Keep Investment Pacts off Cancun’s Agenda
If the European Union, Japan and Canada have their way, negotiations for a multilateral investment agreement will begin at the World Trade Organisation meeting in Cancun in September. But many developing countries are doing everything they can to ensure they do not. They are right to do so: an MIA has the potential to cause them serious economic damage.
There is no conclusive evidence that investment agreements lead to increased foreign investment. Since the 1980s, developing countries have signed numerous bilateral investment agreements, yet they receive less than one-third of the world’s total foreign direct investment flows. Africa, consisting of 53 countries, receives less than 2 per cent of the total FDI flows to all developing countries. That is not because of a lack of investment agreements: rather, it is because of factors such as the small size of domestic markets, poor infrastructure, civil unrest and political instability.
Even if one assumes that an MIA might lead to increased investment in some countries, there is no guarantee that it would contribute to economic growth and development. It is the quality of investment that determines growth and development. Since most portfolio investments have tenuous links with the real economy and are speculative in nature, their contribution to economic growth is negligible. Even FDI flows, traditionally known for their stability and spillover benefits, have changed in character. Since the bulk of FDI flows are now associated with cross-border mergers and acquisitions, their positive impact on the domestic economy through technology transfers, employment generation and other effects has been diluted. It is worth recalling that restrictions on foreign investment have not necessarily led to poor economic performance. Many countries, such as Japan, South Korea, Taiwan and China, have registered higher growth without liberalising their investment regimes.
The existing frameworks of investment liberalisation are highly biased in favour of protecting foreign investors’ rights. Countries enjoy correspondingly less freedom to adjust their investment policies to suit their development needs. Although the EU favours the adoption of a “bottom up” approach to investment, which allows countries to select the sectors they wish to liberalise – along the lines of the General Agreement on Trade in Services – there is no guarantee that it would give member countries the policy freedom they need. As seen during the ongoing Gats negotiations, it puts added pressure on countries to make wider commitments over the years. Likewise, an agreement covering many but not all developing countries would also be problematic, as it would in effect compel outsiders to join later on.
The MIA’s one-size-fits-all strategy is ill-conceived because WTO members are at different stages of development. What is good for capital-exporting Japan may not be good for capital- importing Bangladesh. Investment is a much more politically sensitive issue than trade. In spite of the liberalisation of investment rules that has occurred in recent decades, all countries (including the developed ones) have used regulation to ensure that foreign investment meets their development goals. This is why previous attempts to establish a multilateral investment regime have failed. Recent “mini-ministerial” meetings of the WTO have also failed to build a consensus on launching negotiations.
The MIA has many other flaws. What would happen to the more than 1,800 existing bilateral and regional agreements once the MIA came into force? Would these be deemed invalid? The WTO’s working group on trade and investment has yet to give this issue the attention it deserves.
Another problem is that the WTO’s interest in balance of payment issues is at present confined to current account transactions. But an MIA would necessitate capital accountliberalisation. That may not be to many countries’ taste, given the reappraisal of the benefits of capital account liberalisation that has taken place since the 1997 Asian financial crisis.
The WTO is not an appropriate venue for negotiating an investment agreement. Since its mandate is confined to trade in goods and services, it has neither the jurisdiction nor the competence to deal with investment issues. The WTO’s trade arbitrators, for instance, lack the expertise that would be needed to work out how much compensation a foreign investor should receive if a member country violated the MIA. The world may well need a radically different institution to address investment issues at the multilateral level.
Unless the MIA’s advocates can find a solution to these fundamental issues, they should not continue to press their case. There will be no shortage of other matters to discuss at September’s meeting.
The above op-ed in FT evoked sharp reactions from International Chamber of Commerce and others. Below are the discussions published in the Letters to Editor Pages of FT. Also included is an op-ed by Noboru Hatakeyama and response by Kavaljit Singh.
Multilateral investment pacts should be on Cancun agenda
By Livanos Cattaui
Published: July 9 2003
From Ms Maria Livanos Cattaui.
Sir, Kavaljit Singh is wrong to assert that a multilateral investment agreement under the World Trade Organisation is against the interests of developing countries (“Keep investment pacts off Cancun’s agenda”, July 7). The opposite is true.
The existing patchwork of bilateral and regional treaties is hardly the most effective way to create that elusive level playing field. It allows the strong to dictate to the weak and to discriminate against countries as they please. The International Chamber of Commerce wants investment pacts on the Cancun agenda because we are convinced that a framework of WTO rules would contribute to transparent, stable and predictable conditions for long-term cross-border investment. Such a framework should balance the interests of home and host countries, and take due account of the development policies and objectives of host governments, as well as their right to regulate in the public interest, without discriminating against foreign investors.
