This leaked document, which was prepared by DG1 of the European Commission for a meeting of the EU Council's Article 113 Committee in the third week of December 1998, was scanned and converted to HTML by Corporate Europe Observatory. Sections where this document differs from a public discussion paper, which was distributed by DG1 of the European Commission during a dialogue meeting between the Commission and non governmental organizations in Brussels on Wednesday 27 January 1999, have been marked red.See also the background and analytical notes provided by Corporate Europe Observatory.
EUROPEAN COMMISSION DIRECTORATE GENERAL I
EXTERNAL RELATIONS: COMMERCIAL POLICY AND RELATIONS WITH NORTH AMERICA, THE FAR EAST, AUSTRALIA AND NEW ZEALAND
WTO, OECD, commercial questions with respect to agriculture and fisheries; export credit policy; and export promotion
Multilateral commercial policies and WTO and OECD questions
Brussels
I.G.1/(98)Note for the attention of the 113 Committee
113 COMMITTEE
M.D.642/98Source: Commission
For: discussion
Date received:15.12.98
SUBJECT: WTO New Round: Trade and Investment
Discussion Paper
Origin: I/M/2
Objective: pour information and discussion
EUROPEAN COMMISSION DIRECTORATE GENERAL I
EXTERNAL RELATIONS: COMMERCIAL POLICY AND RELATIONS WITH NORTH AMERICA, THE FAR EAST, AUSTRALIA AND NEW ZEALAND
Directorate M - Services, investment, TRIMS, dual-use goods, standards and certification, external relations in the research, science, nuclear energy and environment fields
Investment, TRIMS, Dual-Use Goods, Standards and Certification
Brussels, 15 December 1998
I-M-2/
Discussion Paper: Trade and Investment[1]
A. Introduction
1. Preparations for the 1999 WTO Ministerial have now commenced in earnest with the meeting of the WTO General Council in September. Since 1995[2] the Community has identified on various occasions investment as one of the "new issues" which the WTO should take up for rule making in 1999. This note sets out some elements to define a strategy on how to approach the issue in Geneva.
2. FDI activity is rapidly increasing as a key motor for international economic integration. If WTO Members can create a consensus on the right framework of rules for this phenomenon, this will bring benefits of two kinds. First, it will provide a framework within which all interested parties, including public opinion, can participate in the regulation of FDI as a legitimate and desirable activity. Secondly, greater legal certainty for FDI will mean lower risk for investors and higher levels of activity worldwide, with greater and more stable economic growth than may otherwise be the case.
3. The European Business community has made clear its position in favour of multilateral rules on investment both through its representative bodies (UNICE, ERT) and through informal direct contacts with investment decision-makers. A decision to invest abroad, and the subsequent decision to locate the investment in a particular host country, is obviously taken on the basis of economic and market factors. The legal climate in the host country, however, has a strong influence on the perception of risk associated with an investment abroad. Thus, a favorable legal climate may not have a direct impact on any given individual investment decision, but does have a strong influence on the overall willingness of a firm to invest abroad and on the resources it feels able to devote to FDI. The resulting impact on the overall investment performance of firms, and therefore on global investment flows, should be obvious.
B. Background
4. Investment has become a driving force of economic growth world-wide, expanding much faster than trade and significantly contributing to long-term integration of the world economy. According to the UNCTAD 1998 World Investment Report, yearly investment outflows reached US$ 424 billion in 1997. It is also estimated that sales of foreign affiliates abroad in goods and services reached 9.5 trillion US$ in 1997, thereby topping world-wide exports (6 trillion). Forty-five thousand companies are now operating world-wide, many of them small and medium enterprises. Despite the impact that the current financial and economic crisis is having at present, Foreign Direct Investment is expected to grow further in the long term, as production processes are further integrated. Developing countries are becoming important players, in 1997 they generated around 60 billion US$ outflows, compared to 50 billion US$ in 1996. In this respect it is important to note that, while the financial crisis appears to have a dramatic impact on short-term capital flows, longer-term capital flows appear hardly affected.
5. Rule-making for investment on the multilateral scale, however, is still embryonic. Investment protection is covered by some 1600 bilateral Treaties, while market opening rules on the admission of investment are confined to regional initiatives (EC Treaty, MERCOSUR, NAFTA). WTO rules cover some forms of investment ("commercial presence" for service suppliers under the GATS) or address issues highly relevant to investment (e.g. TRIMs and subsidies) but do not address for instance, investment protection. If concluded, the Supplementary Treaty to the Energy Charter Treaty would provide an example of a fairly ambitious sectoral international agreement covering most aspects of investment.
