11:47 AM Oct 15, 1996

MIA OR GLOBAL 'WELFARE' RULES FOR TNCS

Geneva Oct 14 (Chakravarthi Raghavan) -- Transnational Corporations and their major home countries (US, EU, Canada and Japan) have made clear that their push for a multilateral framework on investment at the World Trade Organization is to ensure all rights and no obligations for foreign investors - ensure their global welfare.

After initial attempts to disguise it, this position came out loud and clear at the Global Investment Forum (10 October) organized by the UN Conference on Trade and Development during a panel discussion on "Towards a multilateral framework on investment?"

In opening the panel discussions, UNCTAD Secretary-General Rubens Ricupero noted that bilateral investment treaties are rapidly expanding and the issue was whether a multilateral framework was needed. Two approaches were developing side by side. The first was the organic growth approach, with more and more regional and bilateral treaties as FDI expands. Would it better to continue with this organic approach or is it necessary to have a comprehensive multilateral framework? The central issue of the debate, from UNCTAD point of view, is to assess what a multilateral framework can bring to development and how developing countries could try to define possible elements of a balance, Ricupero said.

India's Minister of State for Commerce, Dr B.B. Ramaiah, said that India values FDI and is committed to a more liberal and transparent investment regime. On the issue of a multilateral framework for investment, he recalled that developing countries had initiated the process for regulation of TNCs to curb their restrictive business practices through a Code of Conduct on TNCs. Thus, when the issue of bringing TNCs under a framework of discipline under multilateral trade rules first arose, the aim was to check adverse effects of TNC behaviour in the host country. The matter was not pursued at all as it was inconvenient to developed countries.

And instead of reviving the earlier agenda, the MIA proponents are now propagating a pro-TNC agenda by erroneously assuming that autonomous investment liberalisation measures taken by countries is the same thing as countries being asked to join a MIA.

Whilst investment and trade are linked, investment has even stronger linkages (positive or negative) with development. East Asian countries benefitted from FDI because of policies they followed to regulate and direct FDI flows, as the Trade and Development Report 1996 showed.

Investment policy addresses complex matters of national importance, such as regional disparities, inequalities, employment, environment and social justice. These vary from country to country and in the same country from time to time. "We are concerned that a multilateral investment framework would take away the right of national governments to regulate and channelise FDI in light of national developmental objectives."

Ramaiah added that the interests of foreign investors and governments do not always coincide. FDI could have both positive and negative effects. It could increase exports and improve infrastructure; but if FDI is only interested in capturing domestic markets, there may be a net loss of foreign exchange through profit outflow.

The aims of the foreign company and the host country may be different, and if so, it is critical that any FDI meets both sets of objectives. FDI may increase if national constraints are removed, but the increase may be in sectors where FDI is not desirable. "That is why many developing countries are trying to frame their policies to enhance positive efforts and minimise negative effects."

Ramaiah said a multilateral framework would not be able to take on board every country's specificities, and there is a "real risk that a uniform regime will accentuate the negative effects of FDI rather than enhance the positive effects."

He also challenged the argument that a MIA will lead to more foreign investment in a given country. Instead, elimination of all regulation will merely lead to FDI flowing to countries with larger markets and demand, higher profitability and natural resources. It will not lead to a more balanced flow of investment nor enhance flows to countries currently having less FDI.

Ramaiah added that the MIA protagonists are "strongly advocating the interests of TNCs by trying to camouflage it with the argument that what is in the interests of TNCs will automatically also promote the interests of developing countries."

He said this was an exercise principally for the benefit of TNCs and raised many serious questions. "In our view, the pursuit of development objectives cannot be subordinated to the rights of the investors and each country must retain full competence to regulate and determine the role of FDI."

For these reasons, he concluded, India felt that prima facie there is no need for a multilateral investment framework. Nevertheless, all issues relating to a possible framework should first be discussed in a non-confrontational way in UNCTAD. "Starting a so-called educative process in the WTO to discuss investment is an avoidable duplication."

