Cancun Trade Agenda: No to Investment Negotiations

By Mariama Williams

(August 14, 2003) Over forty NGOs concerned with global justice said a resounding “no” this past March to a multilateral agreement on investment (MAI) in the World Trade Organization (WTO). These groups, at a seminar/strategy session in Geneva on the WTO Investment Issue, also called on governments to reject the launch of negotiations on such an investment agreement at the upcoming WTO Ministerial meeting set for September, 2003, in Cancun, Mexico. The NGO position is in response to the current move by some developed countries to resurrect the defunct MAI as a new MIA (multilateral investment agreement) in the WTO.

This “no” to the MAI is not a rejection of foreign investment. Foreign direct investment (FDI), when managed properly, contributes to domestic investment, consumption, and growth. It can also bring benefits such as external financing for the balance of payments (BOP), new technology, access to international production and markets and employment. But these positive benefits are not automatic. Hence, government must retain the right to regulate foreign investment in all its forms.

Additionally, there is urgent need to pay attention to the systemic process governing the intervention of multinational financial and trade institutions (the International Monetary Fund, World Bank and WTO) with global capital. There are economic, political and moral imperatives to rethink current policy directions. It is essential to move beyond the current ethos of investment liberalization pursued as an end in itself, advocating for unrestrained FDI flow with a pervasive one-sided push for investor rights, while ignoring or benignly neglecting the development impacts of FDI.

This movement must be driven by the perspectives and needs of poor men, women and children. It must also be grounded in the fundamental values already laid down in the international system: the Universal Declaration of Human Rights, the Convention to Eliminate all Forms of Discrimination Against Women (CEDAW), the right to development, the rights of the child, and the rights of indigenous peoples.

However, what is being pushed in the WTO as a multilateral agreement on investment is irreconcilable with these fundamentals. The proponents of the agreement have emphatically stated that no corporate social responsibility provisions or attempts to impose obligations on home countries (the senders or exporting capital nations) to regulate their transnational corporations (TNCs) on the grounds of environment, labor, technology transfer, etc. are acceptable. Without these measures, developing countries have nothing to gain from accepting such an agreement. The rules presently being proposed will restrict their ability to ensure positive spillovers and other benefits from FDIs.

ECONOMIC DEVELOPMENT AND THE MIA

Thus there are strong political, economic and social imperatives for saying no to the launch of negotiations at Cancun and for ultimately rejecting a MIA in the WTO. These imperatives are reinforced by the following important distinctions about the MIA and its economic development impacts that emerged from the collective learning and dialogue among NGOs and resource people at the March, 2003, WTO investment seminar.

• The MIA emphasizes and protects the interests of investors who seek freedom of entry and profit maximization. Such an instrument will not lead to the development of infrastructure, growth and development of developing countries economies.
• While the MIA seeks to expand the space of TNCs and foreign investors, it will curtail the role of governments by limiting their options and policy flexibility. According to noted trade/WTO expert Lal Das, “This is dangerous because developing countries need to experiment, so they need policy flexibility in order to take corrective measures when experiments have not proven successful. The now developed countries such as Britain, the U.S., Japan and even the newly industrialized countries such as South Korea utilized a number of restrictions on foreign direct investment in order to ensure and promote their economic development. Historical and contemporary empirical evidence of experiences with FDI shows that only the countries that have had a strategic policy vis a vis FDI have benefited from FDI.”
• There is common agreement among trade analysts that the outcomes of the Uruguay Round are asymmetrical with a clear bias toward developed countries. Current investment and talk of an MIA in the WTO would only increase this serious asymmetry. UNCTAD (UN Conference on Trade and Development) chief economist, Yilmaz Akyuz, notes that: “The asymmetry is particularly evident in the inclusion of services, intellectual property rights and investment into the WTO. For unlike cross border merchandise trade, where developing countries are both exporters and importers, in the areas of services (especially financial services), intellectual property rights and foreign investment, the developing countries sit on one side—they are recipients of financial services, technology, and foreign investment, especially FDI. (many are debtors). So there is not much give and take in these issues.”
• Extending the principle of non-discrimination, most favored nation (MFN)1 status and market access to foreign investors is bad for development. First, investment is different from goods and services, so principles built around the latter do not automatically apply. Investment involves the outflow of funds that can negatively affect the balance of payments. There are also quite significant differences between national firms and foreign firms in terms of size, capitalization and access to resources. National treatment 2 can be disadvantageous to local entrepreneurs who need assistance in the form of grants, loans and technical assistance from governments. Without such assistance and protection, in the long run national firms may be eliminated from the market.Secondly, as noted by Akyuz, extending nondiscrimination and market access to foreign investors “entails no counterbalancing of obligations on the side of home country and TNC.” Since developing countries are not home country to investors, such commitments would not benefit both countries. There is no reciprocity. Developing countries could compensate for non-reciprocity by including obligations on investment, but proponents of the MIA resist such obligations on the grounds that these are matters best dealt with in the competition policy discussion
• There is a lack of clarity about what is investment and what type of investment is to be included in a MIA. a) Foreign investment can come in two broad forms, with each having different implications for development: the creation of new assets and productive capacity, and mergers and acquisition (the majority of investment). b) As noted by UNCTAD and the U.S. submission on investment to the WTO, there are significant empirical analytical problems in distinguishing foreign direct investment from portfolio investment and in their statistical accounting in balance of payments methodology and practices. As a result, the U.S. would like to see all investment included under a MIA. Thus governments would have no scope of policy differentiation based on the different effects on development of different types of foreign investment such as equity, undistributed profits (estimated to be about 50% of FDI), and loans from parent companies. These different forms of FDI have different impacts on countries’ productive capacity and balance of payments, as well as on the degree of speculative behavior by TNCs.
• The ambiguous relationship between FDI and the balance of payments could be the source of another looming debt crisis. So great care needs to be taken in managing foreign direct investment inflow to ensure that the liabilities it engenders on the balance of payments are offset by the earnings/assets it generates in the economy.A MIA will not automatically lead to increased flow of investment. India’s Ambassador to the WTO, H.E.K.M. Chandrasekhar, among others, rejects the carrot presently being sold to developing countries—that the MIA will bring in new investment. He argues that the underlying assumption behind such predictions is that it is “lack of predictability and certainty in [the] overall industrial environment that is responsible for inadequate flow of capital resources into countries.” But, he argues, “the single most important factor is the autonomous industrial policy of the government in attracting FDI.” Investors move in response to anticipation of short term profits; they are not especially restricted by the nature of environment, but by the inducements offered.

CONCLUSION

It is questionable whether an international agreement on investment can meet the needs of all the developing countries given the wide variations in their level of development, interest and priorities. It certainly is the case that the interests of capital export nations (mainly the European Union, U.S., Japan, Canada and a few newly industrialized countries) are inherently in conflict with those of developing countries as a group. Any emerging global framework for investment must be a priori constructed outside of the scope of the WTO. To be an effective agent for just and equitable development, FDI must also be predicated on the promotion of economic development, environmental protection and preservation, and, above all, poverty eradication and gender equality.

Mariama Williams is an adjunct associate of the Center of Concern and serves on the Steering Committee of  the International Gender and Trade Network. This article first appeared in Center Focus which can be seen at www.coc.org

1 Most Favored Nation (MFN): This measure in WTO agreements states that governments must apply equal treatment to all foreign investors.

2 National Treatment: This measure in WTO agreements outlaws any regulations or subsidies which could give preference or a competitive advantage to domestic investors over foreign investors.

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