Sunday, August 29, 2010

Company Law - Enforcement of Corporate Social Responsibility in the Host Country in the line of Originating Country

 
INTRODUCTION

My project is based on the basic premise that men indulge in trade and commerce to increase their material well being. In other words the purpose of trade and commerce is to bring prosperity and wealth to the engaging parties. Crucial at this point, is to bear in mind that both parties should benefit. Any inequity would render the relationship exploitative.
The era we live in is characterized by proliferation of trade and cross border investments. The recent movement of the Indian bourses is a vociferous testimony of how the markets dance to the tunes of foreign investment pattern. There exist amplitudes of agreements regulating international trade in goods and to a large extent covering services as well. However there is gaping need when it comes to investment as we shall see in following pages.
While examining various existing trade related measures, their limitations and implications, I have made an effort to make a case for developing nations. To bring them at par and to alleviate them from vicious poverty, it is imperative that similar strings of corporate social responsibility be attached to the investment being made there inline with originating country. This very proposition of streamlining the CSR requirement in host and originating country is antithetical to the spirit of TRIMs and idea of free trade. Therefore it is argued that welfare should be the judging yardstick and not wooden principles of economics which are based on farfetched assumptions of perfect competition and benevolent nations.


CHAPTER 1
UNDERSTANDING TRADE RELATED INVESTMENT MEASURES

(1) Trade-Related Investment Measures

In the late 1980's, there was a significant increase in foreign direct investment throughout the world. However, some of the countries receiving foreign investment imposed numerous restrictions on that investment designed to protect and foster domestic industries, and to prevent the outflow of foreign exchange reserves.
Examples of these restrictions include local content requirements (which require that locally-produced goods be purchased or used), manufacturing requirements (which require the domestic manufacturing of certain components), trade balancing requirements, domestic sales requirements, technology transfer requirements, export performance requirements (which require the export of a specified percentage of production volume), local equity restrictions, foreign exchange restrictions, remittance restrictions, licensing requirements, and employment restrictions. These measures can also be used in connection with fiscal incentives as opposed to requirement. Some of these investment measures distort trade in violation of GATT Article III and XI, and are therefore prohibited.

Until the completion of the Uruguay Round negotiations, which produced a well-rounded Agreement on Trade-Related Investment Measures (hereinafter the "TRIMs Agreement"),[1] the few international agreements providing disciplines for measures restricting foreign investment provided only limited guidance in terms of content and country coverage. The OECD Code on Liberalization of Capital Movements, for example, requires members to liberalize restrictions on direct investment in a broad range of areas. The OECD Code's efficacy, however, is limited by the numerous reservations made by each of the members.

In addition, there are other international treaties, bilateral and multilateral, under which signatories extend most-favoured-nation treatment to direct investment. Only a few such treaties, however, provide national treatment for direct investment. Moreover, although the APEC Investment Principles adopted in November 1994 provide rules for investment as a whole, including non-discrimination and national treatment, they have no binding force.

(2) Legal Framework [2]

GATT 1947 prohibited investment measures that violated the principles of national treatment and the general elimination of quantitative restrictions, but the extent of the prohibitions was never clear. The TRIMs Agreement, however, contains statements prohibiting any TRIMs that are inconsistent with the provisions of Articles III or XI of GATT 1994. In addition, it provides an illustrative list that explicitly prohibits local content requirements, trade balancing requirements, foreign exchange restrictions and export restrictions (domestic sales requirements) that would violate Article III:4 or XI:1 of GATT 1994. TRIMs prohibited by the Agreement include those which are mandatory or enforceable under domestic law or administrative rulings, or those with which compliance is necessary to obtain an advantage (such as subsidies or tax breaks).
. Indeed, the TRIMs Agreement is not intended to impose new obligations, but to clarify the pre-existing GATT 1947 obligations. Under the WTO TRIMs Agreement, countries are required to rectify any measures inconsistent with the Agreement, within a set period of time, with a few exceptions .


(3)Future Challenges[3]

The TRIMs Agreement is only a first step toward eliminating trade distortions. Although some policies, such as certain export requirements, are not expressly prohibited by the TRIMs Agreement, it is important that governments understand the capacity of such measures to distort trade. Disciplines on these policies will need to be given further consideration in the new investment working group that the WTO Ministerial Conference decided to establish in December 1996.

The TRIMs Agreement is scheduled to come up for review within five years of the entry into force of the WTO Agreement and efforts should be made to incorporate appropriate new rules to address such additional policies at that time.


