NO INVESTORS' RIGHTS VIA TRIMS SAY THIRD WORLD NATIONS.

Mar 21, 1990

NO INVESTORS' RIGHTS VIA TRIMS SAY THIRD WORLD NATIONS.

GENEVA, MARCH 19 (BY CHAKRAVARTHI RAGHAVAN) -- A group of eleven Third World nations have opposed the use of the Uruguay Round TRIMs negotiations to create rights for investors or discipline investment measures as such.

Instead, they said, the negotiations should be used for tackling identified and demonstrated adverse trade effects and within the existing framework of rights and obligations under the GATT.

This view has been put forward by Argentina, Brazil, Cameroon, China, Colombia, Cuba, Egypt, India, Nigeria, Tanzania and Yugoslavia, in a paper tabled in the Uruguay Round negotiating group on "Trade-related Investment Measures".

The paper has been drawn up after a few weeks of consultations within the informal group of Third World countries in GATT and discussed at their meetings, where it got widespread support.

At the meeting of the group last week, while the eleven countries agreed to cosponsor it, a number of others (Chile, Honduras, Jamaica, Morocco, Pakistan, Sri Lanka and Zimbabwe) reportedly said they were awaiting instructions from capitals.

The Asean countries and Mexico said they could support paper in the discussions in the group.

"The negotiated outcome (in TRIMs)", the 11-nation paper said, "should facilitate a movement of investments across international frontiers, especially with a view to serving the developmental aspirations of developing countries. To prohibit the employment of investment measures per se would only have the effect of undermining and thwarting investment opportunities".

In this view, the paper suggested that

* Modalities should be discussed for avoiding the adverse trade effects of investment measures, where "it is demonstrated that such trade effects are direct and significant",

* The negotiation of such modalities should take place only in the context of identified and demonstrated adverse trade effects and within the existing framework of rights and obligations under the GATT,

* The process of addressing the direct and significant effects, if any, should not be designed to create rights for investors but, rather, to remove distortions and impediments to international trade while serving the developmental interests of Third World countries, and

* Negotiations on TRIMs should take into account the concerns of the least developed countries.

The clear intent and operative thrust of the Punta del Este mandate, the eleven-country paper said, was to focus on trade restrictive and distorting effects of investment measures and not to establish an international investment regime nor to circumscribe the capacity of governments to employ investment measures per se.

The mid-term decisions on TRIMs not only reaffirmed this understanding of the original mandate but also stipulated that developmental aspects should be integrated into the negotiating process.

Investment measures were employed by governments in the broader context of social and economic policy objectives, and the need to employ them arose from development considerations.

Before any consideration could be given to further provisions to avoid adverse effects on trade of TRIMs, in the context of an examination of the operation of relevant GATT Articles, "the alleged direct and significant adverse effects must be demonstrated".

The paper insisted on a proper methodological approach to discussions and negotiations on the issue and rejected any a priori presumption that investment measures were inherently trade restrictive and distorting.

If in certain circumstances, and on a case by case basis, it could be demonstrated that the investment measures cited by participants had a direct and significant trade restrictive and distorting effect which was adverse, a clear causal link would have to be established between the measure and the alleged effect.

If such an adverse effect was demonstrated, an assessment the nature and impact of the measures having an adverse effect the interests of the affected party would have to be undertaken.

Depending on these, and if the negotiating group felt that in certain circumstances a particular investment measure did indeed have a direct and significant adverse effect on trade, then appropriate ways and means would have to be found to deal with the adverse effects, and not the measures themselves.

On the developmental aspects, which the mid-term accord has mandated the negotiators to address, the paper has pointed out that investment measures were employed by Third World governments in the broader context of development policy, foreign capital treatment, industrialisation policy and for BOP reasons.

They were used as important instruments for attainment of social and economic policy objectives consistent with GATT and Part IV and to promote socio-economic development by among other things,

* Ensuring most efficient and fullest contribution of investments to the national economy; enhancing and maximising employment opportunities; facilitating restructuring under socially acceptable conditions; eliminating industrial, economic and social disadvantages of specific regions;

* Diversifying and expanding economic activities; alleviating pressures on foreign exchange and making most efficient use of it;

* Ensuring most effective use of natural resources and value-added contributions to the economy; expanding export markets and ensuring adequate supply of some products for the local markets;

* Enhancing contribution of investments to upgrade domestic technological capacity; and encouraging R and D programmes.

