Sep 16, 1989

EXEMPT THIRD WORLD INVESTMENT MEASURES FROM TRIMS DISCIPLINES.

GENEVA, SEPTEMBER 14 (BY CHAKRAVARTHI RAGHAVAN) Negotiations in the Uruguay round on Trade-Related Investment Measures (TRIMS), should deal only with adverse trade effects of TRIMS and encompass not only government-mandated measures but also those of foreign investors and technology suppliers.

These are among the viewpoints put forward by India in a comprehensive paper on TRIMS tabled before the Uruguay round negotiating group on Thursday.

So far, the TRIMS group has received a number of papers and submissions from the industrial countries, including the U.S., Japan and Switzerland, seeking in effect to deal with and discipline investment measures and regulations of governments.

In its latest paper Japan has called for prohibition of some investment measures, discipling others, and giving third world countries with exceptions for a limited period.

Among the prohibited TRIMS listed by Japan were requirements for local content, export performance, trade-balancing, domestic sales, technology transfers, manufacturing, product mandating. Some of these same effects sought to be achieved through incentives, Japan said, should be disciplined.

India however argued that most of the investment measures of third world countries, like export performance and local content requirements are instituted by countries in pursuance of their macro-economic and development objectives and in line with spirit and philosophy of the general agreement and this should be fully recognised in any effort to extend scope of GATT articles to deal with any direct and significant effects of investment measures.

Investment policies lay in the domain of national sovereign jurisdiction and domestic policy considerations are too vital for governments to allow a GATT Committee to sit in judgement or decide whether a particular TRIM should be prohibited or made actionable.

The thrust of the Punta del Este mandate is to "avoid" the trade restrictive and distorting "effects" of investment measures, and only the "direct trade effects" should be addressed and not "the broad relationship between investment, production and trade".

The focus of negotiations was thus not investment measures per se nor on prohibition of measures. Hence the negotiating group must confine its activities to identification of adverse trade effects of investment measures and seek to avoid them.

Through various rationalisations, the U.S., Switzerland and others industrial countries who are home to the world' major TNCS, have sought to deal with investment measures per se. Switzerland, for example, has rationalised this approach, by arguing that focussing on "diverse trade effects" and seeking remedies could not lead to "operational results"

In its paper, India has rejected these approaches as contrary to the mandate of the group and has warned that such an approach would vitiate the work of the negotiating group.

Almost every investment and production measure would have trade implications in the short to long run, and hence the group should focus only on those that would have direct and significant adverse trade effects in terms of trade-distortion or restriction, India insisted.

Even in respect of direct trade measures, India noted, GATT severely circumscribed prohibitions, and granted specific dispensations in respect of several to the third world.

Any attempts to prohibit investment measures as such was hence "totally alien" to the GATT framework of rights and obligations.

It was not also logical to assume that a performance requirement on an investor was ipso facto trade restrictive or distortive, in third world countries such requirements in fact created trade and expanded trade, and in many cases were of the type that the investors could take themselves.

To prohibit performance requirement on the ground of their being mandated by governments would mean use of GATT to ensure "a regime of investor freedom, non-intervention by governments and unfettered operation of market mechanisms, in the garb of avoiding trade-restrictive or distorting effects", India declared.

For all these reasons, India said, the negotiating groups should not follow the approach suggested by some ICS, namely, that certain performance requirements were inherently trade-restrictive or distortive solely because they are stipulated by governments, and that the corresponding investment measures should be banned.

Such a step could even be counter-productive and lead to bans on foreign investment, India noted.

Investment were the product of investment climate and investment opportunities offered by a host country. Performance requirements were the basic mechanisms for harmonising FDI and technology flows with national development objectives and priorities, especially in the third world.

Each country followed and investment regime best suited to its needs and would not adopt such stringent measures as to keep out investment and technology flows.

The foreign investor had the choice of accepting or refusing performance requirements on business considerations, and given the competitive situation in the international market place the choice was fairly wide.

If this balance between the investor and the host country is to be upset, and the freedom of host countries to negotiate or stipulate performance requirements is nullified by GATT rules, "it might lead to increasing restrictions on FDI itself", India warned.

This would be unfortunate at a time of world-wide trend in third world countries towards liberalisation of their FDI regimes.

The fundamental objective of investment measures in the third world countries was promoting growth and diversification of their economies, and building up domestic industrial, technological and export capabilities.

Performance requirements and investment incentives thus played a dual role: they tended to harmonise investment and technology flows with national needs and priorities and, on the negative side, sought to counter the restrictive and anti-competitive business practices of TNCS.

Hence, the developmental aspects should be integrated into the work of the group, rather than follow the idea of some of the industrialised countries, namely, that TRIMS disciplines should first be evolved and then provide exceptions or time-limited derogations to third world countries.

Also, where the developmental implications of an investment measure outweighed any identified adverse trade effects, third world countries should have freedom and flexibility to maintain the investment measure. Their freedom to do so should not be curbed by any GATT rules or disciplines.

There was also a serious imbalance in the negotiating process by an exclusive focus on effects of government mandated measures, while ignoring the more severe and wide-spread restrictive and anti-competitive policies of TNCS.

Given their unequal bargaining power, third world countries were particularly in a vulnerable position in dealing with TNCS.

It would hence be a one-sided approach, particularly for third world countries, to work out rules for disciplining policies of host countries without disciplining the RBPS and policies of TNCS.

If export performance requirements employed by third world countries were to be viewed as "trade-distorting", there was no rationale in viewing export restrictions imposed by TNCS in a different way.

There was no basis for the view that export performance requirements resulted in "dumping". But if in any particular case the importing country was able to establish the fact of dumping, existing GATT rules enabled the country to take counter-measures and no new disciplines were needed.

The local content or local manufacturing requirements in third world countries were a key policy instrument to serve several macro-economic policy objectives.

They were essential to build up the industrial production base and diversify economies from predominantly agricultural or commodity based to one where industrial production would play an important role.

They were also necessary to build up domestic technological capacity. There would be no diffusion or transfer of technology if production were based on "screw driver" operations. Such performance requirements targeted at technology transfer were essential to bring about forward and backward linkages within the economy.

Local content or manufacturing requirements were also essential to counter the TNC practices of "tied sales" and "tied purchase" arrangements and prevent their abusive "transfer pricing".

These requirements alleviated the foreign exchange problems of third world countries and contributed to economic gains for the country through value added and greater utilisation of domestic resources, increased employment opportunities and upgrading the technological level of the economy.

India noted that such local content and manufacturing requirements were prevalent even in the industrialised countries. The rules or origin requirements in some of the European countries was not distinguishable from local content rules in intent and effects. The intent behind them was to discourage "screw-driver" type assembly operations.