11:27 AM Jul 17, 1996

WIDE OPPOSITION TO INVESTMENT IN WTO

Geneva July 16 (Chakravarthi Raghavan) -- A vast majority of participants at a conference here on the WTO and Southern perspectives spoke out against bringing the investment issue onto the WTO agenda, while a few others, though sharing many of the concerns of opponents, were ready for an 'educative process', without any commitments to negotiate.

There was a lively debate at the conference on the investment issue, with a paper presented by Mr. Martin Khor, both at the session devoted to investment question, as also at other sessions.

In the session devoted to the built-in agenda of the General Agreement on Trade in Services, for example, a paper by UNCTAD officials Murray Gibbs and Mina Masheyekhi brought out that the entire scheme of GATS, and its attempt to deal with all factors of production, would be negated in the face of an Multilateral Investment Agreement with right of foreigners to invest and establish themselves on territory of any WTO member.

Speaking as a discussant on the investment issue, Syed Jamaluddin, Economic Minister of the Bangladesh Mission in Geneva, said the poor countries were not against FDI and in fact were liberalising autonomously. "But whilst we welcome FDI, we need to see that they are regulated and guided properly," he said.

In this context, a MIA could be damaging to economic sovereignty and development efforts, and in addition faced the threatening possibility of cross-sectoral retaliation in the WTO.

"Given the possible threats and negative effects, more study needs to be done by developing countries before they can even agree to putting the issue on the WTO agenda," he said. "If there is no certainty of obtaining a greater and beneficial flow of FDI, why should a country join a treaty on investment with the built in provision of trade sanction?"

Jamaluddin said that at UNCTAD-IX, a mandate has been given for studying the implications of an MIA. He did not understand why, in spite of that mandate to UNCTAD, the Northern countries are saying that "simultaneously we must start a discussion in the WTO, with a view to negotiations."

"UNCTAD should start a study process, and after this process, and only if the need is found, should the WTO also study the issue."

Jamaluddin said that if developing countries join a treaty, they would have new obligations. The WTO's dispute settlement system includes the use of trade sanctions and cross retaliation, and this was why developing countries feared the introduction of new issues and obligations in the WTO.

There were already many bilateral agreements on investments, where countries have the liberty and option to shape them according to their needs and liking. If there be an MIA in the WTO instead, there would be no range of options, and not following the obligations could subject a country to cross-retaliation.

Jamaluddin added the proposed MIA "stresses the rights and interests of foreign investors but has nothing to do with the rights of host countries."

The issue was not whether FDI was desirable, as most countries are trying to attract such investment. But governments must have the right and power to regulate their entry, terms and conditions.

"The power to regulate foreign investment, obtain benefits from them and the right to enact policies to aid the weaker local firms is essential to any country that wants to have a critical minimal degree of control over its economy and social life," he said.

"FDI can play a positive role in development provided there are mechanisms for screening, regulating and monitoring. The right to have such controls would be repelled under the proposed treaty."

FDI, Jamaluddin said, could result in large foreign exchange payments for the host country through import of machinery and intermediate goods, high payment for foreign consultancies and outflow of profits and other investment incomes.

"There are benefits and costs to FDI. Benefits include employment and higher exports. But there are also costs including social and environmental costs and opportunity costs such as loss of tax-revenues."

He added that an MIA provision of national treatment for foreign companies would mean there can no longer be any measures that favour local firms. The MIA would also mean extension and application of the WTO's principles and its dispute settlement system (including use of trade sanctions and retaliation) to investment policy.

Transnational companies would have the greatest freedom and right to conduct business all over the world, free from government regulations they now face.

But with the removal of all national constraints on foreign investment, total FDI flows to a country may or may not increase, and an increase may not be in sectors which the host country would like.

It is no secret, he noted, that the country which attracts maximum foreign investment today is not even a WTO member. In fact, an MIA leading to uniform rules, may increase the tendency for investments to flow to big countries and miss the smaller and poorer ones even more.

Jamaluddin said that gaining access to the resources and markets of the South and the right to invest and operate in developing countries has been a major strategic objective of governments and companies of the North.

