1. In the context of global trade liberalisation and the increasing internationalisation of production networks, foreign direct investment (FDI) has expanded substantially since the 1990s. In 1999 total FDI flows reached US$800 [Note 1] billion and exceeded US$750 billion in 2001, of which about US$220 billion went to developing countries [Note 2]. Furthermore, in the global economy, the links between trade and investment have become increasingly intertwined. Today, about one-third of international trade consists of transactions between multinational firms and their foreign subsidiaries, while another third consists of trade between multinational firms and their suppliers [Note 3].

2. The trade and investment debate has become increasingly polarised both among policy makers and civil society (including NGOs, consumer groups, labour organisations, etc.). The failed Multilateral Agreement on Investment (MAI) negotiations at the OECD illustrates the polarisation of views regarding the desirability of establishing rules on investment at the multilateral level.

3. International investment agreements, whether bilateral, regional or multilateral, need to strike a balance between, establishing clear and predictable rules that would help reduce foreign investors’ risk and thus promote FDI flows on the one hand, while preserving the flexibility of host states to pursue their economic and development policies, on the other.

4. The proponents of a WTO Agreement on investment argue that multilateral rules on investment would allow member governments to deal more effectively with the evolving patterns of investment flows and production networks driven by global corporate strategies. Moreover, a multilateral approach would be more advantageous for smaller and poorer countries that have limited or no bargaining power when negotiating bilaterally with their major economic partners. Bilateral or regional agreements may damage third country interests since they are inherently discriminatory, apart from being costly to negotiate and administer. The proponents also believe that a WTO investment agreement would help increase world-wide foreign investment flows since multilateral rules would provide greater legal certainty for investors and commitments for liberalising market access for foreign investments. However, they recognise that claims of increased FDI deriving from a multilateral agreement should not be overstated and that the geographical distribution of FDI flows will continue to hinge primarily on country-specific conditions.

5. On the other hand, some WTO members remain strongly opposed to an investment agreement in the WTO, essentially on the grounds that it would curtail their “policy space”, i.e. their ability to implement investment policies in accordance with their individual development objectives. In their view, bilateral and regional investment agreements are best suited for this purpose, since they provide the protection required by foreign investors, while preserving the host country’s control over the admission of foreign firms into their territories and their activities. They feel that concluding bilateral agreements allows them more flexibility than would be the case in the context of a multilateral negotiation in the WTO. In this respect, they point to the fact that most bilateral investment agreements cover only the post-establishment phase of a foreign investment, thus leaving the pre-establishment phase (i.e. the admission of an investment) to be decided upon by the host country in accordance with its domestic law and policies. They also contend that the case for a multilateral investment agreement is far from being proven and that it would not necessarily lead to increased FDI flows to developing countries. Overall, they feel that the costs of opening market access to foreign investment and of limiting host governments’ ability to control their activities would far outweigh the gains that might derive from negotiating an investment agreement in the WTO.

II. The Doha Work Programme on Trade and Investment

6. Although a number of WTO Agreements contain provisions that affect foreign investment [Note 4], currently there is no single set of rules in the WTO that deals specifically and comprehensively with foreign investment. Since the conclusion of the Uruguay Round and the creation of the WTO in 1995, several members considered the possibility of negotiating multilateral rules on foreign investment within the framework of the WTO.

7. At the first WTO Ministerial Conference, held in Singapore in December 1996, members decided to begin analytical work on the relationship between trade and investment. The WTO Working Group established for that purpose met regularly to examine the links between trade and investment from different perspectives, including the contribution of foreign investment to economic growth and development, and the relative advantages and disadvantages of bilateral, regional and multilateral investment agreements.

8. In November 2001, at the Fourth Ministerial Conference in Doha, Qatar, WTO Ministers recognised “the case for a multilateral framework to secure transparent, stable and predictable conditions for long-term cross-border investment, particularly foreign direct investment” [Note 5]. They also agreed that negotiations in this area would take place after the Fifth Session of the Ministerial Conference, to be held in Cancun, in September 2003, “on the basis of a decision to be taken, by explicit consensus, at that Session on the modalities of negotiations” [Note 6]. Until such time, Ministers instructed the WTO Working Group to focus on the clarification of a number of issues relevant to a possible multilateral framework on investment [Note 7], and set out a number of principles to be taken into account, in particular incorporating a development dimension into the framework, safeguarding governments’ “right to regulate in the public interest”, and ensuring that any new investment framework would be compatible with other WTO Agreements and with existing bilateral and regional agreements on investment.

