Statement on investment for the September 2002 WTO Investment Meeting
On 16 – 17 September 2002 WTO Members, meeting as the Working Group on the Relationship between Trade and Investment (WGTI), will hold their third formal meeting since the Doha Ministerial Conference. CIEL, IATP and Oxfam are concerned that this meeting constitutes another step towards negotiating a WTO agreement on investment – in practice setting aside sustainable development.
The WTO is the wrong forum to negotiate a multilateral framework for investment. Based upon the WTO’s focus on the principles of trade liberalization and non-discrimination, an international agreement for investment would most likely rule out precisely those domestic policies which have proven essential for fostering economic growth and development and protecting human rights and the environment. It cannot be assumed that investments would automatically deliver benefits – without such adequate domestic flanking policies.
We call upon WTO Members to keep new investment disciplines out of the WTO for the following reasons:
- The launching of any WTO negotiations on investment are contingent on an explicit consensus decision at the Cancun Ministerial;
- Sustainable development must be the central goal of any international framework for investment;
- The WTO and other economic policy fora have failed to take a sustainable development approach to investment;
- Negotiations on investment would not meet the benchmark of the so-called Doha Development Agenda; and finally,
- We have substantive concerns with the WGTI’s work to date on the clarification of elements.
We urge WTO Members not to put the cart before the horse, in other words to refrain from discussing modalities of negotiations without clear evidence that a WTO agreement on investment would be beneficial for developing countries and for sustainable development in general. In particular, WTO Members must discuss the pros and cons of an international framework for investment, and take a sustainable development perspective to that issue. Only such a broader discussion would enable Members to make an informed decision about whether or not to initiate WTO negotiations on investment at all. True commitment to making an informed, open and explicit decision about this fundamental issue is crucial for the success of current WTO processes and more broadly for the organization’s legitimacy – both internally and externally.
1. Sustainable Development Must Be the Central Goal of Any International Framework for Investment
Foreign direct investment (FDI) can play an important role in fostering sustainable development, including environmental protection, and human and economic development. However, to realize the potential benefits of FDI, it is crucial that governments retain the right to carefully regulate FDI at the national level. Such regulation may include strategies for good quality investment that develops productive capacity; performance requirements to ensure positive spill-over effects to the local economy; incentive mechanisms to direct FDI into priority areas determined by the host country in question; screening mechanisms to discriminate on the basis of the investment’s likely contribution to development goals; and other regulations to protect particularly vulnerable groups in a society, public health and the environment.
When considering the investment issue, WTO Members must refrain from any steps, which might undermine governments’ rights to regulate to ensure that investment generates sustainable economic activity. Only this would bring about better standards of living, promote human development, human rights and environmental protection. Yet there are concerns that WTO negotiating processes as well as negotiating processes in other fora will not generate an investment framework with sustainable development as its central objective.
2. To Date, WTO and Other Economic Fora Have Failed to Take a Sustainable Development Approach Towards Investment
Past experiences with trade-negotiating processes have brought about disappointing results from a sustainable development perspective. They have shown that trade negotiators lack the breath of expertise to deal with issues going beyond the traditional remit of international trade and economic issues. Thus, trade negotiating processes, including those in the WTO are inherently incapable of adequately taking into account social and environmental concerns. The General Agreement on Trade in Services (GATS)1 and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)2 are cases on point. The situation is similar for the Agreement on Trade Related Investment Mechanisms (TRIMS). The TRIMS Agreement explicitly constrains governments’ use of certain regulatory practices, which aim at deriving benefits from and promoting sustainable development through investments.
Sustainable development has also remained absent from investment initiatives in other economic policy fora. The Organisation for Economic Co-operation and Development’s (OECD) attempt to produce a multilateral investment treaty failed for a variety of reasons, including concern that such a treaty would constrain domestic regulatory practices. Today, governments are already suffering from such constraints through their experience with investment litigation under the investment chapter of the North American Free Trade Agreement (NAFTA) and numerous bilateral investment treaties.3
Yet, WTO Members do not seem to have learnt from these experiences.
3. Negotiations on an International Investment Agreement Would Fail to Meet the Benchmark of the So-called Doha Development Agenda
Throughout their recent work on investment, WTO Members have failed to approach investment from a sustainable and developmental angle:
- Since WTO started to address new investment issues after the 1996 Singapore Ministerial, Members proceeded according to a checklist of issues. This included “implications of the relationship between trade and investment for development and economic growth.” However, discussion of this checklist point has not generated clear evidence on the role which trade and investment play for economic development and growth and, more broadly, has failed to take a sustainability perspective.
