Institute for International Economics and Development Seminar Paper

on the Topic Multilateral

Framework for Investment

Elements and Problems of Multilateral Agreement on
Investment from a development perspective Ankica
Jovicic (0351489) Mirko Popovic (0351008) Course: 1464 Lecturer:
Dr. Werner Raza Winter Term 2008/09

Table of content
1. Introduction .................................................................................................... 3
2. Historical overview ................................................................................................ 3
2.1 The Doha Round .......................................................................................... 3
3. Existing multilateral provisions in the WTO framework GATS and TRIMs . 4
4. The Elements of the Multilateral Framework on Investments
(on the Proposal of the EC) ......................................................................................... 5
4.1 Transparency (WT/WGTI/W/110) ............................................................... 5
4.2 Non discrimination (WT/WGTI/W/122)....................................................... 6
4.3 Pre-establishment (WT/WGTI/W/121) .........................................................7
4.4 Balance of payments safeguards (WT/WGTI/W/153) ..................................7
4.5 Development provision (WT/WGTI/W/140) ................................................7
4.6 Definition of investment (WT/WGTI/W/115) .............................................. 8
4.7 Settlement of disputes between members (WT/WGTI/W/141) .................... 8
5. Advantages of the multilateral framework for investment 9
Literatur 11

1. Introduction
Worldwide economic activities require a strong and stabile framework and rules
especially in investment area. The integration of skills and knowledge of people and the
various asses tangible (e.g. land and resources), intangible (e.g. intellectual property)
and monetary (e.g. stocks) is a essential basic for successful trade. In this process the
trade and the investment have become the indistinguishable parts of the single strategy.
At the moment the international investment activity is being negotiated by more than
1800 bilateral investment treaties (BITs) and regional agreements such as North America
Free Trade Agreement (NAFTA). The Multilateral Agreements in the WTO such as
Trade-Related Investment Measures (TRIMS), Trade-Related Aspects of Intellectual
Property Rights (TRIPS), and the General Agreement on Trade in Services (GATS) are
playing an extremely important role in worldwide investment activities, too. Given the
growing importance of the international investment for investors, for host and home
countries the international framework of WTO is essential for establishing stabile longterm cross-border investments. The goals, the merits and the demerits of this agreement
especially from developing perspective will be discussed in following sections.
2. Historical overview
After the failure of the negotiations on a Multilateral Agreement on Investment
initialized by OCED in mid-1990s, the EU and some other industrialized countries have
tried to reopen the negotiations on this topic. In 1996 a Working Group in WTO was
formed with the aim to discuss the problems of the world trade discipline, especially in
the sphere of worldwide investments.
After the first Ministerial Meeting in Singapore in 1996, the Working Group was entitled
to discuss the relationship between trade and investment (Working Group on the
Relationship between Trade and Investment WGTI). At the
4
Fourth Ministerial Meeting in Doha in November 2006 the members of the WTO decided
to start new negotiations on multilateral framework on investment after the Fifth Session
of the Ministerial Conference. This proposal was supposed to be discussed after the
Ministerial Conference in Cancun (Mexico) in September 2003. As already mentioned,
the most of the developed countries (EU, USA) have tried to stress the importance of this
framework. On the other side, there were developing countries (India, Egypt, Pakistan,
Malaysia), which were opponent to this idea.
2.1 The Doha Round
First decision of Doha Declaration considered the so called positive list approach
rather than making broad commitments and after that exceptions (negative list
approach). The next three paragraphs are of importance:

Relationship between trade and investment:

20. Recognizing the case for a multilateral framework to secure transparent, stable
and predictable conditions for long-term cross-border investment, particularly foreign
direct investment, that will contribute to the expansion of trade, and the need for
enhanced technical assistance and capacity-building in this area as referred to in
paragraph 21, we agree that negotiations will take place after the Fifth Session of the
Ministerial Conference on the basis of a decision to be taken, by explicit consensus, at
that session on modalities of negotiations.
21. We recognize the needs of developing and least-developed countries for
enhanced support for technical assistance and capacity building in this area, including
policy analysis and development so that they may better evaluate the implications of
closer multilateral cooperation for their development policies and objectives, and human
and institutional development. To this end, we shall work in cooperation with other
relevant intergovernmental organizations, including UNCTAD, and through appropriate
regional and bilateral channels, to provide strengthened and adequately resourced
assistance to respond to these needs.
22. In the period until the Fifth Session, further work in the Working Group on the
Relationship Between Trade and Investment will focus on the clarification of: scope and
definition; transparency; non-discrimination; modalities for pre-establishment
commitments based on a GATS-type, positive list approach; development provisions;
exceptions and balance-of-payments safeguards; consultation and the settlement of
disputes between members. Any framework should reflect in a balanced manner the
interests of home and host countries, and take due account of the development policies
and objectives of host governments as well as their right to regulate in the public interest.
The special development, trade and financial needs of developing and least-developed
countries should be taken into account as an integral part of any framework, which
should enable members to undertake obligations and commitments commensurate with
their individual needs and circumstances. Due regard should be paid to other relevant
WTO provisions. Account should be taken, as appropriate, of existing bilateral and
regional arrangements on investment.1

