10:53 PM Jul 28, 1995

EU'S WTO-INVESTMENT REGIME WILL HIT SOUTH

Penang 28 July (TWN/Martin Khor) -- The European Commission is initiating the setting up of multilateral socalled trade-related rules on foreign direct investment, which would give foreign companies the right to enter any country, establish themselves there and be treated no differently from local firms.

It is also proposing to widen the authority of the World Trade Organisation to include the regulation of the terms of foreign investment worldwide.

[The EU Trade Commissioner Leon Brittan's initiative in this regard was made even as the United States initiated a move for an investment regime rules to be fashioned at the Paris-based Organization for Economic Cooperation and Development (OECD).

[The US view was that it would be easier for the OECD members, who already some foreign investment guidelines, to negotiate a OECD set of rules, and then take it to the WTO to push it there.

[The EU's Executive Commission instead preferred going directly to the WTO. One reason was that at the WTO, it is the EU Commission that negotiates on behalf of the EU members, and thus its own 'turf' visavis the member-states can be expanded and preserved. In the OECD, it is the member-States that are the actors and negotiators. Also, in the WTO context, the EU can 'play' on the views of other members (Asean and other major Asians as well as the Latin Americans) against the US, and the US views against the others, to fashion a regime that would be more useful to Europe.

[At the OECD Ministerial meeting before Halifax, and since then, there has been a decision to go ahead with an OECD process in this area. But EU Commissioner Brittan has not abandoned his ideas either.]

Under the EU Commission's plan for a WTO process, the principles that have guided conduct in trade in goods in the General Agreement on Tariffs and Trade (GATT) would be extended to the international flow of investments.

These principles include national treatment (that a foreign product, or in this case, a foreign company, should not be treated differently from a local) and most-favoured nation or non-discrimination (that goods, or in this case firms, from any country should not be treated differently from those coming from other countries).

[The authors of the original 'national treatment' provisions that were put into Art III of the 1947 General Agreement, had intended it to have a limited scope: to ensure that the tariff reductions negotiated and bound in the schedule of a country are not negated inside the markets of a country by taxing the imported goods (by any kind of domestic tax, levy, cess or fees, transportation costs etc) differently from the domestic product to offset the tariff concession and provide protection to the domestic production.

[But gradually, through a process of panel rulings, the scope of the GATT article (with similar language in the GATS and other WTO agreements) has been so extended that 'national treatment' requirement -- equality of treatment between domestic and imported goods -- has become a superior right and treatment to the foreigners, and created a kind of 'welfare regime' to promote the 'welfare' of the foreign suppliers, mostly the TNCs, at the expense of the domestic small and medium producers].

The EU Commission's plan was outlined in a paper distributed at an informal meeting called by the EU Commissioner with over a dozen senior diplomats from developing countries in Geneva a couple of months ago.

At that meeting, senior officials from the European Union presented the rationale for their proposal and elaborated on the need to start negotiations at the WTO on the matter.

While many of the Third World diplomats seemed to welcome it -- with a few even suggesting that the EU wants to expand scope for investment abroad and developing countries want investment and the two could do a 'deal' -- some other developing country diplomats were cautious and guarded in their response, and have begun to study the implications of the proposal for their national economic and social interests.

The paper, entitled "A level playing field for direct investment worldwide", is a draft prepared by the European Commission in Brussels.

It states that foreign direct investment (FDI) has become an essential element in today's complex corporate investment and strategies, with global communications creating a near global market place.

"European companies would greatly profit from a sound world-wide regulatory framework for FDI in which the right to invest and fair treatment of FDI once it has entered the host country are firmly established."

The paper proposes that multilateral rules on FDI be set up containing three principal elements: generally free access for investors and investments; national treatment for investors and their investments; and accompanying measures to uphold and enforce commitments made to foreign investors.

Under the rubric of "free access", the EC paper explains that worldwide there remains a "host of barriers that prevent foreign investors to enter the host countries freely."

It gives some examples: Governments may only allow a foreign investor to set up a subsidiary or take over a local enterprise after a specific authorization is given. Foreign investors may only be allowed to start operations in the form of joint ventures with local companies. Joint ventures sometimes cannot be majority-owned or controlled by foreigners.

Foreigners can be excluded from participation in privatisations or barred access to government concessions. Performance requirements, such as export or local purchase requirements, can be made a condition for establishment. Complete sectors like transport, energy or financial services can be closed to foreign investors.

Such requirements, cited by the EC paper, exist in many developing countries, and also in some developed countries, and have been set up by governments with the aim of increasing the benefits to the host countries of these foreign investments or for enabling local companies to strengthen themselves in terms of negotiations with foreigners and by shielding them from the full force of competition from foreign firms.)

The EC paper says however that these barriers "clearly are costly", not only to the investor but also to the host economy, and its obvious implication is that such rules should be scrapped.

The EC paper concedes that there are a few areas where restrictions on foreign control are reasonable, for instance in the case of a strategically vital defence industry.

