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.