CHAPTER 2
EFFORTS TOWARDS A COMPREHENSIVE REGIME

Efforts to Establish New Rules Regarding Investment

(i)                 Efforts to establish a Multilateral Agreement on Investment at the OECD [4]
Members of the OECD have been negotiating a comprehensive and legally-binding "Multilateral Agreement on Investment" (MAI) that would provide for both the liberalization and the protection of foreign investments. The Agreement would provide :-
(1) a high degree of discipline on investment protection;
(2) broad obligations to liberalize investment; and
(3) an effective dispute-settlement mechanism that would include a scheme for litigating disputes between investors and states as well as between states.
 It was expected that the Agreement would be open to all countries, not just OECD members. Negotiations, which began in May 1995 with a goal of presenting a draft to the OECD Ministerial Council in April 1998, were extended because of an inability to reach a compromise on liberalization commitments, general exceptions and considerations to the environment and labour. However, immediately before the resumption of the negotiations in October 1998, France withdrew from the negotiations due to the reason that the above-mentioned high degree of discipline would violate its sovereignty. Thus, it became difficult to continue the negotiations and at present the negotiations are not conducted.

The following four points about MAI remain to be solved:
1.      Whether to allow exceptions to the "standstill" clause for certain specific areas;
2.      Whether exceptions to most-favoured-nation treatment should be allowed for regional economic integration organizations;
3.      Whether to allow a general exception for cultural reasons;
4.      Whether to include provisions covering environment and labour issues. In addition, there is no concrete results regarding country-specific exceptions.
There are strong needs for some Multilateral Framework on Investment (MFI). The OECD Committee on International Investment and Multinational Enterprise (CIME) is scheduled to discuss, towards the OECD Ministerial Council in May 1999, how to develop the future work programme including the continuation of the analytical work.

(ii) Efforts to Establish a Comprehensive Legal Framework for Investment at the WTO [5]

WTO investment disciplines are found in the TRIMs Agreement and the GATS, but both of these deal with particular areas or particular aspects of investment. There is currently no comprehensive multilateral legal framework that provides investment disciplines.
As we have noted, the OECD was negotiating a comprehensive, legally-binding Multilateral Agreement on Investment (MAI) that would liberalize investment and provide protection for foreign investments. However, it is said that the level of commitments to be included in the agreement was too high for developing countries and there were doubts about how many developing countries would actually join.
The WTO Singapore Ministerial Conference of December 1996 therefore decided to establish a Working Group on the Relationship between Trade and Investment so that countries could examine the need for comprehensive investment rules in which the developing countries participate as well as the developed countries. In the past two years the Working Group did analyze and review the following three issues: "implications of the relationship between trade and investment for development and economic growth," "the economic relationship between trade and investment," and "stock-taking and analysis of existing international instruments". The Group reported the results of the review to the General Council. The WTO General Council decided to extend the Working Group's work programme to further analyze and discuss on investment. Whether to negotiate comprehensive rules on investment will be further discussed, with a view towards the Third WTO Ministerial Conference at the end of 1999, within the framework of the General Council's preparatory process for the next trade negotiations starting in 2000. Along with this process, the Working Group will continue its work in order to contribute to the General Council's discussion.

Examples of TRIMs Explicitly Prohibited by the TRIMs Agreement

1. Local content requirement Measures requiring the purchase or use by an enterprise of domestic products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production. (Violation of GATT Article III:4)
 2. Trade balancing requirements Measures requiring that an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports. (Violation of GATT Article III:4)

3. Measures restricting the importation by an enterprise of products used in or related to its local production, generally or to an amount related to the volume or value of local production that it exports. (Violation of GATT Article XI:1)

4. Foreign exchange restrictions Measures restricting the importation by an enterprise of products (parts and other goods) used in or related to its local Production by restricting its access to foreign exchange to an amount related to the foreign exchange inflows attributable to the enterprise. (Violation of GATT Article XI:1)

5. Export restrictions (Domestic sales requirements) Measures restricting the exportation or sale for export by an enterprise of products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production. (Violation of GATT Article XI:1)

Exceptional Provisions of the TRIMs Agreement[6]

(1)    Transitional period Measures specifically prohibited by the TRIMs Agreement need not be eliminated immediately, although such measures must be notified to the WTO within 90 days after the entry into force of the TRIMs Agreement. Developed countries will have a period of two years in which to abolish such measures; in principle, developing countries will have five years and least-developed countries will have seven years
(2)    Exceptions for developing countries Developing countries are permitted to retain TRIMs which constitute a violation of GATT Article III or XI, provided that the measures meet the conditions of GATT Article XVIII which allows specified derogation from the GATT provisions, by virtue of the economic development needs of developing countries.
(3)    Equitable provisions In order to avoid damaging the competitiveness of companies already subject to TRIMs, governments are allowed to apply the same TRIMs to new foreign direct investment during the transitional period described in (1) above.[7]

