Cancun trade meeting should leave investment issue alone

Susan Ariel Aaronson, Yale Center for the Study of Globalization, Washington

On Sept. 10, trade officials from almost 150 nations will travel to Cancun, Mexico. They will spend the next four days trying to negotiate new rules to govern trade in agriculture and services, and other sectors not yet fully covered by the World Trade Organization (WTO).

This round of trade talks is supposed to meet the needs of developing countries. Policymakers finally acknowledged that despite eight earlier rounds, these nations still encounter many protectionist barriers to their exports.

Negotiatiators will also decide whether to negotiate rules governing international investment within the WTO framework. While international investment rules make economic sense, these same rules may not make political sense.

In the three earlier attempts (the International Trade Organization, 1948-1950, under the aegis of the United Nations, 1972-1992, and the Multilateral Agreement on Investment in 1995- 1997), policymakers were never able to agree even on the objective for such negotiations.

Capital-exporting nations wanted rules to govern entry and post-entry conditions. Yet capital-importing countries wanted obligations that would bind foreign investors and investment rules that would help these nations meet their development objectives.

International investment has flourished without an international system of rules. Developed and developing countries alike rely on bilateral investment treaties (BITs). Today there are over 2000 of these BITs, mainly agreements between developed and developing countries.

Generally, the BITs define foreign investment broadly, require that host states treat private foreign investment fairly and equitably, and require equal treatment of foreign and domestic investment. Many BITs limit expropriation and guarantee fair compensation should expropriation occur.

BITs also give investors the right to transfer funds in and out of host countries using market exchange rates. Finally, they provide for state-to-state and sometimes investor-state dispute settlement.

Each country can tailor its BITs to provide the level of investment protection it wants, and it isn't tied to other countries' preferences as would happen in a multilateral agreement.

Moreover, BITs allow nations to ensure that certain sectors and development objectives are protected and national laws, regulations, and practices. Thus, the U.S. can ensure that foreigners don't control its defense industry, France can ensure that its culture remains uniquely French rather then a mirror image of the U.S., and smaller countries have leverage when negotiating against bigger, richer nations.

But despite the successful track record of such BITs, some policymakers and business leaders still believe that the world needs an international system of investment rules.

They stress that because trade and investment are linked in the real world, the system of rules that governs trade must also govern investment. And they argue that the WTO is the right place for these rules, because it already includes investment agreements negotiated during the Uruguay Round of the GATT from 1986-1993.

One such agreement prohibits trade related investment measures, such as local content requirements. Moreover, the General Agreement on Trade in Services includes rules governing foreign investment in services. Yet each of these investment agreements is designed to ensure that trade is promoted. They are not designed to govern international investment per se.

In 1996, under pressure from Japan and several European nations, WTO members agreed at the Singapore Ministerial to undertake exploratory and analytical work on investment. But many developing countries also insisted that WTO members must first decide by "explicit consensus" whether to include investment and then decide when such negotiations should begin.

Explicit consensus is a term that has no meaning for WTO members. Not surprisingly, when WTO members again met in 2001 in Doha, Qatar, they provided no guidance on what negotiators should do if they could not find a consensus on the scope and timetable of such negotiations.

Despite this clear ambivalence, WTO staff, guided by WTO members, began to examine the relationship between investment and trade. Members couldn't even agree on the scope of potential investment negotiation -- should it focus simply on investment that expands trade or also on portfolio investment, which is less stable?

Portfolio investment differs from direct investment in that investors don't have lasting control over a business enterprise. A controlling investment is usually viewed as 10 percent of an investment. India said developing countries needed policy flexibility to determine what type of investments would be in the national interest. Switzerland and Canada concurred with India's position, revealing that there would be unusual alliances should actual investment negotiations proceed.

In April 2002, the European Commission argued that any investment agreement must cover both portfolio and direct investment. The U.S. adopted a similar position, but its business community did not enthusiastically support this position.

Further, in December 2002, India, China, and several other developing countries demanded that any international investment agreement delineate not just the rights of investors and the rights of states, but also the responsibilities of investors. They also argued that foreign investors should be required to undertake obligations that meet the host countries' interests, development policies, and objectives. Just this week developing countries made it clear that they opposed such negotiations.

Thus, this is not the time to press for international negotiations on international investment rules. It does not make political sense internationally or domestically. Most countries -- even the most liberal -- limit investment in some sectors. Moreover, policymakers have not effectively explained why business needs international investment rules and how such rules can assist the world's political or economic stability.

The challenge for the organization is to promote trade and to help manage trade relations between its 146 members. That difficult task can be better handled without getting bogged down in a rancorous investment treaty.

The writer is Senior Fellow and Director of Globalization Studies at Kenan Institute in Washington, Kenan Flagler Business School. She is writing a history of international investment agreements for University of Michigan Press.