Investment chances through WTO?

Investment chances through WTO?

By Djauhari Oratmangun

JAKARTA (JP): In today's increasingly globalized and
competitive world, developing countries recognize that foreign
direct investment (FDI) contributes positively to their economic
growth and the welfare of their populations. Especially those
elements of FDI which are considered an important vehicle for
development such as the transfer of technology, know-how and new
skills.

In addition, investment activities would also open up new
economic development centers, which would enhance equitable
distribution of income as well as creating many job
opportunities.

In recent years, FDI has been growing rapidly in developing
countries. According to the United Nations Conference on Trade
and Development (UNCTAD) World Investment Report 1996, FDI has
actually been growing faster than international trade, which has
long been considered the principal mechanism for economic growth.
In 1995, investment flows increased by 40 percent while
international trade increased by less than 10 percent only.

In 1995, realizing the important role that the investment flow
would play in economic growth and development, as well as
increasing greater access to the market, many developed countries
put forward the idea of having an agreed Multilateral Agreement
on Investment (MAI).

In presenting this idea, they wanted to establish a specific
link with trade because investment and trade are both handmaids
of growth and development. On the contrary nuance of such
specific linkages, the UNCTAD report stated that national FDI and
trade policies related independently of each other.

The result is that the two sets of policies may not always
support each other both from the point of view of their
objectives and from that of the efficient implementation.

Therefore, better understanding of the interlinkages can
contribute to the formulation of national policies in the two
areas that are mutually supportive. This would, of course,
provide a background and basis for discussion at the
international level with regard to the appropriate policy
measures.

Looking at the greater opportunities for market penetration as
well as the availability of natural and human resources in
developing countries, the European Commission (EC) presented a
paper in early 1995 entitled A Level Playing Field For Direct
Investment Worldwide, which threatened to put a brake on these
opportunities.

The paper consisted of elements for the MAI and specifically
requested that this MAI should be discussed and agreed within the
World Trade Organization (WTO), which has legally binding concept
and contractual obligations.

The EC version of the MAI, as reflected in the paper, would
give full rights to foreign investors to establish their
companies in all sectors (except security) in any WTO member
country, without restriction, and to be treated on an equal
footing with or better than local firm (elimination of a national
treatment concept).

This would imply that national investment policies or laws
which favored domestic firms/enterprises or facilities could be
considered as discriminatory, or WTO-illegal and, therefore, had
to be modified or withdrawn.

The EC is asking for free access for investors and
investments, national treatment for investors and their
investments, and accompanying means to uphold and enforce
commitments made to foreign investors.

Based on this fact, some developing countries suspect that the
EC actually wants to transpose the main elements of the draft MAI
negotiated elsewhere, in particular within the framework of the
Organization for Economic Co-operation and Development (OECD), as
basic principles for negotiation in the WTO.

In view of the very significant implications which the EC
proposal could have on the basic sovereign economic rights of
developing countries -- in particular as far as directing the
flow of investments to their development objectives is concerned
-- this idea met strong resistance from several major developing
countries, including Indonesia.

Therefore, the proposal was softened and reintroduced by
Canada during the WTO Singapore Ministerial Conference (SMC) in
December 1996. The Canadian proposal suggested that the SMC
should establish a Working Group to conduct a study on issues
such as the relationship between trade and investment, which
would cover the impact of investment on trade and the impact of
trade on investment, the treatment of investment in international
and related economic analyses.

After having discussed, debated and analyzed the matter, while
at the same time the majors were flexing their muscle by using
economic and political pressure, the WTO SMC agreed that the
Working Group on Investment be established to examine the
relationship between trade and investment. This should be done on
the understanding that the work undertaken would not prejudge
whether negotiations would be initiated in the future or not.

Last month, the working group was established to discuss the
interlinkage between trade and investment, in what many countries
consider to be an educative process. I would prefer to use
"explorative process" since the educative process has the nuance
of developing countries being educated by developed countries.

The question for developing countries, including Indonesia, is
whether -- although it is still premature to predict -- the
explorative process in the WTO will lead to a MAI within the WTO
and whether investment opportunities will be created to benefit
them?

This is not an easy question to answer since there is no
guarantee that if one country becomes signatory to the MAI, the
flow of investment to that country will automatically be
increased.

However, we need to realize that, like or dislike, agree or
disagree, the majors, such as the EU, the U.S., Canada and Japan
(QUAD countries), play an important role in deciding on the trend
or the agenda of the discussion within the WTO framework,
including the discussion on trade and investment.

Therefore, we need to be mentally prepared for the fact that
sooner or later, the MAI will be taken up at the WTO because of
the tense atmosphere resulting from the knowledge that the WTO is
a legally binding rule-based system in which a mere discussion
can lead to the negotiation of new rules in investment and trade.

At least the first step has been taken through the
establishment of the WTO Working Group on Trade and Investment.
We should not forget that the line between explorative process
and negotiation in the WTO is so thin that we run the risk before
even realizing it that we have already crossed that line during
the explorative process.

So far, Indonesia has participated actively, and even taken a
lead in the discussion on the investment issue, both in UNCTAD
and in the SMC-WTO preparation. Therefore, Indonesia should
continue its leadership in the forthcoming discussions in the WTO
Working Group on Trade and Investment by injecting and insisting
on the substantive discussion on the need of developing countries
to include the developmental aspects during the deliberations.

The participation of Indonesia should lead to two main
objectives. To secure its national investment policies while at
the same time, seeking investment opportunities in the very near
future through the agreed, acceptable and balanced future MAI.

