Global Policy Forum

Investment Agreement in the WTO:


By Kavaljit Singh

July 25, 2003

The Fifth Ministerial Conference of World Trade Organization (WTO) would be held in Cancun, Mexico in September 2003, in the midst of several controversial issues. There has been no meaningful progress on agriculture, TRIPs and public health, "special and differential treatment" provisions of the WTO agreement. All the mandated deadlines agreed upon at the Fourth Ministerial Conference at Doha in 2001 have been missed. In this context, attempts by EU, Japan, South Korea and Canada to widen the scope of trade negotiations encompassing new issues — popularly known as "Singapore issues" — are unfortunate. Among the new issues, investment happens to be the most contentious one. Although Doha declaration stresses that negotiations on investment can commence only if there is an "explicit consensus" among the member-countries of WTO, yet the supporting countries are interpreting it as a mandate to launch negotiations in Cancun. Thus, the road to Cancun is expected to be a bumpy one.

Notwithstanding the proliferation of over 1800 binding treaties that contain provisions related to foreign investment at the bilateral, regional (e.g., NAFTA, EU, and MERCOSUR) and sectoral levels, there is no comprehensive multilateral agreement on foreign investment. In the past, every country has used a variety of regulations to control foreign investment depending on its stage of development. The discriminatory forms of regulatory measures on foreign investment vary from country to country. For instance, host countries often impose pre-admission and post-admission regulations on foreign investment. It is important to stress here that regulations are not confined to the developing and the under-developed countries. Several developed countries (for instance, US and Japan) have extensively imposed regulations on foreign investment in the past and many of them still regulate the entry of foreign investment in strategic sectors such as media, atomic energy, telecommunications and aviation. Evidence also suggests that performance requirements such as local content requirements and technology transfer help in establishing industrial linkages upstream and downstream and contribute significantly towards economic development of the host country.

Past attempts to establish a multilateral investment regime through various for a have failed miserably. The first attempt to forge a multilateral agreement on foreign investment was made in the immediate post World War II period. In 1948, the draft Charter to establish an International Trade Organization (ITO) was presented at a meeting in Havana. Notwithstanding the fact that the US government was one of the driving force behind the Havana Charter, the US Congress refused to ratify it. Consequently, the proposal for establishing ITO was given up and the General Agreement on Tariffs and Trade (GATT) was launched as a temporary measure. For nearly four decades since its inception, GATT never brought investment issues under its rubric and maintained the dividing line between trade and investment issues. It was only at the Uruguay Round of GATT negotiations from 1986 to 1994 that the issue of investment was brought within its framework.

The failure to establish ITO was one of the major reasons which facilitated a shift from multilateral to bilateral investment agreements. In the 1950s and 60s, bilateral investment agreements were the dominant instruments of investment agreements. In those decades, majority of bilateral investment agreements were geared towards protecting foreign investors against the threat of expropriation as many developing countries had undertaken nationalization measures in the aftermath of independence from colonial rule.

In the sixties and seventies, international investment negotiations shifted to other for a. Big capital exporting countries led by the US started initiating discussions on investment issues at the OECD. While the developing countries started raising investment issues with an entirely different perspective at the United Nations in the 1970s. The UN initiatives were geared towards drafting a Code of Conduct on Transnational Corporations to curb abuse of corporate power and establish guidelines for corporate behavior in the host countries. Concerned with the fact that the Code was unlikely to serve the interests of capital exporting countries, the US persuaded other developed countries to block the draft Code of Conduct at the UN. Consequently, the Code was not approved. UN initiatives also lost momentum in the eighties when excessive build up of external loans triggered the debt crisis in many developing countries. The drying up of commercial bank lending forced indebted countries to open their doors to foreign investment.

Initiatives at UN did not deter the US from aggressively pursuing the investment liberalization agenda. Despite its failure to include investment in the Tokyo Round negotiations during 1973-79, the US remained resolute in pushing a comprehensive agreement on investment at the GATT. By incorporating TRIMs and General Agreement on Trade in Services (GATS) in the Final Act of the Uruguay Round, the developed countries were successful in bringing investment issues under the ambit of GATT. To circumvent opposition from the developing countries, the developed countries led by US also called upon the OECD to launch a comprehensive binding investment treaty known as Multilateral Agreement on Investment (MAI) which included heavy dose of investment liberalization, protection of investors and a dispute resolution mechanism. Because of the differences among the OECD member-countries on certain issues coupled with popular opposition by the NGOs and trade unions, the MAI was finally shelved in November 1998. After the collapse of the MAI negotiations, the Working Group on Trade and Investment at the WTO remains the only multilateral forum where investment issues are under discussion at present.

Current approaches advocating international investment agreements are grounded on several myths. There is no evidence to prove conclusively that investment agreements lead to increased foreign investment in all countries. Nor does it boost the prospects of obtaining investment in future. Since the 1980s, a number of developing countries have carried out wide-ranging investment liberalization measures and have signed numerous bilateral investment agreements, yet they receive less than one-third of total FDI flows. Further, FDI flows are highly concentrated in a few developing countries. Bulk of portfolio investment flows are also concentrated in a few "emerging markets."