Rufus Yerxa, partner of a law firm in Brussels, and former deputy US trade representative, said businessmen would invest where they get the highest rate of return. The present "patchwork" of bilateral treaties would cause divisions between those countries who get investments and those who get left out. But an MIA would offer protection to smaller and weaker economies, Yerxa added but did not reconcile this with his earlier statement about business chasing highest returns. A balance was needed between businesses wanting safeguards and governments wanting protection. From his experience of negotiations, it was clear that an MIA would have many exceptions to national treatment and host countries need have no fears.

The director of the Third World Network, Martin Khor, said that to answer the question whether there should be a multilateral framework, it should first be asked what kind of a framework was being proposed. In the recent past, the developing countries had worked for a multilateral investment framework based on a Code of Conduct on TNCs -- balancing the rights of home countries and foreign investors.

"However, due to the rejection of developed countries, the Code has been abandoned, the Centre on TNCs was closed down and has now become the Investment Division of UNCTAD, but with very different orientation and functions," said Khor.

The MIA and MAI now being proposed was very different from the Code of Conduct: it was one-sided, granting foreign investors full rights to entry and establishment and national treatment, but deprive governments of the right control investment policy -- the most important element of development and macroeconomic planning as well as a key component of political stability.

National governments would have less space for key policy making, and power would be handed over to the international sphere.

He said that the OECD model of an MAI and the Northern proposals for a MIA in the WTO were basically similar. The effect would be that the rights of host countries would be ignored, and they would find it difficult to protect their balance of payments, natural resources, political stability and retention of economic benefits from FDI. The MIA would thus be an extreme approach.

Khor said that liberalisation may be good in certain circumstances, for instance when two countries of similar stature complement each other. At other times, however, it could lead to marginalisation if there is a weak partner that is unable to compete or to export. In such a case, as is now well known, liberalisation can lead to marginalisation and polarisation between the winner and losers.

The MIA approach will lead to even more marginalisation and losses for the weaker countries.

Khor criticised UNCTAD for only inviting the International Chamber of Commerce (ICC) to speak on behalf of business and questioned the definition of "international business". ICC, as the representatives of big business could not speak for the overwhelming number of businesses around the world, which comprised small and medium size enterprises. This majority still needed protection from big business.

He referred to a Joint Communique of the Asean Chamber of Commerce, -- a confederation of the seven national Chambers of Asean countries -- asking their governments to oppose an MIA in the WTO. Treatment of FDI, the Asean chambers said, should be the prerogative of each country in line with its level of industrialisation, capability of its domestic firms, etc.

These Asean businesses took an opposite position from the ICC because they required protection until they were strong enough to compete on more equal terms. "If this is so for Asean countries, which are relatively more developed, surely the local enterprises of other developing regions would need protection for the time being even more."

Khor added that the present debate on investment policy was the most important discussion in the world today because it has such crucial ramifications for economic, social and political life in each country.

"The developing countries insisted on independence from colonial rule because they did not want their economies to be distorted by colonial policies, and this point should certainly not be forgotten," Khor said. "With independence, they hoped to be able to design their own development policies. But this would be difficult or impossible with the MIA approach."

Khor said that the venue of discussion on a multilateral framework was important as the choice of venue would determine the nature of the discussion and approach taken.

He added that the argument put forward by some that the issue is ripe for discussion in the WTO because the OECD countries had already been discussing it was a fallacy.

"That OECD countries are ready for a discussion does not mean that the international community is ready because the developing countries are not yet prepared. In fact the issue is even less mature for a discussion in the WTO than if both sides are not yet ready."

Khor said that the issue of multilateral investment framework was too serious a matter to be discussed at the WTO because it was a rule-making body, not an academic institution for a study process. "Whatever is discussed at the WTO is already a negotiation, and this may lead to making of rules, with an integrated dispute settlement system involving trade retaliation and cross-retaliation."

UNCTAD, Khor said, was a better venue as it had the framework and approach to look at the many ramifications of investment, including the development dimension, technology, balance of payments, social and other aspects, and not being a rule-making body the discussions could be held in a less tense atmosphere.

