Community and its Member States, in order to draw up a multilateral agreement on investment with which non-member states will be associated'; and that 'work should also commence within the WTO for the subsequent establishment of a multilateral framework'.

2.1.2. On 20 October last, the proposed Council guidelines for the Community's and Member States' involvement in OECD negotiations for a multilateral agreement on investment (MAI) were submitted; these were approved by the Council in November.

2.1.3. The WTO has neither mandate nor resources to start up work on a genuine multilateral agreement, and this can only be rectified at the ministerial meeting scheduled for the end of 1996 in Singapore.

2.1.4. It is in the European Union's interest to speed up the WTO's work by proposing that its resources (human, technical and financial) be boosted, as recommended by the ESC in its Opinion on the results of the Uruguay Round negotiations (CES 1028/94 - Rapporteur: Mr Giesecke).

Moreover, if the preparatory work were to be carried out in collaboration with the WTO Secretariat, then more would be known about the views of non-OECD countries on the subjects being debated and this would help prepare the basis for a genuine multilateral investment framework.

2.1.5. The Economic and Social Committee would prefer the Multilateral Agreement on Investment to be negotiated at WTO level. However, since the OECD has already started up negotiations, the Committee feels that the Community and its Member States should fully participate in these and do everything possible to ensure that the OECD negotiations bear in mind the need for a WTO level agreement in the future, thus preventing a duplication of the work to be carried out in the WTO. Conclusion of an agreement restricted to the OECD area would further consolidate the trend towards concentrating FDI within the OECD.

2.2. The scope and objectives of the OECD agreement

2.2.1. In May 1995, the OECD Council of Ministers decided to start up negotiations immediately in the OECD so as to reach a multilateral agreement on investment (MAI) by the May 1997 Ministerial Meeting.

2.2.2. In reaching this decision, OECD ministers took account of the fact that, in spite of the OECD having the most comprehensive set of multilateral investment rules of any group of countries in the world, some of the problems not covered by the current rules had to be resolved: the question of measures taken at sub-federal level in federal states, preferential treatment granted to countries participating in regional economic organizations, national treatment applied in the pre-establishment phase, the inclusion of individual investors in the definition of investments subject to mandatory liberalization.

2.2.3. Moreover, the new agreement aims to include new subjects at present not covered by existing OECD instruments: steps to facilitate the movement of key personnel in technical areas, the behaviour of public and private monopolies, consumer protection, privatization policies subject to mandatory national treatment and investment incentives.

2.2.4. Lastly, the aim is to take advantage of this opportunity to relax current restrictions on FDI in some sectors such as transport, communications and natural resources and to shorten the procedures for screening investment proposals.

2.2.5. In the negotiations, the OECD has an important asset in its technical ability, rooted in years of experience both in the OECD Secretariat and in the two committees responsible for this area (Committee on International Investment and Multinational Enterprises and Committee on Capital Movements and Invisible Transactions). A negotiating group was set up which will have to keep the two committees briefed; various drafting groups were also created (on investment protection, treatment of investors, settling disputes).

3. Specific comments

3.1. Other questions to be discussed in the negotiation

3.1.1. Definition of investment

3.1.1.1. OECD instruments define FDI as being firm-based and aiming at stable relations; sometimes their definitions include the acquisition of a minimum of 10 % of existing voting rights. The definitions do not include portfolio investments or aspects such as intellectual property or intangible assets.

3.1.1.2. In the Community, liberalization of other types of capital movement, introduced unilaterally, together with the growing importance of certain aspects of intellectual property, has meant that the Community is considering broadening the scope of its definition of investment. However, this may well make it more difficult to achieve the high degree of liberalization being proclaimed and may also pose different problems as regards investment protection requirements.

3.1.1.3. On the other hand, broadening the scope of the definition may enable balance of payments and monetary policy safeguard measures to be more easily accepted in the agreement, which would have positive repercussions for any future extension of the agreement to include non-OECD Member States, since these concerns are shared by the majority of developing countries.

These safeguard clauses were provided for in the Treaty of Rome; although we cannot foresee the circumstances under which they would be necessary, and although they do not apply to countries participating in phase III of economic and monetary union, it would still be useful to keep this possibility open.

