Dangers of Negotiating Investment and Competition Rules in the WTO

Item

Title
Dangers of Negotiating Investment
and Competition Rules in the WTO
extracted text
TWN Trade & Development Series

Dangers of Negotiating Investment
and Competition Rules in the WTO

Bhagirath Lal Das

Third World Network

16

Dangers of Negotiating Investment and
Competition Rules in the WTO
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Bhagirath Lal Das

TWN

Third World Network

Dangers of Negotiating Investment and Competition Rules
in the WTO
is published by
Third World Network
228 Macalister Road
10400 Penang, Malaysia

© Bhagirath Lal Das 2001

Printed by Jutaprint
2 Solok Sungei Pinang 3, Sg. Pinang
11600 Penang, Malaysia.

ISBN: 983-9747-65-7

CONTENTS

1

EXAMINATION, NEGOTIATION, AGREEMENT
1
Relationship (or Lack Thereof) between Investment and Trade 2
Paving the Way to a New Investment Agreement
3
Dangers of a Multilateral Investment Agreement
5

2

NEW INITIATIVES ON INVESTMENT AT THE WTO 7
Developing-Country Concerns
8
Potential Hazards of EC Proposal
9

3

PITFALLS IN PLURILATERAL PATH ON
INVESTMENT AND COMPETITION ISSUES
A New Initiative
Initiative Involves Amendment of WTO Agreement
Crowding Out Important Subjects
Imbalanced Initiative
Illusory Inducement
Dangers for Developing Countries
No Benefits to Developing Countries
Competition
Conclusion

15
15
16
18
19
19
21
21
22
23

1

EXAMINATION,
NEGOTIATION, AGREEMENT

Note: This chapter is an edited version ofa Third World Network Briefing Paper
that was distributed during the 1st WTO Ministerial Conference in Singapore
in December 1996, when the issue of investment was sought to be brought up for
WTO consideration.
Suggestions are being made that the subject of investment should be
taken up for examination in the World Trade Organization (WTO). The
countries which see great danger in a proposed multilateral investment
agreement curtailing their discretion to guide and control foreign invest­
ment, are being persuaded that they should at least agree to have some
study and examination of this subject in the WTO.

But a study or examination in the WTO would have some serious
implications which must be considered by governments, particularly the
governments of developing countries, before they decide to initiate it.
GATT/WTO is a serious body. It does not take up an issue for examina­
tion without a definite final objective or without a clear prior indication
of the existence of the problems which have to be studied.

Several times in the past, working parties or groups were established in
the General Agreement on Tariffs and Trade (GATT) forum to study and
examine specific issues relating to the operation and implementation of
the agreement. In practice, these exercises were a joint consideration and
examination by governments.
To a great extent, this exercise involves negotiations among the interested
governments on the identification of issues involving differing interests
1

and on the possible compromises. By its very nature, the study or
examination has been on the subjects which are already well founded in
GATT.

Relationship (or Lack Thereof) between Investment and Trade
It will therefore be quite a unique development to initiate an examination
of the relationship between investment and trade.

Of course, any subject can be shown to have a relationship with trade by
stretching the argument. For example, the internal taxation policy of
governments can be shown to have some relationship with trade, as it
affects the disposable income of the people and, thereby, their purchasing
capacity for foreign goods. Even health and nutrition can be shown to
have some links with trade by a further stretch of logic. These affect the
physical and mental capacity of the workers to work and thereby affect
their output, which may in turn have a link with the cost and quality of
production, and thus impact on competitiveness.
All these linkages cannot, however, hide the fact that these subjects,
including investment, are in reality external to trade. And initiating an
examination on trade and investment in the WTO may in fact prejudice
the debate on whether or not a relationship exists.
An examination of an issue in the WTO has to come within the latter's
functions which are prescribed in Article III of the Marrakesh Agreement
Establishing the WTO. According to this provision, the functions of the
WTO are to:
"facilitate the implementation, administration and operation,
and further the objectives, of this Agreement and of the Multilat­
eral Trade Agreements, ... provide the forum for negotiations
among its Members concerning their multilateral trade relations
2

in matters dealt with under (the various existing WTO Agree­
ments, and) also provide a forum for further negotiations among
its Members concerning their multilateral trade relations ..."