3. Existing multilateral provisions in the WTO framework

GATS and TRIMs
The WTO, which exists since Uruguay Round in 1994, already has two major
agreements related to the investment issues: the Agreement on Trade-Related Investment
Measures (TRIMs) and the General Agreement on Trade in Services (GATS). There are
also three more agreements (ASCM, TRIPs, Government Procurement Agreement) that
indirectly influence the investments.
1

http://www.wto.org/english/theWTO_e/minist_e/min01_e/mindecl_e.htm (on December 17th, 2008)

TRIMs: they relate to the trade-distorting restrictions imposed by the host country
on multilateral firms that operate on its territory. The most important TRIMs are:
requirements on local content, on trade and foreign exchange balancing, on joint venture
or on equity participation, on manufacturing limitation, on export performance and on
remittance restrictions. Nevertheless, the rules of the TRIMs may also be inconsistent
with GATT, so that it was decided that in that case the countries should ignore the
TRIMs. All those decisions of TRIMs that are inconsistent with the Article III (National
Treatment) and IX (General Elimination of Quantitative Restrictions) of the GATT are to
be prohibited. GATS: is related to the FDIs as long as there is a supply of services on the
basic of the direct commercial presence on the territory of another country. The main
characteristics of the GATS are: it requires transparency, national treatment, MFN
treatment, provides members with movement of personnel and transfer rights in service
sectors. The GATS has a so called positive-list approach that allows members to
provide for national treatment exclusively in sectors they have decided to open up to
international investors, with conditions and qualifications.

4. The Elements of the Multilateral Framework on Investments

(on the Proposal of the EC)
Transparency (WT/WGTI/W/110)
Transparency means information. Making available relevant information for all
interested operators is essential in order to enable them to make investment decisions. [...]
is closely linked to the principle of fairness as well as of economic efficiency and legal
security. In the international trade and investment area the legal requirement on
transparency of host countries means, in general terms, the requirement of making
available the relevant rules of the game in force in their territory. The rules of the
game cover the relevant laws and regulations as well as the procedural rules and
formalities regarding investment2
The EC is of the opinion that multilateral framework of investment has to provide
transparent, predictable und stabile conditions for long-term investment. It has also to
provide investors with reduced risk for investment in the country and therefore to provide
higher flows of FDIs. Otherwise, the lack of transparency would mean uncertainty about
legal framework in that country. That could also cause inefficiencies in allocation of
capital. At the last stage that could mean no investment at all.
Nevertheless, transparency is beneficial not only for the investors (foreign and
domestic), but also for stakeholders, third country governments, ... As already mentioned,
the transparency means not only the information, but the rules and regulations as well as
their implementation in addition. The problems connected with a lack of transparency are
various. The investors are forced not to enter in the market, because they are unable to
estimate the risk for their investments. The developing countries desiring new and
modern technology are staying without investment flow in this so important sector. The
inflow of capital all kinds is staying outside the country.
2

http://trade.ec.europa.eu/doclib/docs/2004/july/tradoc_113128.pdf (on December 18th 2008)