The TRIMs Agreement requires Members to notify the WTO of TRIMs they operate. As of this writing, 24 Members have notified the WTO of such measures. Figure 8-3 details the TRIMs that have been notified, many of which are local content requirements in the automotive and agricultural sectors.
By 1 January 2000, developing countries must eliminate its TRIMs that have been notified. At present, however, such TRIMs are covered by the transitional arrangement. This means that they must do so within less than one year. Yet, to date, developing countries have not revealed any detailed plans or schedules regarding the necessary elimination. The elimination of the above-mentioned measures is crucial to the sound implementation of the TRIMs Agreement. It is necessary for developing countries to recognize the necessity of the elimination and to eliminate the measures steadily. Lastly, it should be noted that, among these developing countries, Uganda - the only least-developed country (LDC) - may delay its compliance for two years.
Recourse to the WTO dispute settlement procedures is currently underway concerning the automotive TRIMs of Brazil and Canada.

   In the short term, TRIMs provide countries with perceived benefits. Some governments view TRIMs as a way to protect and foster domestic industry. TRIMs are also mistakenly seen as an effective remedy for a deteriorating balance of payments. These perceived benefits account for their frequent use in developing countries. In the long run, however, TRIMs may well retard economic development and weaken the economies of the countries which impose them by stifling the free flow of investment.
Local content requirements, for example, illustrate this distinction between short-term advantage and long-term disadvantage. Local content requirements may force a foreign-affiliated producer to use locally produced parts. Although this requirement results in immediate sales for the domestic parts industry, it also means that this industry is shielded from the salutary effects of competition. In the end, this industry will fail to improve its international competitiveness. Moreover, the industry using these parts is, unable to procure high-quality, low-priced parts and components from other countries, and will be less able to produce internationally competitive finished products. The domestic industry can hope to achieve, at best, import substitution, but the likelihood of further development is poor.
The consumer in the host country also suffers as a result of TRIMs. [8]The consumer has no choice but to spend much more on a finished product than would be necessary under a system of liberalized imports. Since consumers placed in such a position must pay a higher price, growth of domestic demand will stagnate. This lack of demand also hinders the long- term economic development of domestic industries.[9]


CHAPTER 3
PROBLEMS OF TRADE POLICIES AND MEASURES OF INDIVIDUAL COUNTRIES

Under the TRIMs Agreement, member countries are required to notify the WTO Council for Trade in Goods of their existing TRIMs. Figure 8-3 shows the general breakdown of the TRIMs that have been reported to the Council. Most are from developing countries who, based on their stage of economic development, have adopted industrial policies that may, for instance, impose local content requirements.
Countries maintaining TRIMs are expected to amend their domestic laws and institutional rules within the appropriate transitional period. Even in the transitional period, it is desirable to phase out the TRIMs in the spirit of the TRIMs Agreement.
From this perspective, the moves being seen in some developing countries to introduce new TRIMs are something that cannot be ignored if the TRIMs Agreement is to be implemented faithfully. Therefore, when necessary, resolution should be sought through WTO dispute settlement procedures.[10]

Even developing countries should realize that they must eventually break their dependence on TRIMs. Japan and other developed countries should extend whatever assistance is necessary, both technical and otherwise, to facilitate the phasing-out of TRIMs.

It goes without saying that Japanese companies investing overseas are expected to increase the amount of parts they purchase locally. Indeed, the rapid appreciation of the yen has created a powerful economic incentive for Japanese companies to expand local procurement. Market-driven local procurement will contribute to the local economy. Such efforts, however, should be carried out in economically viable forms tailored to the local corporate environment, rather than enforced through TRIMs or other policy-based regulations.
Faced with the rapid internationalization of developed countries' industrial bases, many developing countries are intensifying their efforts to attract foreign investment, hoping to draw on outside capital for their own industrial and economic development. We would note in this regard a new trend that is particularly prominent among Asian countries of relaxing investment restrictions to create an environment that is more attractive and inviting to prospective investors. We can say that developing countries should promote further measures in order to attract investors


CHAPTER 4
TRIMS: INDIAN PERSPECTIVE

Local Content Requirements, Import/Export Balancing Requirements, Export Restrictions [11]