Foreign direct investment is not a panacea for development. There is hardly any reliable cross-country empirical evidence to support the claim that FDI per se accelerates economic growth. In the present circumstances, it is quite difficult to establish direct linkages between FDI and economic growth if other factors such as competition policy, labor skills, policy interventions and comprehensive regulatory framework are not taken into account. Further, in the absence of performance requirements and other regulations, many of the stated benefits of FDI would not occur.

Liberalization of investment by itself cannot enhance growth prospects because it is a complex process, subject to a wide range of factors. If one tries to match the periods of investment liberalization with the economic performance of countries, the results may appear contradictory. Growth started deteriorating around 1970s when many countries moved towards liberalized investment regimes. The 1980s and the 1990s witnessed sharp deterioration in economic performance of many countries, both developed and the developing ones. The worst decadal-growth performance occurred in the 1990s. Restrictions on investments have not necessarily led to poor economic performance. Many countries enjoyed high growth without liberalizing their investment regimes. Japan, China and South Korea are some of the examples.

To a large extent, the quality of investment determines the growth and productivity rates. Since most portfolio investments have tenuous linkages with the real economy and are speculative in nature, it would be naí¯ve to theorize on their contribution to economic growth. Besides, bulk of portfolio investment is prone to reversals. Sudden withdrawal of capital can negatively impact on the exchange and interest rates. Several episodes of financial crisis in Mexico, Southeast Asia and Turkey in the 1990s point to the preeminent role of unregulated short-term portfolio flows in precipitating a financial crisis.

In the last two decades, the attributes of FDI flows, known for their stability and spillover benefits, have also changed profoundly. FDI is no longer as stable as it used to be in the past. The stability of FDI has been questioned in the light of evidence which suggests that as a financial crisis becomes imminent, transnational corporations indulge in hedging activities to cover their exchange rate risk which, in turn, generates additional pressure on the currencies. Since bulk of FDI flows are associated with cross-border mergers and acquisitions, their positive impact on the domestic economy through technological transfers and other spillover effects has been significantly diluted.

The oft-repeated argument that a multilateral investment agreement is always a better bet than scores of bilateral ones also carries little conviction. Notwithstanding the establishment of a multilateral trade regime under WTO, the US and European Union have signed several bilateral and regional trade agreements in recent years. It is not without significance that 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. With rich countries and big corporate groups consistently seeking higher standards of market access and investment protection, it would be naí¯ve to assume that MIA would put a stop to investment agreements in future.

The existing frameworks of investment liberalization are highly biased in favor of protecting foreign investors' rights while constricting the policy space of countries to intervene in public interest. Take the case of North American Free Trade Agreement (NAFTA). Private corporations from NAFTA member-countries have exploited the provisions of the agreement to challenge those regulatory measures that infringe on their investment rights. The growing conflicts between private corporations and regulators are the outcome of the investment provisions under Chapter 11 of the NAFTA which entails non-discriminatory treatment to foreign investors.

With emphasis on enlarging and protecting foreign investors' rights, MIA could constrict the policy space of countries to maneuver investment policies in accordance with their developmental priorities. Although the EU favors the adoption of a GATS-type approach on investment allowing countries to select sectors which they wish to liberalize, there is no guarantee that it would provide adequate policy space to member-countries. By "locking in" reforms, the GATS approach generates additional pressure on countries to undertake wider commitments over the years. Likewise, an agreement covering many but not all countries may prove problematic as it would induce developing countries to become part of the agreement at a later date.

Furthermore, it is difficult to fathom the relationship between a prospective investment agreement at the WTO and the existing over 1800 bilateral and regional investment treaties. What would be the fate of these agreements if a multilateral agreement at the WTO comes into force? Would existing investment agreements become null and void? Till now, the Working Group on Trade and Investment at the WTO has not contemplated on this important aspect.

Another problematic issue pertains to the liberalization of capital account. At present, balance-of-payment issues in the WTO are restricted to current account transactions. But an investment agreement at the WTO would necessitate liberalization of capital account. In the aftermath of Southeast Asian financial crisis, there has been a rethinking on liberalizing capital account.

Since the mandate of WTO is confined to trade in goods and services, it is debatable whether WTO is an appropriate venue for negotiating an investment agreement. In fact, MIA carries little support among WTO's member-countries. Out of 146 WTO member-countries, more than 60 member-countries belonging to the developing world have articulated their opposition to launch negotiations at Cancun. While not even a dozen member-countries have backed 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. It remains to be seen how long the developing countries are able to resist attempts to bring investment issues under the ambit of WTO.


1. Kavaljit Singh, Multilateral Investment Agreement in the WTO: Issues and Illusions, Policy Papers No. 1, Asia-Pacific Research Network, Manila, 2003.

2. Kavaljit Singh, "Keep Investment Pacts off Cancun's Agenda," Financial Times, July 7, 2003.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.