9. Since the Doha Ministerial Conference, the Working Group has moved from an “educational” and analytical mode to a more focussed and intense debate on the core elements of a possible WTO framework on investment. This does not mean, however, that there is consensus among members on the desirability and practicability of such a framework. Among the developed countries, the European Union, Canada and Japan strongly favour the establishment of investment rules in the WTO. The United States, initially sceptical about negotiating an investment agreement in this forum, has now taken a more proactive approach and supports the launch of negotiations. Among developing-country members, most Latin American countries would be prepared to negotiate a multilateral agreement on investment, provided that enough progress is made in other areas of the Doha Round, in particular in agriculture. China has expressed support for the negotiations, but within certain parameters (e.g. that the agreement be limited to foreign direct investment). Other developing countries, notably India and some countries in South East Asia, oppose the idea of an investment agreement in the WTO on the grounds that it would curtail their ability to pursue investment policies in accordance with their development objectives. Least-developed countries, and African countries in particular, while accepting the logic of a multilateral agreement in preference to current bilateral approaches, argue that the Doha Work Programme is overwhelming as it is and they lack the human resources and institutional capacity to adequately participate in investment negotiations.

10. Although the discussions in the Working Group have helped to clarify and promote a better understanding of the implications that a possible agreement on investment would have for members, it is not yet clear whether WTO negotiations in this area will take place.

III. The Core Elements of a Possible Multilateral Framework on Investment

11. In accordance with its mandate, the Working Group on the Relationship between Trade and Investment has thoroughly examined the seven core elements listed in paragraph 22 of the Doha Ministerial Declaration as well as other issues related to a possible framework on investment. The following are some of the main issues that have been raised by members throughout the discussions [Note 8].

12. Scope and Definition. Discussion has focussed on whether the definition of investment in a prospective agreement should be limited to FDI (narrow definition) or whether it should also cover portfolio investment and other categories of investments (broad definition). The proponents of a narrow approach argue that it would allow members to attract long-term, productive FDI that contributes more directly to economic and trade growth, while avoiding the financial risks associated with short-term capital flows, particularly those of a speculative nature. Also, a narrow definition would clearly establish the scope of the agreement from the outset, making it unnecessary to further delineate its coverage through operative provisions. This position is shared by the majority of members, including some of the main proponents of negotiations (the EU and Japan). A different view is that a broad definition would better capture the evolving nature of international financial flows and new forms of investment, such as joint ventures and strategic alliances, and would avoid the risk of any framework soon becoming obsolete. Besides, in a world of complex financial transactions, drawing a distinction between direct and indirect investment is increasingly difficult and not intrinsically meaningful. Supporters of a broad definition (notably the US) argue that it would not necessarily imply less flexibility for host countries to treat different categories of investment differently. In their view, flexibility is best achieved not by narrowing the definition of investment, but through the agreement’s operative provisions and specific commitments.

13. Transparency. The debate has focussed not so much on the importance of transparency for securing a predictable and stable climate for foreign investment–on which there is broad agreement—but rather on the nature and scope of transparency obligations in a prospective WTO framework on investment. Given that transparency obligations do not figure prominently in international investment agreements, it was felt that existing WTO provisions on transparency provided a useful starting-point for the discussion. Most members agree that the concept of transparency involves two basic requirements: the publication of relevant laws, regulations and other policies, and the notification of interested parties regarding relevant laws and regulations and changes to them. However, there are differing views on whether transparency also involves obligations on the way laws and regulations are administered. It has been pointed out that since investment is subject to a wider range of domestic regulations than trade, the potential scope of transparency provisions in a prospective investment framework would be much broader. In this respect, some have stressed the need to clearly define the extent and limit of transparency obligations in any such framework. Concerns have also been raised about the technical and resource capacities of developing countries to meet new transparency obligations. A related issue is the need to provide technical assistance and capacity building to help host countries make their investment regimes more transparent. Some developing countries have proposed that transparency provisions should apply to investors and home countries as well as host countries. This view is firmly opposed by others.