On 12 December 1997, India announced a new automotive policy that requires manufacturers in the automotive industry and the Ministry of Commerce to draft and sign a memorandum of understanding (MOU) on new guidelines for the industry. The policy has the following problems in relation to the TRIMs Agreement. First, the policy requires that 50 percent local content be achieved within three years of the date on which the first imported parts (CKD, SKD) were cleared through customs, increasing to 70 percent within five years of first clearance. Second, the policy requires that exports of automobiles or parts begin within three years of start-up, with the possibility of restrictions on the amount of parts (CKD, SKD) that can be imported depending on the degree to which the export requirement is met. This amounts to an export/import balancing requirement. Even prior to this policy, India had a history of making auto parts import licenses for companies setting up operations within its borders conditional upon signing MOU containing local content requirements and export/import balancing requirements--despite the lack of any legal basis for doing so. It is certain that the new automotive policy of 1997 is designed to institutionalize the previous administrative guidelines. In the TRIMs Committee held in March/September 1998, some countries - including Japan, the EU and the United States - argued that the policy would not be regarded as compatible with the WTO Agreement. Subsequently, in October 1998 the EU requested consultation - Japan and the United States participate in the consultation as third parties - and the first consultation was held in December 1998. The government of India should eliminate the policy as soon as possible.
In addition, India has had export restrictions on agricultural products and industrial goods since 1991, and in 1986 imposed local content requirements for penicillin and other pharmaceuticals. The WTO has been notified of these measures and they are not in contravention of the agreement, but Japan must still watch that they are not expanded and that they are eliminated on schedule.


CHAPTER 5
The MIA: VIABLITY
Reasons for Opposing the MIA
The treaty proposal should be countered because:
(a) Its contents can be very damaging to economic sovereignty and development efforts, as pointed out above. It would run counter to various UN Charters and Declarations affirming the sovereign right of states to control national resources and the right of states to economic sovereignty.
(b) The treaty is to be within the WTO. Being a trade agreement, this makes it legally binding. The obligations are binding and have to be followed. National laws and policies have to be subjected to the treaty's provisions.
(c) The WTO has under its umbrella a number of agreements, the main being the Agreements on Trade in Goods (including GATT 1994, Agriculture, Textile and Clothing, TRIMs), the GATS and the TRIPs agreement. The WTO is also a "single undertaking", meaning that a member has to accept all agreements. Refusal to sign on to one of the agreements means the country cannot be a WTO member, or has to leave. This makes it risky or even dangerous for new issues to be negotiated in the WTO. If there is agreement to negotiate a new issue like the investment treaty, and then a good majority of countries have reached agreement, those that do not agree would be under intense pressure. For there may be the prospect of having to leave the WTO as a whole. [12]
(d) The WTO has a dispute settlement system which has "bite". Failure of a country to follow its obligations could lead to its being brought to the WTO panel (or court). If found guilty, that country would have to change its laws, or be subjected to a trade sanction.
Further, the WTO has an "integrated dispute settlement system" which connects the different  aspects and agreements (goods, services, IPRs). This means that if a country is taken to court (WTO panel) and found guilty, it can be retaliated against not only within the area of dispute but also in another area, which may hurt it more, in order that the complainant gets adequate relief equivalent to the quantum of the loss it claims to have suffered.
This possibility of "cross-sectoral retaliation" is very threatening. For example, if a rich country, A, has a grievance against a poor country, B, for not allowing its banks to have full access, it can bring B to a WTO panel. If B loses, then it has to change its laws and policies. If it does not, then A can ask for a suspension of concessions (or trade penalties and sanctions) equivalent in value to the loss claimed by A. This penalty will first be sought to be applied in the same sector (e.g. banking) or other sectors in the same agreement (services).
But if this is not effective, then A can seek to have sanctions applied in another area where B will suffer more loss, for instance a sanction or countervailing duty on B's export goods. Thus: "If you don't grant my bank permission to set up or be given national rights, I will restrict or have countervailing duties on imports of your rubber or electronic products to my country." The threat of painful cross-retaliation is what gives WTO its clout, as this can be used effectively to discipline the weaker countries. [13]
If the investment treaty is accepted into the WTO then the pressures of having to comply could be tremendous. It is precisely because WTO has teeth that the Northern countries have chosen the WTO as the vehicle of choice to introduce this treaty and for introducing other issues into the WTO.
As the EC says in its Discussion Paper on Trade and Investment: [14]
"An additional strong point in the WTO's favour (as the forum for negotiations on investment) is that it possesses an effective dispute settlement mechanism, an important consideration for the credibility of the investment regime which would emerge." Through the WTO, the North can get developing countries to comply with the policies it chooses, under pain of punishment and trade penalties to the developing countries if they do not follow.
(e) The EC's proposal is that this be a "blanket" or catch-all treaty. The effects would thus be more serious as the treaty covers almost all sectors, and there would be litle ground for negotiating exclusion or relaxation of some areas. All sectors or activities would be covered, unless specifically excluded. This would be unlike the present WTO services agreement, which is on an "on offer" basis, i.e. each country offers a list of sectors/activities for liberalisation. The investment treaty would be like the WTO TRIPs (intellectual property rights) agreement, which covers all areas except a few products (e.g. medical equipment) that the treaty explicitly excludes.
(f) This being an international treaty, a signatory country has to lock its national policies to the treaty's obligations for as long as the treaty stands. To amend a WTO Agreement is very difficult, as it requires either all, or three-fourths or two- thirds majority (depending on the part to be amended) and in practice it could not be done if one major trading country objects. In a way, this can be likened to the veto power in the Security Council. It would thus be almost impossible for a country to change its policies if they are contrary to its WTO obligations. The country's policies would have to be in line with the WTO treaty "forever", or at least for a long time. This would foreclose a country from having various policy options, even if it needs to change policy when the situation changes. [15]