Many bilateral investment treaties already incorporate high standards of market access and investment protection. The purpose of a WTO investment agreement should be to establish those same high standards multilaterally for all 146 members of the WTO.
Maria Livanos Cattaui, Secretary General, International Chamber of Commerce, 75008 Paris, France
Multilateral case has weaknesses
By Kavaljit Singh
Published: July 11 2003
From Mr Kavaljit Singh.
Sir, It comes as a great surprise that Maria Livanos Cattaui (Letters, July 9) has not responded to any substantive issue raised in my article of July 7. Instead, she has made a case for multilateral investment agreements based on the oft-repeated argument that a multilateral agreement is always a better bet than scores of bilateral ones. This argument, in the context of the World Trade Organisation, is flawed on two counts.
First, adoption of a multilateral investment agreement would not necessarily imply an end to bilateral agreements. Notwithstanding the establishment of a multilateral trade regime under WTO, the US and European Union have initiated and concluded several bilateral and regional trade agreements in recent years. Significantly, the bilateral free trade agreement signed by the US with Jordan, Chile and Singapore includes aggressive safeguards for intellectual property rights, which go well beyond the benchmarks set in the WTO’s trade-related aspects of intellectual property rights (Trips) agreement.
If Trips experience is any indicator, it would be incorrect to infer that once a multilateral investment agreement comes into force, the world would be free of a plethora of existing bilateral and regional investment agreements. It needs to be recognised that no multilateral investment agreement can address all issues related to investment liberalisation and protection. With corporate lobby groups such as the International Chamber of Commerce consistently seeking higher standards of market access and investment protection, there is no guarantee that MIA would put a stop to investment deals in future.
Second, the argument that a multilateral investment agreement would enhance the bargaining power of weak countries betrays a lack of basic understanding about politics and power relations. It is too simplistic to assume that unequal power relations only exist at bilateral level.
If Ms Cattaui genuinely believes a multilateral investment agreement in the WTO would serve the interests of developing countries, why are they opposed to it? Of 146 WTO member-countries, over 60 – belonging to the underdeveloped and developing world – have articulated their opposition to launch negotiations at Cancun. Not even a dozen member-countries have backed a MIA.
What is perplexing is that supporting countries are pushing their agenda for launching negotiations at Cancun, without even arriving at a consensus on basic issues such as scope and definition of investment. No one is against creating transparent, stable and predictable conditions for long-term cross-border investment. But the moot question is whether these conditions should be solely aimed at expanding and protecting foreign investors’ rights.
Kavaljit Singh, Delhi 110092
Multilateral investment agreements will not hurt developing countries
By Kerstin Berglof
Published: July 28 2003
From Ms Kerstin Berglöf.
Sir, I challenge Kavaljit Singh’s statement that there is potential for serious economic damage to developing countries with a multilateral agreement on investment (“Keep investment pacts off Cancún’s agenda”, July 7). The prime reason is simply that countries can keep on doing what they always have done.
If countries want to keep their markets completely closed to investments, they can continue to do so, although few countries choose this option. If countries want to keep their markets open on an ad hoc basis they can continue to do this. It is only if a country wishes to commit to market openness on a long-term basis that a multilateral agreement would offer a structure for doing so.
The purpose of such commitments would be to provide predictability for investors. It is widely acknowledged that liberalisation should take place only when a country is ready.
So if liberalisation is not the purpose of a multilateral agreement, what is? The main purpose of a multilateral agreement on investment is transparency.
A large step towards attracting the kind of quality investment we all want is to let investors know what we think.
Survey after survey shows that transparency is a crucial component in decisions to invest, in many instances far more important than market size and infrastructure, as mentioned by Mr Singh.
This brings me to the other main point Mr Singh makes. He claims that bilateral agreements have not brought more investment to developing countries – with the logic that neither would a multilateral agreement. If bilateral agreements have not resulted in more investments to developing countries, one reason could be that these agreements do not always contain transparency provisions.
Another reason is that bilateral agreements do not always focus on what applies before an investment is made (which is what a multilateral agreement would do) but, rather, what happens after an investment is made. For these reasons, a multilateral agreement would serve as a complement to all the bilateral investment agreements out there.
Kerstin Berglöf, Trade Policy Analyst, 114 31 Stockholm, Sweden
Published: August 1 2003
From Mr Kavaljit Singh.
In response to my article of July 7, Ms Kerstin Berglöf (Letters, July 28) contends that multilateral investment agreement (MIA) in the WTO would not be harmful to the developing countries as it would provide them space to pursue development policies. On the contrary, our view is that even though an element of flexibility may initially be available in a multilateral regime on investment, there is bound to be a watering down of this flexibility as the process of liberalization deepens. The ongoing GATS negotiations have clearly demonstrated this fact. It is pertinent to point out that once a country gives market access commitments in the WTO, it becomes difficult to reverse it.
