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Dealing with investment in WTO
Recognising the limited scope left for further reciprocal trade liberalisation in industrial products and the fact that the built-in agenda of the UR Agreement already calls for negotiations in agriculture and services, in the post UR era, developed countries have begun to focus on other areas. The most prominent of these has been the international flow of capital, especially direct foreign investment (DFI). As early as 1995, they launched enthusiastic negotiations for a Multilateral Agreement on Investment (MAI) among the members of the Organisation for Economic Cooperation and Development. After three years, however, no consensus has evolved among the 29 OECD members. So much so that prospects for the signing of the agreement are now virtually nil. Partly, this has resulted from a belated realisation that the Most Favored Nation (MFN) obligations, embedded in the WTO rules, forbid them from exchanging market access for investments with each other on a preferential basis. This failure of the MAI does not signify an end to developed country efforts to seek a uniform investment regime, however. Instead, they are now likely to pursue this goal more vigorously in the WTO. It may be recalled that, taking advantage of a provision in the Trade-Related Investment Measures (TRIMs) Agreement, at the maiden WTO Ministerial Conference held at Singapore in December 1996, developed countries had successfully placed the study of an eventual investment agreement on the WTO agenda. Despite misgivings expressed by some key developing countries including India, the Singapore Ministerial Declaration called for a working group to examine the relationship between trade and investment. On a net basis, developing countries play the role of the `host' country to foreign investment while developed countries serve as the `source' country. This asymmetry leads to a divergence in the interests of developing and developed countries. Thus, the issue has a clear North-South dimension. Indeed, in the OECD negotiations, the interests of multinational firms have played a central role. Being jointly subject to as many as 800 bilateral investment treaties currently, these firms have a natural vested interest in a uniform international regime for investment. Within the WTO context, such a regime will even be backed by trade sanctions. The next WTO Ministerial, which could lead to the launching of the socalled millennium round of negotiations, is less than a year away. Since the issue of an agreement on investment is bound to be on the Ministerial's agenda, developing-country governments urgently need to work out strategies aimed at defending their interests. What should be their stance? There are at least four broad issues on which they must focus their efforts. First, developing countries must ensure that any investment agreement is confined to direct foreign investment (DFI). The benefits of liberalisation in areas of trade and DFI are much better understood than in the area of financial capital flows which have a very large speculative component. Until such time as internal distortions in the banking and financial sectors are largely removed, - India has a long way to go in this regard - free flows of financial capital are risky, and must be subjected to national policy discretion. The countries wishing to go beyond DFI are naturally free to negotiate a separate plurilateral agreement. Second, even on DFI, developing countries should insist that no negotiations proceed until China has been admitted to the WTO. That country is the world's second largest recipient of DFI, and the largest among developing countries. China should be a party to the negotiations for developing country interests to get a fair hearing. Third, any agreement must pay adequate attention to the `host' country interests rather than serving as the bill of rights for multinationals. For example, it must provide for an end to subsidies on DFI that countries pay to multinationals to attract foreign investment. Being entirely silent on the issue, the failed OECD agreement was not a good model in this regard. These subsidies are a direct transfer from host countries to the firms. Moreover, they distort DFI in the same way that export subsidies distort trade. The latter are prohibited under the GATT; so agreement on investment should prohibit the former. Most importantly, developing countries should agree to an investment agreement only in return for an agreement on the movement of natural persons. Two things justify this stance. First, the benefits from international movement of labour are much larger than those from the movement of capital or liberalisation in any other area, according to calculations by Bob Hamilton and John Whalley, the only one of these benefits. The value of marginal products of essentially similar workers varies vastly across countries as demonstrated by differences in remunerations received. This is also the area in which, for obvious reasons, market access has been most restricted. Second, the distribution of gains from factor mobility is heavily in favour of the source country. This is because the migrating factor receives the high return prevailing in the host country rather than the low return in the source country. And since developed countries are likely to be the source country for investment, they will reap the much larger share of benefits from the mobility of capital. In contrast, since developing countries are likely to be the source country for the movement of natural persons, they will capture the lion's share of the benefits from labour mobility. It is fashionable in developed countries to dismiss even the idea of labour mobility on grounds that there is no political support for it. But there are at least three reasons why developing countries should not take such dismissals seriously. First, with the issue of multilateral investment rules having been placed on the agenda, there is a natural case for placing the labour mobility issue on the agenda. The history of GATS negotiations supports this argument. Initially, the movement of natural persons was not on the table and was included later at the insistence of developing countries. Second, the political pressures in the US and EU are largely concentrated in the market for unskilled labour. The same need not apply to professional services for which shortages exist. Finally, as in the case of goods liberalisation, we are looking at agreements for market access that will take place ten or more years from now. There is no reason to believe that current pressures in labour markets in the OECD countries will persist. To make the movement of natural persons a central item in the WTO agenda, work is needed at three levels. First, it is necessary to identify specific areas where both sides can engage in mutually beneficial gains. Second, it is important to calculate numerically the likely benefits of increased mobility. Finally, and most importantly, developing countries need to arrive at a mutually agreed negotiating position vis-a-vis developed countries. Economic Times, December 28, 1998 |
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