EU's konceptpapir vedr. handel og investering
C:\ValueSoft\In\20021_16398.DOC
edlemmerne af Folketingets
Europaudvalg
g deres stedfortrædere
ilag
Journalnummer
Kontor
400.C.2-0
EU-sekr.
9. april 2003
Til
underretning for Folketingets Europaudvalg vedlægges EU's konceptpapir
vedrørende handel og investering.
Materialet er oversendt til WTO.
C:\ValueSoft\In\20021_16398.DOC
EUROPEAN COMMISSION
Directorate-General for Trade
Directorate D - Co-ordination of WTO
and OECD matters. Trade questions relating to GATT, services,
dispute
settlement, Trade Barriers Regulation
Co-ordination of WTO and OECD
matters; GATT
Brussels, 3 April 2003
133 COMMITTEE
MD :
142/03 REV 2
SOURCE : Commission
FOR : Information
DATE RECEIVED : 03-04-03
NOTE FOR THE ATTENTION OF THE 133
COMMITTEE
SUBJECT:
Doha Development Agenda – Trade and
Investment
EC Concept paper on “Policy Space for Development'
ORIGIN:
DG Trade F/2
OBJECTIVE:
For information
REMARKS:
Final
version as sent to the WTO
C:\ValueSoft\In\20021_16398.DOC
Submission by the EC and
its Member States to the
Working Group on Trade and Investment
Concept
paper on
POLICY SPACE FOR DEVELOPMENT
1.
The Doha
Declaration states in paragraph 22 that
any future investment
framework “should reflect in a
balanced manner the interests of home and host coun-
tries, and take due
account of the development policies and objectives of host govern-
ments as
well as their right to regulate in the public interest'. This paper addresses
some
of the concerns expressed in this working group regarding the need of
host countries,
and in particular of developing
countries, to preserve policy space for
the purpose of
regulating in the public interest and for
development purposes.
2.
The EC fully supports the view that
developing countries should maintain
their right and their policy space to
pursue their policies and that no international agree-
ment should prevent
them from doing so. Following the previous EC paper on the “Im-
pact of
international investment rules on current national policies' that we presented
in
June 20001, we would like to deepen the discussion about the
right to regulate of host
countries and the possible impact that a
multilateral “Investment for Development Fra-
mework' (IDF) would have on
the policies of developing countries in particular. During
the last 4
meetings of the Working Group on Trade and Investment (WGTI) some opti-
ons
for investment rules that would allow
policy flexibility have been presented and
discussed. However, some members still fear that any investment framework
would pre-
vent developing countries from pursuing
particular policies. We feel that the
time has
come to try to clarify and substantiate these
statements. In particular, it would be useful
to start by giving concrete
examples of the policies that have been brought forward as
impeded by the
possible rules that have been proposed in the WGTI by several mem-
bers.
This paper aims at giving a concrete contribution to this debate.
3.
In the last part of this paper we also comment briefly on the argument that
has been put forward a few times
in this group according to which FDI
produces a
“crowding-out' effect on domestic
investment. Although this argument is not
directly
linked to the negotiation of an IDF, it seems to us that it
has been used consistently to
imply that an investment
framework would increase the supposed
negative effect that
FDI can produce on host countries.
First, we have found no evidence in real life that
there is any
“crowding-out effect' problem caused by FDI. Second, we do not see how
an
IDF would amplify any such feared negative effect caused by FDI in host
countries.
1
Communication from the European Community and
its Member States WT/WGTI/84 of 16
June 2000.
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I.
WOULD A
MULTILATERAL FRAMEWORK RESTRICT “POLICY SPACE'
FOR
DEVELOPMENT ?
4.
A few members have often
referred2 to the flexibility (and thus, potential
benefits) that
bilateral investment agreements provide to their economies as opposed to
the believed inflexibility (and implied damages) that multilateral investment
rules would
impose on their policy space.