The lack of transparency could also be interpreted in the way that the investment
environment is corrupt with the intent to prosper. On the other side, if the procedure of
implementing the rules is too long and too slow it would harm the investors and their
profits. To sum up, the lack of transparency could cause the foreign direct investors
having losses or being unable to develop as much as they would do under different
circumstances. That has negative effects on developing countries as well.
Non discrimination (WT/WGTI/W/122)
The non-discriminatory treatment of international investment is a necessary condition
for the development of a level playing field for FDI worldwide which would improve the
allocation of capital and minimize distortions, releasing additional resources.
Discrimination on the basis of the nationality of the (ownership, control, or place of
residence) investor does not make much sense given the complex organizational structure
of todays multinational companies. Moreover, all countries have realized that in order to
attract foreign investors they need to provide, as a pre-condition, a predictable,
transparent and non-discriminatory regulatory framework, beyond macroeconomic and
political stability, infrastructure, labor skills, etc. This is why more than 2000 bilateral
investment treaties and a number of other regional and multilateral investment
agreements, all including non-discrimination standards to a certain extent, have been
concluded. This is also why the EC and its Member States believe that the time is ripe for
the consolidation of basic non-discriminatory provisions in a truly multilateral investment
framework.3
According to this point it should not be allowed a host country to treat in more
favorable way neither foreign or domestic investors. This condition is necessary to be
able to attract FDIs, to allocate capital efficiently,... The discrimination would make those
goals impossible. Nowadays the non-discriminatory treatment of investors and
transparency as pre-conditions have the same importance as macroeconomic stability.
The non-discrimination is the basic element of all proposals in this agreement. The focus
in this part of the seminar paper is on two most important principles of nondiscrimination (other standards such as fair and equitable treatment are not going to be
explained):
- Most-favored-nation principle (MFN) : host countries must provide an investor
from one foreign country with the conditions for work not less favorable than investors
from any other foreign country
- National treatment (NT) : host country must treat all investors and their
investments coming from foreign countries in same way as domestic investors and
domestic investments.
Pre-establishment (WT/WGTI/W/121)
The importance of having clear rules for admission of foreign investors is stressed
in this chapter. In this moment, the host country governments are
3

http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/W122-e.pdf (on
December 18th 2008)

allowed to restrict the entry of FDIs and to impose entry conditions to the permitted FDIs.
The fact is also that there still are barriers preventing foreign investors from entering
domestic markets, in order to protect domestic industry.
The proposal of the EC is a model of GATS: on the one hand host country governments
can keep an influence and a control over the sector in which they wish to commit market
access and NT to foreign operators and of sectors in which they do not feel ready to do
so.4 On the other hand, the main conditions for successful inflow of FDIs are fulfilled:
liberalization, flexibility and transparency of rules for admission and establishment of
investors.
Balance of payments safeguards (WT/WGTI/W/153)
A BOP crises are not rear and it is very important to protect both foreign investors
and host country of those situations. A BOP crises arise for several reasons and an
example for it is when a current account is in deficit and the current and the net imports
can not be financed with a sufficient inflow of foreign capital or a reduction in foreign
reserves. The country is obliged to take restrictive measures on current transfers and on
capital movements, which causes costs. As a result the foreign investors can recognize
that as a high risk and they could withdraw their investments.
This clause should protect members in a case of BOP problems. This clause should
allow temporary restrictions on the outflow of current and capital transfers related to
those investments covered in IDFs, if those restrictions are non-discriminatory, if they are
consistent with other relevant international provisions, if they are limited in time, if they
are necessary in that situation, if they will not harm interests of other members and if they
are not use with the aim to protect and support other industries.
Development provision (WT/WGTI/W/140)
The EC recognizes that developing countries try to maintain and to improve their
openness to FDIs, but they also try to protect and develop their own industries.
Even though those developing policies could be efficient, but they also have to be
compatible with the MIF. On the other side, the MIF is to be compatible and supportive
for domestic development policies, too. If there were a provision included in MIF that
would enhance transparency, non-discrimination and predictability, that would be
especially beneficial for developing countries, which would attract a greater share of
world investment flows. The EC is of the opinion that a flexible, GATS-type structure
(positive-list approach) is a best solution for MIF, that could allow some countries to
make commitments on access and NT, and to add to this list country and developing
specific objectives.
Definition of investment (WT/WGTI/W/115)
The EC thinks that the definition of investment has to depend on the provisions
included in the agreement.
4

http://www.wtocenter.org.tw/SmartKMS/fileviewer?id=13835 (on December 18th 2008)

It has been said that developing countries would better preserve their interests with a
narrow definition rather than in a broad definition of investment. In our view, this is too
simplistic, as the interventions of some developing countries in this Group have
confirmed. The need to preserve the development objectives of host countries in a
multilateral investment framework should not be addressed by merely narrowing the
scope and definition but rather by including substantive provisions that allow all
countries, and in particular developing countries, to pursue their development policies.
[...] In any case, WTO Ministers have agreed in Doha that a multilateral investment
framework should focus on long-term cross-border investments, particularly foreign
direct investment.5
Foreign direct investment is defined as a category of international investment that
reflects the objective of the resident entity in one economy (direct investor) obtaining
the lasting interest (long-term relationship between the director and the enterprise,
significant degree of influence) in an enterprise resident in another economy (direct
investment enterprise).6
The EC proposes that direct investment enterprises, direct investment capital transactions
and foreign direct investors should be taken into account as the possible elements of the
definition of investment.
Settlement of disputes between members (WT/WGTI/W/141)
The EC is of the opinion that the member states should be provided with the
opportunity to be able to go to Dispute Settlement Body, if they think that another
members did not fulfill their obligations from the agreement. The WTO already has an
effective mechanism that enables the fair management of disputes. Even GATS is covered
by WTO DSB. The EC thinks that any problem related to the interpretation and
application of obligations from the multilateral framework on investment should be
addressed to the WTO Dispute Settlement mechanism.