Ms Berglöf asserts that the principal purpose of MIA is transparency. If that is the case, why create complex binding rules pertaining to national treatment, performance requirements, expropriation and dispute settlement mechanisms that restrict governments’ ability to regulate foreign investment. Transparency could be better promoted through much simpler mechanisms and on a best endeavor basis.
More importantly, it is not our contention that investment policies of countries should not be transparent, but should not the same principles be applicable to foreign investors as well. This issue acquires greater significance since transnational corporations have become the dominant players in the contemporary global economy with little public accountability. Ironically, proponents of MIA vehemently oppose attempts to enforce similarobligations on foreign investors.
It is difficult to accept Ms Berglöf’s argument that transparency is the “crucial component” that influences decisions of investors to invest. If lack of transparency is the root cause hindering investment, China’s ability to attract $53 billion of foreign investment in 2002 needs to be explained. That China has been able to corner investments of such magnitude without the semblance of transparency seen in most democratically governed regimes is a pointer to the fact that there are no causal relationships between extent of transparency and investment flows. The same is the case with Central and Eastern Europe that witnessed a surfeit of foreign investment in its banking sector in the 1990s without adhering to any transparency and disclosure standards.
In my opinion, WTO is not the proper forum to inculcate transparency, as its decision-making processes do not pay heed to the principles of transparency and democratic accountability. As witnessed during the Dohaconference, draft ministerial text was made available to member-countries at the eleventh hour which hardly left any time for wider consultations. Disregard for transparency also marks the preparatory process for theCancun conference. Arbitrary practices such as Chairs producing draft texts “in their own responsibility” and organizing “Mini-Ministerials” (where a few member-countries are invited) do not bode well for WTO which is primarily a member-driven organization where decisions are expected to be taken by consensus.
The world needs investment rules
By Noboru Hatakeyama
Published: FT, July 31 2003
The possibility that the World Trade Organisation may start negotiating investment rules at its Cancún meeting in September has alarmed some developing countries. They have produced numerous arguments as to why such a move would undermine the Doha round’s development agenda. In fact, they have little to fear and much to gain.
An often-repeated argument is that there is no evidence that WTO investment rules would increase foreign direct investment (FDI) in developing countries. This is true: there are many determinants for investment, including market size and political stability, so the introduction of such rules alone would not necessarily boost FDI. But exactly the same is true for trade. There is no evidence that trade rules alone will result in increased exports, either, unless exporters have strongly competitive products or services. The WTO does not guarantee anything but at least it provides some degree of equal opportunity in trade and investment.
Opponents also claim that since FDI flows to some developing countries have increased without multilateral investment rules, there is no need for WTO investment rules. However, investments in developing countries have been made mainly by big companies, which can gain fair or advantageous treatment from recipient countries in a way that small and medium-sized enterprises cannot. One of the main reasons some recipient countries have suffered a negative balance of payments or a decline in their trade surplus is that not enough parts and components companies have invested in them. Big manufacturers have to import parts, offsetting the trade surplus expected to follow FDI.
It is, therefore, important for developing countries to establish “supporting industries” that can supply parts to a variety of sectors. The most efficient way to do this is to invite investment from overseas SMEs – which may be reluctant because they lack the political clout to ensure equitable treatment. They might think differently if there were an international investment agreement that obliged recipient countries to treat foreign investors fairly. TheDoha round negotiators should listen to the silent voices of SMEs.
Another line of attack is to argue that since investment rules can be laid down bilaterally, there is no need for multilateral rules in the WTO. But nobody would dare to say that bilateral free trade agreements (FTAs) are sufficient, so there is no need for the WTO; the WTO and FTAs are complementary. Minimum requirements for international trade are incorporated in the WTO, whereas higher requirements, if any, are stipulated in FTAs. The same should be true of investment.
But even if that is granted, it is possible to ask why the WTO, a trade organisation, should have jurisdiction over investment. In fact, trade and investment are so closely intertwined that it is imperative both be dealt with by a single organisation. Indeed, some aspects of investment are already covered in the WTO’s agreement on trade-related investment measures; and rules on investment in services have been incorporated in the WTO in the form of the general agreement on trade in services. It is only natural to have WTO rules on investment in goods as well.
Some suggest that developing countries must be able to maintain appropriate restrictions on investment if they are to be sure of receiving quality investment. But is it plausible that bureaucrats in recipient governments are the best judges of this? In this era of globalisation, the market should decide. Besides, the Doha ministerial declaration and subsequent discussions on investment rules encourage the introduction of an approach that will take into account countries’ existing policies. I believe that portfolio investment could be excluded from future WTO investment rules. But cross- border mergers and acquisitions should certainly be included because of their positive effects on employment.