Through a study process in UNCTAD perhaps a consensus could develop on the issue as well as to agree to the areas of competence of various institutions, including the WTO.

China's Assistant Minister of Foreign Trade, Mr Long Yong-Tu, said that hearing the discussions, he had the impression that a discussion process in UNCTAD on investment might be more balanced. In contrast, the TRIMs agreement in WTO was not that balanced.

"I am kept busy in the WTO discussing investment, so I know how difficult the TRIMs has been for my country," he said. "I am puzzled. China is attracting FDI, yet we are facing so many questions on our investment condition. It is a ridiculous situation. It reflects the imbalance of TRIMS and does not reflect the investment reality in the world."

Long said that on one hand there were the rights and obligations of TNCs and on the other hand the rights and obligations of host governments. "The key is to ensure a proper balance between these two sets of rights and obligations," he said. In the past, Long added, the rights of recipient countries and obligations of TNCs were emphasised. Now, too much emphasis is put on the rights of TNCs and very little on the rights of states.

"The key to attain balance is to put the development objective at the centre of the formulation. We need a balance between the development objective and the investors' profit. From the global viewpoint, we have to put the development objective in the first place. We must recognise the diversity of different stages of development, human resources, cultural traditions, natural resources, within a framework that enables healthy development."

On a future multilateral investment framework, Long said that whilst it might be said that all parties should be equal before the law, it must also be recognised that there was the need for differential treatment to developing countries, to allow for exemptions and longer implementation time-frame, for example. "Otherwise, the principle that all parties are equal is only hypocritical," he added.

Mr Long commented that UNCTAD had not played an active role in the Uruguay Round, "and maybe this is why we have an imbalanced package in the WTO. In order to have a balanced package in future, UNCTAD must have an active role."

Mr Long concluded that it was crucial to "ensure that future rules are equal and fair to everybody."

The Ghana Minister of Trade, Mr Ibrahim Adam, said that Ghana approached multilateralism with "caution".

"In the 18th and 19th century, the present OECD countries traded with us and took away our resources and freedom. Then structural adjustment came to us via the World Bank.

"The Bank and the world are still looking for a true success case for structural adjustment. Just as developing countries are coming to terms with structural adjustment, we are now confronted with the WTO and its multilateralism. So we have every right to be nervous about the real intentions of this multilateralism."

Adam said that bilateral and regional arrangements should be encouraged, and only later should attempts be made to apply them multilaterally.

India's Commerce Secretary, Mr Khanna, referred to the TRIMs agreement, in which two provisions (export obligations and phased manufacturing programme for increasing level of indigenisation in joint ventures) had been made "not acceptable" on the ground they were "trade distorting." Both provisions would have had positive effects on development, but had been embargoed by TRIMS. Under the guise of a trade linkage, the development process was being distorted.

Khanna said that for India the core objective was to achieve a higher level of development. "National governments are entitled to chart out national development strategy, including the role of domestic savings, poverty eradication, jobs in cottage and small scale sectors. To jettison these just to expand the space for TNCs is to oversimplify the development question. We are jumping to conclusions too fast if we say that the world supports a MIA. This is not true, and we are not prepared to go along with such a proposition."

Ambassador John Weeks of Canada said that Canada had put forward a paper at the WTO for a work programme on investment. This paper was not a proposal for negotiations. It would cover such issues as the role of development. Whilst he supported a continuing role for UNCTAD, there was a room for both UNCTAD and the WTO to work cooperatively on the issue. References to trade issues argues for a process in the WTO. He added that fears about the issue were not justified, when it was not known what was being discussed. The provisions of regional and bilateral agreements showed there was a lot of room for specificities, for example, NAFTA has a hundred pages of exceptions.

"Let me clarify we want a discussion for at least a couple of years in the WTO before seeing if negotiations are needed," Weekes said.

Although the Canadian Ambassador thus sought to give the impression that the issue was open as to what kind of investment agreement was being proposed at the WTO, other developed countries (Japan and the US) made clear what their intentions were.

