Home ›› 07 Oct 2022 ›› Editorial
The General Agreement on Tariffs and Trade (GATT) came into existence some 75 years ago. It is important to recall that it was negotiated based on the trade provisions of the Havana Charter, which contained issues on foreign direct investment and restrictive business practices. These, however, were not included in the GATT. The Havana Charter did not become operational because of the failure of the US to ratify it.
The question of including in the text of GATT investment provisions was raised soon after GATT became operational. In the 1955 Review, a Resolution on International Investment for Economic Development was adopted which recognized that an increased flow of capital into countries in need of investment from abroad, particularly into developing countries, would facilitate the attainment of the objectives of the GATT. It recommended that countries in a position to provide capital for international investment and those who desired to obtain such capital should use their best endeavours to create conditions to stimulate the international flow of capital.
These included providing security for existing and future investments, the avoidance of double taxation and facilitating the transfer of earnings of foreign investments. It urged GATT member countries to enter into consultations or participate in negotiations directed to the conclusion of bilateral or multilateral agreements on these matters.
In the years, that followed, GATT extended the scope of its rules, initially confined to measures applied by governments at the border, to internal policy measures.
Even though the new rules adopted in the 1970s during the Tokyo Round of negotiations in such areas as subsidies, technical specifications and government procurement aimed at the removal of trade barriers. Some of them are also relevant to the competitive conditions which foreign investors face. The rules developed in the area of subsidies apply to some aspects of the incentives provided by governments to attract foreign investment.
Another important development in the work of GATT has been the gradual evolution of international rules governing the treatment of foreign companies. Originally, GATT rules imposed an obligation on the governments only in respect of foreign goods.
They were not concerned with the treatment of foreign persons, legal or natural, operating in their territories, which had been the issue at the heart of investment policy. The General Agreement on Trade in Services and the Agreement on Trade-Related Aspects of Intellectual Property Rights negotiated in the Uruguay Round, imposed important obligations on governments regarding the treatment of foreign nationals or companies within their territories. In addition, the Agreement on Trade-Related Investment Measures, also negotiated in the Uruguay Round requires the government not to place conditions on investors, such as local content requirements, that are inconsistent with the provisions of GATT.
Taking into account these developments, as well as the important role which foreign direct investment (FDI) now plays in the globalizing world economy, it was decided at the 1996 Singapore Ministerial Conference to set up a Working Group on the Relationship between Trade and Investment. Its mandate was to examine the relationship between trade and investment, it was understood that the creation of the Working Group was without prejudice to the issue of whether multilateral disciplines on investment should be established within the framework of WTO.
The Singapore Ministerial Declaration provided that any decision to launch negotiation on investment disciplines in WTO would require explicit consensus. Direct Investment (FDI) is an important driving force in globalization, which characterizes the modern world economy. The escalating flow of FDI, which has been accompanied by rising foreign portfolio equity investment, underscored the increasingly major role played by transnational corporations (TNC) in the economies of both developed and developing countries.
The liberalization of FDI regimes particularly by developing and transitional economies, which in the past restricted FDI flows, and the steps they have taken to promote it has increased many folds in the past few decades. FDI flows are mainly directed to a few developing countries. It has been observed that around 20 developing countries, mostly more advanced among them received about 90 per cent of the total FDI flow to developing countries. The rest of the developing and least developing countries received barely 10 per cent of the total. The 48 LDCs received 1.4 per cent of the total flow to developing countries.
The last few decades have witnessed the widespread liberalization of laws and regulations on foreign investment, especially in developing and transitional economies.
Bangladesh is one of them offers one of the most liberal investment regimes in South Asia. In most cases, this liberalization of foreign investment policies has been part of a market-oriented reform of economic policies involving trade liberalization, deregulation and privatization.
The desire of the governments to facilitate FDI flows is also reflected in the dramatic increase in bilateral investment treaties for the protection and promotion of investment during the 1990s. About 62 per cent of such treaties have been between developed and developing countries. Of the developed countries most active in negotiation were France, Germany, the UK, Netherlands, and the USA. The treaties focused on protecting the interests of investing companies from expropriation, compensation for the losses due to armed conflict or internal disorder, and the transfer of payments.
Regional Arrangements Dealing with Investment Issues:- In addition to bilateral investment treaties, arrangements have been made to promote foreign investment on a regional basis under regional arrangements. The regional agreements contained provisions for non-discriminatory treatment of foreign investors including the Treaty of Rome establishing the European Economic Community, the Agreement on the European Economic Area and the Agreements establishing ASEAN, MERCOSUR, SAARC, NAFTA and many others.
Multilateral Agreement on Investment:- Although several attempts were made in the past to develop a binding multilateral instrument containing comprehensive substantive rules on
foreign investments, none were successful. OECD drafted an agreement aimed at imposing on member countries to extend non –discriminatory treatment to foreign and domestic investors by applying the national treatment principle which has been based on three basic principles:- Most Favoured Nation (MFN), National treatment and Transparency. However, negotiations have failed without any accord being reached.
Agreement on Trade-Related Investment Measures(TRIMs): The agreement on TRIMs prohibits countries from using five types of trade-related investment measures which are considered inconsistent with the provisions of GATT, 1994, on national treatment (Article III) and those prohibiting the quantitative restrictions (QR), (Article XI).
Countries maintaining trade-related investment measures which are inconsistent with the GATT provisions should inform WTO within 90 days from the day of the operation of the agreement. However, for developing countries, the time frame has been extended to 5 years and for LDCs it was 7 years.
General Agreement on Trade in Services(GATS):- The other important provisions on investment are contained in GATS. GATS recognized that unlike international trade in goods which takes place through cross-border movement, trade in services takes place through three modes. They are the establishment of a commercial presence in the country where the services are provided.
GATS visualised that countries might agree in trade negotiations permitting foreign suppliers on a selective sector-by-sector basis to set up a commercial presence.
Although the TRIPS Agreement does not directly address foreign investment, its provisions on minimum standards for the protection of intellectual property, domestic enforcement procedures and international dispute settlement are relevant to the legal environment affecting foreign investment.
WTO Working Group Discussion on Trade and Investment from time to time: - The Working Group discussion was based on the submission of delegations and analytical papers prepared by the Secretariat of WTO, UNCTAD and OECD
The Group noted that the experience of several countries had demonstrated that FDI brought to the host country a package of tangible and intangible benefits. The intangible benefits included technical innovations, managerial skills, and human resource development.
FDI also helped domestic industries to increase their efficiency by stimulating competition. These intangible benefits were considered far more important than FDI’s contribution to capital formation. However, some members held a view that FDI harmed the investment in the host countries.
The degree of correlation between trade and investment flows established that there was an overall positive relationship between outward flows of investment and the exports of the home country. This was true of the relationship between the inward flows of investment and the exports of the host countries providing a positive effect both on home and host countries. In the case of the host countries, the trade impact was more pronounced in countries that followed open and liberal trade policies to encourage export-oriented growth, than in countries which still relied on import substitution for promoting growth.
The Working Group at WTO discussed the development dimension in any multilateral set of investment rules. It was argued that one way of doing this was to ensure in drafting each element of any multilateral set of rules that consideration was given to development implications. To the working group, it was necessary to deal with the basic issue of whether the very notion of a multilateral framework for investment per se was compatible with the need to preserve the ability of the governments to pursue development strategies suited to the special problems of individual countries.
In conclusion, it can be said that economic development is greatly dependent on investment. In the absence of an international discipline that would encourage the flow of investment countries would find it difficult to attain development and growth.
The writer is former Director General, EPB. He can be contacted at [email protected]
