Investment Issues at the WTO

September -2001


Investment came into the scope of WTO in the Uruguay Round through the Agreement on Trade Related Investment Measures (TRIMs) and the General Agreement on Trade in Services (GATS). Review of both of these agreements forms part of the WTO’s built-in agenda and is being discussed since the last five years at Geneva, therefore it is vital that developing countries develop a clear strategy on how to approach the issue in future.

The EU and several other countries are also pushing for a fully-fledged multilateral investment agreement under the auspices of the WTO, on which many countries are opposed. However, if this does form part of the likely agenda for a new round of trade talks, developing countries must be prepared to defend their interests by taking an active part in the negotiations. This paper highlights the required strategies for developing countries.


Foreign direct investment provides much needed resources to developing countries. These include capital, and intangible assets like technology, know-how, access to markets, brands, managerial skills and entrepreneurial ability that are essential for developing countries to industrialise, develop, and create jobs attacking the poverty situation in their countries.

Most developing countries recognise the potential value of FDI and have liberalised their investment regimes and engaged in investment promotion activities to try to attract more. Many have signed Bilateral Investment Treaties (BITs) that provide for investor guarantees, national treatment, dispute settlement etc. There are now more than 1900 BITs in place and their number is increasing continuously.

The issue of investment policy has been dealt with at the WTO under the Agreement on Trade Related Investment Measures (TRIMs) as part of the Uruguay Round Agreements. It is a limited agreement with few negative measures, which are being dealt with later. However, it also has a built-in agenda under Article 9 of the agreement, wherein the Members may recommend further policy measures on both investment policy and competition policy. At the 1st Ministerial Conference of the WTO at Singapore in December 1996, the Members decided to set up two study groups to examine the necessity of further accords on investment policy and competition policy. After nearly five years of work, the two groups are yet to come to any conclusion if such additions are desirable.


Following that study process, a multilateral investment agreement (MIA) at the WTO is being proposed by a number of countries including the EU, Korea and Japan. It is being vigorously opposed by India, Malaysia, Egypt and others, while the US has said that it will not stand in the way of such an agreement but nor will it be an active proponent.

Considering the realpolitik of the WTO, which involves trade-offs, some developing countries may be tempted to compromise on the issue in order to move forward in implementation or agriculture, or other bilateral issues of their interest. Both EU and Japan see the push for such an agreement to fend off protests on the further liberalisation of their highly protectionist agriculture policy. However, it is not in the interest of developing countries to go along with an MIA proposal.

There is no evidence that an international investment agreement would increase the flow of investment to developing countries and it would tie the hands of governments trying to channel investment flows according to their national developmental needs and strategies. Investment flows to developing countries have actually gone down as a proportion of total FDI since the implementation of TRIMs.


Even if countries do not agree to discussions on an MIA, investment issues will still be discussed as the TRIMs is mandated for review. During the review, developing countries should resist attempts to extend the scope of the treaty to include any of the following:

  • A broader definition of investment
  • Pre-establishment rights
  • Restrictions on non-trade related performance requirements

Developing countries should take the opportunity to press for amendment of the treaty on the following lines:

The Development Dimension. The current agreement fails to take into account the vast differences between countries in their needs from investment.

  • Introduce flexibility for developing countries to use local content requirements. Local content requirements can contribute to the development of domestic industry and have been used successfully by OECD and the newly industrialised economies in the past. The current TRIMs treaty requires developing countries to phase these out within the time limits for implementation (2000 for developing and 2002 for Least Developed Countries). These time limits are arbitrary and should be replaced with an indicator of development benchmark. Until countries reach this level, they should be able to introduce or retain local content requirements.
  • Flexibility to impose restrictions on balance of payments grounds should be retained.

Balancing the Agreement. The current agreement imposes onerous obligations on the governments of the poorer capital-importing countries. These need to be balanced against obligations for developed countries and businesses.

  • Regulate the use of investment incentives, or ‘positive TRIMs’. Incentives have the same distorting effects on investment flows as the limits and conditions imposed by negative TRIMs. Limits should be set on the levels of all incentives and a schedule imposed to reduce these further over time. Incentives that are not justified on developmental grounds should be banned under the revised agreement.

Regulating Investors:

  • Code of Conduct: Build a binding code of conduct for investors and countries into the agreement. Existing international agreements should be integrated and expanded into a comprehensive set of treaty provisions. This would prevent the exploitation of developing countries’ resources by powerful transnational corporations (TNCs) and the ‘race to the bottom’ phenomenon (lowering domestic regulatory standards to try to attract FDI). The agreement could include provisions on corruption, accounting and reporting, transfer pricing, technology transfer, information disclosure, environmental and labour standards, dispute settlement etc.
  • Competition policy and law: Any further liberalisation of investment should only take place after national and international competition regimes are strengthened. TNCs enjoy advantages over domestic firms in developing countries through economies of scale and monopolistic ownership of intellectual property such as brands and proprietary technology. Without competition law, foreign companies may abuse market dominance to the detriment of local firms and consumers, with long-term implications for the development of domestic production capabilities.
  • Home country obligations: Impose obligations on capital-exporting countries to regulate the behaviour of their TNCs according to their national standards. Some developed countries apply their anti-corruption laws to the activities of firms outside the domestic economy. The same extra-territorial jurisdiction should be applied to corporate standards in other areas.


If an MIA is included on the agenda at Doha, developing countries can best safeguard their interests by participating actively in the negotiations on the agreement, whether or not they choose to sign on to the final outcome. They should insist on the following points:

  • Definition: The definition of investment should cover only foreign direct investment. Other capital flows are notoriously volatile and shocks to the domestic economy from short-term capital market movements can reverse long-term development gains. Furthermore, there is no conceptual justification for linking these flows with trade.
  • Screening: National treatment should apply only to the post-establishment phase, and not to pre-establishment. It is essential for developing countries to be able to screen investments to ensure that they meet with their developmental needs. Domestic ownership may have an important long-run effect on the development of the indigenous industrial capability of the country.
  • Performance requirements: There should be no further restrictions on performance requirements e.g. local employment, technology transfer etc.
  • GATS type approach: The agreement should adopt the same approach to liberalisation as the General Agreement on Trade in Services (GATS). Countries would offer to liberalise in sectors of their choice. Having liberalised a sector, countries should be allowed to reimpose restrictions if justified on developmental grounds.

Dispute settlement: Investor-state dispute settlement should not be allowed. This mechanism has generated damaging results under NAFTA and would lead to even more serious consequences in the broader international environment.

  • Code of conduct: A binding code of conduct for TNCs and countries as part of the Agreement.


As two mobile factors of production, the free movement of capital is conceptually tied to the free movement of labour. Developed countries are rich in capital and are therefore demandeurs for investment liberalisation. On the other hand, developing countries are rich in labour and should demand a reciprocal liberalisation on the movement of labour as a trade-off for agreeing to MIA, or building on the provisions for the movement of natural persons set out in the GATS.

This Viewpoint Paper is researched and written by Mr. Pradeep S. Mehta and Ms. Olivia Jensen of and for the CUTS Centre for International Trade, Economics & Environment.


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