- Later, the Doha Ministerial resulted in a potentially far-reaching mandate for investment – despite the clear objection of many developing country Members and the concerns voiced by civil society organizations. In addition, the mandate takes the perspective of adopting a multilateral agreement on investment – not of analyzing the pros and cons of such an agreement from a sustainable development perspective.
- In its work since the Doha Ministerial, demandeurs of an investment agreement proceeded on the basis of the above mandate. If Members continue to reject sustainable development as a crucial aspect of their work on investment, they will be unable to take an informed and balanced decision at the Cancun Ministerial Conference.
The above examples show that processes in the WGTI do not adhere to the so-called Doha Development Agenda (DDA). If there were a real development content to the DDA and if Members were truly committed to it, they would make it explicit that a multilateral investment framework should only be developed if proven beneficial for development. Quite the opposite, major demandeurs on investment have proven to mainly seek benefits for their own private sectors and to be well aware of the limited gains that developing countries can expect from any possible investment agreement.
In April 2001 the EC,4 one of the main demandeurs of multilateral rules on investment in the WTO acknowledged, that:
- “There is no mechanical relationship between the presence of FDI and the transfer of technology”; and that
- “It has never been suggested that the establishment of such rules was key to enhancing the attractiveness of host countries to FDI. Rather they would make a limited but valuable contribution by enhancing legal certainty for investors”.
This raises the more fundamental question of whether or not Members should strive towards negotiating an international agreement on investment at all. Several arguments suggest that WTO Members should tread with caution on that issue and refrain from negotiating international rules on investment in the WTO. First, evidence of the possible benefits from FDI is not conclusive. So far there remains a very mixed picture of the advantages and disadvantages of FDI – many of which depend on the particular economic and regulatory context in host countries. Second, evidence suggests that international rules are only one – and not even a decisive – factor of a country’s attractiveness for FDI.
Yet, many Members have disregarded this question and with the Doha Declaration have attempted to shift the discussion away from a debate about whether a multilateral framework on investment should be negotiated under the WTO, to a debate about the probable content of any such agreement.
4. Current Work to Clarify Elements Raises Serious Concerns
The Doha Declaration mandates the WGTI to clarify certain aspects related to a possible framework for investment in the WTO. The mandate raises serious concerns because it takes the perspective of adopting a multilateral agreement on investment – not of evaluating the costs and benefits of such an agreement. Specifically, it requires Members to clarify 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.”5
To date most of the above topics have already been addressed, and discussions have highlighted flaws in the WGTI’s approach. For example:
- When discussing scope and definition of investment, some Members seem to go beyond the Doha mandate’s focus on “…long-term cross-border investment, particularly foreign direct investment”. Rather, they call for a broad, open-ended definition of investment, which would include certain types of financial and other portfolio investments. This position is not shared by the developing world.
- When discussing transparency, industrialized countries have focused on their private sector’s concern that lack of transparency of investment laws constitutes a major obstacle to investments abroad. They have not responded positively to developing countries’ suggestions that transparency is a concept that includes obligations placed upon investors to ensure that their investments are transparent and sustainable. Yet, on the other hand, industrialized countries wish to expand the concept to include notification and prior comment processes. Similar mechanisms in other WTO Agreements have proven a source of concern for developing countries.
- When discussing non-discrimination, Members have emphasized the importance of the non-discrimination principle as one of the cornerstones of the multilateral trading system. There has not been much recognition of the fact that non-discrimination may be at odds with domestic development policies, which discriminate in favor of FDI that promotes technology transfer, capacity building and employment. Sound national policy could also include special treatment of those foreign investors with favorable environmental policies.
- When discussing a GATS-type, positive-list approach for pre-establishment commitments, Members have stressed the flexibility which such an approach would grant to developing countries. They have failed to acknowledge the challenges inherent in the GATS approach. These challenges are becoming obvious in the current GATS negotiations and include, amongst others the built-in drive to further liberalization; the resource intensive nature of the request/offer negotiating process; and the potential for abuse of power imbalances in what are essentially bi-lateral negotiations.