This striking difference is not corroborated
by any evi-
dence, as far as we know. The only explanation
given was that in most bilateral invest-
ment treaties concluded by these
countries “national treatment and MFN treatment were
accorded with respect
to the post-establishment phase once investments had been admit-
ted in
accordance with the applicable policy framework', and that “bilateral investment
treaties provided protection of foreign investment and did not deal with
market access
issues'3.
5.
One could
conclude from the above that, according
to these members,
their policy space would be impeded
mainly by pre-establishment rules. This will be the
main focus of this
paper.
6.
We should also ask ourselves: what are host country
development objecti-
ves ? Are they universal or do they differ from
country to country ? Some of them, such
as generation of employment and
income growth, seem to be universal. We also know
that some policies are
applied specifically by some countries to develop particular regi-
ons, or
to protect minority groups, or to promote local small and medium enterprises.
Some of these policies are pursued
through positive discrimination in favour of
these
regions, groups or sectors. It
has also been argued by some
developing countries that
mandatory performance
requirements imposed on foreign investors are essential policy
tools for
development.
7.
We believe that the intended
objectives of these instruments are better
achieved through means other than performance requirements4.
Backward linkages and
technology transfer through foreign investment depend
mainly on the absorption capaci-
ty of the host country. For instance,
governments can maximise backward linkages and
technology transfers
by providing better domestic skills, capabilities, supplier
networks
and infrastructure5. Having said this, the point
is whether a multilateral framework would
prevent countries from using
these instruments or not. In particular, we should analyse
whether
pre-establishment rules would prevent the use of these policies, in light of the
fact that BITs, most of which do
not include pre-establishment rules, are
regularly
concluded by many developing countries.
SOME CONCRETE
EXAMPLES
8.
Paragraph 22 of the Doha Declaration refers to
“pre-establishment com-
mitments based on a GATS-type, positive list
approach', among the issues to be addres-
sed by this working group in the
period until the next ministerial conference. Thus, as-
2
See for instance statements in WT/WGTI/M/8 par. 47-49, and WT/WGTI/M/18, par
74.
3
ibid.
4
See EC statement in WT/WGTI/M/19, par.65.
5
See UNCTAD World Investment Report 1999: Foreign Direct Investment and
the Challenge of
Development.
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suming that a future
multilateral framework would include pre-establishment rules based
on a
GATS-type, positive list approach, would developing countries be prevented from
pursuing their general or specific policies ?
9.
Under the
GATS-type approach, members first decide,
for each sector,
whether to take commitments or not. If a
member decides not to take any commitment
in a given sector, it remains
free to be as open or as closed to foreign investment as it
chooses, at any
given time. If it decides to take commitments in a given sector, then the
member may include in its schedule of commitments limitations to National
Treatment
(NT) and Market Access (MA). The limitations to the NT principle
and MA can also be
included as horizontal commitments, which means that
they may apply to all sectors of
the economy, and not
just to one specific sector. Even
after taking commitments, a
member may still modify
or withdraw any commitment in its schedule, provided it fol-
lows certain
procedures6. Indeed, this may not always be straightforward in
practice, but
WTO members will be able to draw lessons from the GATS
experience. Under this sy-
stem, each member has to strike its own balance
between providing certainty (thus, in-
creasing the possibilities of
attracting FDI) and retaining flexibility. The following
examples show how
certain specific policies can be dealt with under the GATS-type ap-
proach.
A.
POLICIES AIMED AT INCREASING EMPLOYMENT
10.
Employment-generation is an objective that most countries wish to pursue
throughout their economy. The different policies adopted by governments to
maximise
employment generation through investment
may vary. UNCTAD lists7 the
following
among the policy tools to generate
employment: 1) measures to attract FDI in general
(improving the
regulatory framework; liberalisation; targeted promotion; 2) targeting spe-
cific employment-intensive industries or promoting FDI in specific regions
through in-
centives; 3) fiscal incentives linked to employment generation;
4) industrial parks or ex-
port processing zones.
11.