C. EU Objectives
6. The rationale for undertaking negotiations on this issue is, above all, that our companies are looking for transparent, uniform and predictable rules pertaining to their investments abroad. Community investors look for access to invest world-wide, on a non-discriminatory and transparent basis. Investment decisions are taken on the basis of a matrix of conditions. The favourable discount rate associated to countries with a stable and predictable legal framework for foreign investment is one important factor among those that determine a company's decision to invest abroad. The Business sector expects, in the first place, that the establishment of a set of multilateral rules on investment would lead to an improvement of the international investment climate. Secondly, according to the Business community, it would be desirable to conclude an agreement on investment in the WTO framework, since it would cover the widest range of developed and developing countries and would also facilitate the effective application of established trade principles, such as National Treatment/MFN and Dispute settlement, to investment issues. Moreover, an Investment instrument in the WTO could be gradually improved and adjusted to changing conditions in future negotiating rounds.
7. Many host countries have unilaterally liberalised their domestic investment regimes, having realised that this is the best avenue to attract much needed investment. Thus, circumstances appear ripe for a multilateral framework of rules that could consolidate this favorable climate, and do so in a balanced manner, which could ensure greater stability of investment flows, in the interest of investors and host countries alike.
8. The elements of an ideal result that at the same time opens markets to new investments and then protects those that are made would include:
9. Some, if not all, of these issues will be controversial, as the discussion in the WTO Working Group on Trade and Investment (WGTI) are showing. Thus, the "ideal" result sketched out above may well not be the final deal. But even if a perfect result is not achieved in a first agreement, the main point is to get investment rules firmly implanted in the WTO. Further improvements of these rules and additional liberalization can be part of future agendas, once we have basis from which to work. The GATS experience shows that an agreement based on a flexible, country by country, bottom-up approach, can prove to be extremely effective.
10. However, a worthwhile agreement must maintain a high degree of ambition. It is worth recalling, in this respect, that as far as investment flows are concerned, all countries have an inherent self-interest to adhere to rules. In fact, while liberalization measures as regards trade in goods and services could have a short term negative impact on the balance of payments and on employment in the receiving country, liberalization and protection of investment, by generating inflows of funds, has a positive effect on the host country's BoP and employment in the short term as well as in the longer period. In addition, rules on investment would add benefits such as transparency and thereby provide the possibility to fight corruption and tax evasion, particularly in developing countries. The win-win result of an agreement on investment should therefore be adequately underlined.
11. Thus, much speaks for setting out a broad opening position of the Community. Tactical considerations, in relation to the need to maintain our room for manoeuvre in the course of the negotiations will obviously also have to be factored in when setting out this position.
D. Key issues related to the decision to launch negotiations in WTO on a multilateral framework for investment
12. Firstly, we have to convince many developing WTO Members that investment rules lead to a win-win situation. Much as it is unlikely that we will be able to convince all of them, the Commission thinks that a majority of WTO Members are indeed of this view. The objections and uncertainties of many developing countries, in fact, are linked more to the relationship between investment flows and speculative capital movements than to the issue of investment.
13. Secondly, the Community will have to answer more specific questions on "what is in it for us" which many developing countries raise about investment rules. This cannot stop short at pointing out the benefit of investment for development, but will have to underline and sustain the point that rule making increases confidence of investors and stable investment flows. In this respect, the current financial crisis should indeed be an additional argument in favor of investment rules. The enhanced predictability provided by clear rules could contribute to promote investment, particularly in those countries that are likely to suffer from strongly reduced FDI inflows and considerable outflows as a result of the financial crisis.
14. Thirdly, scepticism in some quarters (notably the US) as to whether the WTO can arrive at "high quality" investment rules must be defused. On the one hand, there is "quality" in having a realistically ambitious set of multilateral investment rules that apply throughout WTO membership. On the other hand, according to the Business sector's experience, the Community should continue to pursue an improvement of investment protection in the WTO forum, including with regard to developed countries.
E. Key issues relating to the scope of a multilateral framework on investment
15. The key elements of an ideal multilateral framework have been set out above (paragraph 8). The following attempts to give some greater detail and to set out some of the substantive and tactical consideration surrounding them.
16. A broad definition of investment is a common feature of most bilateral protection Treaties, but the issue is less clear when it comes to liberalising investment flows. One option could be to work with a broad definition for protection and a narrower one for admission. Another option could be to limit WTO rules to a narrow, enterprise-based definition, thereby excluding many difficult issues related, for instance, to intangible assets and possibly to portfolio investment too.
17. Classical investment protection rules (on transfers, National Treatment, fair and equitable treatment, expropriations and compensation, protection from strife, national security exceptions) have been accepted by almost all WTO Members in Bilateral Investment Treaties. A WTO investment agreement should revolve around these elements and provide, at a minimum, the benefit of more uniform rules than the numerous bilateral and/or regional Treaties that are out there now.