3.1.2. Regional economic integration clause (REIC)

3.1.2.1. This clause is of considerable importance for the Community (it represents an exception to the application of the most favoured nation (MFN) clause in cases of regional economic integration), since it will allow Member States to continue the integration and liberalization process in greater depth without third parties (who are not members of the regional integration agreement) having automatic access to the benefits flowing from the MFN clause. This clause should be worded carefully, since not all obligations under the Agreement have to be included in it.

3.1.2.2. The United States, although subscribing to treaties with this kind of clause (such as Article XXIV of GATT and Article V of GATS), expressed reservations about Article 25 of the Energy Charter and has been expressing reservations about accepting the Regional Economic Integration Clause in the MAI. In spite of the difficulties which could flow from its ratification procedure, this position is not acceptable, especially since American firms established in Europe are regarded as European firms and enjoy the same rights, being amongst the first to benefit from the European integration process.

3.1.3. Procedures for settling disputes

3.1.3.1. Multilateral agreements usually provide mechanisms for resolving disputes, aimed at facilitating swift, effective solutions to differences of opinion arising either between a firm and a state, or between states. Given the particular nature of the circumstances involved, access to this kind of mechanism should be extended to trade unions which could sometimes emerge as interested parties in settling differences of opinion. Generally, along the same lines of the GATT provisions, any party able to demonstrate an interest must have the opportunity to be heard; this can include employers', and even consumers', associations.

3.1.3.2. Two examples generally raised in this connection are the WTO and the World Bank. As a result of the GATT negotiations, instruments were set up in the WTO which could provide a model for the system to be adopted in the MAI for settling disputes between states. The system developed under the World Bank has a mechanism to be used in resolving disputes between investors and states: the ICSID (International Centre for the Settlement of Investment Disputes) was set up by the Washington Convention in 1965. Although these are the best known systems, there are others for solving disputes which are likewise used in bilateral agreements such as the UNCITRAL (UN Commission on International Trade Law) and ICC (International Chamber of Commerce) mechanisms.

3.1.3.3. The Committee believes that the mechanism to be implemented under the MAI ought to be compatible with WTO mechanisms for dealing with disputes between states. As far as disputes between investors and states are concerned, it is important, using existing instruments as a basis, and without prejudice to the interests of the recipient country, to secure the broadest range of possibilities for investors to defend their interests so as to improve investment protection and security, which are crucial to enhancing and boosting investment.

3.1.4. Application to Member States' sub-federal bodies

3.1.4.1. The aim of extending the scope of the MAI at sectoral level should be backed up by including sub-federal levels of federal states amongst those to whom the agreement is to be applied. The positive impact of the Agreement could be very limited if the local and sub-federal decision-making levels of participating states do not feel that they are required to comply with the Agreement.

3.1.4.2. This issue is of paramount importance for the success of the negotiations from the Community's point of view, especially since the United States has already demonstrated in the case of the European Energy Charter that it has a very particular idea as regards the outcome of the negotiations, not having subscribed to the Charter to date.

3.1.5. Exceptions to the principle of national treatment

3.1.5.1. Exceptions should be possible for reasons of public order, public health and national security.

3.1.5.2. The list of exceptions and reservations should be published to facilitate economic operators' forward planning.

3.1.5.3. The contracting parties should undertake not to introduce new exceptions or reservations (standstill commitment) and the timetable for dismantling existing exceptions and reservations should take into account the specific circumstances of each contracting party.

3.1.5.4. Application of the principle of national treatment to privatization and public sector monopolies will represent one of the most difficult subjects for negotiation, especially since the various countries are not starting out from the same point. However, in broader terms, the negotiations could demonstrate the value in starting up a debate on a competition policy at international level.

3.1.5.5. The issue of export processing zones (EPZs) should also be dealt with in the negotiations so as to curtail contracting parties' attempts to abuse them. There should, for example, be a ban on inverse discrimination against national firms in favour of foreign firms.

3.1.6. Most favoured nation clause

3.1.6.1. The most favoured nation (MFN) clause is designed to allow investors and their respective investments to benefit from the same treatment granted to investors and investments from whichever state is granted the most favourable treatment. In bilateral agreements the MFN clause constitutes an option vis-à-vis national treatment, i.e. the investor is guaranteed the most favourable treatment of two possibilities, either (a) that granted to third parties or (b) that granted to the nationals of the recipient country.