CHAPTER 6
CURRENT STATE OF AFFAIRS
(a) The Situation in the WTO [16]
For the EC, investment is by far the most important new issue that they are pushing for acceptance to start a new round of negotiations.
The EC introduced a detailed plan of their proposal in March 1995 to 17 developing countries in Geneva. They presented the rationale for the treaty on the ground it would be beneficial for developing countries as they would be able to receive more investments.
Since then the EC has lobbied hard and at first seemingly did not face serious objections from most developing countries. In fact, many of these countries have had no time or capacity to study the proposal in detail. They are already overburdened with having to cope with the aftermath of the Uruguay Round and cannot deal with new issues being pushed by the North in the WTO.
Over time, however, many developing countries have been studying the issue. Several have now voiced their opposition to the concept of a MIA, including at the informal WTO heads of delegation meetings in Geneva, and would not like the issue to be brought into the WTO, whilst many more have strong reservations.
The EC is attempting to push their proposal to a "consensus" position or else to a "near consensus" position so that it would be difficult for a few countries to dissent. There is a great deal of pressure, from the EC and Canada, to start the process in the WTO, through a declaration or decision at the Singapore Ministerial Conference. These proponents are being aided by the WTO Director General, Renato Ruggiero (an Italian), who is also pushing for the investment treaty to be accepted as a new issue. On 21 January, in an interview in Ghana, he was asked about the EC investment proposal. He claimed that "there is broad consensus on the need and value of such an investment treaty, except for the objections of a few big developing countries." Pressed on what the objections were, he claimed not to remember the details but added: "Some things about sovereignty." (SUNS, 24 Jan. 96)
(b) The OECD's MAI Process [17]
The EU brought up the investment treaty proposal at the Asia- Europe Summit in Bangkok in early March 1996. However it met with a cool reception. According to reports, Indonesia as well as Malaysia strongly objected.
The industrial countries are also having their own negotiations on an investment treaty within the Organisation for Economic Cooperation and Development (OECD). The Americans are said to prefer the OECD as a forum, for a stricter investment regime can be attained there. An OECD investment treaty could then be opened up to other countries. The EC is said to prefer the WTO as a forum because in the WTO, the EC negotiates on behalf of its member states whereas in the OECD each European country negotiates for itself. The EC also thinks the WTO's dispute settlement system would give the treaty "credibility".
At an OECD-organised meeting on foreign investment held in Hong Kong in March 1996, the OECD secretariat and officials revealed that the OECD countries are negotiating a multilateral agreement on investment (MAI) which would be a multilateral treaty and not an OECD-only treaty. Once the OECD members have signed and the treaty is established, it will be opened to non- OECD countries to join in. There will be terms of accesion, but the nature of these is still not clear. OECD officials denied at the meeting that there is any intention of transferring the OECD's MAI to the WTO.
The MAI will be ready by May 1997, the dateline having been set at political level by OECD Ministers at a meeting in 1995. The negotiations are already advanced, with several working groups. There did not seem to be any doubt from the OECD officials that the dateline will be met.
The OECD explanation drew criticisms from most of the 12 non- OECD countries' representatives at the meeting, on both process and substance. Most countries were outraged with the OECD's intention of negotiating a multilateral treaty amongst themselves, without the participation of other countries, in order to attain "high standards". They said that they could not be expected to join an agreement, when they had not been invited to participate in the creation process. What was important was not "high standards" but the "correct standards". Most non-OECD participants also raised serious concerns about the substance of the MAI, that it would give all rights to the foreign companies and all obligations to host country governments.
Moreover the benefits to developing countries were not concretely spelt out, beyond statements that joining the MAI would be taken as receiving a "certificate of good conduct", which would then presumably result in foreign investors having greater confidence in the MAI-member countries. A paper commissioned for the meeting by the OECD in fact concluded that there was scant empirical evidence on the effects of investment liberalisation on host countries. Some participants asked if this was so, why then should it be presumed that the MAI would be beneficial to developing countries, especially since there were legitimate and major concerns on the effects of FDI inflows on balance of payments and on local enterprises? These concerns were not addressed by the OECD participants.
It would appear that since the OECD's MAI would be concluded by May 1997, there is no way that developing countries can influence this treaty through establishing a programme in the WTO and giving inputs from there.


