By Murray Gibbs and Mina Mashayekhi

14 May 1998

1. This note reviews the negotiations in the Uruguay Round and subsequently in the WTO on investment issues, with the objective of drawing "lessons" which would be relevant for future consideration of this issue in the WTO. The first part of the note provides historical background by examining the major steps in the negotiations of the TRIMs and GATS Agreements in chronological order. The second part focuses on specific elements of these negotiations which seem most relevant to the future. Reference is made to the negotiations on the Multilateral Agreement on Investment in the OECD, where relevant.

2. Investment was a major issue during the Uruguay Round negotiations. The negotiations in the context of GATS, TRIMs, TRIPS, Government Procurement, and Subsidies,[1] as well as the MAI and discussions at the WTO Working Group on Trade and Investment have demonstrated that many countries continue to have concerns with providing right of establishment to foreign investment and consider it important to maintain flexibility in their economic and development policies. All multilateral negotiations on this subject since the Havana Charter have been marked by the reluctance to subject investment policies to international rules and disciplines.

3. Many developing countries use a combination of investment incentives and performance requirements to pursue a variety of development objectives: to orient resource allocations to sectors considered to have a particular growth potential, to build up a viable domestic private sector, to promote vertical integration, to attract foreign technologies or export-oriented investment, or to improve access to major markets and export marketing capacities. In many cases, moreover, since policy instruments to ensure free domestic competition are not sufficiently effective or enforceable vis-a-vis large foreign enterprises, investment measures are relied upon to correct market distortions created by these enterprises.

4. The basic policy dilemma that developing countries face is that the attainment of economic and development objectives imply the need for limiting the full application of the principles of market access and national treatment, while with the phenomena of globalization, to promote international competitiveness more liberal FDI policies are required. Moreover, with the reduction of official aid countries need for private investment has increased. The TNCS favour establishment in countries with the least number of restrictions.[2] Liberalization of investment will not, however, guarantee establishment of foreign firms or development. This is demonstrated through the existence of regional imbalances in development, when examining national markets where perfect mobility of factors of production exists.[3]

5. The GATS provides for the above mentioned concerns through separate provisions on market access and national treatment to be scheduled as commitments in the selected sectors and modes of supply. In the sectors subject to specific commitment performance requirements could be scheduled as limitations to market access and therefore maintained. The MAI attempts to combine obligations on market access for investors (i.e. termed "right of establishment" or "pre-establishment national treatment") and national treatment including possibility of lodging reservations and excluding sectors, with rules on the protection of investors (drawing upon the provisions of BIT). The negative list approach taken in the MAI does not facilitate progressive liberalization through the exchange of market access commitments.

6. A list of performance requirements are prohibited under MAI e.g transfer of technology, joint venture, domestic equity participation, to hire a given level of nationals. This will limit the flexibility of countries in respect to their industrial policies and would mean that investment would not lead to learning effects and the important externalities in the rest of the economy (e.g. building of domestic capacities through TOT, strengthening of management techniques, human resource development). Moreover, although it provides obligations for host governments, it does not include disciplines for abusive behaviour of investors. Investors are provided with the possibility to take states to arbitration but governments are supposed to deal with problems they encounter with investors within the context of national legislations.

7. In view of the above, any future framework for investment in the WTO needs to allow for trade offs and reciprocal benefits, as well as provide for movement of different factors of production, and permit the maintenance of key development oriented performance requirements to maximize the welfare gains from liberalization. The positive list approach will permit flexibility to make market access and national treatment commitments on commercial presence in those sectors where countries wish to attract investment. Moreover, such access could be conditioned with certain performance requirements which could also improve welfare gains by encouraging for example transfer of technology and management techniques.

8. Whereas the structure of the GATS (i.e. positive list approach) has enabled developing countries to maintain the flexibility needed for implementing their industrial policies (performance requirements), transitional periods and special and differential treatment provisions contained in other agreements e.g. TRIMs have not dealt effectively with development concerns in relation to implementation difficulties. For example, some developing countries have not identified their TRIMs in time for notifying them and therefore protection under the transitional period is not being granted to them.

9. Experience of GATS demonstrates that "development friendly language" is difficult to apply in practice (Article IV of GATS) and that developing countries interests are best protected through a structure (positive list approach and possibility to maintain performance requirements) that maximizes their negotiating leverage and possibilities of trade offs.

10. Particular attention needs to be given to definitional issues to ensure that the scope of any agreement on investment is clearly circumscribed so that it would not lead to difficulties for the operation of economic, development, monetary or exchange rate policies. Particular attention should be given to the use of terminology e.g. "right of establishment", "commercial presence", "pre-establishment national treatment" to obtain political acceptance. A broad definition of investment (including volatile capital) providing for the concept of assets of economic value to an investor including resources could result in protecting future business forms that parties did not specifically agree that they should be protected as investment.

