Negotiations for multilateral agreements on investment

The number of Bilateral Investment Treaties (BITs) has increased since the 1980s. These treaties focus among others on the protection of foreign investments against nationalisation and expropriation, and on free transfer on funds. In addition, regional and plurilateral agreements have become increasingly important, especially in the context of economic integration agreements. Although there are some instruments at the multilateral level that relate to FDI, such as the OECD guidelines for multinational enterprises, the TRIMS agreement and GATS, there is no comprehensive multilateral agreement on FDI.

MAI

The negotiations for a Multilateral Agreement on Investment (MAI) at the OECD were one of the first efforts to establish a comprehensive multilateral agreement on FDI. The MAI was supposed to be an international treaty open to all OECD members and to all non-members willing and able to meet its obligations. It would be a comprehensive agreement in the sense that it would cover all economic sectors and measures taken at all levels of government. It would use a broad definition of Investments and, in contrast to most bilateral treaties, it would not only cover protection of investments after they are made, but also the pre-establishment phase. The negotiations for MAI started in 1995 but were discontinued in 1998, after disagreement between governments on various issues and opposition of civil society against the MAI. Because many of the issues on which there was disagreement will be important in negotiations for a multilateral agreement on FDI, this section looks in more detail at the main points of discussion of the negotiations for MAI.

Regarding the content of the negotiations for MAI, there was disagreement on various issues:

• Definition of Investment. While there was broad support for an asset-based and open-ended definition for investment, some parties wanted to exclude portfolio investment from the definition and others objected to an open definition.

• National Treatment and Most-Favoured-Nation Treatment. These principles would apply to the entry and establishment of foreign investors and to all aspects of the operation of investments. Exceptions to these principles were possible. The idea to negotiate these exceptions led to a large number of exceptions that varied widely between countries so that no agreement could be reached. The fact that not all exceptions had to be specified beforehand also led to controversy.

• Cultural exceptions. A proposal to include a cultural exception clause, which would exempt cultural industries from the MAI coverage, met strong opposition.

• Settlement of disputes. The MAI negotiating text provided for consultations, conciliation, state-to-state and investor-to-state means for the settlement of disputes. The investor-to-state dispute settlement provoked most discussion. It was argued that this would give foreign investors too much control over policy issues and it would provide foreign investors with instruments not available to domestic enterprises.

• Labour and environmental issues. There were discussions on whether to associate existing OECD Guidelines for Multinational Enterprises should be associated to MAI, on whether to make reference to relevant convention on labour and the environment and on whether to include provisions in the agreement on not lowering labour and environmental standards. Especially on the latter subject controversy remained.

• Regulation vs. regulatory takings. According to the MAI negotiating text, any measure taken by a host country having an effect equivalent to expropriation might need to be accompanied by compensation for foreign investors. This issue provoked discussion, especially from NGOs, because it could be interpreted in such a way that it could inhibit the normal regulatory powers of governments.

• Regional economic integration organisation exception (REIO clause). The European Union wanted to have the possibility to granting preferential treatment to some parties. This would apply to measures taken in the context of such regional economic integration organisation. There was disagreement on whether MAI should contain such a clause at all, or on how broad such clause would be.

Other subjects that were difficult to agree upon include the use of performance requirements, the application of MAI to sub-national authorities, the treatment of intellectual property, provisions for incentives, the possibility of extraterritorial application of national laws and provisions for taxation.

Next to the discussion about the content of the agreement, changes in the social, political and economic context contributed to the failure of the MAI negotiations:

• In some countries, the negotiations led to an intensive public debate. NGOs complained about the lack of transparency in the negotiations and opposed to the philosophy, structure, objectives and specific issues of MAI.

• The initial strong business support declined during the negotiations after it became clear that the negotiations would not lead to substantial liberalisation and tax provisions would not be included in the MAI.

• A change in the political climate during the negotiations after the election of centre/left governments, which had other political priorities.

In addition, developing countries were not able to provide a direct input into the negotiations. While the Agreement would be open for accession by all countries, these countries could not participate in the discussions.

For more information on the failure of MAI, see UNCTAD’s World Investment Report 1999.

WTO

After the negotiations for the MAI came to a stop, some parties wanted to include investments in the next round of multilateral negotiations of the WTO. At this moment, the EU and Japan are at the forefront of efforts to put investment on the WTO agenda. The United States and a large number of other -notably developing- countries oppose to this idea however. These countries do not want to include investment in the negotiations, either because they feel that other issues, such as agriculture and implementation problems, are of higher priority, or because there is lack of consensus on this issue.

At the WTO Singapore ministerial conference in 1996 it was decided to set up a working group on trade and investment. This working group explores and analyses the relationship between trade and investment, without negotiating any new rules or commitments. Although the WTO members still support the study and analysis undertaken by the working group, there is still no consensus on negotiating multilateral rules on investment.

The European Union is strongly in favour of putting investment on the WTO agenda. It argues that FDI has become increasingly important over the last years, and that this is reflected in the growing number of bilateral and regional agreements. Providing credible guarantees for investments that are made is of crucial importance. The EU feels however that the growing number of treaties creates an inefficient and non-transparent framework for making and protecting investments abroad. This has adverse effects on small and medium enterprises in particular. By putting investment on the WTO agenda, the EU wants to create a level playing field world-wide for FDI. The advantage of discussing multilateral rules in the WTO is its universal membership, in contrast to the MAI negotiations that took place in the OECD, and its institutional framework, which includes the Dispute Settlement Understanding. In addition, the WTO has built up experience in the field of investments through the GATS and TRIMs, see under the section FDI-Policy. Developing countries would also benefit from multilateral investment rules according to the EU, because increased transparency will increase FDI flows. The EU wants to design the rules in such a way that developing countries will maintain flexibility to further their development objectives. This would be possible in a bottom-up multilateral agreement that requires the removal of entry controls and restrictions, but only in sectors included in a positive list.

In contrast, nearly all developing countries from Asia and Africa in the WTO are opposed to negotiations on multilateral investment rules, while most Latin American states are in favour of creating some framework for investment rules under the WTO. India, Pakistan, Egypt and Malaysia are at the forefront of the opposition to multilateral investment rules. India stated in June 2000 that more research was needed before the phase of negotiations should start, especially on the following issues:

• The benefits of FDI: experience varies from country to country and no definite conclusions can be made about the beneficiary effects of FDI.

• The direction and size of FDI: there is no evidence that multilateral rules on investment will alter the pattern and flow of investment significantly. Moreover, bilateral investment treaties seem to be effective in protecting existing investments.

• Flexibility: there is evidence that a multilateral agreement on investment would limit flexibility currently available to developing countries.

This stance was supported by most Asian and African developing countries.

More information on the activities of the WTO Working Group on Trade and Investment can be found on the WTO web-site.

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