What kind of elements are likely to characterize the
development aspects of the future MAI?. Should issues such as
employment, national income, effect of investments on balance of
payment and sustainable development be considered? Or should the
working group only dwell on a narrow definition of investment,
namely how to promote investment in developing countries to
achieve development objectives?

As has been recognized, the issue of investment has many
facets. We cannot agree on one side of the coin only or put all
the emphasis just on the trade aspects or investor rights only at
the expense of the sovereign rights of the recipient countries,
most of which are developing nations.

In this context, developing countries, including Indonesia,
must insist on the substantive consideration of certain important
developmental elements, such as how the rights and aspiration of
the host countries can be respected (right to establishment), how
can a member's sovereign rights be upheld, vis-a-vis investors'
rights and their presence.

In this regard, the right to regulate investment and incentive
programs should not be touched upon, but disciplines on the part
of investors is indeed necessary. This is because the position of
the proponents appear to favor capital-rich economies, and to
dwell too much on the obligations of recipient countries.
Therefore, the discipline to be observed by investors should also
be elaborated upon.

This does not mean that we oppose the FDI. We are merely
looking for the right and balanced way of increasing the
significant role of the FDI in the development of developing
countries through maintaining the fundamental sovereign rights of
governments in such a way as to preserve the national development
objectives of the country.

The role of the FDI must be placed in an appropriate policy
context, which requires that governments be allowed the
fundamental right to regulate the terms and conditions for the
entry and operation of foreign investments in the various sectors
of the economy in such a way as to preserve the national
development objectives of the country.

This fundamental right must be determined in a more
transparent way, with a view to strike a balance between the
rights and responsibilities of investors as well as governments
in making decision as to the sector to which the flow of
investment should be directed in any one country.

If the working group dwells too much on the elements that have
been proposed by the EC and others, they will run the risk that
the recipient government -- and this is particularly true for
developing countries -- would give up their authority despite the
fact that they still need the right to protect their local firms.

This also goes for their agriculture and public sectors
through the national treatment concept in order to, at the end of
the day, increase their capacity (capacity building concept) to
compete with the giant TNC's which have every reason, as well as
the power, to eliminate local firms.

In these conditions, what would remain of the right of
developing countries to regulate the area of investment would
effectively close the possibility of domestic economic capacity
building. This is not a common goal that developing countries'
minister have in mind when they endorsed the idea of discussing
the issue of trade and investment within the WTO framework.

In order to achieve this through the deliberations at the
Working Group, a two-pronged approach should be pursued in
discussing the issue. First, member countries should discuss
comprehensively the relationship between trade and investment,
and particularly the developmental aspects issue, in so
explorative process only.

Second, if, as a result of the discussion, the possibility of
having a MAI is there, members then have to consider whether the
WTO, with its character, is the appropriate forum to take up this
issue. If, at the end of the day, the principal proponents still
insist that the WTO is an appropriate body to take up the issue,
some negotiation tactics and substantive positions that
developing countries, including Indonesia, will have to take are:

First: Ensuring that the discussion would continue for some
time. So as to buy time to reach a certain level of development
or readiness before accepting a multilateral framework of
investment. Or we need to wait until we reach a same level
playing field to talk to.

Second: Since the issue of investment is closely interrelated
to competition policy, it would benefit developing countries if
both issues be discussed hand in hand. In this regard issues such
as anticompetitive practices of developed countries TNC through
intrafirm trade, predatory pricing, antidumping measures, etc,
could also be linked with the discussion on investment.

In this way, if developed countries insist on MAI, then
developing countries could also touch on the question of the
setup of multilaterally agreed rules and principals to control
Restrictive Business Practices (RBPs) and Antidumping Measures,
which developed countries are averse to.

Third: Not accepting any transposition into the WTO of any
multilateral agreement on investment negotiated elsewhere,
particularly in the OECD, which is scheduled to be adopted by
OECD's Ministers in May 1998.

Fourth: Seeking a possible avenue within the WTO's existing
Agreements where the issue of investment can be discussed. In
this regard the Agreement on Trade Related Investment Measures
(TRIMs) could well have an avenue.

Article IX of TRIMs stipulates that "not later than five years
after the date of entry into force of the WTO Agreement, the
Council for Trade in Goods shall review the operations of TRIMs,
and, as appropriate, propose to the Ministerial Conference
amendments to its text".

However, we still need to realize that the acceptance of TRIMs
in the Uruguay Round was in fact already a ... concession on the
part of the developing countries.

Fifth: Developmental aspects should also be the main element
of the future MAI in this regard. UNCTAD should also be given an
authoritative mandate to study and seek the developmental aspects
of the issue of trade and investment.

The result of the UNCTAD study should be fully taken into
account while discussing the possible future MAI within the WTO.
However, when we proceed through this avenue, we should also be
cautious by ensuring that discussion in UNCTAD is directed to
address our interest and not to legitimize the portion of the
developed countries.

Sixth: Realizing the nature of the negotiation in the WTO
framework, in particularly the concept of offer and request,
developing countries must gain something even in other sectors,
if they finally have to agree on having MAI at the WTO.

Hopefully, by participating actively in the discussion with a
positive attitude, Indonesia will invest its idea in the future
MAI and this will boost its image with a view to attracting FDI
to Indonesia in accordance with its national development
objectives.

The writer is an international trade analyst in Jakarta.

Window: Governments must be allowed the fundamental right to
regulate the terms and conditions for the entry and operations
of foreign investments.