Examining The Political Case For An Investment Agreement At The WTO

Published: The Financial Express, August 12, 2003
By Pradeep S Mehta

As the D-Day for the Cancun Ministerial approaches, trade policy bureaucrats are very busy in formulating their respective negotiating positions. Even the traditional one month’s summer holidays in Geneva have been cut down to a fortnight, as the time is very short.

But, the honchos are busy in their home capitals working out possible trade-offs, so that even if Cancun is not successful, it does not become another Seattle.

As I have written earlier, in the current Doha Round of trade negotiations, so far, agriculture, Trade Related Intellectual Property Rights (TRIPs) and Singapore issues have remained the most contentious subjects of negotiations. Some efforts have been made to bring convergence on views over agriculture and TRIPs, but the jury is still out. Of the two contentious Singapore issues, in my last column (In Search Of A Dealmaker at Cancun, August 4) I dealt with competition. In this column I deal with the more difficult nut: investment.

On this either the demanding or the opposing World Trade Organisation (WTO) members are not willing to budge an inch from their respective positions.

The European Union (EU) is consistent in its demand, while India, in association with China, leads the like minded group (LMG) of vocal opponents of an investment agreement at the WTO.

All the Singapore working groups, including the one on investment, have finished their pre-Cancun meetings and submitted their reports to the WTO’s General Council last month. This means that any further formal talks/progress on this issue will take place only at Cancun. What will happen on investment at Cancun? It is very difficult to predict the same now. However, seeing the hardline stance of protagonists and antagonists, this issue has the potential of playing the role of a spoilsport.

In the WTO, including any issue for negotiation depends either on its economic merit or political support. And it is the business lobbies of each country which drive the agenda. As regards an investment pact, the economic argument may be very weak but there could be a political support behind it. After all, the main demandeurs (EU, Japan, Korea) of an investment agreement in the WTO are big economic powers. A recent interesting debate on this in the Financial Times throws light. While Kavaljit Singh from India has been able to get a piece published in the pro-establishment the Financial Times opposing the possible investment pact, others have argued for it. In a letter to the editor, US International Business Council’s President Thomas M.T. Niles writes, “What business need in order to promote foreign investment are market access and high standards of investor protection.” It is these very two demands, which are strongly opposed by India, China et al.

If we look at the numbers game in the WTO, there is a 15-member EU, supported by Japan and Korea, and some non-EU members such as Norway and Switzerland, who are the main demandeurs of an investment agreement. In all probability they will get support from the USA, Canada and Latin America.

Most of the Latin American countries feel that as investment (and competition) provisions will be inserted in the proposed Free Trade Areas of America Agreement (FTAA), there maybe no harm in a multilateral agreement on investment in the WTO. As it is, a multilateral setting may be better than regional and bilateral agreements. The number of supporters crosses 50 and if the EU manages to rope in all the least developed countries (LDCs) by giving some concessions to them —as it often happens— then they will sail through in the game of numbers.

In the past also, the TRIPs agreement was signed without having any strong economic arguments in favour.

On the contrary, even free trade economists have criticised it most stridently. However, the pact got into the WTO mainly under pressure from big US and European pharmaceutical companies.

Had economic arguments prevailed, the TRIPs pact would not have been there at all. It perpetuates monopoly and rent-seeking behaviour, which are against the principles of free trade.

Similarly, a debate is sill going on, whether WTO is the right forum for handling investment. The trade-investment link, other than what is covered under Trade Related Investment Measures (TRIMs) agreement or the General Agreement on Trade and Services (GATS), is by no means straightforward.

The bulk of foreign direct investment (FDI) flows continue to be market-seeking and actually substitute trade. Therefore, possible trade distorting investment policies have been taken care of under the TRIMs agreement, while service-related investment will be taken care of under the GATS pact.

Hence, there is very little justification of including a full-fledged investment agreement under WTO. The other arguments, often cited against an investment agreement are: lack of empirical evidence supporting increased flow of FDI to developing countries. Secondly, a multilateral investment pact’s one-size-fits-all approach may be good for capital-exporting Japan but may not be beneficial for capital-importing poor countries.

Further, the WTO’s coverage of balance of payment issues is at present confined to current account transactions but an investment pact would necessitate capital account liberalisation etc. Like in any civilised debate, protagonists of investment agreement may have counterarguments for all the above facts but they do not have any compelling arguments in favour of the investment deal in the WTO.

Therefore, if at all negotiations on investment are launched at Cancun, it would be mainly due to the strong political clout of demandeurs. This won’t be surprising because at Doha, the EU managed to get mainstream environment into the work programme of the current trade round in spite of the fact that majority of the members, in principle, were against linking trade with environment.

If such a situation emerges and EU manages to get negotiation on investment launched at Cancun, what should be the negotiating strategy of developing countries?

The first obvious demand is to seek a balance between mobility of capital and mobility of labour. Both are mobile factors of production and in my view the economic arguments for free movement of labour are stronger than those for free movement of capital. This is already mandated in a sense under mode 4 of GATS, which seeks to ease the restrictions on movement of natural persons.

Secondly, the developing countries will need to ask for much more enforceable policy flexibility than what is being proposed. Their experience with the existing special and differential treatment provisions in the WTO have been rather dismal, to say the least.

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