CHAPTER 7
OPTIONS FOR DEVELOPING COUNTRIES
The EC and Canada's objective is to get endorsement of the Singapore Ministerial Conference of the WTO for trade and investment as an issue for the WTO to discuss. The meeting is held once in three years and is the WTO's highest body. The EC plan is to get this meeting to endorse the principle of a treaty and to establish a working group to negotiate its terms.
If they succeed, there would be a dangerous situation, for the North is much better prepared in negotiations. Once a subject is given a "negotiating status" (or even a mere "discussion" status), it is likely that the North will have its way, given the present state of bargaining power in the WTO, and given the recent experience of the Uruguay Round negotiations on new issues (intellectual property, services, investment measures).
Some developing countries have been influenced by the idea that the WTO should discuss the treaty, otherwise it would be determined by the OECD countries (without the participation of developing countries) and then thrown open to developing countries to sign on. The threat of its being decided elsewhere, is thus being used to get developing countries to agree to getting the treaty discussion on board the WTO.
However, this is not a viable position, because the OECD will complete its MAI by May 1997, upon which it will open the MAI for other countries to sign on. Thus, even if the Singapore Ministerial Conference in December 1996 decides to begin a discussion on trade and investment, it would not be able to influence the OECD treaty. [18]
Moreover, it is not compulsory for any other country to join an MAI negotiated solely by the OECD countries. The imminent emergence of an OECD MAI should not be grounds for countries to agree that the WTO negotiate a similar issue. In fact this would set a dangerous precedent. In future, the OECD countries can again negotiate other issues among themselves (such as labour standards, human rights, corruption etc.) and then again put pressure on WTO Members to also start working groups on the same issues.
Thus, the argument that developing countries should agree to a WTO process to avoid a worse version of an MAI through the OECD, is not valid. It is possible to say "No" to initiating a WTO process, as well as to attempts to transplant an OECD's MAI into WTO, as well as to have a choice of joining or not joining the OECD's MAI.
The South has important choices to make in the preparation of the Singapore meeting. [19]
The EC and Canada would like the Singapore Conference to refer to the need for NEGOTIATIONS on trade and investment or on a MIA, in the Ministerial Declaration or a Ministerial Decision. If this is not possible, the preference may then be for establishing a WORK PROGRAMME through a WORKING GROUP on trade and investment (similar to the present programme for trade and environment).
If this is not possible, there might then be a reference to the need for an EDUCATIVE PROCESS, which presumably may mean the establishment of something like a "study group". It is not clear whether in practical terms there will be any difference between this and a working group.
Seeing that there is growing resistance to initiate negotiations on a MIA or even on establishing a working group, the MIA proponents might opt instead for getting a Ministerial decision to begin an "educative process" in the WTO, with no commitment that there be negotiations for an agreement.
It is, however, unclear what an "educative process" would be like. There is a strong possibility that once the issue is accepted as within the competence of the WTO, even for an educative process, there would be strong pressures that this process would proceed into working groups, negotiations and treaty.
The pressures within the WTO towards rule-making make the WTO an unsuitable forum for an educative process, since there would be an atmosphere of tension, fear and suspicion.
A more open forum for discussion and an educative process would be the UN, where the issue can be seen in its many facets, and not only from the perspective of rule making and the trading system.
At the UNCTAD-9 [20]Conference in Midrand in May 1996, the United Nations Conference on Trade and Development (UNCTAD) was given the mandate to discuss the issue of trade and investment and the implications of a MIA, at intergovernmental level. Thus, for the next few years, discussions and an educative process could take place at this forum. Arising from such a process, the role of the trading system can be better clarified.
In any case, the WTO is already scheduled to review the TRIMs agreement in the next several years. Should any country want to bring up the trade and investment relation, this can be done in the context of the TRIMs review. This option also has the advantage that TRIMs is geared towards trade-related measures and aspects of investments (which is a more legitimate area of WTO competence), rather than investment regimes per se.
Finally, the Singapore Trade Minister has put forward a suggestion that before any new issue is brought into the WTO for negotiations, it should be able to meet three criteria: that it be substantially trade-related, that the WTO (and not some other agency) is the appropriate forum, and that the issue is already "mature." On all three counts, the MIA or "trade and investment" fails to meet the test. (See next section, point 11 for an elaboration.)


