An analysis of agreement on Trade Related Investment Measures

Prior to the Uruguay Round Negotiation, the linkage between trade and investment received little attention in the framework of the GATT. The Havana Charter for an International Trade Organization (1948) contained provisions on the treatment of foreign Investment as part of a chapter on economic development. The charter was never ratified and only its provisions on trade policy were incorporated in the GATT. In 1955, the GATT contracting parties adopted a resolution on international investment for economic development in which they inter alia, urged countries to conclude bilateral agreements to provide protection and security for foreign investment. The most significant development with respect to investment in the period before Uruguay Round was a ruling by a panel in the dispute settlement proceeding between the United States and Canada. The Canadian administration of the Foreign Investment Review Act (FIRA), 1984 a GATT dispute settlement panel considered a complaint by the US regarding certain types of undertakings which were effectively required from foreign investors by Canada as conditions for approval of investment projects. These undertakings pertained to purchase of certain products from domestic sources (local content requirements). The panel concluded that local content requirements were inconsistent with GATT obligations. The panel emphasised that at issue in the dispute before it was the consistency with the GATT of specific trade-related measures taken by Canada’s right to regulate foreign investment per se. The panel decision in the FIRA case was significant in that it confirmed that existing obligations under the GATT were applicable to requirements imposed by governments in an investment context in so far as requirements discriminated between imported and domestic goods. At the same time the panel’s conclusion that export performance requirements were not covered by GATT underscored the limited scope of existing GATT disciplines with respect to such trade-related requirement.

Governments often impose conditions on foreign investors to encourage investment in accordance with certain national priorities. Conditions that can affect trade are known as Trade Related Investment Measures or TRIMs. The agreement on TRIMs that was negotiated in the Uruguay Round requires countries to phase out TRIMs that have been identified as inconsistent with GATT rules. When the Uruguay Round of negotiation was being launched, the United States proposed that there was a need to bring under discipline ‘investment measures that distort trade’. It also suggested that the negotiations should cover policy issues affecting the flow of foreign investment. In particular it suggested that it would be necessary to consider the feasibility of applying to foreign direct investment the GATT principles of nation treatment ( which would give foreign companies the same right as domestic companies to invest in and to establish local operations) and MFN treatment(which would prevent countries from discriminating amongst sources of investment).

The objectives of the agreement as defined in the preamble include ‘the expansion and progressive liberalisation of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners particularly developing country members, which ensure competition.

TRIMs are measures adopted by government to attract and regulate foreign investments include fiscal incentives, tax rebates and the provisions of land and other services on preferential terms. Also, the government imposes conditions to encourage or compel the use of investment according to some national priorities. Local content requirements, which require the investor to undertake to utilise a certain number of local inputs in production, are an example of such conditions. Such conditions which can have adverse effects on trade are known as ‘trade related investment measures’ or TRIMs.

Trade related investment measures have been used mainly by developing countries to promote development objectives. For example, the growth of domestic ancillary industries has been sought by the imposition of local content requirements and export expansion through export performance requirements. In a number of cases, TRIMs are designed to deal with the restrictive business practices of transnational corporations and their anti-competition behaviour. In a recent study it was seen that TRIMs are mainly concentrated in certain specific industries such as automobile, chemical, petrochemical, and computer / informatics. Local content requirements are more pre-dominant in the automobile industry and are less so in the computer industry. In chemical and petro-chemical industries local contents and export performance requirements are prominent.

The TRIMs Agreement negotiated in the Uruguay Round prohibits countries from using TRIMs as listed here. They are: Local contents requirements, Trade balancing requirements (imports to be equivalent to certain portion of export), Foreign exchange balancing (foreign exchange availability restricted to certain amount ), Domestic sales requirements, Manufacturing requirements, Export performance requirements, Manufacturing limitations, Technology transfer requirements, Licensing requirements, Remittance requirements, Local equity requirements etc. These are considered inconsistent with GATT rules on national treatment and the rules against the use of quantitative restrictions. TRIMs prohibited on the ground that they extend more favourable treatment to domestic products in comparison to imports and thus infringe the national treatment principle. TRIMs considered inconsistent with the provisions of Article Xl of GATT against use of quantitative restrictions on imports.

While the TRIMs negotiation was on, the proposal put forth by US received some support from some other developed countries, but the proposal did not get any favour with developing countries. Apart from holding that GATT’s mandate did not permit it to negotiate on investment issues, developing countries maintained that, if any such negotiation were to be held, they would have to include the problems posed by transnational corporations resorting to transfer pricing, restrictive business methods and other practices. The reluctance of developing countries to allow discussions in GATT on investment issues ultimately resulted in negotiations taking place on a narrowly defined concept of trade related investment measures.

For business people, it is important to note that the agreement is limited in scope. It identifies a few TRIMs that are inconsistent with GATT and gives countries transitional periods to remove them. However, the Agreement does not prevent countries from using some of the TRIMs. A number of developing countries even today impose local content requirements. The abolition of these requirements may have an impact on ancillary industries that are benefiting from the protection they provide. Most of the countries are now reviewing the need for continued maintenance of such measures in the light of the open trade policies they are now pursuing and the steps they are taking to attract foreign investment. The Agreement reinforces the trend towards the removal of TRIMs that are considered inconsistent with GATT.

The writer is former DG of Export Promotion Bureau