Global Policy Forum

New WTO Investment Rules


Major issues loom for countries already struggling with
Uruguay Round trade agreements

By Tim Wall

Article from Africa Recovery Vol. 10, No. 3, December 1996

Africa Recovery is published by the Library and Publications Division of the United Nations Department of Public Information, Room S-931, United Nations, New York 10017 USA

African and other developing countries are worried by the industrialized country push to put more liberal proposals for foreign investment on the international agenda. They fear that even discussion of a new set of binding rules may overwhelm developing countries still struggling to implement, and also gain compensation for, the Uruguay Round trade agreements.

These concerns were not dispelled by the carefully worded compromise that emerged from the first ministerial meeting of the World Trade Organization (WTO), held on 9-13 December in Singapore. There, the Ministerial Declaration announced that two working groups would soon be set up, one to "examine the relationship between trade and investment" and the other to study the interaction between trade and competition policy in order to "identify any areas that may merit further consideration in the WTO."

It was precisely such a proposal for a working party on investment that had been beaten back by developing countries at an early November meeting to set the agenda for the WTO's Singapore meeting, Zambian Ambassador in Geneva Patrick Sinyinza had told Africa Recovery. But further attempts would be made to raise the issue in Singapore, said Mr. Sinyinza who chairs the Trade and Development Board of the UN Conference on Trade and Development (UNCTAD). Many African countries, said Mr. Sinyinza, fear that such discussions in the WTO would quickly lead to negotiations in which their position would be one of "vulnerability and little grasp of the issues," as occurred in the Uruguay Round.

Summing up the developed country view, the European Trade Policy Commissioner Leon Brittan said in Singapore that investment should be a "top priority for the WTO" in the years ahead. It is also an issue "primarily for the WTO because it involves the development of an appropriate framework of binding rules." Many developing countries need a secure legal environment to attract a "fair share of investment capital" and WTO rules would help provide the "necessary underpinning," Mr. Brittan argued.

The European Commission (EC), Japan and Canada are among those pushing for early talks. The US is said to favour waiting for the OECD's multilateral agreement on investment (MAI) before starting negotiations in the WTO. Presentation of the MAI is scheduled for an OECD ministerial meeting in May-June 1997. Once accepted, it could then be opened to accession by non-OECD members. Some developing countries have already expressed interest in becoming early signatories to an OECD accord on investment.

The push for WTO discussion of a more liberal framework for transnational corporations and other foreign investors was led last May at the UNCTAD IX conference in Midrand, South Africa, by some members of the Organization for Economic Cooperation and Development (OECD). But pressure from developing countries led to UNCTAD being mandated to study the benefits and pitfalls of a new multilateral investment framework.

The Singapore compromise recognized this mandate by welcoming the "work under way [in UNCTAD] as provided for in the Midrand Declaration and the contribution it can make to the understanding of issues." WTO ministers said the working groups should cooperate with UNCTAD and "ensure that the development dimension is taken fully into account." WTO's General Council is to chart future directions in two years' time. Acknowledging developing country concerns, the Singapore Declaration stated: "It is clearly understood that future negotiations, if any, regarding multilateral disciplines in these areas, will take place only after an explicit consensus decision is taken among WTO members regarding such negotiations."

Developing country concerns

If such new investment rules "would give something more than current bilateral agreements, in which all the obligations are placed on the host country and none on the investor, we might see an interest in it," said Egypt's Ambassador Mounir Zahran, the African Group's chairman at Midrand.

However, many developing countries, particularly the least developed, still face many problems in adjusting domestic policies to comply with the Uruguay Round Agreements, argued a 28 October statement issued in Geneva by Egypt, Ghana, Haiti, India, Indonesia, Malaysia, Tanzania and Uganda. Introducing new issues on the WTO agenda would also unduly strain national economies and policies and the WTO structure, the statement said.

The eight countries added that study and informal discussion of a possible framework should stay within UNCTAD for the time being, as it remains unclear how a new framework might affect the ability of national governments to regulate investment flows to suit national development plans.

They pointed out that the Uruguay Round already has provisions on Trade-Related Investment Measures (TRIMs) aimed at reducing trade distortions caused by national investment policies. As the WTO is scheduled to review implementation of TRIMs in 1999, the eight countries argued that early WTO discussion of a new investment framework would constitute a back-door route to re-opening issues already negotiated during the Uruguay Round, and that introduction of new investment-related measures should come after the 1999 TRIMs review, not before.

But there were some African countries who said the Singapore meeting should contain some discussion, but not negotiation, of new investment rules. Mr Sinyinza said Madagascar, Morocco, Nigeria, Tunisia and Zambia were among the countries backing this approach at the 10 October Global Investment Forum organized by UNCTAD. These countries, he said, felt that discussion within the WTO would facilitate a "learning process" for African and other developing countries. As the WTO is a rule-making body, the line dividing discussion from negotiation could be very thin, said Mr. Sinyinza. But this possibility is offset by the danger that potentially more rigorous rules from the OECD could become a take-it-or-leave-it proposition for Africa, he warned.

