Aayushi Singh*
Introduction – Cogs of the same wheel – Trade and FDI
Grazia Ietto-Gillies’ theories were based on the classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost of production as a motive for a firm’s foreign activity. The relation between trade and FDI flows from this. Analytical work has recently been developed by OECD in order to explore the nature of these links in quantitative terms.
Globally speaking, the impact of FDI on trade has been much debated and studied in the literature since it provides an indication of how the international specialization of countries is affected by globalization and, hence, holds a clue to understanding the welfare effects. If trade and FDI complement each other then it might lead to greater competitiveness of the foreign market and this is beneficial to exports from host country and therefore to its industries. Reinterpreting models of the multinational firms in terms of the choice between FDI and cross-border services takes into account the fact that services account for an important and stable fraction of global trade. Hence, theories explaining international trade (in services) should, in principle, also be applicable to international trade in financial services.
At this juncture it is integral to understand that FDI may enter through regional, bilateral and multilateral investment treaties. The write-up draws two theses regarding the viability and opportunities offered by bilateral and multilateral investments and attempts to build a case for the latter through an analysis of empirical data and research gathered from financial institutions, trade organizations and research papers.
Thesis 1A) limitations of bilateral FDI arrangements (Achilles Heel) as opposed to multiilateral framework in the interest of member nations
UNCTAD puts the number of BITs globally at the end of 2011 at 2,833. Perhaps because of the larger existing number already negotiated, or because of the shift towards negotiations of regional FTAs or regional treaties, the number of new annual BITs signed has declined recently, with a total of 47 new IIAs signed in 2011 (33 BITs and 14 other IIAs), compared with 69 in 2010. Developing governments have been actively seeking partners for BITs as a way to promote trade and economic relations and to elicit interest in their economies as a destination for FDI. Only a few countries have refrained from the BITs race, most notably Brazil, which has signed BITs with 14 countries, none of which have entered into force. Brazilian authorizes have feared that strong protection clauses and comprehensive investor–state dispute resolution mechanisms in BITs may restrict their ability to pursue an independent national development strategy, expose the country to liabilities caused by legal claims by foreign investors and increase the complexity of policy-making.
The increasingly complex global setting for international investment that has resulted from the “patchwork quilt” of agreements discussed above requires investors and governments to try and ensure consistency between differing sets of obligation.
A large number of investment agreements, notably the BITs, contain similar concepts (national treatment, MFN treatment, fair and equitable treatment, full protection and security), but have legal and/or textual variations that can result in divergent interpretations of the same general obligation under different agreements. This can engender costs, in the form of time and inefficiencies in trying to sort through the implications of various provisions in different investment contexts, and potentially divert investment flows from more efficient to less efficient locations. Another question raised by the overlapping set of investment agreements is the possibility of “forum shopping” in the case of dispute settlement, where an investor may initiate multiple procedures on the same issue to take advantage of the potentially more favorable dispute settlement provisions available in different agreements.
Thesis 1B) Current fragmented governance of FDI contributes to the confusing landscape faced by investors and governments and multilateral agreement on investment is a viable solution
Despite its importance, the disciplines governing FDI lie in the shadow of those governing global trade. There is no single, comprehensive multilateral treaty or institution to oversee investment activity. In addition to the efforts to address the topic in the Havana Charter of 1948 – which ultimately failed for other reasons, a second attempt was made by the OECD through its four-year effort (1995–1998) to craft a multilateral agreement on investment (hereinafter “MAI”). The effort involved OECD Members and a few key developing countries. When made public in 1997, the draft agreement drew widespread criticism from civil society groups and developing countries. The effort was suspended at the end of December 1998. A third attempt to bring investment under multilateral rules took place within the WTO itself, in the context of the Doha Development Agenda, when investment and three other “Singapore issues” (competition policy, government procurement and trade facilitation) were originally included within the Doha negotiating mandate. However, dissension within the WTO ranks made it impossible to reach a decision. In August 2004 three of the four “Singapore issues” were dropped from the Doha Agenda, and negotiations were subsequently launched on only one subject: trade facilitation.
Need for mandating a MAI through WTO
If an International Investment Agreement is to emerge at some future point, then for several reasons the WTO is the logical home for it. WTO provides effective regulation of trade, but only piecemeal regulation of FDI. An MAI will be effective in countering various drawbacks with the fragmented structure of FDI that presently exists and will be beneficial in the following manner:
- There is a growing unhappiness with various provisions in BITs and investment provisions in RTAs, particularly with their dispute settlement aspects. Multilateral negotiations could yield more equitable outcomes and ensure non-discrimination.