The functions are all related to the existing WTO agreements or to the
multilateral trade relations among Member countries. Hence any subject
taken up for examination in the WTO should be related to these matters.
The initiation of an examination of investment in the WTO will therefore
presume beforehand that a relationship exists between investment and
trade.
One may argue that through the subject of trade-related investment
measures (TRIMs), investment is already included in the WTO. But this
is not really true. The existing Agreement on TRIMs has "investment"
only in its name; in fact, it is an agreement clarifying and further enforcing
some existing provisions on the trade in goods. It is no more an agreement
on investment than the Agreement on Trade-Related Aspects of Intellec­
tual Property Rights (TRIPS) can be said to be an agreement on trade. The
existence of the word "trade" in the latter does not hide the fact that this
agreement is simply an agreement on intellectual property rights protec­
tion.1

Paving the Way to a New Investment Agreement

Apart from prejudicing the Members that do not want entry of invest­
ment into the WTO's ambit, the very process of examination will bind
them to the process of negotiation once the examination gets underway
in any WTO forum.
Let us consider how this matter will be taken up in the WTO if the
Ministers decide on initiating an examination.
’ The question of whether negotiations on an investment agreement should be taken up in the WTO is
explored in further detail in Chapter 3. pp. 16-18.

3

It will first come up for consideration in the General Council, which will
have three options before it, viz.: (i) examine the issue in this body, (ii)
establish a Committee of the Whole of itself to examine it, or (iii) establish
a working party or an expert group to undertake the examination.
These subsidiary bodies will then report to the General Council about the
results of the examination. What is to be clearly understood is that it is not
an examination by the WTO secretariat but by a political organ of the
WTO. (The secretariat may, of course, be asked to make its own technical
contribution to the process of examination in these bodies.)

Once the subject is taken up in any of the organs of the WTO, it becomes
a political process, in which the question of rights and obligations enters
the equation. And thus it is a full process of negotiation, howsoever one
may try to hide it by giving it different names.
Hence it has to be understood that initiating an examination of invest­
ment in the WTO actually amounts to undertaking an obligation to start
negotiations on this subject in the WTO. And past experience has shown
that the initiation of negotiations, particularly at the initiative of major
developed countries, will finally result in a full-fledged agreement.

It may be relevant to draw on specific experiences of the past, hi 1982,
strong pressures were built up on developing countries to start negotia­
tions on the subject of services. This was strongly opposed. The final
agreement was that countries would take up national examination of
services, exchange information among themselves and then consider
whether a multilateral framework was necessary and appropriate. This
process la ter led to negotiations in the Uruguay Round and ultimately to
a final agreement.
When the subjects of services and intellectual property rights were
proposed in the Uruguay Round, the developing countries opposed
these issues. However, they thereafter agreed on negotiations, but in4

sisted that when there was an agreement, these subjects would be kept
outside the coverage of GATT and there would be no linkage with the
trade in goods.
The final result, however, is that goods, services and intellectual property
rights have all been integrated in the expanded system of the WTO. And
instead of services and intellectual property rights being kept organically
separate from goods, there is now a close integration through the provi­
sion of cross-sector retaliation (which allows for retaliation against a
Member's non-conformity with its WTO obligations in one sector, e.g.,
services, to be taken in another sector, e.g., goods) in the WTO's Dispute
Settlement Understanding.

Dangers of a Multilateral Investment Agreement
Countries may, of course, decide whether it is in their interest to have a
multilateral agreement on investment. Perhaps it may be useful among
countries which are at almost similar levels of economic development.
But it may be dangerous if such an agreement covers countries whose
economic levels span a wide range and with widely varying strategies for
national development.

For example, an economically mature and strong country may consider
that the free flow of investment is good for its economic operators;
whereas a country striving for industrial upgradation, technological
development and infrastructure development may consider it necessary
to be able to direct investments to specific areas.
Any constraint on the rights of the host country to channel investment in
desirable directions can cause more harm than good to the process of
development. Hence countries have to assess the need for a multilateral
investment agreement in the context of their own specific development
objectives and priorities.
5

The issue at present in the Singapore WTO Ministerial Conference is not
whether there should be an agreement on investment, but whether
simply to have an examination of the relationship between investment
and trade in the WTO.
But as explained above, such an examination in the WTO will be ab initio
prejudicial, and, as past experience has shown, the dynamics of this
process in the WTO are likely to lead to negotiations and finally to an
agreement.

6

INITIATIVES ON
2 NEW
INVESTMENT AT THE WTO
Note: This chapter first appeared as an article in the South-North Develop­
ment Monitor (SUNS), No. 4536, 25 October 1999.