African unease about the potential disadvantages of any new investment rules is compounded by concern that such rules would "remove the last vestiges of national planning and pose a threat to national sovereignty," says Mr. Trevor Abrahams, Advisor to South African Trade Minister Alec Erwin who chaired the Global Investment Forum and presided at UNCTAD IX. It is "absolutely clear" that some of the proposed new measures "would be destructive to weaker economies" whose domestic firms cannot compete with transnational corporations. "It would be unfair to impose such new rules before these countries have had a chance to engage in full economic reforms," he told Africa Recovery.

Many least developed countries are particularly unhappy at the prospect of embarking on new issues in the WTO while Uruguay Round provisions to compensate net-food importing countries for losses entailed under free-trade rules have not yet been implemented, he added.

NGOs cite colonialism

"The issue is not whether foreign investment is good or should be welcomed," said a position paper circulated at UNCTAD IX by the Third World Network (TWN) of non-governmental organizations. But for "foreign investment to play a positive role, governments must have the right and powers to regulate its entry, terms of conditions and operations." TWN argues that "the real motives of the proponents are to increase access of their companies to resources and markets of the developing countries, as well as to have another powerful instrument to block the development of potential rivals." Citing some measures suggested by the European Community for the OECD investment proposals, TWN said that a new treaty under the terms promoted by the EC would constitute "a return to the colonial era."

Even among developed countries, however, there are objections to aspects of EC proposals, including full liberalization of investment rules, and negotiations in the OECD are reportedly going more slowly than originally expected. It now seems that the draft agreement to be presented to the OECD ministerial meeting in 1997 will be long on standardized rules but short on measures that actually liberalize entry for and equalize treatment of FDI.

There is also concern within the OECD that the "go-it-alone route may not be a good idea" because it may antagonize those developing countries which now have a large and growing role in international trade and investment, Mr. Abrahams said. "We should not prejudge that Africa will come off badly, and we don't enjoy the luxury of sticking with the status quo," said Ambassador Sinyinza, pointing to Africa's low inflows of FDI. "If we don't participate in the process, Africa may miss another chance."

The trend since the 1980s is towards liberalization of cross-border investments, notes Mr. Michael Gestrin, an editor of UNCTAD's recently published 1,000-page International Investment Instruments: A Compendium. He said that "clearly, investment is on the table [of international discussions] and it won't be pushed off."

Box 1: Proposed new freedoms for foreign investment

Developed country advocates of new rules for foreign direct investment (FDI) favour measures along the following lines:

  • Foreign firms would have the right to enter a nation and invest in all sectors except for the security sector.

  • Foreign and domestic firms would have equal access to government aid, subsidies, tax benefits and contracts.

  • There would be no restrictions on foreign firms transferring profits to their headquarters.

  • Binding mechanisms would be established to settle state-to-state and investor-state disputes.

    But if investment protection and liberalization are very important for transnational corporations, sustainable development and social policy issues are equally important for developing country governments, trade unions and consumer groups, says the UN Conference on Trade and Development (UNCTAD) in its World Investment Report, 1996. To take account of different levels of development and provide for mutual advantage in new investment rules, UNCTAD says development objectives must be safeguarded (by allowing time for adjustment to stringent new rules), advanced (by allowing developing countries to increase their benefits from FDI), and supported (by developed country governments which can promote FDI flows that fit in with developing country needs, for example, in appropriate technology or export production).

    Box 2: North Africa's relative gain in continent's FDI inflows

    Africa remained at the margin of burgeoning worldwide flows of foreign direct investment (FDI) in 1995, says UNCTAD's World Investment Report, 1996. Global flows of FDI rose by 40 per cent between 1994 and 1995, reaching $315 bn, but in those two years, inflows to Africa fell from $5 bn to $4.7 bn, or just 1.5 per cent of the 1995 world total.

    Within Africa, UNCTAD noted a swing from south to north in subregional inflows of FDI since 1980, largely due to disinvestment in South Africa during the apartheid era and an upswing in European investor interest in North Africa. In 1980, Southern Africa accounted for nearly two-thirds of Africa's stock of FDI, while only 12 per cent was in North Africa. By 1995, Southern Africa's share had fallen to 24 per cent while that of North Africa had increased to 30 per cent. The percentage of FDI located in the rest of Africa rose from 24 per cent in 1980 to 45 per cent in 1995. UNCTAD attributes the surge in FDI to North Africa in part to "efforts to establish an appropriate FDI framework." North Africa has concluded an average of 16 bilateral investment treaties (BITs) per country, more than in any other developing region. Sub-Saharan Africa, by contrast, has 4.6 BITs per country, the lowest among developing regions.

    Although FDI in Africa has become less regionally concentrated, a few countries, mostly oil-producers, still take the lion's share. Nigeria, for example, received 61 per cent of average annual inflows to sub-Saharan Africa in 1993-95; over the same period, Egypt took in 48 per cent of FDI going to North Africa. South Africa experienced a net disinvestment during the 1980s and early 1990s, and only minimal inflows in 1994 and 1995, but it still holds two-thirds of the inward FDI stock of Southern Africa.

    Western European companies remain the largest bloc of investors in Africa, owning more than half of the 600 biggest foreign affiliates on the continent. The US share in Africa's inward stock of FDI fell from 32 per cent in 1985 to 25 per cent in 1993. And growing Japanese development assistance to Africa has not led to an investment surge. According to UNCTAD, only 0.1 per cent of Japanese outward FDI went to Africa in 1990-94.

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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.