11. The experience of the Uruguay Round has been that in order to maintain influence over the future international trade agenda consistent with their growing importance as markets for investors, developing countries will need to establish alliances of like-minded countries which would have the capacity to put forward concrete proposals. In this context, the main actors behind negotiating proposals and their essential objectives should be identified.

12. To maintain the coherence of the international trading system and the balanced results achieved during the Uruguay Round, it would seem preferable to build on the achievements of the Uruguay Round in relation to trade related investment issues. Under the GATS the most significant market access commitments have been obtained in relation to commercial presence, particularly in the post-Uruguay Round negotiations on financial services and basic telecommunications. Under the GATS framework liberalization of commercial presence is viewed jointly with development objectives as a result of the positive list approach and possibility to condition access including through imposing performance requirements. The GATS provides for successive rounds of negotiations (next round of negotiations is to take place in 2000) through expanding the schedules of commitments which will involve further commitments in the area of investment.

13. The expansion of the TRIMS Agreement to include trade-related elements of competition policy and investment would provide a framework to examine the spectrum of issues in relation to trade and investment regimes governing enterprises and enterprise behaviour,[4] as well as measures relating to investment and competition policy which frustrate the objectives of WTO agreements (subsidies, safeguards, agriculture). The issue of the protection of investment would seem to be best treated as a separate issue.

14. Although investment has often been included among the "new issues" for the future WTO trade agenda, it must be recalled that multilateral principles for investment had been addressed as far back as the 1947-48 Havana Conference. With the failure of the Havana Charter to enter into force, multilateral investment issues were largely addressed in UN fora, notably the Commission on TNCs. However, the investment issue was brought back to the GATT in the early 1980s and was very much a subject for the Uruguay Round negotiations. The preparatory work leading up to the 1982 GATT Ministerial meeting [5] which, in turn, set out the work programme leading up to the Uruguay Round investment measures and trade in services were items for consideration.

15. Investment was the issue underlying a number of proposals made by the United States. In 1982, the United States submitted a proposal on investment to the Preparatory Committee for the GATT Ministerial Meeting (Tokyo Round),[6] which did not gain support even from the EEC. At the fourth meeting of the Preparatory Committee leading up to the Punta del Este Ministerial Meeting in March 1986, the subject of trade-related investment measures was introduced by the United States in the context of a discussion on structural adjustment. On June 10, 1986, the United States put forward a text for the ministerial declaration on investment which provided that

"the Contracting Parties should 1) seek to increase discipline over investment measures which divert trade and investment flows at the expense of other contracting parties, in contravention of a major objective of the GATT, i.e. "the elimination of discriminatory treatment in international commerce" and at the expense of sustainable economic growth and liberalization. 2) explore a broad range of investment issues in the negotiations, including: national/MFN treatment for new and established direct investment and the right to establish an investment..., various types of trade-related investment measures: GATT contracting parties must examine ways to stem, and ultimately reverse, the use of these measures. Among these practices are : local content requirements, export requirements, incentives, and product mandating.[7]

The initiative to include investment per se did not enjoy much support and by the time of the Punta del Este meeting it was confined to "trade related investment measures"(TRIMs).

16. Developing countries, with some exceptions e.g. Jamaica, Chile, Singapore, also opposed the inclusion of trade in services in the negotiations. Developing countries perceived that the term "trade in services" had been invented as a means of bringing investment within the scope of GATT disciplines which they opposed. Their concerns were heightened with the passage of United States trade legislation (Trade and Tariffs Act of 1984) which lumped services and investment together as "trade" subject to the retaliatory provisions of Section 301. The inclusion of trade in services was viewed by many developing countries as reflecting the intention of the United States to legitimize the imposition of trade barriers against their exports of trade in goods in retaliation for restrictions they might impose on foreign investors.[8] Developing countries accepted the inclusion of trade in services in the Punta del Este Declaration, only on the condition that negotiations on trade in services would take place on a separate track from those on goods, with a clear development orientation.

17. Thus the first trade off in the Uruguay Round on investment was that only "trade related" investment measures (i.e. "TRIMs") to avoid adverse effects on trade were to be negotiated under the Group of Negotiations on Goods (GNG), while trade in services would be negotiated on a separate track in the Group of Negotiations on Services (GNS).

18. The first series of meetings of the GNS concentrated on the definition of "trade in services". Developed countries, argued that for most services the presence of the supplier in the foreign market, through some sort of investment, was necessary to provide the service. At the Montreal Ministerial Meeting in December 1988, it was agreed that the definition of trade in services should include movement of factors of production where such movement was essential to suppliers. Developing countries attempted to establish symmetry between capital and labour. However, this was not to cover permanent establishment nor immigration, but only activities characterized by specificity of purpose, discreteness of transactions and limited duration. Thus the second trade off in the Uruguay Round negotiations on investment was that a symmetry would be maintained between investment and movement of persons. The Annex on the Movement of Natural Persons, presented by a group of developing countries in 1990, was aimed at ensuring such symmetry.