The WTO, in its current preparatory process for the Seattle Ministerial
meeting, appears to be considering the manner in which the investment
issue should be handled at the Ministerial meeting on 30 November-3
December 1999.
Some developed countries, particularly the European Communities (EC,
the name by which the European Union is officially referred to in the
WTO), Japan and Switzerland, are in the forefront of a proposal that the
Seattle Ministerial meeting should decide to initiate negotiations in the
WTO for a multilateral agreement on investment.
Some developing countries, particularly Hong Kong China, the Republic
of Korea and Costa Rica, have supported the proposal. Several other
developing countries, in particular Association of South-East Asian
Nations (ASEAN) countries, the Dominican Republic, Egypt, Jamaica,
India and Pakistan, have firmly opposed the initiation of any negotia­
tions on investment in the WTO.
The US, which has been lukewarm in the past about initiating investment
negotiations in the WTO, has recently come out more clearly opposing it
in the structured informal discussions in the world trade body. It has been
reported as saying that it is not interested in any investment agreement

7

in the WTO and that it does not support negotiations in the WTO on this
subject.2

The subject of investment was introduced in the WTO in the Singapore
Ministerial meeting in December 1996, when some developed countries
wanted to start negotiations in this area aimed at having a multilateral
agreement. The developing countries firmly opposed it. Finally, it was
decided to have a working group in the WTO to study the relationship
between investment and trade.
Now some countries, particularly some developed countries, as men­
tioned above, say that the study process should be ended and negotia­
tions should start; whereas some other countries, particularly a number
of the developing countries, firmly oppose the launch of any negotiations
in this area and suggest that, at best, the study process should be
continued.

Developing-Country Concerns

The main concern of the developing countries is that the proposed
negotiations are not about enhancing investment but about ensuring
freedom of operation of foreign investors and protecting their rights. Any
agreement in the WTO geared towards this, they fear, is likely to
constrain the role of host countries in channelling investment into prior­
ity sectors, appropria te regions and activities beneficial for their develop­
ment process. It may also restrict their discretion to put conditions on
foreign investors in respect of dissemination of technology, linkages with
domestic economic activities and transfer of funds. Besides, investment
in non-priority areas may result in a drain on their foreign exchange
through the repatriation of profits and dividends, creating balance-ofpayments p >blems.
2 The US has subsequently softened its stand. It now seems to be indicating that it will not oppose
negotiations on investment.

8

The developing countries feel that a multilateral agreement will not
enhance the flow of foreign investment; rather, it will tie them down to
commitments which they cannot retract. They think that instead of
joining a multilateral agreement, they will be better able to attract foreign
investment by adopting appropriate domestic policies and improving
their infrastructure. Such a strategy would give them the benefits of
enhanced investment without the burden of multilateral commitments.

Potential Hazards of EC Proposal

The EC, being the main proponent of this proposal, has been expressing
its objectives and expectations thereon from time to time. It placed a
proposal on this subject in the beginning of July which appears to be
somewhat softer than its earlier pronouncements. This paper (circulated
as a WTO paper on 9 July 1999) should be analyzed carefully as it gives
an indication of the EC's latest position on this subject.
This new proposal does have some positive elements in the sense that it
has tried to accommodate some concerns of the developing countries. In
essence, however, it still fails to assuage the developing countries'
apprehension about the dangers which could arise should negotiations
on investment take place in the WTO.

Both the positive elements and the dangers are analyzed below.
The EC paper limits the coverage of the proposed negotiations to the area
of foreign direct investment (FDI). This appears to be an improvement
from the angle of the developing countries, as the earlier proposals were
for a wider coverage.
But this improvement may be illusory as the coverage of FDI itself may
be a broad one. The paper mentions the difficulty in drawing precise
distinctions between various forms of investments and says that the
9

proposed framework should "focus" on FD1 "to the exclusion of short­
term capital movements". But what would be covered under the heading
"FDI" has not been made clear, thus leaving the door open for a broad
definition. Indeed, many expert studies have brought out that in the
present world of globalized finance and derivative instruments, the
earlier distinctions between FDI, portfolio investment, short-term flows,
etc. are now not so clear-cut.
There are some positive features in the proposed contents of the possible
rules in this area, even though there are some important omissions. For
example, the paper says that the multilateral rules on investment should
preserve the ability of the host countries to regulate the activities of
investors, including the responsibilities of foreign investors. It keeps the
door open for the countries to lay down disciplines and parameters of
operations for the investors.

But it does not clearly envisage the multilateral rules themselves having
provisions for disciplines and limitations on the operations of the inves­
tors, nor for home countries to assume obligations to discipline their
investors. Thus, it appears to absolve the multilateral system of the role
of directly preventing the anti-competitive practices of foreign investors.