"The real motives of the proponents of the MIA are to increase the access of their companies to resources and markets of developing countries as well as to have another powerful weapon to block the development of potential rivals in developing countries."

"Investment is only one factor of production but the industrial countries are not willing to discuss an arrangement for movement of labour which is also a factor of production. Developed countries always push for those arrangements which are beneficial for them."

Developing countries have already made a lot of commitments in the Uruguay Round for grant of more rights for foreign investors, for instance through the agreements on investment measures, intellectual property and services. "These countries have to consider what they are getting in return. A study on the impact of these agreements is needed."

"When the Uruguay Round was negotiated, smaller countries did not have enough negotiators, we feared being left out, and there was a lack of knowledge on the issues. We felt we had to join the bandwagon. We now need to examine if the Uruguay Round has helped us. Before we can even do this, the new issues are being thrust on us. We must be cautious, otherwise there will be even more burdens on us."

Participants discussed the apparent differences amongst Northern countries in their approach to having discussions on the MIA in the OECD, in the WTO and UNCTAD, including the reference to the investment issue in the recent G7 Lyon Summit communique.

One participant said he had an open mind whether the issue could be discussed in both UNCTAD and the WTO, provided developing countries find the MIA can be balanced in terms of rights and obligations of investors. There could be a possibility of the WTO studying the issue, provided it passed the test of the three criteria for new issues that the Singapore Trade Minister had put forward, and this included the need for a consensus to start the discussions.

But a private sector leader from Malaysia remarked that the proposed MIA could threaten the economic sovereignty of developing countries and lead them back to the colonial era. Despite the danger signals, the South countries, he said, did not seem to be sufficiently organised.

From a business point of view, he added, the smaller firms in the South would be severely affected by competition from foreign firms that could freely enter without restrictions under an MIA. Even the big local firms in the South were "peanuts" in terms of size and power compared to the big foreign firms which could easily buy them out.

He said in face of the strong offensive moves of the North, the approach of the developing countries in the WTO so far seemed to be very defensive. The business sectors, consumers and the public at large in the South should be alerted to developments. He proposed a strong monitoring group be established, and including the business sector, to give support to the developing country diplomats in Geneva.

A private-sector economist working with a financial institution said the MIA was a one-sided demand from the North. The South needed to get together and study the issue by themselves, before having a general discussion at the WTO, and for that more time was needed.

The important priority for the South, he said, was to have disciplines on foreign investment, so that developing countries could minimise the costs and maximise the benefits of such investment.

Further, if the North wanted free investment flows and mobility for its capital, the South should insist that the North at the same time accept the free flow of labour. The two factors of production have to be discussed in the same package, he said.

Another participant said the issue should be assessed at the levels of substance and process. On substance, there are valid concerns of developing countries on the MIA's impact on balance of payments, sovereignty and effects of national treatment. The EU's proposals could be seen as a "wish list" , and there was nothing to prevent developing countries from putting forward alternative considerations, such as obligations of investors.

Developing countries could also find an MIA of interest to their companies that carry out outward investments in other countries. As for the process, developing countries should be prepared for discussions, have control over the process and thus protect their sovereignty, limit the scope of the discussion and if needed, reject moving on to negotiations. If there should be an educative process, developing countries could decide for themselves what such a process would mean.

Another senior trade policy official said that developing countries needed investments but they also needed rules for fair play. The MIA proposal for blanket liberalisation did not constitute fair play.

In the past, foreign investments had operated in enclaves and free trade zones. There had been negative social repercussions of the enclave approach, such as a widening gap between the developed and underdeveloped regions of a country.

Social stability was a non-economic factor but essential for longterm growth prospects. To attain such stability, a government needed to regulate foreign investments, and the ability to do so may be curbed by an MIA.

The WTO, he said, should not be dealing with issues that go beyond trade. This was especially so since the WTO made use of trade sanctions in the settlement of disputes. The WTO is therefore not the place to deal with the investment issue and the educative process should be located in UNCTAD.