19. In the period between the Montreal and Brussels ministerial meetings much work was done to refine the definitions, both of "trade" in services and of "barriers" to such "trade". The definition was drawn up to cover "the supply of a service by a service supplier of one member through commercial presence in the territory of any other member". Measures restricting market access, covering all modes of supply were listed in Article XVI of GATS, including "measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service" and "limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment".

20. On the other hand, it was seen that national treatment for foreign service suppliers if granted as a right, would imply unrestricted access to the market for most services. Hence it was decided, at the insistence of developing countries, that national treatment should be a subject for negotiating specific sectoral or sub-sectoral commitments, on a reciprocal basis. Furthermore, developing countries were permitted to impose performance requirements on investors benefiting from these access commitments under GATS Article XIX:2. Thus both market access and national treatment were the subject of negotiated commitments on investment, and performance requirements would be permitted for developing countries, recognizing however, that issues such as limits on foreign ownership would be subjects for negotiation.

21. The structure of the GATS agreement reflected proposals by developing countries. There had been considerable discussion as to whether the commitments should be set in the form of a "negative" list, i.e. the schedules would be comprised of those measures which each country wished to maintain which constituted exceptions to a common set of rules; or a "positive" list, i.e. where the schedules would set out the actual access and national treatment commitments that each member was willing to accept for each service sector included. The negative list was seen as infeasible for a number of reasons (as noted in paragraph 27 below), the most important being that there was no agreement on a common objective or target. Thus another "trade off" in the Uruguay Round was that investment commitments would be drawn up in the form of a positive list, but for each sector included, all the barriers to market access and deviations from national treatment would be "bound". (It should be noted that the MAI uses the negative list approach).

22. The concluding phase of the negotiations on trade in services highlighted by the showdown between the United States and the European Community over the "cultural exception" proposed by the latter. The United States refused to accept the inclusion of a cultural exception in GATS, the EC consequently did not make any concessions on audio visual services and (along with Canada and other countries), included this sector in their list of Article II.2 exceptions from unconditional MFN treatment. As noted below, the cultural exception has become a major issue in the MAI.

23. The GATS agreement also left certain Articles open for future negotiation, Article X on Emergency Safeguard Measures, Article XIII on Government Procurement, and Article XV on Subsidies. The results of these negotiations are directly relevant to any future investment disciplines. The negotiations on Article X are of particular importance to investment, as the rules on emergency safeguard measures will define those situations in which governments may depart from national treatment commitments to intervene to protect national firms from injury resulting from rapid expansion of sales by foreign owned firms.

24. Two basic issues separated the participants in the TRIMS negotiations which were conducted in a negotiating group reporting to the GNG, i.e. (i) whether the disciplines developed in this area should be limited by existing GATT Articles or expanded to develop an investment regime, (ii) whether some or all TRIMs should be prohibited or should be dealt with on a case-by-case basis demonstration of direct and significant restrictive and adverse effects on trade. In the TRIMs negotiations, certain developed countries, notably Japan and the United States, put forward proposals that implied the negotiation of new rules with respect to various aspects of investment policy, notably incentives and performance requirements.

25. The United States and Japan were in favour of an international investment regime that would establish rights for foreign investors and reduce constraints on transnational corporations. They believed that TRIMs had adverse trade effects and that this was a sufficient reason to make the case for applying general principles and disciplines to control them e.g. III and XI. The submissions by these countries [9] enumerated a number of regulatory performance requirements adopted by governments of host countries, which were alleged to have trade-distorting and inhibiting effects, such as requirements for local content, export performance, trade balancing, domestic sales, manufacturing, product mandating, remittance restrictions, technology transfer, licensing and local equity. Incentives granted by governments were included because they allegedly led to distortions of trade flows.

26. The United States position was that GATT already covered trade-related investment measures but that these should be addressed more explicitly through the elaboration of additional disciplines.[10] Certain TRIMs should be categorically prohibited, and a test should be established to evaluate the adverse trade effects of other TRIMs, that a framework should be developed to phase out prohibited TRIMs. Arrangements could be made for a transitional period during which developing countries would eliminate the prohibited TRIMs.

27. The proposal by Japan also drew attention to the need for inclusion of both national and local government measures, and the elaboration of a methodology to facilitate examination of the effects of TRIMs by classifying them into those that were clearly inconsistent with GATT (type A) which would be prohibited and those that were consistent with GATT but were relevant to its provisions (type B) for which additional disciplines would be developed. Type A measures include local content, export performance, trade balancing, domestic sales, technology transfer, manufacturing, and product mandating requirements. Unlike the United States, Japan did not seek to discipline investment incentives.