The deficiencies of bi-lateral relationships also beg the question of why a WTO approach towards investment would be more beneficial than the current bilateral approach towards investment regulation.
The items remaining on the WGTI’s agenda concern exceptions and balance-of-payments safeguards, as well as consultation and the settlement of disputes between Members. The above experiences suggest that sustainable development will again remain absent from WTO work on these issues. In addition, these remaining issues give rise the following specific concerns:
- Exceptions, based on environmental, health, balance-of-payment and other developmental grounds are essential because they place limitations on the application of a possible framework for investment. However, by relying upon exceptions for legitimate policy objectives, the very nature of this approach places public policy objectives at the periphery of any agreement and not at its core. In addition, experience with special development provisions in other WTO Agreements suggests that these are not an example to follow. Such provisions are ambiguous, difficult to enforce and have failed to provide the necessary policy flexibility to promote development.
- Relying on the WTO’s dispute settlement mechanism to enforce possible investment disciplines may put further pressure upon developing countries. Striking imbalances exist between developing and developed Members with respect to the technical expertise and resources necessary to effectively handle WTO disputes. Striking imbalances also exist with respect to the economic clout necessary to enforce decisions. Therefore, even without the highly controversial investor-state dispute settlement mechanism, subjecting investment issues to WTO dispute settlement processes creates severe challenges for developing countries. In addition, experience with investment litigation in other fora has highlighted the potential chilling effect which investment rules can have on governments’ ability to adopt much needed developmental, welfare and other public policy regulations.
These are just some of the glaring indications that the WGTI when clarifying the substance and goals of a possible multilateral framework for investment simply neglects economic development, and appears incapable of considering sustainable development.
5. Conclusions
It is likely that some Members will use the WGTI September meeting to press for a discussion of the modalities of negotiating an investment agreement. This would constitute another step towards the establishment of such an agreement in the WTO. Given that potential benefits of such an agreement for developing countries remain elusive and that sustainable development has been neglected in WTO processes, CIEL, IATP and Oxfam reiterate their objections to WTO investment negotiations.
In addition, we urge WTO Members in the upcoming WGTI meetings:
- To show true commitment towards making an informed, open, and explicit decision about whether or not to negotiate an international framework for investment at the Cancun Ministerial;
- In the meantime, to refrain from discussing modalities of negotiations and to revert back to a discussion of the impacts, possible benefits and costs of international investment agreements; and most importantly,
- To take a sustainable development perspective to investment issues.
A thorough, comprehensive and transparent analysis of these issues will allow WTO Members to make an informed decision about further progress. By moving towards the negotiation of an international agreement for investment in the WTO without an informed and transparent decision making process, WTO Members risk the success of current WTO processes, and – more broadly – further endanger the organization’s legitimacy.
- During the Uruguay Round, demandeurs of a services agreement raised
expectations that an international agreement on services trade would
increase FDI inflows to developing countries’ service sectors. However,
to date, many developing countries have not yet seen any increases in
FDI let alone any positive effects thereof. Given inconclusive evidence,
there is a need to assess the effects of GATS commitments on FDI flows
and their impacts on developing countries more broadly. See Communication
from Cuba, Dominican Republic, Haiti, India, Kenya, Pakistan, Peru,
Uganda, Venezuela and Zimbabwe on Assessment of Trade in Services, S/CSS/W114,
9 October 2001. There are also broader concerns about the environmental,
social and developmental implications of the GATS Agreement. See joint
WWF / CIEL statements on services trade assessment, July 2001, September
2001, December 2001 and June 2002. www.ciel.org. See also CIEL Issue
Brief on GATS for the WSSD, www.ciel.org. - Similarly, during the negotiations of the TRIPS Agreement, industrialized
countries suggested that such an agreement would foster economic development
by attracting FDI and increasing the use of technology in developing
countries. Again, the issues surrounding the TRIPS Agreement have proven
more complex and even detrimental for developing countries. - Foreign Investment and Sustainable Development, A CIEL Issue Brief
for the World Summit on Sustainable Development, 26 August to 4 September
2002. www.ciel.org - Note by the WTO Secretariat, Report on the Meeting of 7 and 8 March
2001, WGTI/M/14, p.6. - Doha Ministerial Declaration, WT/MIN(01)/DEC/1, adopted on 14 November
2001, paragraph 22.