The paper goes on to say that the rules must respond to concerns over the
impact on the environment and labour conditions. Further, it notes the
concerns of the developing countries about ensuring the compatibility of
foreign investors' activities with developmental policies and objectives.
But unlike the concerns for the environment and labour standards, it does
not suggest any action in the multilateral rules to take care of the concern
for development. It gives the impression of being neutral and passive
towards the developmental policies and objectives of the developing
countries.

The paper adds emphatically that the multilateral rules should ensure the
10

right conditions for international investment to be conducive to sustain­
able development. On the face of it, this stipulation appears positive, but
it has several implicit dangers.
Firstly, the concept of sustainable development in the major developed
countries is different from that in the developing countries. The stipula­
tion in this paper about the investment being conducive to sustainable
development may thus not cater to the objectives of the developing
countries. This fear is strengthened by the assertion in the paper of the
link between investment and growth in the home country.

Secondly, it says that the traditional framework of special and differential
treatment of the developing countries may no longer suffice, and sug­
gests that the dimension of sustainable development should be built into
the basic rules which should be implemented by all Members.
Clearly, the implication is that the proposed rules should have obliga­
tions on the developing countries in this regard. In the absence of full
clarity on the features of sustainable development, there is reasonable
apprehension that the proposal envisages enhanced constraints on the
discretion of and enhanced burdens on the developing countries.

Thirdly, the talk of ensuring the right conditions for international invest­
ment to be conducive to sustainable development could imply constrain­
ing the developing countries in respect of channelling investment (both
foreign and domestic) into certain areas which they consider appropriate
but which are considered by other countries as not conducive to sustain­
able development.
These considerations show that the provision regarding sustainable
development in the EC paper may have some serious potential pitfalls.

By suggesting that the rules should be based on the "positive-list" model
as in the General Agreement on Trade in Services (GATS), the paper
11

appears to initiate a constructive approach in this area. This approach
implies that the disciplines will not stretch to all sectors and all areas
automatically; instead, a country will be able to specify the sectors where
it will be assuming obligations and also the types of obligations it will
assume.

On the face of it, this approach appears preferable in case multilateral
rules do get negotiated in this area. But the experience of GATS has
demonstrated the limitations of the positive-list approach in providing
protection and comfort to the developing countries. During the GATS
negotiations as also the negotiations for specific sectoral agreements in
services, e.g., those on financial services and telecommunication serv­
ices, the developing countries faced intense pressures to include wider
areas and measures into the services disciplines. This was despite the
positive-list approach and the mandatory provision in GATS that the
developing countries could liberalize fewer sectors and fewer transac­
tions.
When the whole objective of the proposed multilateral agreement on
investment is to ensure comparatively free operation for foreign inves­
tors in the developing countries, there is thus a natural suspicion that
even an architecture like the positive-list model may not be capable of
providing protection to the developing countries against pressures for
undertaking a high degree of commitments in the area of investment.

The most serious part of the EC paper lies in the stipulation that the rules
should preserve the ability of host countries to regulate investment in
accordance with the basic principles of the WTO.
While recommending the WTO as an appropriate forum for negotiations
on investment, the paper mentions the principle of non-discrimination
and also says that the WTO has a well-established framework, including
the Dispute Settlement Understanding (DSU).

12

Clearly the paper is proposing to incorporate the principles of non­
discrimination, i.e., most-favoured-nation (MFN) treatment (non-dis­
crimination as between the home countries of the investors) and national
treatment (non-discrimination as between the foreign investor and the
domestic investor), as well as the enforcement mechanism of the DSU,
which implies, among other things, cross-retaliation, e.g.z retaliation
through restraints on goods imports for violation of commitments in the
area of investment.
These are precisely the points of concern to the developing countries as
they consider whether to initiate negotiations on investment in the WTO
framework.

National treatment, even if it is applicable only post-entry, may pose
severe problems for the developing countries. Firstly, it will take away
the right of the host country to provide special concessions and facilities
to domestic investors if these are not simultaneously provided also to
foreign investors. Secondly, it will prohibit the host country from putting
discriminatory conditions on the operations of foreign investors, which
may often be necessary in view of the fact that they take away foreign
exchange in the form of profits and dividends. Exceptions to national
treatment will presumably have to be negotiated as in GATS and will be
extremely difficult to secure.

