Need for international arrangements?

Given the importance of foreign direct investment (FDI), the question of international arrangements dealing with it has become a prominent issue on the international policy agenda. The secretariat of the United Nations Conference on Trade and Development (UNCTAD) has published a report intended to lay out the extent to which FDI issues have been covered at the bilateral, regional and multilateral levels and to draw a number of lessons from past experience. These are excerpts from that report (TD/B/(43)/5).

The evolution of international arrangements for FDI has followed and interacted with developments at the national level and reflects the priorities and concerns of a particular period. In the days after the Second World War, FDI concerns related mainly to natural resources and key industries. With decolonization, the principal concern for host developing countries became how to regain control over their economies and natural wealth in order to consolidate their political independence. These efforts were epitomized in the principle of permanent sovereignty over natural wealth and resources which eventually was widely accepted. For foreign investors and their home countries, the main preoccupation was to protect their investments from political risks, especially from nationalization. In this climate, standards for protection of investment emerged, albeit on a bilateral basis and at the initiative of the capital exporting countries.

In the 1980s, these trends were reversed, mainly as a result of the debt crisis in many developing countries (which made FDI a more desirable alternative to bank lending) and of the changing perceptions in these countries as to the role that FDI could play in the growth and development of their economies. As a result, laws and policies began to change dramatically in the direction of liberalization, protection and promotion of FDI, and continue to do so. Liberalization efforts in developed countries were also expanded and deepened during this period. At the same time, a shift in the development strategies pursued by Governments, from highly protective import-substitution models to outward-looking policies emphasizing exported growth, stressed the opportunities offered by FDI to establish linkages with globally-integrated production, distribution and marketing networks and led to a more coherent policy approach towards trade and investment.

Two lessons can be drawn from past pendular swings on FDI policies: one is that progress in the development of international investment rules is linked to the convergence of rules across countries; the other is that an approach to FDI issues that takes into account the interests of all parties and hence is to their mutual advantage is more likely to gain widespread acceptance and, ultimately, is more effective.

With the growing appreciation of the role of FDI in development and the convergence of national attitudes in favour of market-oriented policies, a number of issues have moved from the national to the international level and have become standard substantive items in international discussions on FDI. In a rapidly globalizing world economy, the list of substantive issues entering international FDI discussions is becoming increasingly broader - both at the level of individual instruments and as a result of the proliferation of instruments con-eluded - and may eventually include the entire range of questions concerning factor mobility. Issues that receive relatively little attention at this time may therefore acquire increased importance in the future.

So far, progress has been made gradually, helped by increasingly greater transparency and monitoring. As regards the functional characteristics of present arrangements, there are, with many variations, also some common features:

(i) Progressive elimination of restrictions. Higher standards are being sought over time. In the case of the Organization of Economic Cooperation and Development (OECD), it took 25 years from the adoption of the Liberalisation Codes until the right of establishment was confirmed.

(ii) Transparency of national regulation. Through the duty to report existing investment measures and relevant normative changes (e.g., General Agreement on Trade in Services (GATS), NAFTA, OECD), regional and multilateral FDI instruments provide a mechanism to increase transparency of national regulations, thus contributing to a key aspect of a favourable investment climate.

(iii) Monitoring, follow-up and dispute-settlement mechanisms. Bilateral, regional and multilateral instruments on FDI include procedures for their implementation, after referring to the International Convention on the Settlement of Investment Disputes between States and Nationals of other States. These can vary considerably in terms of their strength and the degree of authority delegated to the monitoring authorities, from the full-fledged settlement of disputes to consultation and peer reviews on issues relevant to the implementation and interpretation of a given agreement. In addition, bilateral treaties and an increasing number of regional agreements address the question of investor-State dispute settlement, and reflect increased acceptance of international arbitration. Implementation mechanisms are important to identify and resolve concrete problems and make an instrument effective.

A key lesson that emerges from these functional approaches is that implementing and strengthening standards is a lengthy process. But globalization pressures and changing corporate strategies may encourage faster normative responsiveness in the future.

The Uruguay Round of Multilateral Trade Negotiations was indeed the first time investment issues were introduced as part of the disciplines of the multilateral trading system (although indirectly investment-related issues had been dealt with for quite some time under, for example, the Subsidies Code and the Government Procurement Agreement). Trade and investment issues converged most markedly in the negotiations of GATS which defines trade in services as including four modes of supply, including the provision of services through commercial presence. The Agreement on Trade-related Investment Measures, in fact, focuses on one aspect of the policy interrelationship between trade and investment. Possible future work on investment policy and competition policy may lead to even deeper policy integration. A major question at this juncture is the extent to which this new trend should be accommodated or encouraged through the development of concepts designed to capture the relationships between trade and investment and, to the extent that a more comprehensive approach is pursued, how to avoid any inherent difficulties.

For international agreements to be effective and stable, they need to take into account the interests of all parties, incorporate a balance of interests and allow for mutual advantage. This applies particularly to developing countries and, more generally, to agreements between countries at different levels of development. In particular, any agreement involving developed and developing countries must take into account the special importance of development policies and objectives. In fact, economic and social development is a long-standing and fundamental goal of the international community.

Most FDI agreements begin with at least hortatory commitments to promote FDI flows between signatory parties. The TRIMs Agreement commits Governments to provide incentives to promote technology transfer to the least developed countries. Tax-sparing provisions have been included in taxation treaties with developing countries.

The development dimension is further addressed in FDI agreements by structuring the contents of the instrument in a manner that takes into account the special situation of the developing countries. Thus, provisions of an investment agreement can be negotiated or defined in such a way as to exclude from coverage certain areas or national policy instruments necessary for a country's development. Being a developing country has been a qualifying factor for being granted broad (or broader) exceptions or special treatment in a number of investment instruments. Development or adjustment needs can also be addressed by granting longer transitional periods in the implementation of particular commitments. In fact, this device is also being used within developed country arrangements - e.g., the OECD and the European Union - to allow relatively less developed members time during which to strengthen their indigenous economic base and prepare them for a greater exposure to international competition. This approach to the development dimension has facilitated the participation of developing countries in the development of international instruments, while giving them flexibility to synchronize their liberalization steps with their development objectives.

It is useful to recall that the present national, bilateral, regional and multilateral approaches on FDI emerged partly as a result of the failure to conclude comprehensive multilateral rules in this field in the past. Over the past decade or so, however, there has been a certain convergence of FDI policies in the context of convergent development strategies. The new situation provides a different environment for discussions and negotiations and creates a new set of costs and benefits for various sets of international arrangements.

RELATED ARTICLE: So Far, Only a 'Patchwork'

UNCTAD has released a publication entitled International Investment Instruments: A Compendium as part of its efforts to provide the background for a meaningful dialogue among countries on FDI policies. It notes that no comprehensive framework for FDI exists. Rather, what exists is a patchwork of bilateral, regional and multilateral investment instruments that cover specific and limited issues. The FDI rules have evolved substantially over the past half-century: a clear shift has taken place in basic attitudes during this time, with present international instruments becoming increasingly favourable towards FDI liberalization and encouragement.