Evaluating effects of world trade agreements on investment

The growing importance of investment flows (FDI) in terms of both volume and their contribution to growth, productivity and competitiveness in both developed and developing countries lies behind the impetus to establish a multilateral framework of rules on international investment.

Negotiations on investment proved to be a controversial issue during the Uruguay Round and were thus limited in scope. The main outcome – the Agreement on Trade Related Measures (TRIMS) merely confirms and partly extends General Agreement on Tariffs and Trade (GATT) disciplines relating to national treatment of like products (GATT Article III) and the prohibition of quantitative restrictions (GATT Article XI) to trade-related investment measures.

A Trade Related Investment Measures (TRIM) refer to restrictions attached by host states to the activities of transnational corporations (TNCs) that have undertaken foreign direct investment in the host economy and the Agreement on Trade-Related Investment Measures (TRIMS) prohibited a limited number of measures that are inconsistent with previous General Agreement on Tariffs and Trade (GATT) disciplines. The TRIM may relate to export requirements (e.g. stipulating a share or value of output to be exported). Alternatively, the TNC may be producing import-competing goods, and the TRIM may restrict such competition (e.g. limiting the share or value of output that can compete with imports). Finally, the TRIM may require some minimum amount of inputs be sourced from local producers (such as local content requirements).

All parties to TRIMS were requested to notify WTO of measures that contravened these provisions, and were required to phase out these measures (developing and least developed countries were granted transition periods of five and seven years, respectively). The TRIMS Agreement is limited to measures affecting trade in goods.

The GATS also had important implications for foreign investment, in that the mode of supply covering the establishment of a commercial presence relates directly to investments in service sectors. Two other Uruguay Round agreements have implications for foreign investment policy. The Agreement on Intellectual Property Rights (TRIPs) provides protection for intangible assets that form the basis of many TNC activities. Also, the Agreement on Subsidies and Countervailing Measures prohibits subsidies granted on the condition of meeting export performance (least developed countries, however, are exempted from the prohibition on export performance and local content subsidies).

Since the completion of the Uruguay Round there have been a number of initiatives to draw up a more comprehensive multilateral framework for investment. The negotiations on a Multilateral Agreement on Investment (MAI) within the framework of the OECD aimed to "provide a broad multilateral framework for international investment with high standards for the liberalisation of investment regimes and investment protection, and with effective dispute procedures" (OECD, 1995). Its demise has been attributed partly to the failure to address sustainability issues – in particular, national environmental and developmental policies. The WTO Working Group on Trade and Investment, as well as the United Nations Conference on Trade and Development (UNCTAD), have also examined the issue.

Foreign investment establishes a relationship between the foreign investing enterprise and the host state and can be considered as a horizontal issue. It is appropriate, therefore, to consider investment policy more generally, relating the TRIMS provisions with other WTO provisions, covering competition, services trade, disputes settlements and restrictive business practices.

In the EU the negative sustainability impact of FDI within the European Market will be subject to regulatory measures and investment policy, which will have a mitigating effect. An additional indirect economic impact will be experienced in terms of the economic performance and profitability of European enterprises in non-EU countries, in so far as this is enhanced by their capacity to engage in anti-competitive and restrictive business practices due to the weaknesses in the domestic regulatory framework in the host countries.

The sustainability impact on EU countries will be mainly related to the EU as the 'home' economy for direct foreign investment in non-EU countries. Measures taken by non-EU countries in which EU firms have made investments may lead to an increase in imports from the EU, in which case the economic benefit accrues to the source of the additional imports, i.e. the exporter (probably an affiliate of the TNC). The benefits are essentially internal to the TNC (and may be sourced from outside the EU). Eliminating export requirements can potentially benefit competing exporters, but this could also be internalised within the TNC. The potential benefit to the home country is repatriation of increased profits by the TNC. This is unlikely to be significant. In a more competitive global environment with fewer restrictions to the activities of TNCs in host countries, it is probable that TNCs would locate more of their production overseas.

The effects of FDI per se, on sustainable development are the same as other forms of investment in supporting economic growth. However, in the absence of an effective regulatory and control framework, the monopolistic and restrictive business practices of FDI may have negative economic, environmental and social consequences. For developing countries this may include restrictions on the transfer of technology, anti-competitive behaviour towards local firms and a 'race to the bottom' in terms of labour and environmental standards as host countries compete to attract and retain FDI.

The establishment of a framework agreement could be expected to have a positive impact on sustainability in those developing and least developed countries that attract significant inflows of FDI. This depends, however, on the ability of host LDCs to effectively regulate and control the increased level of FDI activity, and on the capacity of the multilateral framework for investment to ensure that the activities of foreign investors are compatible with developing countries' developmental policies and objectives.

Both the practices which TRIMS were intended to address and restrictive business practices more generally, have negative economic effects as well as having complex social and environmental consequences. The unbalanced and incomplete regulation of monopolistic and restrictive business practices not only has questionable economic impacts, but could also have negative social impacts (due to imbalances in power) and indeterminate (negative and positive) environmental side effects.