CONCLUSION
SUGGESTED POSITIONS FOR DEVELOPING COUNTRIES
It is suggested that the following positions be taken by developing countries[21]:
(1) The WTO is a trade organisation. Its function should be restricted to trade issues. Moreover, issues it takes up should not only be substantially trade related (because there are many issues that are trade related) but also can be shown to be trade distortive, and thus impose an unfair situation on certain Members. It is not within the WTO's area of competence or jurisdiction to deal with investment issues per se or with rules and policies regulating foreign investments as such.
(2) Issues that link investment measures to trade are already covered by the TRIMs agreement in the WTO. The acceptance of this agreement in the Uruguay Round was already a major concession by developing countries. (TRIMs for instance prohibits countries from having a local content policy for their industries, thus restricting the South's development potential.) The WTO should stick to having TRIMs and not broaden its scope by incorporating investment regimes as a whole. There will be a process of reviewing the TRIMs agreement in the next few years. This review process is the appropriate place in the WTO for a discussion of the need and possibility of broadening the trade and investment issue. There is no need to start a working group on this issue.
(3) The proposed foreign investment treaty would deprive developing countries of a large part of their economic sovereignty. This goes against various UN charters and declarations. It removes the right of states and the powers of governments to regulate foreign investments and investments in general as well as other key elements of macroeconomic policy, financial management and development planning. The treaty is a throw-back to colonial-era economics. It cannot have a place in the present world where developing countries have the legitimate right to regulate investments, develop their own domestic economy and to strengthen their own enterprises.
(4) There is an important role for foreign investments in developing countries. But this role can be positively fulfilled only if governments retain the right to choose the types of foreign investments and the terms of their entry and operation.
Thus, the objection to the treaty is not out of any bias against foreign investment per se. Rather, it is because of the successful experience of those countries that have made use of foreign investment that there is realisation of the importance of the need of government to have decision-making powers and policy options over the entry, terms of equity and operations of foreign investments. For example, Malaysia has had a very sophisticated system of combining liberalisation with regulation in a policy mix that can be fine-tuned and altered according to the country's economic condition and development needs. The ability and right to have options for flexible policy was especially needed to redress social imbalances among ethnic communities in the country.
Thus, from this experience, it is clear to us that developing countries need to maintain the right and option to regulate investments and have their own policy on foreign investment, instead of an international investment regime that would take away those rights. Giving total freedom and rights to foreign firms and foreigners may lead to the disappearance of many local enterprises, higher unemployment, greater outflow of financial resources, and therefore to balance of payments problems. It may also worsen social imbalances within society, thereby causing social instability which will offset economic prospects (5) The industrial countries are pushing for this treaty to strengthen their companies' access to Southern countries' markets and resources. It is not for altruistic purposes of helping the South. Developing countries should not be taken in by arguments that this treaty is formulated for their interests.
(6) On principle, it cannot be accepted that the issue of "multilateral investment rules" is an area to be discussed within the WTO as it is not in the purview or area of competence of the WTO. It should therefore not be included as an agenda item in the WTO Ministerial Conference in Singapore. It should also not be mentioned as a legitimate issue for negotiations, a working group or even an "educative process" in the Ministerial Statement in Singapore, or in any decisions of the WTO Council or its Committees before the Singapore Conference.
(7) Should the OECD countries want to negotiate an investment treaty among themselves in the OECD, it is their right to do so. Should they extend their MAI to other countries to join, each country can make its own decision as to whether or not to acede. However, the fact that the OECD is negotiating an MAI should not be used as grounds that the issue should also be negotiated in the WTO.
(8) If there is a need to discuss the inter-related issues of investment needs, rights of investors and obligations of investors, the forum should not be a negotiating venue like the WTO, but a more open and neutral body such as UNCTAD, which has the general mandate to discuss policies within the development context. Through UNCTAD-9, UNCTAD also has been given the specific mandate to discuss at intergovernmental level the implications of an MIA. Thus an educative process can be conducted at UNCTAD in the next few years, and there is no need to begin a similar process in the WTO.