A representative from Japan said that to promote FDI, there was need for a multilateral regime providing for security of investments, MFN treatment, national treatment and a dispute settlement system. A multilateral system was needed because it was difficult for businessmen to understand the many bilateral agreements. He added that whilst some countries say UNCTAD is the best forum, and Japan did not exclude UNCTAD, the WTO is the appropriate place for rule-making.

The US representative said that Trade Ministers of the Quad (Canada, EU, Japan and the US) in a joint communique at their Seattle meeting had agreed to conclude the OECD process on a MAI by Spring 1997, and this was a top priority for the US. The US is not trying to force any country to accept the MAI, but they can join the OECD agreement if they feel it is in their interest. The US would respect the decision of countries that do not want to join. But the US also supported a WTO working group in the framework of the Canada-Japan paper. A common understanding was needed before discussing whether any WTO work is needed.

He added: "We noted references by other speakers to the obligations of investors. This is problematic and goes against GATT and WTO's national treatment principle. It implies that foreign investors have greater obligations than domestic investors. We don't accept this."

He said the US had engaged in heated debates in the 1970s on these investor obligations. There was a profound stalemate. The World Bank ended up with non-binding guidelines. APEC also had non-binding rules. With the renewed vigour of the move for investor obligations, the US had doubts on the success on an investment framework in any fora other than the OECD. The US was encouraged that UNCTAD had refrained from taking up this issue of investor obligations.

Ambassador M. Zahran of Egypt said that bilateral agreements already provide many benefits, guarantees and incentives for foreign investors. "Why then do we need a multilateral agreement if it will add nothing to the rights and benefits to developing countries?" he asked. Amb. Zahran said a proper framework should be balanced between the rights and obligations of both parties. Such an agreement should have these provisions, which were proposed in the Code of Conduct on TNCs but could not be agreed to.

If such an agreement is needed, it should not trespass on other existing agreements and it should respect the development objective and needs of developing countries.

Amb. Anthony Hill of Jamaica cited Adam Smith's view that the central purpose of capital accumulation was to meet social ends and said that economic debate has been exclusively devoted to efficiency issues to the detriment of social purpose. He also cited the view of Keynes on the role of the government since market mechanisms did not always meet the social purposes. Hill felt that the WIR 1996 had not paid sufficient attention to this, and had limited discussion of investment to FDI. With flashing lights behind the podium signalling his exceeding the time limit, Hill cut short his final comment with the suggestion that instead of "why not" about knowing, they should say "how to" know.

However, the abrupt way he ended did not make clear whether he was referring to the question of "study" of the investment/trade nexus at UNCTAD, or WTO or both, or to the issue of an MIA at WTO itself.

Hill could not be reached at his mission for elucidation.

The Peru representative said a multilateral framework should evolve through a transparent and balanced process. Not only should principles in bilateral agreements be transferred to a multilateral agreement, but it should also stress the interests of developing countries, such as technology transfer and the right to reservations.

Farooq Sobhan, Secretary of Foreign Affairs for Bangladesh, said that in July 1983, as chairman of the Group of 77, he had put forward the Code of Conduct on TNCs. In 1992, it was his misfortune to propose instead a Guidelines for Multinationals. The text, although 95% agreed on, was not accepted.

Much water had now flowed under the bridge, "and now we are talking about a totally different situation." In a multilateral FDI treaty, what would be the obligations on the part of the multinationals?

"We see a net outflow of resources as a result of aid. Are we also going to see a net outflow of capital as a result of an investment treaty which addresses the concerns of one group only? How will it serve the interests of the hundred countries which attract only one percent of FDI? Conventional wisdom is that it will intensify the flow to the ten countries that receive a lot of investments, rather than spread out the flows."

In concluding the discussions, UNCTAD Secretary-General Rubens Ricupero, said that the debate showed that investment is not only a sectoral issue, but much larger. "it is a systemic issue touching on many elements of economic life, and much more complex than the usual subjects in recent negotiations."

But the question put to the panel was an impossible one: to choose between something that was known (bilateral treaties) and something not known -- a possible multilateral investment framework, which could have many different contents, Ricupero added.