In
addition, the following have been listed as policies to upgrade employ-
ment and skills, particularly in developing countries: 1) use of official
development assi-
stance to implement training programmes; 2) promotion of
public-private training part-
nerships by granting tax deductions and
subsidising training costs.
12.
The above policies are generally
applied in a non-discriminatory way and
do not restrict market access. To
the extent that these conditions are fulfilled, these poli-
cies would not
even need to be listed as limitations to NT and MA in the schedule of
commitments of the member that applies them. However, even if a country decided
to
discriminate in favour of its own domestic enterprises, for
instance by providing them
with special tax exemptions, it would not be
required to remove these advantages under
the GATS-type
approach. If the country wished to
have the possibility to offer such
fiscal advantages for its domestic enterprises it could include them as
horizontal limita-
tions to NT if they applied to the whole economy, or it
could include them as sector-
specific limitations to NT if they were
limited to specific areas of activity.
6
GATS Article XXI.
7
UNCTAD, World Investment Report 1999, p. 278.
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B.
POLICIES DESIGNED
TO GENERATE AND TRANSFER TECHNOLOGY
13.
Technology transfer from FDI
is maximised when the host country provi-
des local capacity to absorb it.
Some countries try to encourage domestic companies to
develop indigenous
technology by providing them with a protected domestic market in
which
FDI is restricted or completely prohibited.
Others require foreign investors to
establish
partnerships with local partners through joint ventures, as a condition for
their
access to the market. Although most countries have realised that
these policies do not
work8 and are gradually removing
them, some may still wish to maintain these restric-
tions or conditions to
FDI.
14.
Would the GATS-style approach prevent
them from maintaining these
instruments ? No. They
could either keep a sector “unbound' from NT or they could
include
specific limitations on MA such as joint venture requirements or other technolo-
gy transfer requirements, insofar as they constitute market access
restrictions.
15.
Market-friendly measures aimed at promoting
technology transfer, such as
providing incentives for specific high
technology industries, if applied in a non-
discriminatory manner would not
even need to be included as limitations to NT or MA
in the schedule of
commitments.
C.
POLICIES AIMED AT PROTECTING MINORITIES
16.
Some governments grant specific advantages to ethnic or linguistic minori-
ties, in terms of preferential treatment such as positive discrimination.
Whatever the rea-
sons are for adopting such policies (protection of
diversity, cultural heritage, improving
social conditions, equal
opportunities, etc.), the question is whether they could be main-
tained or
not under a GATS-type approach.
17.
The GATS experience clearly shows
that these policies could perfectly be
included as limitations to NT in any
given country's schedule of commitments. Thus, it
seems safe to
conclude that these policies that address
particularly sensitive concerns
could also be preserved
without interference, in the presence of pre-establishment rules
based on a
GATS-type approach.
D.
OTHER HOST COUNTRY POLICIES
18.
A
country might wish, for some reason, to completely exclude FDI in cer-
tain
sensitive sectors. Would the GATS-style
approach prevent the host country from
doing so ? Again, the answer is no. The GATS shows that a number of developing
coun-
tries have kept “unbound' some sectors
of their economy. This does not
necessarily
8
As demonstrated by empirical research.
Cfr. T. H. Moran, Parental Supervision: The New Pa-
radigm for Foreign
Direct Investment and Development, Institute for International Economics,
2001; S. Urata and H. Kawai, Intrafirm Technology Transfer by Japanese
Manufacturing Firms in
Asia, The role of Foreign Direct Investment in East
Asian Economic Development, eds. Taka-
toshi Ito and Anne O. Krueger, 2000;
International Finance Corporation and Foreign Invest-
ment Advisory
Service, Foreign Direct Investment: Lessons of Experience, No 5, World Bank
Group, 1997; A. Kokko and M. Blomstrom, Policies to Encourage Inflows of
Technology Through
Foreign Multinationals, World Development 23, no. 3
(March) 1995.