Similarly, the MFN principle will take away the right to give preferences
to particular countries, which a host country often does for various
considerations, including special economic relationships, particularly
special linkages in the areas of industry, finance and technology.
The application of the DSU is likely to keep the developing countries
under constant fear of restraints on their goods trade. Defending oneself
in the WTO dispute settlement proceedings is complicated and costly, as
several developing countries have experienced in the last five years of the
operation of the DSU.
13

Finally, the paper says towards the end that difficulties in obtaining
knowledge of the laws and regulations of the host country have been
identified by international investors as an important brake to their
investment abroad. This appears too simplistic.
Investors are attracted by the level of infrastructure, smooth and easy
approvals wherever these may be needed, availability of trained workers
and large domestic markets. These are the factors which are within the
domestic domain of a country, and can be improved if the country has the
will and the resources.
The availability of knowledge about the laws and regulations can, of
course, be easily assured by a country welcoming investment. A country
does not have to join any international agreement for this purpose;
indeed, no international rules are needed in this regard at all.
From what has been said above, the EC proposal, though appearing to be
somewhat soft and mentioning development at several places, contains
almost all the dangers inherent in negotiating on investment in the WTO.

14

3

PITFALLS IN
PLURILATERAL PATH ON
INVESTMENT AND
COMPETITION ISSUES

Note: This chapter appeared as an article in the South-North Development
Monitor (SUNS), No. 4840, 21 February 2001.

A New Initiative
Recently a proposal has been informally mooted in the WTO circuit for
initiating negotiations and possible agreements on two new subjects,
viz., investment and competition, on a plurilateral track. The suggestion
is that negotiations should start in these areas in the WTO, and whichever
country wishes to participate in them should do so. Finally, when
agreements are reached, the countries wishing to be parties should sign
on and participate in them. It is thus suggested that the other WTO
Members need not have any apprehension of harm as they will be free to
keep themselves out of the agreements, and even out of the negotiations,
if they so decide. The proposal put forward in this way may perhaps
appear innocuous, but it involves severe problems and risks, as will be
explained below.
The proposal has been initiated by a few major developed countries on
the ground that they need agreements on investment and competition in
order for them to undertake commitments in other areas, particularly
agriculture and textiles. Some reports have indicated that they are keen
on starting negotiations in these new areas even if there is no formal
launching of a new round of trade talks in the WTO.
Since a large number of the developing countries are opposed to taking
up negotiations in these areas in the WTO, the proponents have come up
with this seemingly practical approach to get around the problem. Their
15

line of argument is that the developing countries should not block the
negotiations; rather, they should just step aside and clear the way if they
do not like these negotiations and the resulting agreements.

Some other seemingly reasonable initiatives have also been advanced.
For example, some type of assurance has been held out that the proposed
agreement on investment will not be about the freedom of entry of
investors but only about their operations after they have entered the host
country. In this manner, it is suggested that the policies of the host
country for putting conditions on the entry of investment will not be
fettered. Also, an assurance is made that the development objectives of
the developing countries will be taken into account in the possible
agreement.

There are, however, serious flaws in the suggestion for the plurilateral
route. It might have been worth considering if the developing countries
were indifferent and neutral to the new issues being taken up in the WTO.
In that case, the advice to them to step aside and not block the process
might have been relevant. But as the situation stands at present, a large
number of developing countries are strongly opposed to initiating nego­
tiations on the new subjects in the WTO. They are far from being neutral
and indifferent; they are actively opposing negotiations and agreements
on the new issues.

It is useful now to consider the two subjects, viz., investment and
competition, separately.

Initiative Involves Amendment of WTO Agreement
On the subject of investment, the basic opposition to launching negotia­
tions thereon lies in the fact that it does not come within the scope of
functions of the WTO in accordance with the Marrakesh Agreement
Establishing the WTO (WTO Agreement). Article III of the WTO Agree­
16

ment, which defines the functions of the trade body, says that "(t)he WTO
shall provide the forum for negotiations among its Members concerning
their multilateral trade relations in matters dealt with under the agree­
ments" which are currently in existence. For future subjects of negotia­
tions and agreements, it goes on to say that "(t)he WTO may also provide
a forum for further negotiations among its Members concerning their
multilateral trade relations, and a framework for the implementation of
the results of such negotiations, as may be decided by the Ministerial
Conference".