Replying to the comments, Martin Khor recalled that following racial riots in 1969, Malaysia had introduced a New Economic Policy to expand the share ownership of the Malays in the economy. This involved regulations on foreign companies, such as joint ventures requiring a percentage of shares to locals and to the Bumiputra community. This had raised its share of overall equity from one per cent in 1970 to 20-30% today. Although there was still social and economic imbalance, the affirmative action policies had significantly reduced racial tensions, and the resultant social stability had been a factor in the country's development.

Khor said that if there had been a MIA in 1970, these policies could not have been possible as conditions on foreign companies would have been prohibited. Malaysia's development in the past two decades might have been undermined by social instability. This experience was also of significance to developing countries many of whom are multi-ethnic societies and face imbalances among ethnic communities.

In an "educative process" in the WTO, Khor said, developing countries would be in a weak position. Their negotiators in the WTO were already burdened with implementation problems, trade and environment issues and the built-in agenda.

Moreover, discussions at the WTO were not so open, and many important decisions were made in "informal meetings" to which many developing countries may not even be invited.

If issues that were not strictly trade-related and trade-distortive were brought into the WTO, it would begin a process in which the WTO is converted from a trade body into one dealing with the whole spectrum of economic, social and political issues.

This was why many developing countries are opposing new issues like labour standards, social clause, human rights and corruption from being even conceptually accepted as part of the WTO's area of competence.

Khor said that the MIA or investment policy per se was even more of a threat to economic and political sovereignty than issues like labour standards and corruption.

"It would thus be a double standard to oppose these other issues but accept the MIA for an 'educative process'."

Some participants, he said, had argued that the South should not object to a discussion in the WTO because in the negotiations, they could bring in issues to its own interests, such as the obligations of foreign investors and the rights of host governments, and these points would have to be accepted by the North.

Khor recalled that the Northern countries had taken great efforts to put an end to the process of formulating a Code of Conduct on TNCs (that had sought a balance between the rights and obligations of foreign investors and hosts, but towards the end had more obligations on hosts) as well as to close down the UNCTC itself.

Khor said that if the South has failed to defend the Code and the UNCTC within the United Nations, a forum in which the South is strongest, it is most unlikely to succeed to get a balanced result in the WTO, a forum where the South's negotiating position is much weaker. The "educative process" on a MIA should thus be located in UNCTAD.

In his response, Jamaluddin said in Geneva many delegations do not even know what is happening in the WTO. Often one or two bodies in each delegation had to run around looking after so many meetings. The South is not united, and some developing countries were afraid to annoy the major countries. Thus there is always a danger of countries being coerced into a process or agreement not to their liking. The WTO is a rich man's club, and the poor seem to have no place in it, he said.

He questioned why countries wanted to have the investment issue discussed in the WTO, when UNCTAD already had the mandate. Would agreeing to an MIA bring a dollar of extra FDI to a country? Why should countries take on liability of a possible trade sanction in a MIA when they are not guaranteed of any extra FDI? Panel chairman, Amb. Mounir Zahran of Egypt, said that it was useful, as the session had done, to consider the issues of trade, investment and development together. If developing countries paid attention to the development aspects of investment, this did not mean they do not want foreign investment. On the contrary, they compete to attract more foreign investments as they add finance, jobs, technology transfer and management.

But the question is whether the MIA is intended to encourage foreign investment flows. From his own experiences in the North-South dialogue, starting with Paris dialogue of the 1970s, the results have been disappointing because of the North's lack of response to the South's vigorous efforts to obtain more flows of finances for capital.

He said that UNCTAD already had a programme on investment, with a World Investment Report, and there was the UNCTAD-IX mandate to initiate a process to study trade and investment.

There was also the agreement at UNCTAD-IX in Midrand, as well as at the WTO, that there should be no duplication but complementarity between UNCTAD and the WTO. "Why not then let an educative process be in UNCTAD? We have by consensus already agreed on this at Midrand."

As for the WTO, the relevant trade aspects of investment are already in the built-in agenda and in the GATS.