But it states that the following "essential principles" should apply worldwide:

* general commitment to grant foreigners the legal right to invest and operate competitively in all economic sectors. * Only transparent, narrowly defined and well justified exceptions from the general right of entry for FDI are permissable. National security restrictions or public order considerations might not develop into a pretext for protectionism.

* Most favoured nation treatment (non discrimination). Host governments should not be in a position to accord preferential treatment for investors from certain countries and thus discriminate against others.

* "standstill" commitment not to introduce new restrictions and "roll-back" commitment -- gradual elimination of measures contra to liberalisation, and open up closed sectors.

The EC is thus clearly trying to get developing countries to accept that foreign companies should have the "right of entry and establishment" in their countries. In other words, should a foreign company want to enter and set up operations in a country, the government should not have the power to stop it from doing so, unless there are exceptional, multilaterally agreed reasons.

The EC paper also proposes once they have been given entry and have been established in a country, foreign companies should then be given "national treatment" -- a term used in GATT and the WTO to imply that a foreign product imported into a country should be treated the same way as a local product.

The EC paper sets out what it means by "national treatment" in the context of investments. It says: "In general, the host country should treat the foreign investor and his investment operating in its territory in the same way as a domestic investor or firm."

The paper adds that the national treatment principle should be complemented with the "most favoured nation standard" where host countries grant to foreign investors specific favourable conditions not available to national investors. In other words, there should not be discrimination between investors from different foreign countries.

The EC's rationale for national treatment is that in the absence of this principle, the foreign investor "might find the operation of his firm hampered by discriminating measures."

The paper mentions the following "typical restrictions": a prohibition to own real estate, limited or no access to government aids and subsidies (example: participation in R&D programmes), discriminatory tax provisions or an exclusion from bidding for government contracts.

The paper says that most of these restrictions discriminate against foreign investors and "should be outlawed." It concedes that there can be exceptions, such as access to R&D subsidies, public order and national security. But in general, national treatment must apply.

The EC paper goes further, and says that the right of entry and national treatment alone are "not enough" to create favourable conditions for FDI. Multilateral rules should also cover "accompanying measures".

It gives examples of such measures:

An effective mechanism to settle disputes between the source and the host country, freedom to make financial transfers, expropriation of a foreign investment only in exceptional and internationally recognised circumstances and accompanied by adequate, effective and prompt compensation.

Host countries must also have transparent domestic regulations, and assure that international obligations are honoured by sub-federal and local authorities.

Further, the EC proposes that rules on investment should also consider informal and structural barriers not directly linked to FDI but have consequences for investment flows.

Examples include: merger control and anti-trust laws that prevent the making of an investment; private practices such as ownership restrictions in company by-laws that could discriminate against foreigners; exaggerated investment incentives that distort investment flows or lead to a "race to the bottom" between countries and regions.

The paper adds that a multilateral investment instrument could also address "taxation, labour or environment policies" as these can influence the climate and conditions for FDI.

The EC proposals are wide-ranging and comprehensive and would, if adopted, have very significant implications for developing countries.

Most of these countries have policies that regulate the entry of foreign firms, and include various conditions and restrictions for foreign investors overall and on a sector-by-sector basis.

No country at present has adopted a total right of entry policy. In some countries, foreign companies are not allowed to operate in certain sectors, for instance banking, insurance or telecommunications. In sectors where they are allowed, foreign companies have to apply for permission to establish themselves, and if approval is given it often comes with conditions.

The mix of conditions varies from country to country. They may include equity restrictions (for example, a foreign company cannot own more than a certain percentage of the equity of the company it would like to set up); and ownership restrictions (for instance, foreigners are not allowed to own land or to buy houses below a certain price).

Many developing countries also have policies that favour the growth of local companies. For instance, there may be tax breaks for a local company not available to foreign companies; local banks may be given greater scope of business than foreign banks; local firms may be given preference in government business or contracts.

Governments justify such policies and conditions on the grounds of sovereignty (that a country's population has to have control over at least a minimal but significant part of its own economy) or national development (that local firms need to be given a "handicap" or special treatment at least for some time so that they can be in a position to compete with more powerful and better endowed foreign companies).

Most developing countries would argue that during the colonial era, their economies were shaped to the advantage of foreign companies and financial institutions (belonging usually to the particular colonising country).

Local people and enterprises were often at a disadvantage, and now require a considerable span of time where special treatment is accorded to them, before they can compete on more balanced terms with the bigger foreign companies. This has been the main rationale behind developing countries' policies in applying restrictions or imposing conditions on foreign investments. Such conditions also enabled them to tackle hidden restrictive practices and other activities. detrimental to host countries.

The EC proposal to liberalise foreign investment flows in so comprehensive a manner, if adopted, will result in governments of developing countries finding themselves severely restricted in the 'space' available to them to adopt independent and autonomous policies on how to treat foreign companies.

It will result not in more, but perhaps less investments, and those that come in will be solely on basis of global considerations of the TNCs.

No longer will each government have the freedom to choose its own particular mixture of policies and conditions on foreign investments. Their policies would have been determined by the multilateral investment rules, and the choice available to countries would be very much confined to more minor aspects.