A NEW GATT TO DEREGULATE DOMESTIC INVESTMENTS.

Dec 1, 1989

A NEW GATT TO DEREGULATE DOMESTIC INVESTMENTS.

GENEVA, NOVEMBER 30 (BY CHAKRAVARTHI RAGHAVAN)— If the major industrialised countries have their way, the GATT regime that will be in place after the conclusion of the Uruguay round will not only curb the powers of third world countries to attract and regulate foreign investments. But even encouragement of domestic investments of countries in their efforts to industrialise and diversify.

This position has become clearer as the Uruguay Round negotiating group on trade-related investment measures (TRIMs) ended Wednesday its three-day meeting after discussing the proposals of the European Community and the Nordics.

Both proposals make clear that whatever disciplines are evolved should apply to "investment measures" of governments whether on foreign or domestic investments.

There is the suggestion that since domestic investors might not be able to bargain or defend themselves against their governments in these matters, the GATT regime should make all offending measures "GATT illegal".

Third world observers suggested that the actual effect would be so far reaching that in effect it would block capacity of third world countries to industrialise and develop or displace established exports of other countries in any market, within the country or abroad.

Third world participants said that in informal conversations the major protagonists concede that it would result in enforcing a particular pattern of economic development on third world countries, but justify it on the ground that the GATT is based on principles of market operation, and contracting parties have thus an obligation.

While GATT has some provisions relating to the international trade, there is no provision requiring a social system of production based on laissez faire market theories.

The papers of the EEC and the Nordics argue that since any investment measure could have a trade distorting or trade restrictive effect, and affect trade of other countries in third markets, the disciplines should apply to foreign and domestic investments.

Also, investors whether domestic or foreign who might accept incentives (tax holidays, etc.) and undertake to carry out some obligations, would be able to escape those obligations once they had begun to produce, by questioning, through their home governments or using some foreign government, the GATT-legality of the obligations.

The TRIMs negotiating group is to meet next on January 29-30, when the GATT Secretariat is expected to produce an informal synoptic table or paper of the various proposals and suggestions.

The U.S., Japan and Switzerland are among the other ICs who have already put forward their proposals.

With the tabling of proposals by the EEC and Nordics, it is becoming clear that while the ICs have some differences among themselves, they are all moving towards some consensus on curbing the investment measures that third world countries apply in their efforts to industrialise and diversify their economies and emerge as competitive suppliers on the international markets.

The very limited mandate of trying to evolve disciplines to deal with effects of trade distorting or restrictive investment measures is being expanded to bring the whole range of economic policies of countries under international control and freeze the status quo.

Among third world countries India and Singapore have presented papers outlining their positions. Brazil and others have made extensive comments and, in this process, outlined some of their thinking.

Most third world countries have insisted on their right to adopt investment regulations, incentives and other policy measures as legitimate part of their development policy objectives.

India, Brazil and others have also insisted that any GATT disciplines would have to deal not only with trade-restrictive or distortive effects of government ordained investment measures, but also the effects of investment measures and decisions of the TNCs.

The papers of ICs, including those of the EEC and Nordics, either are silent on this or reject any GATT rules to deal with private enterprises or home countries accepting obligations, even though they want host countries to undertake obligations.

The U.S. and Japan in effect have sought to use the negotiations to create a new international regime relating to investments.

The EEC while differing from these two, and arguing that "investment polices" as such should not be called into question, but only those affecting "legitimate trade interests" of other contracting parties, has nevertheless put forward proposals which in effect seeks to curb investment measures rather than their trade-distorting or trade-restrictive effects.

The EEC and Nordics, like the U.S. and others before, have tried to attack and curb conditions imposed on investors as a condition for investment, irrespective of whether or not the investors had agreed to the measures as a pre-condition.

The two also seek to attack local content and export performance requirements. While the former, in the case of ICs, has been held by a panel to be GATT illegal, export performance requirements have been held as not contrary to GATT.

The EEC and Nordics, with some nuances in the discipline, want such export performance requirements to be done away with.

Third world countries generally use such restrictions, among others:

* To ensure forward and backward linkages within the economy of an production enterprise established by the foreign investor,

* To secure exports and export earnings to set off foreign exchange needs of the production facility in imports (the so-called trade balancing), and

* To counteract restrictive practices of foreign investors in regard to exports that would compete in third countries.

While the U.S. and EEC seem to have differences on which TRIMs are trade-distortive and restrictive (and hence to be disciplined) and which are not, both want prohibition of offending TRIMs.