The subject of investment is not a part of "multilateral trade relations", to
which future negotiations in the WTO have been limited. Hence negotia­
tions on investment do not fall within the purview of the functions of the
WTO.
Of course, the WTO's Agreement on TRIMs, in its Article 9, provides for
a review of the operation of that agreement and says that the WTO
Council for Trade in Goods "shall consider whether the Agreement (on
TRIMs) should be complemented with provisions on investment policy
and competition policy". But this provision of review appears to be too
thin a peg to support the massive exercise of negotiations for an invest­
ment agreement. And, in any case, a review in the Council for Trade in
Goods cannot be a plurilateral exercise as it is a full-fledged multilateral
organ of the WTO system. Besides, this provision only mandates the
Council to "consider" whether the agreement should be "complemented
with provisions on investment policy". It does not appear reasonable to
stretch this to mean a mandate for launching negotiations on investment.

If this provision is so stretched, it will straight away come into conflict
with Article III of the WTO Agreement quoted above, which restricts the
WTO's ambit to "multilateral trade relations". And in case of such a
conflict, Article XV 1(3) of the WTO Agreement will come into play which
says that "in the event of a conflict" between a provision of the WTO
Agreement and a provision of any of the multilateral trade agreements
17

(e.g., the TRIMs Agreement), the provision of the WTO Agreement "shall
prevail to the extent of the conflict".
All this suggests that conducting negotiations on investment in the WTO
would require an amendment of Article III of the WTO Agreement,
which is a very basic and fundamental provision.

If the WTO is now expanded to cover investment, the next candidates for
entry may be domestic taxation policy and, further down the line,
domestic macroeconomic policy. Some other subjects, like security policy,
social policy, etc., may not remain far behind. In this way, there will be no
end to the expansion of the WTO and its remit.
If the developed countries pushing this proposal are really serious about
having a multilateral discipline on investment, they should sponsor it in
some more appropriate forum, e.g., the United Nations.

Crowding Out Important Subjects

Apart from the fundamental and basic problem discussed above, there is
also a practical problem arising out of past experience in the GATT/
WTO. If new subjects like investment and competition are taken up for
negotiation in the WTO, whether on a plurilateral or a multilateral track,
the old subjects of interest to the developing countries will be crowded
out of the priority work. This has invariably been the experience so far,
and there is no reason to expect that the situation will change in the near
future. The developing countries have put forth a number of proposals
for the removal of deficiencies, imbalances and inequities in the current
WTO agreements. These proposals have emerged out of their experience
of the workings of the WTO for the past five years. This is of the highest
importance to them at present. Then, there are also the mandated
negotiations on agriculture and services, where the developing countries
have put forth a number of important proposals.
18

All these are likely to get derailed if the WTO system is saddled with
negotiations on further new subjects.

Imbalanced Initiative
The proposed negotiations on investment are not for enhancement of
foreign investment in the developing countries, but for the protection of
the rights of investors. It is very much along the lines of the WTO
Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS), which is for protecting the rights of intellectual property hold­
ers. The developing countries have very few intellectual property hold­
ers; thus, that agreement is almost exclusively for the benefit of the
developed countries. The developing countries have still fewer investors
to invest in foreign countries. Mostly it is the investors of the developed
countries that invest abroad. Hence the proposed negotiations for the
protection of investors' rights are mostly for the benefit of the developed
countries.
The proposed negotiations and agreement on mvestment are also against
the principle of having "reciprocal and mutually advantageous arrange­
ments" as mentioned in the Preamble to the WTO Agreement. Reciproc­
ity and mutuality of advantage will just not be possible in such an
agreement. As mentioned above, it will be the developed countries that
will mostly gain and the developing countries will derive no benefit. In
fact, as is explained below, the developing countries will be exposed to
risks and dangers by such an agreement.

Illusory Inducement

The developing countries see no reason why there should be this extraor­
dinary step of including for negotiation in the WTO a subject like
investment which is not within its current functions. The main propo­
19

nents say it will make it possible for them to make some moves (of
liberalization and improved market access) in areas like agriculture and
textiles.