- WTO’s dispute settlement regime has worked well, especially in its most trying period during the current global financial crisis. It has a strong record with regards to member participation, different levels of development and achieving compliance.
- Current proliferation of investment regimes offers arbitrage opportunities for investors who are well placed to exploit it, yet confuses many others who are not. At the same time, regulating states’ hands are increasingly tied in a confusing array of obligations.
A unified system would help overcome these problems. Reflecting this groundswell of interest in multilateral investment regulation, there have been several recent attempts to reflect on what the content of such regulation should be.
UNCTAD, OECD, ICC and APEC have all recently issued principles, recommendations and policies that could be used to effectively promote and regulate FDI. Overall, these guidelines and recommendations focus on a new development paradigm in which inclusive and sustainable development is at the centre of international investment policy-making. An MAI could perhaps diminish litigation costs and cater to a better understanding of direct and indirect investment globally. Further, some states oppose agreements that contain investor–state dispute settlement obligations and often FDI is looked at with a similar perspective. Since the WTO’s dispute settlement mechanism is a state–state system, it at least has the important advantage that it is widely accepted. WTO dispute settlement could also limit the scope of state obligations and responsibilities and increase the pressure to comply. The downside is that companies would be reliant on their governments to bring such cases, which introduces factors other than corporate interests into the equation, thereby making the process unpredictable. From the investor’s standpoint, this is an argument in favour of investor–state dispute settlement, but it would require amending the Dispute Settlement Understanding, which is deliberated on in the next section.
Overhauling the Dispute Settlement Understanding Scheme of WTO
In the early years of the GATT, most of the progress in reducing trade barriers focused on trade in goods and in reducing or eliminating the tariff levels on those goods. More recently, tariffs have been all but eliminated in a wide variety of sectors. This has meant that non-tariff trade barriers have become more important since, in the absence of tariffs, only such barriers significantly distort the overall pattern of trade-liberalization. The presence of multiple datasets on WTO dispute settlement and FDI arbitration may bias researchers towards further research on patterns within these issue areas. Members often use dispute settlement as a mechanism to gain further clarification of the provisions of the covered agreements and as a means to try to expand the scope of existing obligations to encompass matters on which no negotiating process has been made.
– Cross-border trade in services and investment are addressed in chapters devoted to each. Investment rules and disciplines cover both matters of investment protection and liberalization through market access and even these are met with much chaos.
– Forum shopping in the case of dispute settlement, where an investor may initiate multiple procedures on the same issue to take advantage of the potentially more favorable dispute settlement provisions available in different agreements, is one of the most rampant issues created by the dispute settlement provisions. The tabulation states:
Complaints by developed country members
Respondents – Developed – 127
Respondents – Developing – 77
Complaints by developing country members
Respondents – Developed – 72
Respondents – Developing – 53
Complaints by both developed and developing country members
Respondents – Developed – 6
Respondents – Developing – 0
Given that the largest members of WTO could not deploy these ultimate enforcement measures of suspension and concessions in the DSU effectively, the prospects for developing countries or small economies are even bleaker. Over three-fourths of the WTO’s members are developing countries, and thus this question assumes great importance for a large majority of the member states. If instances of non-compliance go unchecked and cannot be remedied, it may not be very long before the euphoria about the WTO’s “giant leap” withers away and serious questions are raised about the efficacy of the dispute settlement procedures.
Need for unified MTA – Impending a developing nations clause – Conclusion and the Way Ahead.
Each year on July 1, the World Bank revises analytical classification of the world’s economies based on estimates of gross national income (GNI) per capita for the previous year. The updated GNI per capita estimates are also used as input to the World Bank’s operational classification of economies that determines lending eligibility. As of 1 July 2015, low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,045 or less in 2014; middle-income economies are those with a GNI per capita of more than $1,045 but less than $12,736; high-income economies are those with a GNI per capita of $12,736 or more. Lower-middle-income and upper-middle-income economies are separated at a GNI per capita of $4,125.
In the academic literature there is much discussion and analysis of two main types of constraints faced by developing nations in the DSU, which have been thought to hold back participation of developing members in the system. As expressed by Guzman and Simmons, these are “capacity constraints”, a term which includes the limits imposed by shortage of skilled human resources or lack of finance for use of outside legal assistance, and “power constraints”, a term which covers the impact of possible retaliatory action by major players if their policies or measures were challenged in the WTO. These restraints can be addressed and incorporated in the system of multilateral trade agreement policies and a clause to address the needs of developing nations must be encapsulated.
* Aayushi Singh, V Year, Symbiosis Law School, Pune