5. Advantages of the multilateral framework for investment

1. the transaction costs argument: in the case that the foreign investors are faced
with national rules and laws that differ from the existing BITs, they could also be faced
with higher transaction costs and uncertainty. The multilateral framework should lower
5

http://www.international.gc.ca/assets/trade-agreements-accords-commerciaux/pdfs/W115-e.pdf (on
December 18th 2008) 6 Ibid.
6

Ibid.

both costs and uncertainty und improve allocation of the FDIs. This also means higher
welfare.
2. the uncertainty argument: a foreign country may look like unattractive for
investors because of political or economical instability or because the obligations for the
reforms are not realized. It is argued that the MIF could not only increace the
transparency, but could also through raised investor confidence in reform policy attract
FDIs. It is very important especially in a case of greenfield investments, where sunk
investments are to be expected. The agreement could also resolve this problem by
creating a strong incentive for obligatory signatories and by providing the sanctions for
non-compliance.
Even though good sides of MIF in this context have been explained, they stay
mostly only in literature. There are no empirical evidence that MIF would really increase
the FDIs inflows in those countries that have already entered bilateral investment
agreements.
3. the political economy argument: the MIF could help governments to overcome
the obstacles in realization of reforms coming from some domestic organizations.
This framework could help those governments to remove expensive restrictions on the
FDIs. Most of all the developing countries are exposed to the bad influences of local
groups. Those groups are so powerful that they can protect so called unproductive rents,
which could cause market distortions and misallocation of capital. The MIF could support
the nation governments firstly, because once the agreement is signed it offers stronger
support in a case of the resistance of local groups and secondly, because the MIF has
stronger binding effects on governments in comparison to a bilateral agreement.
4. the international policy spillover argument: since it is possible that there are
differences in domestic law and regulations of FDIs the negative effects on a global level
are to be expected (spillovers, externalities). This could cause distortions in the allocation
of capital and investment. The MIF should help resolving this problem.
Very often has been raised the question whether MIF is a good solution for overcoming
international policy spillovers, which means effects of a host country policies on other
countries policies (the home countries of FDIs). Moreover, it has been discussed
whether the provisions of MIF are able to eliminate market distortions and international
policy spillovers caused by host country on the one side and to eliminate market
distortions caused by home countries and FDIs on the other side.
5. the grand-bargain argument: knowing that the developing countries are mainly
importers of the FDIs, there is a argument that they will not benefit much from MIF. The
solution in this context is to offer the concessions on investment policies and at the same
time demand reciprocal concessions in other parts of WTO negotiations where those
countries could reach higher profits. The developing countries could make concessions
on investment policy and the industrialized countries would propose concessions in other
area of interest for them such as market access in agriculture. The concessions in area of
GATS and GATT seem to be more beneficial for developing countries than any other.
Despite the fact that developing countries must have provided a certain stage of
economic development in order to experience the positive effects of FDIs, there is an
increasing number of developing countries penetrating the worldwide market for FDIs
(Figure1). What is more, the number of the countries, which had changed their
regulations in favur of FDIs, increased strongly between 1991 and 2001.

Figure 1: Number of changes in National FDI Regulations, 1991-2001 Source: UNCTAD

Additionally, many of those countries, which had tried with their constraining
regulations to keep away the foreign investors, liberalized those regulations. As a
consequence, the number of the countries with favourable FDI regulations have sharply
increased since 1980s (Figure2).

Figure 2: Accumulated number of countries and areas with FDI regulations, 1953-1998 Source:
UNCTAD 1998, 5

Literatur
Chang, Ha-joon, Foreign Investment Regulation in Historical Perspective. Lessons on the
Proposed WTO Investment Agreement
9

Gallagher K.P.: Putting Development First. The Importance of Policy Space in the WTO
und IFIs, London and New York, 2005
Gallagher, K.P.: Measuring the Cost of Lost Policy Space at the WTO, IRC Americas
Program Policy Brief, 2007
UNCTAD: World Investment Report, 2005
http://www.unctad.org/en/docs/trd2006_en.pdf WTO: UNICE position on a WTO
Framework for International Investment, 2003
http://www.wto.int/english/forums_e/ngo_e/unicef_inter_inves_july03_e.pdf
http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp3_e.htm

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