14. Non-discrimination. Members have discussed the extent to which the principle of non-discrimination, as embodied in national treatment and Most-Favoured-Nation treatment (MFN), should be included in a possible multilateral investment agreement. A distinction has been drawn between the application of non-discrimination standards at the pre- and post-establishment phases of investment. The application of these standards at the post-establishment phase (i.e. once the investment has been established) does not seem to raise major concerns, provided that it is subject to certain exceptions as is the case of many Bilateral Investment Treaties (BITs). In contrast, the idea of extending non-discrimination—and national treatment in particular—to the pre-establishment phase is more controversial because of its potential impact on the ability of host states to control the entry of foreign investment. Another distinction has been drawn between national treatment and MFN. Many agree that in order to ensure equality of treatment for foreign investors and to maintain consistency with other WTO Agreements, MFN should be a general rule of application for both the pre- and post-establishment treatment. On the other hand, there are wide differences in view as regard the application of national treatment. One view is that national treatment should apply to all stages of an investment—its entry, its operation, and its liquidation. Another view is that host countries, in particular developing countries, should be able to maintain the freedom to treat domestic and foreign investors differently and to control, screen and channel foreign investment in accordance with their national laws and policies. A related question is whether the non-discrimination standards should apply differently to different categories of investment. While some feel that host countries should be able to discriminate between FDI and speculative short-term portfolio investment, others believe that non-discriminatory treatment should be extended to all kinds of investments.

15. Modalities for pre-establishment commitments based on a GATS-type positive list approach. The key issue is to examine how members’ commitments on pre-establishment (i.e. market-access commitments) could be scheduled in a prospective multilateral agreement on investment. The debate has focussed on the comparative merits of the GATS-type “positive list” approach (whereby market access and other obligations apply only to those sectors where a member has agreed to undertake commitments), and the “negative list” approach used in most international investment agreements (whereby countries lodge exceptions to the rules of general application). Many members, including developing countries and the main proponents of a WTO investment agreement (EU and Japan), favour the “positive list” approach, since it allows host countries to choose which sectors to open to foreign investment and on what terms. In particular, they feel that this approach would provide developing countries with more flexibility to pursue their development policies and to make commitments commensurate with their individual development needs and circumstances. Other members, including the US, consider that full MFN and national treatment based on a “negative list” approach would be preferable, since using a “positive list” would significantly limit the extent of market access and the guarantee of non-discriminatory treatment. They also feel that the “positive list” approach is inherently less transparent and requires regular updating to remain relevant. Finally, it should be noted that some developing-country members feel that pre-establishment commitments should not be part of a multilateral approach to investment at all.

16. Development provisions. There is a widely shared view that development provisions should be an integral part of the structure and substantive provisions of any multilateral framework on investment. The crucial issue is how to strike a balance between providing members with flexibility or “policy space” for development purposes, on the one hand, and securing a transparent, stable and predictable framework for foreign investment, on the other.  Of particular relevance to many developing countries is the ability to preserve flexibility to regulate the entry of foreign investment (e.g. through screening procedures and entry conditions), and to implement policies aimed at maximising the contribution of foreign investment to their economic and social development (e.g. through the use of investment incentives and performance requirements).  It has been suggested that flexibility can be built into the substantive provisions of an agreement and/or through special provisions or exceptions for developmental purposes. In this regard, discussion has focussed on whether the GATS offers a useful model for securing “policy flexibility” in a investment framework. Some feel that the GATS “positive list” approach based on selective and gradual liberalisation is more flexible and development-friendly than a “negative list” approach. Some developing countries believe that being a trade agreement, the GATS has little relevance to the regulation of capital flows and would fall short of providing the policy flexibility they need. Yet another view is that using the GATS approach would not result into the kind of open and transparent investment climate required by developing countries to attract FDI. Given that the development dimension is considered as a horizontal issue, a number of options have been proposed to integrate it into the various elements of a prospective investment agreement. These include, for example, limiting the definition of investment to FDI; allowing developing countries more flexibility at the pre-establishment stage; providing transitional mechanisms to phase-in commitments, and formulating specific exceptions or carve-outs for developing countries.

17. Exceptions and balance-of-payments safeguards. There is a common understanding that exceptions allowing members to respond to public, security, or balance of payments concerns need to be an integral part of any investment agreement. The view is also shared that current WTO general and security exceptions provide a useful reference for formulating similar provisions in an investment framework, and that clear criteria and conditions should be attached to such exceptions. The need to incorporate exceptions for regional integration arrangements, particularly as regards MFN obligations, has also been raised. Balance-of-payments safeguards are considered to be particularly relevant in an investment agreement, as they may help address concerns about the potential destabilising effects of short-term capital flows. At the same time, the need to ensure the free transfer of investment and related payments has been stressed by many. It has also been suggested that attention should be paid to the precise procedures, conditions and application of any safeguard provisions, and to the compatibility of any prospective WTO investment framework with the Articles of Agreement of the IMF.