It is not necessarily true that international investment rules would necessitate full capital account liberalisation. In making commitments to liberalise restrictions on FDI, countries could reserve the right to control foreign exchange, for example. However, it would be essential to remove restrictions on remittance.
Another criticism concerns the multilateral investment agreement’s “one-size-fits-all” approach, which is supposed to be ill-suited to WTO members’ different stages of development. But while WTO agreements do indeed have to be observed by all members, there are degrees of freedom, as stipulated in the agreements. It is quite possible to formulate an agreement that takes account of members’ development.
Last, but not least, there is concern about overstretching countries’ negotiating capacities. The Doha round negotiations are demanding enough without the addition of an investment agenda. I share this concern and strongly support every effort to help developing countries build up their negotiating capacity. An investment agreement will benefit developed and developing countries alike. We should not let it fail for want of negotiators.
The writer is chairman of the Japan Economic Foundation and a former vice-minister for trade
Time for caution on investment rules
By Kavaljit Singh
Published: August 7 2003
From Mr Kavaljit Singh.
Sir, Noboru Hatakeyama (“The world needs investment rules”, August 1) agrees with critics that World Trade Organisation investment rules may not lead to increased investment in developing countries. He also agrees with our contention that other factors determine investment flows.
Both statements are welcome. However, I challenge several of his arguments. There is no evidence that WTO investment rules would be more beneficial to small and medium enterprises. Most SMEs essentially cater to domestic markets and very few have the economic clout or inclination to invest overseas. Given that SMEs have been victims of investment liberalisation in many developing countries in the past, global capital mobility facilitated by new investment rules is likely to further ruin their businesses. Instead of creating level playing fields, investment rules may well accentuate existing imbalances in favour of giant transnational corporations.
His proposition that since trade and investment are closely linked, they should be handled by a single organisation (WTO) lacks conviction. According to this logic, there is no need for the International Labour Organisationand International Monetary Fund because trade issues are also closely linked with labour and finance issues. Should these institutions be closed and their mandate handed to the WTO?
It is difficult to concur with his argument that cross-border mergers and acquisitions should be included in investment rules due to their positive effects on employment. Several empirical studies have noted that mergers and acquisitions have had a detrimental impact on employment besides encouraging oligopolistic tendencies.
Mr Hatakeyama’s assertion that investment rules would not necessitate capital account liberalisation also does not hold true. The removal of restrictions on FDI and other capital flows are steps towards full capital accountliberalisation. It is unrealistic to assume that an investment agreement in the WTO could be formulated that would take into account development concerns and diverse interests of its 146 member countries.
Mr Hatakeyama has shown concern for building the negotiating capacity of developing countries. No one is per se against capacity building but negotiating capacities cannot be built overnight. It may take years and even decades to build developing countries’ capacities to negotiate effectively on investment rules in WTO. In my opinion, negotiations on investment rules should not be launched at Cancun until its proponents produce conclusive evidence in support of their claims.
Kavaljit Singh, Director, Public Interest Research Centre, Delhi 110092, India.
Boost for equality and transparency
By Noboru Hatakeyama
Published: August 26 2003
From Mr Noboru Hatakeyama.
Sir, Kavaljit Singh (Letters, August 7) criticised my article “The world needs investment rules” (August 1). His counter-arguments are not convincing. First, investment rules will be beneficial especially to small and medium enterprises by providing equal opportunity and ensuring transparency. Although he states that small to medium-size enterprises are victims of investment liberalisation in many developing countries, I am referring not to thoseSMEs in recipient countries but rather to those SMEs trying to invest overseas.
Regarding the jurisdiction of the World Trade Organisation over investment, my argument is that since investment in the service sector has already been included in the WTO rules, there is no reason for investment in the manufacturing sector not to be covered by WTO rules too.
Mr Singh also mentioned that, despite the close linkage between trade and finance or labour, such organisations as the International Monetary Fund and International Labour organisation exist independently from the WTO. But it is also true that despite their existence, some financial and labour issues are also covered by WTO rules.
With reference to mergers and acquisitions, the United Nations conference on trade and development reported in its world investment report 2000 that cross-border M&As can generate employment over time. Mr Singh should not be too “pessimistic” on capital account liberalisation. Developing, and even some developed, countries can stave off “full” capital account liberalisation in the negotiations if they wish. His statement that it may take years, even decades, to build developing countries’ capacities is an exaggeration. The Doha development round, which started almost two years ago, stresses the importance of capacity building. By now the negotiation capacity of many developing countries has improved a great deal.
Thomas M.T. Niles (Letters, August 5) also criticised my article from an entirely different angle. To summarise, he is not satisfied with the discussion in Geneva on investment rules because of its not providing higher standards of investment protection. However, too ambitious an approach will always lead to failure.
Noboru Hatakeyama, Chairman, Japan Economic Foundation.