18. On enforcement mechanisms, State-to-State dispute settlement is part of the WTO "acquis" and would, of course, apply to investment disputes too. In the investment field, however, there is the additional and distinct issue of the means available for foreign investors to enforce their rights in specific cases where they want to make a claim against the host country, typically for damages arising from a specific government action or decision. In Bilateral Investment Treaties (BITs), it is common for host states to give "unconditional consent" to investors' resort to established independent arbitration bodies. In the WTO context, this sort of provisions specifying enforcement procedures outside WTO is only found very rarely and then only in very general terms (e.g. in the enforcement Articles - Part III - of the TRIPs Agreement). A BIT-type arbitration would be an enforcement mechanism that could also be written into a WTO Agreement on investment without being linked to the DSU. The exact nature of any arbitration mechanism would also have to reassure those WTO Members (mainly developing countries) who are afraid of being "taken to court" by big multinational companies.
19. On the issue of provisions on admission of investment, much will depend on the approach chosen to develop it. A GATS-style, bottom-up scheduling approach of positive liberalisation commitments, or a top-down National Treatment pre- establishment obligation with specific exceptions (similar to the approach taken in the draft MAI) are the best known options. In this connection, many developing countries have voiced considerable uneasiness with a top-down approach. They see opening provisions on investment linked to a loss of sovereignty and a loss of their flexibility to channel investment into certain sectors or regions. Although the kind of "educational work" being done in the WTO Working Group on Trade and Investment (WGTI) can take away some of these fears, these are unlikely to disappear altogether. A bottom-up approach would have the advantage that developing countries are already acquainted with it from the GATS. Thus, a possible way forward would be to envisage a bottom-up approach for commitments on the admission of investment. This could go a long way to reassure those developing countries who have strong feelings in this respect.
20. A number of other issues will lead to extensive discussions: i.a. TRIMs-like performance requirements rules1 the movement of key personnel, possible rules on monopolies or privatisation, rule-making on investment incentives to curb the most damaging forms of competition for investment. How many of these issues are tackled, as well as how and where in the WTO system (e.g. TRIMs, GATS, etc.), will determine to a large extent the value of a final deal.
21. It is clear that the question of environmental or social elements in a WTO investment agreement will also arise. Not only this is likely to be controversial vis-à-vis some developing countries but we will also have to strike a very delicate balance between conflicting objectives of different constituencies within the EU.
F. Key issues relating to the linkage with other WTO Agreements
22. Investment relevant issues are already covered to some extent in other WTO Agreements. "Commercial presence" under the GATS covers both the issue of admission of an investor and the treatment of the investment afterwards in services sectors. The WTO Subsidies Agreement covers investment incentives, at least once the production of goods by an investor has begun. The TRIMs Agreement covers certain performance requirements imposed on investors. A comprehensive approach to cover all aspects of investment policy in one agreement would lead to considerable overlaps with the existing WTO body of Agreements. One solution could be to have a comprehensive and separate investment agreement, which would "absorb" all or some of the investment-related provisions that are now scattered in various WTO Agreements. An alternative option could consist in a co-ordinated approach, with a core investment agreement containing only certain key elements, with other elements left in other WTO Agreements.
G. Key steps in preparation of the 1999 Ministerial
23. The report of the WGTI to the WTO General Council has been adopted in December 1998. This descriptive part of the report is fully factual and reflects the views expressed in the Group, the majority of which have underlined the positive benefits of investment for developed and developing countries, as well as the presently "patchy" state of play of rule making on investment worldwide. The report recommends to the General Council to decide that the WGTI should continue its "educational" work, without prejudging any decision that could be taken by the WTO Ministerial on the initiation of eventual negotiations. Nevertheless, given the nature of the discussion that has taken place in the WGTI, the factual basis described above should allow us to draw from the final report the conclusion that WTO-based multilateral rules on investment are indeed both feasible and desirable.
24. At the end of the process leading to the 1999 Ministerial, the recommendations to be presented by the General Council should be in direction of a rather general negotiating mandate on investment.
25. Coalition building
Notes:
1. Investment in this paper is understood to include Direct Investment, characterised by a longer-term investment horizon including a degree of influence by the investor on the management of the enterprise, and portfolio investment (eg. equities), but excludes capital movements that are mere financial transactions for speculative purposes or loans not directly related to an investment. This definition appears the most suitable and reflects discussions in the WTO Working Group on Trade and Investment.
2. See Commission Communication COM(95) 42, "A Level Playing Field for Direct Investment World-wide".
Rue de La Loi 200, B-1049 Bruxelles
Wetstraat 200, B-1049 Brussel - Belgium
Office: CHAR. 15/223
Telephone: direct line 295.09.95, exchange (+32-2)299.11.11
Fax: 299.09.00.
Telex: COMEU B 21877
Telegraphic address: COMEUR Brussels
Index of MAI-related documents on the CEO website CEO home page This page was installed on 3 February 1999