Governments had also to employ investment measures to offset the trade restrictive and distorting effects of corporate practices and behaviour.

The measures were thus used both to promote development objectives and to address the adverse impact of certain forms of corporate behaviour that threaten the development objectives.

Investment measures such as local equity, remittance and other exchange restrictions, technology transfer and licensing were clearly used to promote development and for other considerations and had no relationship with or impact on trade. Some others, though trade-related, did not have a direct and significant adverse trade effect, and if they had direct and significant trade effects they benefited the economies and hence justified on developmental considerations.

Dealing with some of the specific investment measures which the ICs want to outlaw, the paper pointed out that apart from encouraging use of locally available inputs and promoting the process of domestic industrialisation local content requirements were also often the responses of host governments to vertically integrated corporate enterprises with a dominant market power which preferred to source components and parts from parent companies or other foreign sources even if comparable inputs were locally available.

By limiting the scope for transfer pricing and differential or predatory pricing by the foreign enterprise which were aimed at eliminating local production, such local content requirements strengthened the market power of producers of domestic inputs. They were also needed to meet rules of origin as under GSP schemes.

Manufacturing requirements, apart from encouraging domestic production/manufacturing capacity, were also designed to counter international market allocation and strengthen market power of local producers or used to avoid abusive pricing practices of corporate enterprises (as in the case of pharmaceuticals) and protect local firms from predatory practices.

Domestic sales requirements, requiring the foreign enterprise to sell in the domestic market, were intended to ensure availability of some products in sufficient quantity and at appropriate prices in the local market, and were needed to counteract the refusal to deal or unfair pricing of corporate entities.

Trade balancing requirements were used essentially by governments facing foreign exchange constraints to limit net outflows of foreign exchange. They also strengthened the position of domestic producers and enabled them to combat international market allocation arrangements within and among foreign firms.

Remittance and other exchange restrictions were used at reducing BOP pressures on host countries, while local equity requirements were aimed at ensuring a degree of control for local management and encouraged local savings and transfer of technology, as also for reasons of national security.

Product mandating requirements countered enterprise-to-enterprise market allocation or exclusivity contracts by earmarking specific products for export and to take advantage of market opportunities and trade preferences, etc.

Foreign investments necessarily involved obligations for repayments. Hence countries wishing to reduce pressures on foreign exchange, stipulated export requirements in relation to such investments. They also used such requirements to counter international market allocations by foreign enterprises which restrained or blocked exports from a given country or which allocate markets among subsidiaries with the sole aim of securing access to a given market through a local production subsidiary.

Stipulations by governments on investors about technology transfer and licensing had the objective of acquiring advanced technology so important for development, of strengthening the bargaining position of the host country in international contract negotiations. Requests from an investor for a technology unrelated to the proposed project but of value elsewhere in the economy or other licensing requirements, were part of the bargaining process of a host country aimed at strengthening the position of domestic firms in contract negotiations with foreign enterprises.

In examining the various GATT articles in relation to the trade restrictive or distorting effects of investment measures, the basic premises of the General Agreement had been overlooked by several of the participations, the 11-nation paper complained.

GATT was designed to deal with international trade in goods as they crossed international frontiers and GATT's trade liberalisation efforts dealt with border measures like tariffs and non/tariff measures.

Investment measures were not imposed at the border but at the point of production. To the extent that measures at the point of production dealt with acts of importation or exportation, establishing a link between measures imposed at the border and at the point of production involved complex difficulties.

If the investment measures had direct and significant adverse effects in the realm of trade the effects had to be demonstrated, as also the manner in which these measures caused nullification or impairment of benefits accruing to a CP under the General Agreement and its procedures.

The existing framework of GATT rights and obligations, which provided for remedies in event of nullification or impairment of benefits, appeared to be sufficient to deal with the alleged adverse effects cited in the group, the paper argued.

But if participants were able to demonstrate adverse effects of a direct and significant nature from some of the investment measures, over and above those foreseen in the framework of GATT rights and obligations, consideration could be given to search for ways and means to remedy such adverse effects.