The DOHA Investment Negotiations:
Whither or Wither
Bill Dymond and Michael Hart[1]
Introduction
High drama attended the issue of foreign direct investment (FDI) at the last two ministerial meetings of the World Trade Organization (WTO). At the 2001 meeting in Doha, the inclusion of investment in the mandate for the new round of multilateral trade negotiations became a make-or-break issue. The result was a decision to delay launching investment negotiations until the 2003 ministerial meeting, subject to an explicit consensus on the modalities of negotiations. The scope of the intended negotiations was limited to a narrow range of issues and heavily laden with references to the special development and financial needs of developing countries. At the 2003 meeting held in Cancun, investment was treated together with three other issues — trade and competition policy, trade facilitation, and transparency in government procurement — collectively known as the Singapore issues. Following intensive consultations, the Chairman proposed only a modest step on investment — that the Working Group on Investment be mandated to elaborate the negotiating modalities for adoption at a later date. Although the European Union, the principal supporter of WTO investment negotiations, offered to withdraw the proposal, Japan and Korea insisted that at a minimum the Chairman’s text be accepted. Developing countries, on the other hand, refused to accept any of the Chairman’s proposals on the Singapore issues and, on that point, the meeting terminated in failure.
It is far from obvious why a mandate to negotiate a WTO investment agreement should provoke such controversy. There is no dispute that the rapid expansion of foreign investment is the most dramatic feature of global economic performance over the last 15 years, nor that countries can enhance their attractiveness as a destination for foreign investment by undertaking commitments on its treatment. Virtually all developing countries have abandoned decades of hostility to foreign investment and are actively seeking investment wherever it can be found. For the past several years, the number of liberalizing measures taken by developing counties has vastly outnumbered measures in the opposite direction. There is ample evidence from the exponential growth of Bilateral Investment Agreements (BITs) that developing countries are prepared to accept rigorous obligations on the treatment of foreign investment. As a general principle, the superiority of multilateral economic agreements over the risks inherent in a plethora of bilateral and regional agreements is uncontested. The WTO is the logical home for an investment agreement, since it embraces virtually all the home countries of foreign investment and most of the host countries and a number of existing WTO agreements already address FDI issues. It would be reasonable to conclude that the negotiation of a WTO investment agreement should not, in principle, present greater obstacles than those encountered in the negotiation of other WTO agreements. Furthermore, the inclusion of investment discussions would enlarge the menu of useful trade-offs necessary for the successful conclusion of any comprehensive trade negotiation.
The failure to find a consensus on the treatment of investment issues in the WTO suggests that, notwithstanding the merits of a WTO investment agreement, there remain serious gaps in the intellectual capital necessary to establish the basis for negotiations. From the outset of investment discussions in the WTO, it has been assumed that the principles of the multilateral trade system can inform the erection of a multilateral investment agreement. Three major issues arise from such an assumption and require examination if the WTO debate is to be joined on a basis likely to yield a coherent result.
· One is the challenge of lodging rules designed to foster the expansion of global investment flows within an architecture designed to foster the expansion of global trade in goods. The treatment of investment within this architecture presents troubling considerations relating to the weak connection between the beneficiaries of the agreement and the governments undertaking the obligations; the depth, intrusiveness, and duration of obligations undertaken by the host state; and the asymmetry of obligations between home and host states.
· A second challenge is effecting a workable reconciliation between a WTO investment agreement and bilateral and regional agreements that now engage a growing number of WTO members. The inherent advantages of a multilateral investment agreement as a vehicle for the exchange of rights and obligations on investment would be considerably weakened should its provisions amount to a pale imitation of existing rights and obligations set out in bilateral agreements that would, in that event, remain in force.
· A third is that the ritual call for special and differential treatment in favour of developing countries could produce the bizarre situation of developed countries accepting more stringent obligations on the treatment of foreign investment than developing countries. The result would almost certainly be opposite to the intended effect: stimulating new capital flows from developed to developing countries.