28. The EC [11] focused on measures that had a direct and significant restrictive impact on trade and a direct link to existing GATT rules identifying eight TRIMs that met the criterion of being directed at the exports and imports of a company with the immediate objective of influencing its trading patterns (local content, manufacturing, export performance, product mandating, trade balancing, exchange restrictions, domestic sales, and manufacturing limitations concerning components of the final product). A distinction was made between the general issue of foreign direct investment, and the more specific issues of trade-related investment measures and therefore opposed the inclusion of right of establishment in the negotiations. They believed that direct and indirect trade effects of investment measures should be evaluated separately. Indirect trade effects in their opinion were caused by TRIMs related to licensing, local equity and technology transfer requirements, remittances and exchange restrictions, and investment incentives. TRIMs with indirect effects would be subject to consultation and dispute settlement procedure.

29. Developing countries called for strict adherence to the mandate and for limiting the negotiating exercise to the effects of investment measures or regulations that had a direct and significant negative effect on trade.[12] On the basis of an effects test, developing countries wanted to ensure that there could be no a priori presumption that investment measures were inherently trade restrictive or distorting. The intended objective of their proposals was to maintain maximum flexibility in respect to investment policies including remittance restrictions, technology transfer requirement, local equity requirements, licensing requirements, incentives to achieve economic growth, trade expansion, industrial, social and development objectives.[13]

30. The effects test would require credible evidence based on a case-by-case examination of investment measures (as in the FIRA panel case) to establish whether a direct and significant adverse effect on trade existed. In such cases a clear causal link would need to be demonstrated between the measure and the alleged effect; and if such a link was established, the nature and impact on the interests of the affected party would need to be assessed and appropriate ways and means would have to be found to deal with the demonstrated adverse effects, including in relation to the treatment accorded when development aspects outweigh the adverse trade effects.[14]

31. Whilst highlighting their need for foreign direct investment, they maintained that certain investment measures or performance requirements were necessary to channel foreign investment according to their national development policy objectives. Developing countries argued that they used TRIMs to offset the anti-competitive practices of the transnational corporations, and that these should be addressed, particularly the restrictive business practices which in themselves would have trade-distorting effects in any solution decided upon (see Annex I). Such measures were considered outside the scope of the negotiating mandate by the United States and the EC.

32. A group of like-minded developing countries were successful in preparing a joint counter proposal, which had the effect of blocking the negotiation of new rules on investment and confining the TRIMs agreement to a restatement of existing GATT rules drawing upon the results of GATT jurisprudence. In fact, the TRIMs Agreement actually permits developing countries, and particularly least developed countries to maintain prohibited TRIMs to year 2000 and 2002 respectively with the possibility of seeking extensions in individual cases. The real trade off in the TRIMs agreement was the decision to consider in 1999, the possibility that it could be "complemented with provisions on investment policy and competition policy". This symmetry was established at the insistence of developing countries which saw TRIMs as a means of preempting the use of certain anti-competitive practices by TNCs.

33. While the paper does not examine the negotiation of the TRIPs Agreement, it should be noted that the objective of enforcing property rights (based on a set of norms/standards drawn up at WIPO and directly included as trade obligations in TRIPs) through trade sanctions which was not achieved for investment, was achieved with TRIPs Agreement.

34. At the end of the Uruguay Round it was agreed to continue negotiations on three sectors under GATS (basic telecommunications, financial services, maritime transport) and one mode of supply (movement of natural persons). These have been completed, but have not resulted in achievement of reciprocal benefits by developing countries. Whereas the negotiations on maritime transport were put off to the next round of negotiations on services in the year 2000, and the negotiations on movement of natural resulted in commitments of limited scope, those on basic telecommunications and financial services achieved substantial results, mainly in the form of commitments on investment. These negotiations were almost totally oriented to achieving of increases in the permitted percentage of foreign shareholding.

35. Work is still underway in the area of rules i.e. emergency safeguard mechanism, subsidies, government procurement and professional services (accounting). In the absence of any reciprocal benefits and linkages, most of this work programme will probably be carried over to the next round of negotiations, which, as provided in Article XIX of GATS, must begin before the year 2000. The same Article provides that the Council of Trade in Services shall carry out "an assessment of trade in services in overall terms and on a sectoral basis with reference to the objectives of GATS, including those set out in Article IV". Within the same time frame, the Council for Trade in Goods is to consider whether the TRIMs Agreement should be complemented with provisions on investment policy and on competition policy.

