No multilateral investment framework

Since the early 1980s, there has been a widespread trend towards liberalization of national laws and regulations relating to foreign investment, especially in developing and transition countries.

Unilateral action has, however, been insufficient to consolidate reforms. Without a multilateral regime, the liberalization of national FDI regimes has seen a rapid proliferation of bilateral, regional and plurilateral arrangements dealing with foreign investment issues.

Some two-thirds of the nearly 1,160 bilateral investment treaties concluded up to June 1996 were signed during the 1990s.

In 1995, OECD Members began negotiations on a Multilateral Agreement on Investment (MAI), reaffirming their intention to pursue a multilateral framework on investment rules. The OECD was seen as a useful forum because its existing framework of investment codes provided a foundation for negotiations, and OECD members accounted for 85 per cent of FDI outflows.

The MAI was to be open for signature by non-OECD countries; thus several developing countries became full observers to the MAI negotiations (Argentina, Brazil, Chile, Hong Kong and China) with others attending occasionally.

Negotiations were abandoned in December 1998 because a number of vital sections of the negotiated text could not be agreed, and because some important issues were excluded by major OECD Members (eg. taxation, subsidiarity). Another contributing factor to the cessation of negotiations was the lack of transparency in the process.

The need for a comprehensive agreement on foreign investment led to the Singapore Ministerial meeting deciding to establish a WTO working group on the relationship between trade and investment. The WTO General Council will review reports by this working group and the working group on trade and competition policy.

WTO rules related to FDI

The WTO - through the GATS and the TRIPS Agreement, and the plurilateral Agreement on Government Procurement - places important obligations on governments in their treatment of foreign nationals or companies. Through the inclusion of rules on "commercial presence" - defined as any type of business or professional establishment - the GATS recognizes that FDI is a prerequisite for exporting many services.

The Agreement on Subsidies and Countervailing Measures defines as subsidies some types of measures in each of the three main categories of FDI incentives (fiscal incentives, financial incentives and indirect incentives).

The TRIMs Agreement provides for a review within five years, in the context of which consideration will be given to whether the Agreement should be complemented with provisions on investment policy and competition policy.

WTO working group on Trade and Investment

In accordance with the decision of the 1996 Singapore Ministerial Meeting, the WTO has established a working group on the relationship between trade and investment. The Group met for the first time in June 1997 after which the Chairman issued a check-list which reflected the issues raised by participants.

Check-list of Trade and Investment Issues

I. Implications of the relationship between trade and investment for development and economic growth, including:

economic parameters relating to macroeconomic stability, such as domestic savings, fiscal position and the balance of payments;

industrialization, privatization, employment, income and wealth distribution, competitiveness, transfer of technology and managerial skills;

domestic conditions of competition and market structures. In this work, the Working Group should seek to benefit from the experience of Members at different stages of development and take account of recent trends in foreign investment flows and of the relationship between different kinds of foreign investment.

II. The economic relationship between trade and investment:

the degree of correlation between trade and investment flows;

the determinants of the relationship between trade and investment;

the impact of business strategies, practices and decision-making on trade and investment, including through case studies;

the relationship between the mobility of capital and the mobility of labour;

the impact of trade policies and measures on investment flows, including the effect of the growing number of bilateral and regional arrangements;

the impact of investment policies and measures on trade;

country experiences regarding national investment policies, including investment incentives and disincentives;

the relationship between foreign investment and competition policy.

III. Stocktaking and analysis of existing international instruments and activities regarding trade and investment:

existing WTO provisions;

bilateral, regional, plurilateral and multilateral agreements and initiatives;

implications for trade and investment flows of existing international instruments.

IV. On the basis of the work above:

identification of common features and differences, including overlaps and possible conflicts, as well as possible gaps in existing international instruments;

advantages and disadvantages of entering into bilateral, regional and multilateral rules on investment, including from a development perspective;

the rights and obligations of home and host countries and of investors and host countries;

the relationship between existing and possible future international cooperation on investment policy and existing and possible future international cooperation on competition policy.