The EEC also talks of willingness to consider the possibility of "reasonably defined special transitional provisions" in the case of third world countries who view their investment policies as being of particular relevance for achievement of their economic, social and technological development objectives.

This transition is not however to apply to those third world countries who have reached "high level of international competitiveness".

The EEC envisages both GATT articles and principles to apply to TRIMs, and wants some provisions strengthened.

It notes that the GATT panel (which adjudicated on an U.S.-Canada dispute on the latter’s investment law) has held export performance requirements do not prevent an investor from acting in accord with commercial considerations.

However, the EEC argues that such requirements distort, and may restrict, trade, and could cause injury to industries in other countries, and hence should be disciplined.

While noting the argument that existing GATT provisions against subsidies and dumping could be used by an affected country to take actions, the EEC wants "explicit disciplines" obliging GATT signatories to forego use of export performance requirements.

On the local content requirement, and its possible violation of GATT’s national treatment principle (for equal treatment of domestic and imported products), the EEC sets out a limited view of what this national treatment means.

In the EEC view all that is called for are "effective equality of opportunity for imported products in respect of application of laws. Regulations and requirements affecting their internal sale, offering for sale, purchase, distribution or use".

"A requirement which would stipulate that goods should be purchased on a competitive price, quality and delivery basis, without the requirement of a specific origin of those goods, would appear to be in conformity with the national treatment principle".

This appears to be an effort to leave some loophole to enable ICs themselves to curb enterprises of foreign investors in their countries form souring their inputs from home countries.

Several of the EEC countries, and particularly France, etc., have in place, particularly vis-à-vis Japanese investments, requirements about local content, and this is also applied against the so-called Japanese "screw-driver" plants – an euphemism for plants that import goods in completely knocked down condition and just reassemble them for sale, to escape dumping duties.

The EEC countries also operate for this a so-called rules of origin.

Some EEC delegates said that the formulation in the EEC proposal was loosely worded to take care of the French and other positions, but has not gone as far as the French wanted.

At the same time, the EEC proposal or qualification in this area might enable TNCs to argue that they are importing their inputs, even when price competitive inputs of the host third world country are available, on the ground that local inputs are not acceptable for "quality" or "delivery" – judgements that are subjective and not easily refutable.

Importing inputs from their home bases is a common transfer-pricing practice of TNCs in their global profit maximisation and capital accumulation policies.

Apart from direct prohibition of some of the "investment measures", the EEC has also called for application of GATT provisions on nullification and impairment of rights to trade effects of investment measures so that any contracting party could raise a dispute, and have the issue adjudicated.

The Nordic countries, in their paper, have ruled out any disciplines on "incentives" to investors. They also call for what they call "measured response" to the negative trade effects of TRIMs, rather than prohibition of the TRIMs themselves.

In the Nordic view both local content and export performance requirements (including in this trade balancing requirements) should be covered, and disciplines evolved to eliminate them but adopting a gradual approach to enable governments to adjust – three years for ICs, 5 years for third world countries, and 10 years for least developed.

In respect of other investment measures that carry the risk of adverse trade effects under certain, but not all circumstances, GATT CPs should commit themselves to avoid such measures, apply GATT principles of "national treatment" and "non-discrimination" to TRIMs, and make "negative trade effects" actionable in GATT through dispute settlement.

The EEC proposals would also eliminate the manufacturing requirements, by linking it to the prohibited local content requirement.

Third world countries in their efforts to industrialise with foreign collaboration, whether through joint venture capital or technology imports and licensing, etc., generally prescribe a phased programme of local manufacture.

The EEC proposals would block this.

Third world countries have argued that any export performance requirements, if it results in subsidised exports or dumping of exports, the importing country could take action if this caused material injury.

GATT itself does not prohibiting subsidising of exports (except of manufactures by industrialised countries) or dumping, only countervailing action on proof of injury.

The EEC now wants to reverse this making it a GATT obligation for countries to forego export performance requirements.

In an effort to rope in the regulatory powers of states and local authorities in the United States, the EEC proposals would cover investment measures taken a sub-federal, state, provincial or local level and not merely federal level.

And while the mandate is to deal with directly trade-related measures that distort or restrict trade, the EEC would expand GATT’s transparency obligations (relating to imports and exports of products) to any investment measures that would have a significant impact on trade, either directly or indirectly, to increase exports or decrease imports.

In GATT normally, the nullification and impairment of rights provisions are used only when basic GATT rights are violated. But the EEC wants to expand it in respect of investments, so that any investment measure could be raised as a GATT dispute, since any investment and expansion or new production would affect exports or imports into the country.

"This is an effort to freeze production and trade shares in the world", one third world participant commented._