36. The Group on Trade and Investment in the WTO established at Singapore Ministerial Conference has held preliminary discussions on a checklist of issues.[15] These discussions have not yet resulted in narrowing down the scope of issues to be examined. The negotiations in the OECD on a Multilateral Agreement on Investment (MAI) have met some difficulties and in May 1998 ministers decided to suspend negotiations until October 1998. It seems that the MAI, which draws heavily on the investment provisions of NAFTA, is expected to be much less ambitious than envisaged by the main proponents of such an agreement, and thus may not be acceptable to them, while opposition is beginning to mobilize, particularly at the provincial and state levels in federal countries.[16]

37. The United States' Helms-Burton and D'Amato legislation (involving the issue of extra-territoriality), the United States' proposals to include labour and environmental standards, and the proposal by France and Canada on cultural exception, and the EU's insistence on exception for regional integration agreements have created major difficulties in completing the MAI. The OECD members seem reluctant to accept further commitments to liberalize restrictions on foreign investment that go beyond what they have already accepted in the WTO or in free trade agreements. The MAI may be rejected by both its proponents and its opponents.

38. The inclusion of investment on the agendas of international organizations was due mainly to initiatives of the United States [17] which took the position that there was a need to anticipate changing realities in the international trading system through a coherent integrated approach to negotiations on goods, services, high technology and investment.[18] These objectives were pursued in a comprehensive way through an extensive programme of research both nationally and in the context of work programme of several intergovernmental organizations e.g. OECD.

39. The initiatives directly related to market access problems encountered by the private sector and were driven by the private sector. In fact the first push for disciplines on services in GATT was made by American International Group (AIG) during the Tokyo Round (AIG was having problems in some of the Asian markets. "Trade in Services" emerged too late as an issue for the Tokyo Round, but "services" and "investment" were included in a new broader definition of "trade" in US implementing legislation and within the scope of Section 301. In 1978 the AIG was joined by American Express Company (AMEX) in the effort to open services markets by securing a place for services in trade talks. The term "trade in services" was invented to facilitate the negotiation of investment issues in GATT.

40. The private sector devoted substantial funds and effort to ensure that "trade in services", defined to include investment, would become an acceptable terminology with the objective of placing investment on the GATT negotiating agenda. Amex helped establish the Coalition of Services Industries, and the Advisory Committee to the USTR and sponsored research in US and Europe. These initiatives were strongly supported by the US Executive Branch, notably USTR, which sought to strengthen those political lobbies which would favour free trade initiatives. Developing countries would need to mobilize their domestic private sector to make a more active contribution to their trade agenda including by systematically gathering information on the access barriers met by the private sector.[19] Monitoring and understanding private forces requires particular attention by developing countries.[20]

41. If developing countries are to maintain influence over the future international trade agenda including in the area of investment, consistent with their growing importance as import markets, they will have to exert considerable efforts to prepare technically sound initiatives reflecting the realities of globalization and liberalization for action in their favour i.e. "positive agenda", and to form solid alliances and to counter proposals emanating from developed country fora. It is also essential to identify the "prime movers" behind these initiatives, and their underlying motives. The success of developing countries in influencing the outcome of the Uruguay Round negotiations on investment (i.e. on trade in services and TRIMS) may be one reason contributing to the decision by OECD countries to negotiate the initial MAI in that forum.

42. Developing countries were successful in achieving balanced results in the Punta del Este Declaration and exerted considerable influence in the Uruguay Round, due to the fact that the agenda for the Round was set in a major diplomatic conference in the preparation for which they were able to mobilize their intellectual and diplomatic resources. Moreover, the Uruguay Round took enough time to permit the establishment of alliances among like-minded countries, including with developed countries, on specific issues. Alliances were instrumental in obtaining a satisfactory outcome in the structure of the GATS, the inclusion of the movement of persons in the GATS and limiting the scope of the TRIMS Agreement to existing rules.

43. In the post-Uruguay Round trading system, developing countries are faced with serious challenges in exerting influence over the process of setting the international trade agenda, given that there has been a tendency towards continuous and sectoral negotiations (e.g. ITA-type initiatives) which has made it difficult for developing countries to effectively prepare initiatives and counter proposals.[21] This situation requires the re-establishment of alliances of like-minded countries in the form of an informal core group to define positive agenda in the area of investment in general and in its [22] sub-issues. As it is difficult to form an alliance of developing countries on broad issues -efforts should be made to address specific components of the negotiations. Increased efforts are also needed in human resource development and institution building. Recent progress in sub-regional integration agreements may facilitate this process.

44. In the GATS negotiations, developing countries put forward several written, joint proposals on the multilateral framework, Annexes on basic telecommunications, movement of natural persons and financial services. They also submitted a counter proposal which confined the TRIMs negotiations to the trade rules. Where like-minded developing countries took joint initiatives they were successful in obtaining results. The structure of the text presented by a group of developing countries from Asia and Africa, has considerably influenced the GATS text. The Afro-Asian text's structure made a clear distinction between what is of a general mandatory character (e.g. MFN and transparency) applicable to all sectors, and those subject to negotiated commitments, i.e. national treatment and market access, which would be applicable to specific concessions at the sectoral and subsectoral level in particular modes of supply (positive list approach).