C:\ValueSoft\In\20021_16398.DOC
mean that they are
completely closed to FDI in those sectors, but simply, that they re-
main
free to take all the measures they wish on those sectors, whenever they like,
even if
the measures are not in conformity with NT and MA, subject to MFN
and transparency
principles.
19.
It has been said in this working
group that “Developing countries needed
to retain the ability to
screen and channel foreign investment in accordance with
their
domestic interests and priorities'9.
We would like to know from those
members that
have implied that this ability to screen foreign
investment would be impeded by any pre-
establishment rule, if the GATS has
prevented them from screening foreign investment
in the services sectors.
In our view the answer is no. One of our examples (D) in the
annex
shows that it is possible for members
to include, in their schedule of
commit-
ments, the right to screen the entry of foreign investors.
II.
WOULD A MULTILATERAL FRAMEWORK REALLY INCREASE THE
“CROWDING-OUT' EFFECT ON DOMESTIC INVESTMENT ?
20.
Some
members brought into debate a fear that FDI can produce a “crow-
ding-out'
effect on domestic investment. Some have argued that, if this is so, an invest-
ment framework should not be negotiated
since the crowding-out effect would be
further enhanced, damaging first and foremost developing countries. We would
like to
briefly reflect on this assumption.
21.
The first
question to be asked is: does FDI
really “crowd-out' domestic
investment ? Supposing it
does, is the host country really affected negatively ? We have
not seen any
compelling evidence supporting this view10. In our view, foreign
investment
would actually displace domestic investment if the two were
perfect substitutes. Even in
this case, the total output in the host
country is likely to remain unchanged. If FDI and
domestic investment were
complementary, there would be a growth in total investment
and output in
the host country11. FDI would “crowd out' in cases where it
outcompeted
domestic investments, although the latter could find better
investment opportunities in
other areas of the economy. Some may still
argue, following the “infant industry' argu-
ment, that FDI may, in a
specific sector, establish all the capacity that can be sustained by
the
available market, and that this would
in consequence crowd out domestic invest-
ments, even if these potential investments
would also have had over time a
potential
comparative advantage. Even in this specific case, it is
acknowledged that FDI tends to
stimulate competition and promote domestic
investments.
22.
Leaving this aside, what can
definitely be observed today is that
almost
every country in the world is striving to attract FDI and
devoting increasing resources to
9
See WT/WGTI/M/18, par
74, and 137.
10
See for instance: UNCTAD WIR 1999; OECD, “Foreign
Direct Investment for Development, Maximising Bene-
fits, Minimising Costs',
2002; Saggi, Kamal. "Trade, Foreign Direct Investment, and International
Technology Trans-
fer." World Bank, May 2000; Sharma, Kishor, "Export Growth
in India: Has FDI Played a Role?", Economic
Growth Center at Yale
University, July 2000; B. Smarzynska, “Does Foreign Direct Investment Increase
the Pro-
ductivity of Domestic Firms? In
Search of Spillovers through Backward
Linkages', World Bank working paper,
2002.
11
For instance, according to the World Bank working paper “Trade,
Growth, and Poverty', by D. Dollar and
A. Kraay (2001), a one percentage
point increase in FDI inflows as a share of GDP would result in a
positive
effect on average incomes over the course of a decade of around 10 percent.
C:\ValueSoft\In\20021_16398.DOC
investment promotion. This is also
reflected in the Trade Policy Review Mechanism, in
which most WTO members
are eager to show the openness of their investment regime
to FDI. Thus, it
is not plausible to conclude that most countries in the world would be
wrong in trying to attract FDI as
they do not realise that their
companies risk being
crowded out by foreign investors.
23.
Even admitting that FDI crowds-out
domestic investment, the second
question to be
asked is: what would be the impact of a multilateral framework on this ?
There are 2 alternative possibilities. Either: 1) a multilateral framework
would enhance
FDI flows, thus, allegedly increasing the risk of
crowding-out domestic investment; or 2)
a multilateral framework would not
significantly increase FDI flows, hence with no im-
pact on the
“crowding-out" effect. What cannot be said is that, at the same time, a multi-
lateral framework will increase the risk of “crowding out' domestic
investment but it will
not increase FDI flows for developing countries.
