Investment Policies: Scope and Prospects for Further Reforms at the WTO

1
Investment PoliciesScope and Prospects for
Further Reforms at the WTO

• Dr. Simon J. Evenett
• World Trade Institute
• Bern, Switzerland
• simon.evenett_at_wti.org and www.wti.org

2
Agenda

• Types of cross-border capital flows
• Magnitude of foreign direct investment flows
• Liberalisation of FDI regimes in the 1990s
• Economic effects of inward FDI
• What is the economic case for government
  intervention to attract FDI?
• What is the case for international collective
  action on investment rules?
• Existing international rules on investment
• Investment and the Doha Round

3
Sources

• Data UNCTADs annual World Investment Reports
  (available at the WTI)
• Ferrarini paper (in reader)
• Writings of Theordore (Ted) Moran and Gordon
  Hanson
• Check relevant chapter(s) in the World Banks
  book Development, Trade and the WTO.

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Types of cross-border capital flows

• Foreign direct investments (FDI)
• Greenfield FDI
• Mergers and acquisitions (M and A)
• Shorter term capital flows
• Portfolio investments
• Bank loans
• Non-bank loans
• Each type of cross-border capital flow has its
  own regulatory regime

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Magnitude of FDI flowsSource UNCTAD WIR 2002
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Distribution of FDI flows Source UNCTAD WIR 2002
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Trend towards liberalisation of FDI regimes
Source UNCTAD WIR 2002
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Types of FDI reform introduced in 2001 Source
UNCTAD WIR 2002
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Economic effects of inward FDI

• Labour market
• Employment
• Creating/expanding a pool of trained/skilled
  workers
• Output
• Sales to national markets
• Exports
• Technology and innovation
• Direct transfer to FDI recipient
• Spillovers to rival firms or to alternative
  activities
• Corporate social responsibility
• Environmental impact of FDI
• Use/abuse of market power by subsidiaries of
  foreign firms

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What is the economic case for government
intervention to attract FDI?

• Efficiency-based rationales for intervention
  require the identification of an externality
  created by FDI
• Externality is an effect on a third party that is
  not transmitted through voluntary exchange (or
  markets)
• Most of the identified effects of FDI (see last
  slide) are transmitted through voluntary exchange
• However, labour market pooling and
  innovation/technology spillovers need not be
• What are the optimal policy instruments to
  attract FDI?
• Subsidies?
• Trade-policy related measures?

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What is case the for international collective
action on investment rules?

• Last slide identified case for unilateral
  liberalisation of policies towards inward FDI,
  but what is the case for multilateral (or even
  regional) investment reforms?
• Does the political economy argument used to
  sustain collective action in trade policy carry
  over to FDI? Not necessarily, so a different
  argument is needed.
• Can one identify adverse spillovers from national
  FDI policies to harm other countries?
• Yes, competition over subsidies and incentives
  more generally

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Subsidies to attract FDI in the automobile sector
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Existing international rules on investment

• Bilateral investment treaties
• By now, over 2000 in place
• Regional investment agreements/rules
• For example, NAFTA and EU
• WTO rules, in particular
• TRIMS agreement
• GATS agreement
• TRIPS agreement?

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TRIMS agreement

• Rules
• Apply to goods only (not services)
• Ban TRIMS that are inconsistent with GATT
  provisions on national treatment and the
  elimination of quantitative restrictions on trade
• Do not define TRIMSjust gives an illustrative
  list
• Goal appears to be protect the market access
  rights of sellers to foreign investors

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Illustrative list of TRIMS

• Following applies to any domestic law or
  regulation, including those which confer benefits
  on foreign investors including
• Requirements on foreign investors to buy a
  minimum amount of domestic products
• Limitations on foreign investors ability to buy
  or use imported products, including those limits
  based on foreign exchange.

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What is a TRIM?

• Domestic content requirements which are less
  strict on domestic firms than foreign investors
• Trade-balancing restrictions on foreign
  investors sourcing and export decisions
• Foreign exchange balancing restrictions on
  foreign investors sourcing and export decisions
• Domestic sales requirements

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What is (probably) not a TRIM?

• Hard to say since only an illustrative list
  was provided for in the TRIMS agreement. The
  following are probably OK
• Direct or indirect subsidies to foreign investors
  that do not have performance requirements.
• Ownership or equity restrictions.
• Licensing regimes that do not involve
  performance requirements.

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How does TRIMS affect a countrys interests?

• Exporters of parts and components, which could be
  hurt by foreign domestic content requirements.
• As a recipient of FDI
• Nations cannot protect its intermediate goods
  producers using performance requirements on
  foreign investors.
• Nor can nations protect domestic firms with
  domestic sales restrictions or export
  requirements on foreign investors.

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GATS Agreement

• Note FDI is needed to contest many service
  sector markets
• Aims
• To liberalise entry into service sectors by
  foreign firms, so encouraging competition
• To constrain/guide the manner in which foreign
  firms are regulated in service sectors (alters
  post-investment regime)
• Coverage at most, service sectors only
• Modalities Positive list approach

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Investment and the Doha Round

• Investment is one of the Singapore issuesand
  future negotiations will depend on an explicit
  consensus being agreed on modalities at the
  Cancun WTO Ministerial in September
• Modalities on what? Eight items are listed in
  paragraph 22 of the Doha Declaration
• Discussions in Working Group on the Relationship
  between Trade and Investment

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Negotiating proposals

• See Ferrarini paper for an overview and analysis
  of them
• EC proposal
• US proposal
• Indian response

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Concluding remarks

• Economic effects of trade flows differ markedly
  from investment, so does the political economy of
  national (unilateral) reform
• The economic case for national interventions to
  attract FDI differs from the case often
  articulated by policymakers
• It is difficult to think of a case for using
  discriminatory trade policies as a means to
  attract FDI
• There is a real concern that investment
  incentives (often subsidies and tax
  reductions/holidays) offered to foreign investors
  are far in excess of the benefits that accrue to
  the nation

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Some parting questions

• Can the externality-related benefits of FDI be
  better quantified? If so, what guide would they
  provide for policymakers?
• What is the relationship, if any, between the
  economic case for further multilateral rules on
  investment and the proposals advanced to date for
  such rules by WTO members?
• Is a GATS-style (positive list) approach to
  negotiating further investment rules at the WTO
  more likely to overcome the objections of
  developing countries, such as India?