45. AMEX and AIG made considerable effort to ensure that the terminology trade in services would be accepted,[23] realizing the political importance of such terms. Terms are invented to obtain political support for economic objectives. It is paradoxical that the term "trade in services" was invented by those wishing to include investment in GATT; but now it would appear that the same countries, given the new political context, may wish to differentiate "investment" from "services" as was done in NAFTA. This highlights the importance of definitions, concepts and terminology in determining the scope of any future disciplines on investment and the need to give attention to definitions from the outset of discussions on investment (for example, the concept that "trade and investment" is a "new issues"). Care needs to be taken to avoid confusion resulting from terminology and to retain a historical perspective.

46. The 1988 Montreal Ministerial Mid-Term Review accepted that work would proceed on a definition of "trade in services" flexible enough to include those services, the delivery of which required the movement of factors of production across borders.[24] The idea of symmetry as between the treatment of factors of production was pressed by developing countries, that is if capital as a factor were to be included, then labour should also be included in the definition of trade in services. This balance between the two factors of production was logical, and seen as a major "victory" by developing countries at the time, but has not been effectively maintained in subsequent negotiations. The schedules of specific commitments do not reflect such symmetry. In accordance with the definition of trade in services the establishment of foreign investors became a subject for sectoral negotiations and subject to reciprocity in other service sectors and trade in goods. Every WTO member has included commitments related to establishment of investors in its schedule, in recognition of the advantages of foreign investment.[25]

47. The inclusion of the Annex on Movement of Natural Persons, deriving from an initiative taken by a group of like-minded developing countries is a clear recognition that concessions with respect to all categories of natural persons could be negotiated. The commitments on this mode of supply cover both movement of intracorporate transferees and contracted professionals. Trade in goods and services and investment can not effectively take place without movement of persons, and the movement of persons from developing countries appears subject to ever increasing restrictions.[26] Establishment of enterprise structure with commercial presence in the importing market would facilitate movement of persons.

48. To supply services effectively would require market openings to be made in the four modes given the interdependence among the modes. This is clear from the schedules of commitments which link in particular cross border mode and movement of natural persons to the establishment of a commercial presence. More efforts are needed to include more liberal and sector-specific commitments with respect to the movement of natural persons in the schedules to achieve symmetry between movement of capital and movement of labour. To have full and effective contestability of the markets it would be necessary that labour move as freely as capital,[27] and provide for streamlined visa requirements to facilitate temporary movement of business visitors and service suppliers.

49. The concepts underlying the definitions have provided a framework where liberalization by developing countries with respect to investment and cross-border movement (mainly that falling into the category of what is now termed "electronic commerce") can be traded off for advantages with respect to other modes of supply (i.e. movement of natural persons), or other advantages under GATS or with respect to market access for trade in goods. Separate agreements with respect to individual modes of supply could seriously erode this balance and undermine liberalization efforts.

50. The GATS contains an enterprised based definition of investment, that is an investor is in a position to exercise direct control or influence over an investment and the investment is generally viewed as a corporate entity. GATS Article XXVIII(d), (m) and (n) provides inter alia that commercial presence is any type of business or professional establishment including through the constitution, acquisition, or maintenance of juridical person, or the creation or maintenance of a branch or a representative office within the territory of a member for the purpose of supplying a service. A juridical person under the GATS is "owned" by persons of a Member if more than 50 per cent of the equity interest in it is beneficially owned by persons of that Member, "controlled" by persons of a Member if such persons have the power to name a majority of its directors or otherwise to legally direct its actions. This approach is also followed by OECD instruments and Canada-US FTA.

51. MAI follows the approach of NAFTA and the Energy Charter in providing for a broad definition of investment (including portfolio investment) and covers not only capital that crosses the borders, but also other kinds of assets of an enterprise which could result in protecting future business forms that parties did not specifically agree to. The broad definition was accepted once it was agreed that appropriate exceptions, safeguard provisions and reservations could be negotiated.

52. The unconditional MFN principle which is the main pillar of the GATS would ensure that the benefits of any agreement negotiated elsewhere on services would be granted to WTO Members. At the beginning of the Uruguay Round, developing countries had to oppose the idea of introducing "conditional MFN" into the Agreement. It should be noted that during the negotiations, particularly on financial services the possibility of retaining MFN exemptions has been used as negotiating leverage to obtain additional concessions, rather than its original purpose of "grandfathering" existing preferential treatment or reciprocity requirements in domestic legislation. Moreover, it should be noted that GATS Article XVI.1 [28] clearly provides that the MFN exemptions cannot be applied to commitments included in the Schedules.[29] There is a need to ensure that the MFN principle is not abused or weakened as it would weaken the benefits of a multilateralization of concessions and the multilateral trading system. Moreover, negotiations should be on the basis of mutual benefit (GATT Article XXVIII, GATS Preamble paragraph 3) not threat of retaliation.