Baseball great Yogi Berra once observed: “if you don’t know where you are going, you might end up somewhere else.”[2] At some point, WTO ministers will need to dispose of the Doha mandate by deciding on the object and purpose of bringing investment within the WTO family of agreements. It would be useful to examine the advantages and disadvantages of using the GATS negotiations to achieve the goals of the Doha mandate. Realism suggests that a scaling back of ambition may need to be contemplated; this could take the form of either an agreement setting out a multilateral framework and providing a bridge between the WTO and the existing network of bilateral agreements, or a declaration of principles on the treatment of foreign investment. Finally, the option of taking investment off the WTO negotiating agenda should not be excluded.
This article aims to contribute to that decision. We first review the efforts to negotiate multilateral investment agreements in the past and the discussions at the WTO that led to the Doha investment mandate. We then examine the intellectual and policy foundations for a WTO investment agreement. Finally, we discuss some of the major issues that require resolution and offer some recommendations on the way forward. We do not discuss the economic and political issues surrounding the merits and demerits of foreign investment, a field that has already been amply plowed.
Past and Present
If the history of the multilateral trade system over the last fifty years has been one of cautious pragmatism and consequent success, the history of multilateral investment negotiations has been marked by spectacular failure, leavened only by modest and episodic achievement. The first failure, at the beginning of the era of multilateral cooperation, was the still-born International Trade Organization; its investment provisions left both exporters and importers of foreign investment deeply dissatisfied and contributed in no small measure to the ultimate abandonment of the Charter.[3] The latest was the collapse, in the face of business indifference and protests from labour and environmental groups, of the negotiations for a multilateral agreement on investment (MAI) held among members of the Organization for Economic Cooperation and Development (OECD).[4] During the nearly fifty years between these failures, the OECD countries made modest progress in devising Codes of Conduct (on Invisibles and Capital Movements) and a Declaration on the Principles of National Treatment. These instruments captured a policy consensus among OECD countries on the treatment of foreign investment without trying to enshrine that consensus into an enforceable set of rights and obligations.[5] These expressions of ‘soft’ law succeeded in exercising a certain level of moral suasion and provided models for bilateral and other intergovernmental agreements, but did not address the fundamental issue of the role of investment in relations among states. The absence of a multilateral framework has been filled by an exponential growth in BITs and an increasing tendency for regional trade agreements to include the standard investment provisions.[6]
The WTO launched a full-scale work program on trade and investment at its Singapore Ministerial meeting in 1996. The Singapore Declaration, otherwise triumphalist in its optimism about the future of the multilateral trading system, strikes a distinctly muted note about the prospect of negotiating a WTO investment agreement.[7] It established the Working Group on Trade and Investment on the understanding that the work undertaken would not prejudge whether negotiations would be initiated and that an “explicit’ consensus” would be required for “future negotiations if any regarding multilateral disciplines.”. Five years later, in their Doha Declaration, ministers expressed a by-now familiar litany: that a multilateral framework to secure transparent, stable, and predictable conditions for long-term cross-border investment, particularly foreign direct investment, will contribute to the expansion of world trade. However, reverting to the language of Singapore, the Doha Declaration goes no further than stating that“…negotiations will take place after the Fifth Session of the Ministerial Conference on the basis of a decision to be taken, by explicit consensus, at that session on modalities of negotiations.” The Working Group is called upon to focus on seven issues: scope and definition; transparency; non-discrimination; modalities for pre-establishment commitments based on a GATS-type, positive list approach; development provisions; exceptions and balance-of-payments safeguards; consultation and the settlement of disputes between members. Ministers also underlined the importance of taking account of the special development, trade, and financial needs of developing and least-developed countries, which should enable members to undertake obligations and commitments commensurate with their individual needs and circumstances. Due regard is to be paid to other relevant WTO provisions and, as appropriate, to existing bilateral and regional arrangements on investment. [8]
Although the Working Group met 22 times between its establishment at the Singapore ministerial meeting and the Cancun meeting, wide gaps remained between the supporters and opponents of WTO investment negotiations. In the view of the former, the time had come to move to negotiations. In the view of the latter, significant differences remain and a decision to move to negotiations is premature.[9]. The Chair’s proposal at Cancun to mandate the working group to develop negotiating modalities for subsequent approval constituted an admission that ministers could find no basis on which to proceed to negotiations.