In respect of textiles, this is a totally wrong inducement, one that even
verges on being misleading. Already there are commitments of the
developed countries in the area of textiles and clothing which they have
to implement. The developing countries do not have to make further
concessions to ensure the implementation of these commitments.
In the area of agriculture, this type of hope and linkage is misplaced.
Negotiations have already been started in this area, as called for in the
Agreement on Agriculture. The course of these negotiations will have its
own momentum and dynamics.
The experience of the Uruguay Round negotiations has shown that the
major developed countries liberalize their agriculture sector mainly on
the basis of internal pressures and because of the mutual pressures
among them. The main proponent of the negotiations on investment, the
EC, is likely to be guided in the agriculture negotiations by the differing
views of the various countries which it represents and also by the amount
of pressure which the US exerts on it. This is precisely what happened in
the Uruguay Round. Pressures and persuasion by other countries and the
concessions made by them had hardly any role in motivating the EC to
liberalize agricultural trade.
Moreover, the main proponents are grossly distorting agricultural trade
by way of high tariffs, high domestic subsidies in various forms and high
export subsidies. It is only fair that they remove these distortions. It is
grossly unfair of them to expect the developing countries to make
concessions, e.g., by accepting to negotiate investment and competition
agreements in the WTO, in return for an offered hope of their reducing
agricultural trade distortion. Past experience shows that it will be totally
futile for the developing countries to make concessions in other areas to
20

encourage some major developed countries to liberalize their agricul­
tural sectors. It will be an entirely misplaced sacrifice on the part of the
developing countries.

Dangers for Developing Countries
For the developing countries, a WTO agreement on investment, which is
really for the protection of investors' rights, involves danger without
benefits. The agreement could constrain the policy flexibility of the host
country in various ways. At present, the host country has the right to
channel and guide foreign investment in support of its development, to
prevent investments which can disturb its economy, to provide guide­
lines to investors in their operations so that these are not injurious to the
country, to ensure that the foreign investment enhances local economic
activities, to give special treatment to domestic investors over foreign
investors, etc. The insistence on having an agreement on investment in
the WTO is aimed at constraining these options of the host country.

Assurances have been held out that the entry stage of investment will not
be covered by the agreement and that it will be limited to the post-entry
phase. But this does not help much. The danger still remains that the host
country's options for guiding the post-entry operations of the investment
will be constrained. And this can have an injurious effect on the develop­
ment process.
All this indicates that there is serious apprehension of losses for the
developing countries through negotiations and agreement on invest­
ment in the WTO.

No Benefits to Developing Countries
And there are no real benefits to the developing countries from such an

1043 0

agreement in the WTO. The proponents say that it will enhance foreign
investment into the developing countries. Current experience, however,
does not bear out this proposition. It is well known that a large number
of countries which allow totally free entry for investment and impose
absolutely no restriction on its operation have not attracted much invest­
ment, while some countries having restrictions and controls on invest­
ment have got high levels of investment. Experience shows that investors
are attracted mainly by the infrastructure, facilities and other conven­
iences as well as opportunities in the host country, rather than by total
liberalization of entry and operation. In any case, if a country assesses that
liberal entry and operation rules and processes will encourage invest­
ment, it can effect these on its own by adopting appropriate domestic
regulations and procedures. An agreement and a commitment in the
WTO is not necessary for that purpose. The problem with such a commit­
ment is that it binds a country for all time, and the country loses its policy
options and flexibility.
Thus, having a WTO agreement on investment is a "no gain-only loss"
proposition for the developing countries.

Competition

The subject of competition may technically come within the folds of
"multilateral trade relations". Hence, unlike the situation with invest­
ment, starting negotiations and concluding an agreement in this area will
not be considered as violating the WTO Agreement's provision on the
functions of the WTO. However, most of the other elements of risk
mentioned above apply also to starting negotiations on competition in
the WTO.
Being a new subject of negotiations sponsored by the major developed
countries, it is also likely to crowd out consideration of the other subjects
which are of interest to the developing countries. The main aim of the
22

sponsors in proposing negotiations in this area is to have an agreement
which will facilitate the entry and operation of foreign firms in the
developing countries. In the name of free competition, it is likely to place
constraints on the developing countries in their policies of supporting
their domestic firms. It is very unlikely, though, that the agreement will
put any enforceable burden on the major developed countries to control
the anti-competitive actions of their firms in the developing countries. It
is also unlikely that it will control the anti-competitive nature of the wave
of mergers taking place in the world economy.

Thus, there is serious apprehension that negotiations and an agreement
in the field of competition will put constraints on the developing coun­
tries in their path of development without giving them benefits.

Conclusion
The developed countries use various methods to push the developing
countries to toe their line. Sometimes, they apply bilateral, regional and
multilateral pressures; on other occasions, they resort to persuasion
through inducement. The current proposal by some major developed
countries has been put in a persuasive form. But as has been explained
above, whatever the form of persuasion, the proposal involves risks for
the developing countries without any benefits. The plurilateral route
does not make the proposal innocuous and acceptable, as has been
explained above. There may also be an effort to suggest that the develop­
ing countries should just agree to start the negotiations without any
commitment at this stage to having an agreement. But past experience
has shown that a process of negotiation started at the initiative of the
major developed countries generally ends with agreements that are in
accordance with their aims.