53. The term "grandfather clause" has come to describe provisions which permit countries to maintain measures which otherwise would be prohibited, usually limited by time, in the GATT Protocol of Provisional Application or the MFN exemptions under Article II.2 of GATS. In the negotiations on financial services the term "grandfathering" came to be used to apply to commitments not to roll back foreign ownership in specific firms, where these exceeded the bound limits. To call the binding of the status quo market access situation a "grandfather clause" would seem a misuse of the term, as the same logic could be applied to "grandfather" unbound tariff rates or GSP. Moreover, such "grandfathering" would seem to discriminate against new entrants to the market which would only enjoy the right to the access provided in the schedules, in favour of established suppliers, to increasing the economic rents of the latter.

54. During the financial services negotiations, which focused mainly on obtaining investment commitments preserving the existing ownership rights of firms was an important objective for the United States.[30] Malaysia refused to "grandfather" the existing ownership rights of AIG, given its national policy objective in relation to promoting economic balance between the major ethnic groups in Malaysia. The United States retaliated by including an MFN exemption in relation to forced divestiture of existing investment to the extent that acquired rights were not protected by bindings in insurance services.[31] The EC interpreted this MFN in the sense that the circumstances addressed did not cover cases of nationalization of a sector or a subsector when the nationalization applied in the same manner to all companies independently of their nationality. The stance of Malaysia demonstrates that Governments are determined to defend the principle in GATS that their commitments do not extend beyond what they have included in their schedules and that certain national policy objectives override interests of existing ownership rights.

55. The GATS structure ensured that the development objective would be integrated throughout the text of the agreement through provisions providing flexibility for developing countries and ensuring their increased participation in trade in services. The positive list approach to the negotiation of commitments increases the possibility for tradeoffs and allows obtention of reciprocal benefits. Thus, facilitating the efforts of developing countries to liberalize their own services sectors. The structure of the GATS has proven to be of greater utility to developing countries, than declarations in their favour, such as in GATS Article IV. Any new disciplines in the area of investment would need to provide a structure that would facilitate achievement of reciprocal benefits of liberalization in investment for liberalization in other service sectors or mode of supply or even in goods e.g. tariffs, agriculture. The inclusion of investment in GATS has in fact increased the negotiating leverage of those developing countries which are "interesting" for the capital exporting countries.

56. In the negotiations on the GATS all the impracticabilities of the negative list approach were examined [32] and GATS adopted the positive list approach which facilitates the achievement of reciprocal benefits and reduces the risk of omissions.[33] Moreover, it should be noted that in a negative list approach new sectors which are rapidly arising as a product of information technologies, could be automatically covered by GATS disciplines, unless explicit action would be taken to exclude them. A negative list approach is appropriate to a context where all parties have subscribe to a common objective, such as in the OECD Codes or in free trade agreements such as NAFTA. Introduction of a negative list approach into the WTO would imply a major change in the whole philosophy of the organization under which multilateral trade negotiations are to be based on reciprocity and mutual advantage.

57. Acceptance of a negative list approach for investment or services would only be coherent if free trade targets were also established for market access in goods. Application of a positive list approach to investment in the area of goods would involve agreeing on a market access article comparable to Article XVI of GATS (which allows for scheduling a list of limitiations including performance requirements). Countries could make commitments on market access and national treatment (i.e. post establishment). A separate article comparable to Article IV of GATS and XIX.2 could provide for maintaining incentives and performance requirements for developing countries.[34]

58. The MAI approach (based on NAFTA and US BITs) of providing right of establishment by applying national treatment to the pre-establishment phase does not reflect general practice in most BITs. Moreover, the application of national treatment in respect of entry of foreign investments is far more difficult than its application to trade in goods in terms of establishment of similar situations. The BITs usually provide limitations to national treatment and apply the principle where domestic and foreign investor find themselves in "identical" or "similar situations", or "in like circumstances" or even to " similar activities". MAI provides for application of national treatment and MFN in like circumstances.

59. The MAI deals with issues going beyond strictly market access issues e.g. protection of investment. The question arises as to whether a comprehensive set of principles dealing with all aspects of investment policy could appropriately be linked to trade obligations enforceable through trade sanctions, or whether specific provisions could be elaborated in WTO agreements to ensure that their objectives were not frustrated by restrictions or conditions on investment.

