Investment facilitation in the Asia-Pacific region

By Bijit Bora

SYDNEY (JP): Foreign investment has been a catalyst for economic growth and integration in the Asia Pacific region. Yet there has been a lack of a formal multilateral mechanism. The depth of economic integration in the region is increasing the pressure on the region to consider a regional institutional mechanism to facilitate trade and investment.

There are a number of reasons, in addition to the general argument for institutional integration, put forth to build the case for a regional investment instrument. First, it is acknowledges the important role that foreign investment can play in ensuring economic growth such as capital formation and the transfer of technology and managerial expertise. Second, it ensures that the sequence of unilateral initiatives by Asia- Pacific countries continue in the future. In that sense these policies can be "locked in" so that they would be difficult to change in the future. Third, the dangerous trend initiated by NAFTA and CUSTA to liberalize foreign investment in a discriminatory fashion needs to be addressed and can be addressed in a regional forum. The arguments against this type of liberalization are similar to the hub and spoke fears associated with regional trade liberalization.

Against this background the Pacific Economic Cooperation Council (PECC) began to work on the concept of a regional investment code in May 1992. The code was designed to encourage investment in the region by advancing a set of principles that economies could adhere to on a voluntary and non-binding basis.

The group was careful to argue that such a step would be a pragmatic start towards achieving a binding regional code. In October 1993 the First Report of the APEC Eminent Persons Group recommended APEC Leaders to consider a set of non-binding investment principles consistent with the PECC Investment Code. At the inaugural Leaders Meeting in Seattle the APEC Leaders instructed their Senior Officials to deliver a set of investment principles for their consideration when they meet for a second time in Bogor the following year. Since then an Investment Experts Group has been established under APEC which began the hard work of negotiating the principles.

What will be in the non-binding Asia-Pacific Investment Principles (APIP) is yet to be revealed, but in line with the PECC code it will probably contain four main parts. A set of basic principles to govern international investment relations, codes of conduct for governments and foreign investors and a dispute settlement mechanism. Let us consider each of these sections.

The basic set of international investment relations principles are transparency, national treatment and non- discrimination.

Transparency ensures that policies, laws, regulations and procedures relating to foreign investment are accessible, understandable and visible. National treatment applies to common treatment of foreign and domestic investors in like situations. This can apply to both pre- and post-establishment situations.

Non-discrimination, of course, is the central issue facing APEC. It is more commonly known as most-favored-nation status and ensures equitable treatment of foreign investors regardless of their country of origin. This principle is the cornerstone of the GATT and fundamental to the concept of "open regionalism".

The section on codes of conduct by host governments can be expected to contain provisions covering investment incentives, performance requirements, expropriation, repatriation, double taxation, capital export barriers and the entry of personnel. The basic principle being that host governments will limit their use of policies listed under each provision subject to an exclusion clause. Of course, the nature of the exclusion has been the subject of much discussion. For some issues the exclusion clause is not contentious such as expropriation. However, for other issues such as investment incentives and performance requirements many governments were unwilling to concede their sovereignty and restrict their use. Such a response is understandable since governments want to retain control over the attractiveness of their region as a host to foreign investment, but also want to ensure that their constituents receive maximum benefits.

Incentives and performance requirements allow a host government this flexibility, but to the detriment of the global trading and investment regime.

The section on provisions governing the behavior of foreign investors is also a subject that generates a lot of debate. On one side of the debate is the suggestion that such a provision assumes foreign investors will behave in an anti-competitive and anti-social fashion beyond the domestic laws and regulations of its hosts. The other side of the debate argues that such a provision only encourages foreign investors to abide by domestic laws and acknowledge the concessions they have obtained from their hosts. Developing nations are in favor of such as a provision since it exhorts foreign investors to abide by national laws and regulations. It also highlights the important point that governments are conceding their right to impose policies on foreign investors and that in exchange foreign investors should be willing to behave as a good corporate citizen.

As for dispute resolution, there is a distinct possibility that APEC may develop a regional dispute resolution mechanism. Until such a time the unique nature of investment disputes is that it recognizes the needs of state-firm disputes. There are third party dispute settlement mechanism, but not all APEC members subscribe to their services. Therefore, the dispute settlement provision will not specifically advocate a mechanism, but will encourage disputes to be solved quickly and efficiently and where feasible the parties engaged in the dispute should consult third party mechanism.

The critics of APIP point to the weakness of having it non- binding. To counter these critics each government will have to embark on a sales mission and indicate to their business sector and to the Asia-Pacific business community that APIP is a first pragmatic step towards developing a rules based regional investment agreement. The sales mission will also have to clarify how a non-binding approach facilitates investment flows and also indicate a mechanism by which the non-binding principles can be converted into a binding code. This task will have to be taken on by the private sector so that the APEC Leaders will be encouraged to continue their work on investment facilitation.