18. Consultation and dispute settlement between members. Most members agree that a WTO investment agreement should be subject to the existing WTO dispute settlement mechanism—as embodied in the Dispute Settlement Understanding (DSU). However, a number of questions have been raised about the applicability of certain provisions of the DSU in an investment context. Some have raised concerns about the scope of non-violation cases [Nota 9] should investment rules be brought under the DSU. Others have questioned how provisions on compensation and suspension of concessions (countermeasures) should apply to investment disputes, noting the difficulty of determining the levels of compensation, in particular as regards non-violation complaints and cases involving a breach of pre-establishment commitments. Concerns have also been expressed about the possibility that countermeasures be applied in the trade area in connection with an investment dispute (i.e. cross-retaliation). As regards the introduction of investor-to-State dispute settlement provisions—a key feature of many international investment agreements—, the majority of members oppose this idea since allowing individual investors to pursue claims against host States would imply a fundamental change to the DSU, which only applies to disputes between member States. Another key question is how the dispute settlement provisions of a WTO investment framework would relate to the dispute settlement provisions found in existing bilateral and regional investment agreements, in particular as regards investor-to-State mechanisms. In this respect, it has been pointed out that there might be a need to elaborate rules to avoid duplication and the problem of so-called “forum shopping”.

IV. The Cancun Ministerial Conference: What are the Prospects for Negotiations on a WTO Multilateral Framework on Investment?

19. At this point in time, it would be difficult to venture any comments on the possibility of a Ministerial Decision being taken in Cancun on starting negotiations on an investment agreement. Nor is it yet clear whether the “modalities” for the negotiations, referred to in the Doha Declaration, will only deal with procedural aspects (e.g. creation of a negotiating group, time-frame, and the relationship of investment negotiations with the rest of the Doha Round), or whether they will also define the substantive coverage of a future negotiation. The matter is being discussed by members at the General Council level and it will be for WTO Ministers to decide upon, by “explicit consensus”, when they meet in Cancun in September 2003.

20. Looking ahead, it is clear that for any prospective WTO investment framework to gain the support of the whole membership, it would have to provide sufficient flexibility to allow individual members, in particular developing and least-developed country members, to make binding commitments that are consistent with their individual needs and capabilities. This was in fact recognised by the drafters of the Doha Declaration, which in paragraph 22 states the following:

“The special development, trade and financial needs of developing and least-developed countries should be taken into account as an integral part of any framework, which should enable Members to undertake obligations and commitments commensurate with their individual needs and circumstances”.

21. But how would an eventual agreement strike the appropriate balance between flexibility and a meaningful set of disciplines to secure transparent and stable conditions for foreign investment? On the basis of the discussions in the Working Group, it would seem that the framework would need to include rules on both foreign direct and portfolio investment, and on pre-establishment and post-establishment treatment, if it were to meet the approval of those members who are seeking a high level of ambition from any WTO investment framework. At the same time, it would need to provide other members with enough flexibility in applying the various obligations under the framework. This might imply, for example, allowing the developing countries to undertake commitments only with respect to foreign direct investment, only as regards post-establishment treatment, and only on the basis of a "positive list" approach for the scheduling of commitments.

22. Thus, the overall framework would provide for a high and wide level of rights and obligations to accommodate those seeking an ambitious agreement in this area. However, each member would have the freedom to undertake as many or as few commitments as it deemed to be consistent with its individual needs and stage of economic development. One might expect that developed countries would be willing to commit to a high level of obligations, in most, if not all areas, while developing and least-developed countries would take on fewer commitments at the outset, and might gradually build up their international obligations in this area. Under this approach, it would be important to ensure that developing countries would not be required to make reciprocal commitments in order to benefit from the obligations undertaken by other members.

23. Finally, it should be pointed out that the prospects for launching an investment negotiation in Cancun would very much depend on progress being made in other areas of the Doha Work Programme. Since the key interests of many developing countries focus on other issues, their support for investment negotiations is conditional upon tangible results in areas such as agriculture; access to patented drugs for treating HIV, malaria and other diseases; effective implementation of existing agreements (e.g. elimination of textile quotas) and strengthened special and differential treatment provisions in favour of developing countries.