Jul 13, 1989

THIRD WORLD REJECTS U.S. MOVES FOR GATT INVESTMENT REGIME.

GENEVA, JULY 10 (BY CHAKRAVARTHI RAGHAVAN) Third world countries and the European community have reacted coolly at the GATT this week to the far-reaching proposals from the U.S. for a GATT framework agreement for prohibiting various investment measures in countries to regulate foreign investors and their activities.

A Swiss proposal on TRIMS also met a similar response, with the EEC viewing it as unlikely to produce any operationally useful results.

While a broad spectrum of third world countries came out against the U.S. proposals, pointing to the limited nature of the mandate, the EEC adopted a more reticent approach, though its effect was the same, participants said.

Japan, which is also pushing for a GATT regime on investments, said it would put forward some detailed proposals at the next meeting.

The U.S. proposals and reactions against it came at this week's meeting of the Uruguay round negotiating group on "trade-related investment measures" (TRIMS).

In putting forward its ideas in the TRIMS negotiating group, the U.S. has said it should be used as "the basis for drafting a comprehensive agreement on TRIMS".

The U.S. proposals, as several third world participants pointed out, went beyond the very restricted mandate of TRIMS group, as also the terms of the mid-term review accord.

Though the title of the mandate talks of "trade-related" investment measures the actual mandate calls for examination of operation of GATT articles related to the "trade restrictive and distorting" effects of investment measures, and for negotiations, "as appropriate", of further provisions that might be necessary "to avoid such adverse effects".

In the negotiations so far the group has been unable to reach a. consensus on the "trade restricting or distorting" effects of measures. The U.S. and Japan from the outset had been pushing for an investment regime, arguing that any investment measure has trade effects and thus "trade-related", and inherently distortive or restrictive - a view that others have not accepted.

The midterm accord has called for further work to identify such effects, those that might be covered by existing GATT articles and others that might not, and the means of avoiding such effects including, as appropriate, new provisions to be elaborated where existing GATT articles might not cover them adequately.

The U.S. proposals appear to be an attempt to short-circuit this entire process, and stretch the mandate, without even the benefit of a rewriting as was done in TRIPS at the april meeting of the TNC.

The midterm accord also called on the negotiating group to integrate into the negotiating process "development aspects that require consideration".

In its paper, Switzerland has said that discussion of which investment measures have "trade distorting effects" and therefore to be disciplined and which would not have such effects, "cannot lead to operational solutions".

On this premise, the Swiss have suggested that GATT disciplines should be on the basis of classification of prohibited investment measures, actionable investment measures (where measures as such would not be prohibited but could be subject to GATT complaints and counter-measures), and permitted investment measures.

The Swiss have sought to bring under prohibited measures all investment measures that would "influence the business behaviour of the investor" during the production process.

In the U.S. view, some TRIMS would be "inherently" trade-distortive and thus should be prohibited, while others could distort trade "in some but not all circumstances", and thus could be negotiated for reduction or elimination of adverse effects.

In its paper, the U.S. has taken the position that TRIMS that reduce imports, induce or increase exports or reduce exports have "adverse" trade effects and should be disciplined. The framework should provide for GATT disciplines, and should have "illustrative" list of TRIMS that would be prohibited and apply both too domestic and foreign investors.

On the "development considerations", an issue mandated as a result of the mid-term accord, the U.S. has taken the view that TRIMS disciplines should apply to all contracting parties, regardless of their levels of development.

"In the U.S. view, a two-tier structure of disciplines or broad, permanent exemptions for developing countries, is bad for the international trading system and contrary to development".

However, in certain circumstances, third world countries might be unable to implement all disciplines immediately, and hence there should be provisions to allow "individual" third world countries "defined, time-limited derogations from certain disciplines".

The U.S. has sought in the investment framework, under the guise of "transparency", provisions for "a higher standard" of transparency than GATT currently provides. At the minimum, the U.S. wants, notifications to GATT as to which TRIMS are in laws, regulations and policies, periodically update them, periodic reports on progress in conforming to disciplines.

GATT currently only requires publication of laws, regulations, judicial decisions and administrative rulings of general application, relating to classification of products for customs, duties etc to be paid, prohibitions on imports or exports, transfer of payments, sale etc.

It also wants dispute settlement procedures.

India, Brazil, Malaysia, Singapore were among those who rejected the approach as well as details of the U.S. and Swiss proposals, pointing out that under the mandate participants could only "elaborate", and that too as "appropriate", the identified adverse trade effects of trade-related investment measures, and there was no mandate for a GATT framework agreement on investment measures.

In a very detailed and written reaction to the U.S. and Swiss papers, Singapore said trade distorting or restrictive effects per se were not grounds for prohibition of a trade measure in GATT, nor were all measures actionable, but only those that caused "material injury" to a contracting party.

GATT articles dealt with "trade measures", and not "production" measures. TRIMS were "legitimate government policy instruments" to restructure an economy, diversify production, promote local employment or upgrade technological level of the economy, and these were "fully compatible" with GATT.

GATT itself recognised possible "trade-offs" where there could be conflicts between reduction of trade barriers and overriding social and economic objectives.

Article XXI of GATT allowed exceptions to GATT obligations on grounds of security and other specified circumstances. Investment measures needed for promotion of social and economic development of countries could surely not be given a "lesser trade-off".

GATT dealt neither with production nor management decisions. But if individual investment or management decisions (in countries) were to be taken into account, as a corollary the trade effects of investment practices of private enterprises too would have to be taken into account.

It was unacceptable that the negotiating group should make "a political" decision or judgement on nature of TRIMS themselves rather than actual trade restrictive or distorting effects based on evidence.

Refuting some of the U.S. arguments about TRIMS violating GATT articles, Singapore argued that the GATT MFN requirement in article one dealt with "discriminatory trade measures" and "border" measures, and not "discriminatory effects" or non-border measures such as "product mandate" requirements.

The tariff concessions and schedules in article ii prohibited imposition of additional charges on imports. But a TRIM increasing cost of importing was not a violation.

Even the GATT panel ruling on the "local content" requirements in Canadian fora, related to discrimination between imported and domestic goods, and could not apply to "manufacturing" requirement, which was a production measure outside GATT jurisdiction.

Singapore complained that-discussions in the negotiating group had shown a singular absence of reference by proponents to the concept of addressing material or serious injury and remedial measures to redress trade distorting or restrictive effects of TRIMS.

The concept of "prohibition" sought to be applied was too serious a matter, and would have far reaching implications going beyond GATT.

The Punta del Este mandate merely enabled "elaborating, as appropriate", further GATT provisions as might be necessary to "avoid" adverse trade distorting or restrictive effects.