24.
In any case, one of the merits of the GATS-type approach is that
it would
allow those members that were willing to take, on a
sector-by-sector basis, pre-
establishment commitments, allowing the entry
of foreign investors and perhaps at risk
of “crowding out' their domestic
investment, to do so only of they wished. Others, who
would prefer not to
risk the crowding-out effect in certain sectors or even in the whole
economy, could simply keep those sectors or
their whole economy “unbound', or, in
other words, free from FDI. It would be a choice left to each government. Their
policy
space would be preserved.
III.
Conclusion
25.
All countries have legitimate reasons for preserving their right to regulate
the activities of domestic and foreign investors. The reasons may be
different: develop-
ment objectives, protection of environment and health
standards and other public inte-
rests. Some countries may not make any
difference in their regulations between domestic
and foreign operators
while others might wish to differentiate the treatment and condi-
tions in
which national and foreign companies operate within their territory.
26.
We wish to emphasise that an Investment
for Development Framework
can and indeed must be shaped
in a way not to inhibit any country's policy space for de-
velopment or, in
general its right to regulate. The purpose of this paper is to try to move
this fundamental debate towards a more
concrete level, rather than continuing an
abstract discussion between those who maintain that any investment rule
would under-
mine their policy space and those who reply that this would
not be true. We look forward
to addressing in an open-minded way any other
examples that other members may pro-
vide, in order to move this debate
forward. In particular we would welcome the possibili-
ty of discussing any
specific development policy or programme that some countries feel
might be
threatened by an investment framework.
27.
As for the possible
“crowding out' effect of FDI on domestic enterprises,
we are
not persuaded that it would be
enhanced by an Investment for Development
Framework. Having said this, we are willing to further discuss and deepen
the analysis of
the “crowding out' effect and on its possible relation with
a future investment frame-
work. This framework, as we see it, should leave
each country free to strike its own ba-
lance between an
appropriate policy space required to pursue
national development
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objectives with an appropriate stable, predictable and transparent FDI
framework
through which firms are encouraged
to operate. This balance can be
reflected in each
country's schedule of commitments.
Annex
Examples of pre-establishment
commitments in a GATS-type approach
The following examples are deliberately
extreme and do not necessarily represent
realistic scenarios. They have
been made only for explanatory reasons.
A.
Example of a country that
wishes to maintain policies aimed at generating
employment in domestic
enterprises, in sector A.
Commitments
Limitations on market ac-
cess
Limitations
on
national
treatment
Horizontal
commitments
(on all sectors)
Sector A
Unbound for all
existing subsidies
to domestic enterprises,
for the pur-
pose of upgrading the level
of wor-
kers' skills
Sector B
Sector C
B.
Example of a country that wishes to
maintain measures requiring foreign
investors to
adopt specific types of legal entities, in sector B.
Commitments
Limitations on market ac-
cess
Limitations
on
national
treatment
Horizontal commitments
(on all sectors)
Sector A
Sector B
Foreign investors can only operate
through joint ventures, in which they
shall not own more than 50% of the
capital.
Sector C
C:\ValueSoft\In\20021_16398.DOC
11
C.
Example
of a country that wishes to maintain
preferences for a specific
minority group without
extending them to foreign investors, on all sectors
Commitments
Limitations on market ac-
cess
Limitations
on
national
treatment
Horizontal commitments
(on all sectors)
Unbound for
special pref-
erences granted to “special
minority' persons or com-
panies.
Sector A
Sector B
Sector C
D.
Example of a
country that wishes to maintain its right to screen the entry of
foreign
investors in sector C
Commitments
Limitations on market ac-
cess
Limitations
on
national
treatment
Horizontal
commitments
(on all sectors)
Sector A
Sector B
Sector C
Prior approval by the State authori-
ty is required for
the establishment
of new companies or the acquisition
of
existing local companies.