Negotiations and agreements on investment and competition in the
WTO involve serious risks for the developing countries without any
23

gains. There are no benefits, only dangers. Further, initiating negotia­
tions on investment will require amending the WTO Agreement to
expand the functions of the WTO. An added danger is that it may give rise
to pressures for inclusion of other areas in the ambit of the WTO in future,
e.g., domestic taxation, macroeconomic policy, etc.

It is advisable that developing countries not start negotiations on invest­
ment and competition in the WTO.

24

Titles in the TWN Trade & Development Series
No. 1

From Marrakesh to Singapore: The WTO and Developing
Countries by Magda Shahin
(48 pages
US$6.00)

No. 2

The WTO and the Proposed Multilateral Investment
Agreement: Implications for Developing Countries and
Proposed Positions by Martin Khor
(40 pages
US$6.00)

No. 3

Some Key Issues Relating to the WTO by Bhagirath Lal Das
(40 pages
US$6.00)

No. 4

The New Issues and Developing Countries
by Chakravarthi Raghavan
(48 pages
US$6.00)

No. 5

Trade and Environment in the WTO: A Review of its Initial
Work and Future Prospects by Magda Shahin
(68 pages
US$6.00)

No. 6

Globalisation: The Past in our Present by Deepak Nayyar
(40 pages
US$6.00)

No. 7

The Implementation of the WTO Multilateral Trade
Agreements, the 'Built-In' Agenda, New Issues, and the
Developing Countries by Xiaobing Tang
(68 pages
US$6.00)

No. 8

Strengthening Developing Countries in the WTO
by Bhagirath Lal Das
(48 pages
US$6.00)

No. 9

The World Trade Organization and its Dispute Settlement
System: Tilting the balance against the South
by Chakravarthi Raghavan
(48 pages
US$6.00)

No. 10 Negotiations on Agriculture and Services in the WTO:
Suggestions for Modalities/Guidelines
by Bhagirath Lal Das
(24 pages
US$6.00)

No. 11 The Implications of the New Issues in the WTO
by Bhagirath Lal Das
(20 pages
US$6.00)
No. 12 Developing Countries, the WTO and a New Round:
A Perspective by Ransford Smith
(40 pages
US$6.00)

No. 13 Review of the TRIPS Agreement: Fostering the Transfer of
Technology to Developing Countries
by Carlos M. Correa
(48 pages
US$6.00)
No. 14 The Proposed New Issues in the WTO and the Interests of
Developing Countries by Martin Khor
(32 pages
US$6.00)
No. 15 WTO: Challenges for Developing Countries in the
Near Future by Bhagirath Lal Das
(24 pages
US$6.00)

No. 16 Dangers of Negotiating Investment and Competition Rules in
the WTO by Bhagirath Lal Das
(32 pages
US$6.00)

26

DANGERS OF NEGOTIATING INVESTMENT AND COMPETITION RULES
IN THE WTO

Among the new issues which some developed countries are pressing the World
Trade Organization (WTO) to take up are investment and competition, the aim
being to secure full-fledged agreements on these subjects.
In this compilation of articles, the author warns that the rules which would emerge
from such a process are likely to come in the way of developing countries' regulating
and guiding the activities of foreign investors and firms in the interests of national
development. However they are pursued, be it through coercion or persuasion, the
attempts of developed-country advocates to launch negotiations within the WTO on
these issues could ultimately result in binding commitments on developing coun­
tries which harm their development prospects.

This collection complements two other papers by the author, both of which are also
published by the Third World Network, which further elaborate on and explain in
detail the implications of negotiations and agreements on investment and compe­
tition: The Implications of the New Issues in the WTO and New Issues and New Round in
the WTO.

BHAGIRATH LAL DAS was formerly India's Ambassador and Permanent Representative to
the General Agreement on Tariffs and Trade (GATT) forum. He has also served as Director of

International Trade Programmes at the United Nations Conference on Trade and Development
(UNCTAD). He is currently a consultant and advisor to several intergovernmental and non­
governmental organizations.

TWN TRADE & DEVELOPMENT SERIES
is a series of papers published by Third World Network on trade and
development issues that are of public concern, particularly in the South. The
series is aimed at generating discussion and contributing to the advancement
of appropriate development policies oriented towards fulfilling human needs,
social equity and environmental sustainability.
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