(9) The Singapore Ministerial Conference should focus on its original mandate of reviewing the problems arising from implementation of the Uruguay Round. It should in particular review problems faced by developing countries from having to meet their WTO obligations. The various problems need to be collated, and steps be taken collectively to study which of the provisions of the WTO treaties are causing the problems, and whether and how to review and amend these sections. This is an urgent task, and would require a lot of attention and resources. Moreover, the Ministerial Conference would also require time to focus on the in-built agenda, and trade and environment. It should not be distracted by controversial debate over new and contentious issues.
Countries are already over-burdened from having to study and implement their Uruguay Round obligations. They cannot be overstretched further in dealing with new issues such as labour standards, investment treaty and competition policy. There should therefore be a moratorium for the time being on the inclusion of yet more new issues. The Northern countries should instead focus their energies into helping the South to review the Uruguay Round results and to take measures to amend the agreements where needed, taking into account the need to consider the equity aspect of the rules (i.e. the equitable sharing of benefits and costs arising from the Uruguay Round and from the present trade rules). There should also be serious discussion and decisions on provision of extra concessions, aid or compensation to those developing countries (especially the least developed countries) who have suffered losses resulting from the Uruguay Round.
(10) If there are to be new issues to be discussed, they should be legitimately and clearly distortive of trade, such as the impact of fluctuating exchange rates on the South's trade and the effects of low commodity prices and continuing debt on the South's trade earnings and balance of payments. Unless these genuine problems are resolved, the North should refrain from adding more of their issues on the agenda as this would put even more unfair pressures onto their Southern trading partners.
(11) The Singapore Trade Minister[22] has put forward a suggestion that for a new issue to be brought into the WTO, there should be three criteria, namely:
  • Is this issue trade-related? A "tangible and substantial linkage to trade" is needed.
  • Is the WTO the best forum to address the issue? Even if an issue is trade-related, there may be instances where technical expertise resides beyond the WTO, and thus initial work should be undertaken in those other fora.
  • Is the issue mature for negotiations in the WTO? In cases where the first two criteria are met, an informal committee or working group should study the issue before contemplating formal negotiations.
The MIA does not meet the three criteria:
(i) Trade relatedness: An issue should not only be trade-related (because almost any issue has a link, and many issues have a substantial linkage to trade); priority should be given to an issue that is "trade distortive". In the case of trade and investment, the relevant aspect of trade-relatedness and trade distortiveness is already dealt with under TRIMs. Any review of rules and further discussion of the trade and investments issue can be done under the process of reviewing TRIMs, which is part of the WTO's built-in agenda for the next few years.
(ii) The suitability of forum: Trade and investment, and in particular the implications of a MIA, is extremely complex, involving developmental, economic, social and even political issues of great import. An agency like UNCTAD has a more suitable body of knowledge, technical expertise and history of discussions, to examine the many facets of the implications of investment liberalisation and the balance of rights and obligations of investors and host states. The UNCTAD-9 Conference has given a detailed mandate to UNCTAD (the intergovernmental forum and the secretariat) to study and discuss this issue. Just as the ILO is the appropriate forum to discuss trade and labour standards, the UNCTAD is a suitable forum to discuss the trade and investment linkage, which is still a new area. Conclusions can later be drawn at the WTO for any implications for trade rules.
(iii) Maturity of issue for negotiations: Given (i) and (ii), the issue is not mature for negotiations. There is a significant and growing number of countries that are opposed to and wary of the MIA proposal, and thus a consensus to begin a working group is absent. Since the issue is not ripe (and perhaps not suitable at all) for negotiations in the WTO, and since the WTO is primarily a rule-making and negotiating body, an educative process would better be carried out in another more suitable forum like UNCTAD.


[7] Prof. AK Koul, The General Agreement on Trade and Tariffs(GATT)/  World Trade Organisation(WTO):Law Economics and Politics ( Satyam Books, New Dehi, First Edn.2005) page 695

[9] Supra note 7 at page 763
[10] Ibid.
[12] Supra note 4
[13] supra note 6
[14] infra note 11

[16] ibid.
[21] Infra

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