Intellectual and Policy Foundations
The case for a WTO investment agreement made by its proponents rests upon: the importance of investment as the principal driver of economic development and the main determinant of global trade flows; the inherent superiority of multilateral rule making to bilateral or regional approaches, which lead inevitably to fragmentation and inconsistency and the distortion of investment flows; and the natural locus of the WTO for a multilateral investment agreement.
The first component, the role of investment as the primary driver of economic growth, is apparent from a comparison of the global growth rates of investment, trade, and GDP. Between 1996-2000, global foreign investment inflows grew at an annual average rate of 40 percent, the export of (non-factor) goods and services at 4.2 percent, and GDP at 1.2 percent.[10] In 1990, the sales of foreign affiliates of transnational corporations (TNCs) were roughly equal to world exports. In 2001, these sales were more than twice as high as world exports.[11] The expansion of foreign investment has been fuelled by many of the same factors that have powered the expansion of trade over the last fifty years: progressive liberalization of barriers to investment, internal market reform, and open trade policies replacing the command and control economic models of eastern Europe and many developing countries. Hence the European Union, for example, argues “since trade and investment are inextricably linked … a basic framework of [investment] rules … would be beneficial for the world economy as trade rules have been for most countries over the past fifty years.[12] Such is also the view of the International Chamber of Commerce, which “believes that a multilateral framework of WTO rules on investment would contribute to transparent, stable, and predictable conditions for long-term cross-border investment, particularly long-term investment.”[13]
The second component of the case rests on the deeply held conviction that multilateral economic agreements are inherently superior to bilateral or regional agreements. Moreover, since trade and investment are inextricably linked, they require a common and coherent approach. [14] Foreign investment is not helped, in this view, by the overlaps, gaps, and inconsistencies contained in existing bilateral investment agreements, which generate serious risks of the misallocation of scarce capital resources arising from the absence of a multilateral framework. It follows that the exponential growth of bilateral investment agreements over recent years is a cause for alarm. The EU calculates that if all WTO members concluded bilateral agreements, some 7,500 agreements would be necessary to ensure global coverage.[15] The result would be a patchwork of commitments lacking any coherence, consistency, efficacy, or legitimacy, with potentially deleterious effects not only for current investment provisions but for the WTO generally.[16]
The third component posits that three current WTO agreements — the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Protection (TRIPs), and the Agreement on Trade-Related Investment Measures (TRIMs) — constitute a convenient and effective foundation upon which a comprehensive investment agreement could be negotiated.[17] The GATS deals with an important aspect of investment, the right of establishment for service sectors listed in each country’s schedule of commitments and could provide a basis for progress on the investment mandate (see discussion of GATs option below). The TRIPs Agreement affords protection to certain intellectual property and establishes the principle of non-discrimination for certain investments covered by the Intellectual Property Conventions which the Agreement calls up. The TRIMs Agreement prohibits the attachment of conditions to foreign investment which affect trade flows. It is arguable that the Agreement on Subsidies and Countervailing Measures, providing for disciplines on subsidies directed at start-up operations, and the Agreement on Government Procurement, providing for non-discriminatory treatment for domestic and foreign-owned suppliers for covered procurement, also contain important implications for the treatment of foreign investment.[18]
The case against a WTO agreement rests upon the view that foreign investment policy should be exclusively reserved for domestic decision-making and remain free of multilateral disciplines. This view is strengthened by objections to the loss of policy flexibility flowing from multilateral disciplines and nourished by anxieties that power asymmetries will result in a WTO agreement heavily weighted in favour of foreign investors unless it were balanced by home state commitments to regulate the behaviour of their investors in host states. The apparent contradiction between hostility to a WTO agreement and the enthusiasm for BITs is explained by the capacity of the latter to adapt to the priorities and preferences of the partner states. [19]