3.1.6.2. The solution as far as the MAI is concerned ought to be to use those rules contained in bilateral agreements which are most favourable to investors and their investments, not only in terms of this kind of clause, but also in relation to other aspects of the issue.

3.1.7. Tax and other direct incentives

3.1.7.1. Many countries use tax and direct incentive arrangements to attract FDI; this sometimes results in a lack of transparency or knowledge regarding the real costs for the economy, which in turn can also lead to problems of unfair competition, both on national markets and on the international market.

If fiscal incentives and exemptions for capital are abused, this will worsen state financing problems and create more fiscal injustices, since the income from taxes levied on workers and consumers is then forced to sustain a greater fiscal burden.

3.1.7.2. The quest for greater discipline in this area, after the fashion of the agreement on subsidies concluded in the GATT negotiations, should be backed up by an analysis of all other questions involving decisions about the destination of FDI.

3.1.7.3. In matters relating to corruption, the opportunity could also be seized to include in the agreement guidelines already approved by the OECD on illegal practices, and these guidelines should be made binding.

3.2. FDI and employment

3.2.1. One of the most important issues connected with FDI is employment. The OECD has carried out a series of studies on the linkage between FDI and employment, particularly as a result of current fears in many countries that the process of delocalizing production, which many multinationals are doing, should result in an irreversible shrinkage in employment in FDI source countries.

These studies have hitherto been inconclusive.

3.2.2. The way FDI relates to labour standards reflects economic, political and moral concerns. Establishing labour standards serves two aims: promoting human rights and fundamental workers' and trade union rights and institutionalizing rules of fair trade.

On the one hand, labour standards influence decisions on FDI, such as delocalization, while on the other, the way multinational enterprises locate and organize labour has an impact on these standards and can help improve the level of workers' skills in host countries, as demonstrated by analytical work the OECD has done on labour standards and foreign direct investment.

The use of low labour standards as a way of attracting FDI should in any case be discouraged.

3.2.3. The present-day trend towards economic globalization has had an effect on the mobility of resources and has thus led to the globalization of some segments of the labour market, despite labour's lack of geographical mobility.

On the other hand, the latest management techniques and ethical requirements associated with the image and name of multinational enterprises have led these firms to extend participative management systems like those existing in the parent company to their branches and affiliates.

This raises the question as to whether globalization leads to higher or lower labour standards.

3.2.4. As a number of recent studies have demonstrated, reduction of labour costs through cheaper labour is not normally taken as the determining factor in decisions on the location of multinationals' activities, although this is taken into account, in certain sectors more than in others. Multinationals have to consider other factors, such as: access to markets in goods and services, access to factors of production, the way production is organized internationally, supplies, infrastructure, capacity to keep up with technological developments, education and training levels, taxation and subcontracting, redundancy and franchising possibilities. Moreover, labour costs account for a diminishing share of production costs, even in those activities deemed to be labour intensive.

3.2.5. One of the advantages of negotiating the agreement in the OECD is that there are OECD guidelines for multinational businesses which, although voluntary, have been widely applied and complied with by an increasing number of firms, especially since there are many other smaller ones who have been internationalizing their businesses, particularly in matters of trade.

The principles contained in the OECD guidelines for multinational firms should be incorporated in the Multilateral Agreement on Investment, thus making a positive contribution to future negotiations at World Trade Organization level.

In addition to employment and industrial relations clauses, these guidelines include environmental protection and consumer-protection clauses which could thus also be included in the MAI.

3.2.6. The current negotiations have been hallmarked by a lack of transparency and information for the main parties to whom the agreement is addressed - employers, trade unions and consumers. Information at Community level has also been limited, although the value of Commission collaboration with the Economic and Social Committee in this Own-initiative Opinion is acknowledged; it is noted that the Commission is open to suggestions and proposals from the social partners. The same should apply to ideas from groups recognized by the OECD, the TUAC (Trade Union Advisory Committee) and the BIAC (Business and Industry Advisory Committee).

Done at Brussels, 28 February 1996.

The President

of the Economic and Social Committee

Carlos FERRER