60. Developing countries were successful in the Uruguay Round of negotiations to obtain reciprocal benefits i.e. they are entitled to seek improved access in respect of other benefits in return for commitments to liberalize in any particular service sector. The GATS provides for progressive liberalization of trade in services through successive rounds of multilateral negotiations. The sectoral negotiation which followed Uruguay Round in the area of maritime transport failed because of protectionist pressure, particularly in the United States, and the results of the negotiations on movement of natural persons were minimal. Given the strong trade interest of major trading partners and bilateral pressures, the sectoral negotiations on basic telecommunications and financial services yielded good results for their proponents, but did not provide reciprocal benefits/tradeoffs for developing countries. In both sectors developing countries are mainly importers, however, they had an interest in liberalization, particularly of their basic telecommunications sector.

61. Developing countries need to pursue more comprehensive negotiations which would provide for mutually advantageous outcome and foresee developed country initiatives e.g. in the area of electronic commerce, energy service or environmental services through monitoring trade legislation and regional initiatives (e.g. bilaterally between United States and the EU, in the context of APEC etc.). Uruguay Round negotiations on services took place in a situation in which service export activities of developing countries and their knowledge of the realities of international trade in services were limited. Some guidelines would need to be established in identifying export sectors of real commercial interest candidates for early liberalization including in the commercial presence mode. Some of the following criteria could be used by a developing country in selecting sectors for liberalization: selecting the most heavily protected sectors in target market (professional services), selecting producer services which are inputs of goods exports (distribution, packing, quality control, advertising), and selecting sectors which are already important in service exports (tourism, health services, port services). Given also sectoral and modal interdependence, balanced and mutually advantageous results can only be obtained through a round of comprehensive negotiations.

62. Transnational companies (e.g. AIG) openly influenced the process of the negotiations through direct recourse to their home countries in their dealings with the host country to achieve greater market access, without respecting national policy objectives.[35] This has again illustrated the contrast between the "myth" of globalization, according to which TNCs have become genuine international citizens and the "reality", in which governments intervene to protect and further the interests of their enterprises abroad, providing the foreign firms with de facto treatment better than national treatment. The Latin American countries had addressed the problem as early as in the nineteenth century, through the "Calvo Doctrine" (1868), which provided that an alien established in a State had the same rights as a national of the State, but was not entitled to count on his home State or foreign courts for protection. The Doctrine also provided that no State might intervene, diplomatically or otherwise, to enforce one of its citizen's private claims in a foreign country.[36]

63. The GATS in effect represented a departure from the Calvo Doctrine; as the sales by foreign firms in the host country market are defined as "exports" of services, actions affecting such foreign firms, in contravention of the GATS rules and commitments are legitimate subjects for the home country to raise in the dispute settlement mechanism. The GATS, therefore, legitimizes the differentiation between "national" and "foreign" firms, as only the latter would have rights under GATS. The question of "origin", i.e. whether a firm is in fact "of another member" and if so, which WTO Member is entitled to defend the rights of a given firm also will inevitably arise.

64. The Havana Charter for an International Trade Organization [37] contained provisions on the encouragement of the international flow of capital for productive investment (Article 1:2). Chapter III, Article 12, on "International Investment for Economic Development and Reconstruction" stated, inter alia, that "The Members recognize that, international investment, both public and private, can be of great value in promoting economic development and reconstruction and consequent social progress ... a Member has the right to take any appropriate safeguards necessary to ensure that foreign investment is not used as a basis for interference in internal affairs or national policies; to determine whether and to what extent and upon what terms it will allow future foreign investment...". Havana Charter encouraged investment but recognized sovereignty of countries to regulate investment. This suggests that disciplines maybe needed to ensure that foreign investors which receive national treatment, abstain from seeking recourse to their home countries to counter national policy objectives.

65. Although some disciplines on monopolies are included in the GATS, developed countries resisted the inclusion of disciplines on anticompetitive practices. Subsequent negotiations on basic telecommunications demonstrated that there was a need to include competitive safeguards and a reference paper was included in most commitments which included such safeguards.[38] However, developed countries appear to be seeking commitment on competition policy issues on a sectoral basis rather than aiming at disciplines applying to all services sectors.

66. There is an asymmetry between the treatment of disciplines governing government practices and corporate practices which would need to be tackled in future. In the MAI, investors are provided with the possibility to take states to arbitration but governments are supposed to deal with problems they encounter with investors within the context of national legislation relating to competition policy.[39] During the TRIMS negotiations also the issue of anticompetitive behaviour of enterprises was discussed and competition policy was included as a built-in agenda to be discussed in the year 2000. Developing countries insisted on symmetry, in the context of TRIMS, between investment and competition policy (Article 9).

67. Developed countries have pursued a coherent strategy to enable their transnational enterprises to achieve effective market access. The TNCs demand open access to telecommunications networks for the purpose of delivering information based services, the right to acquire and attach equipment to the national telecommunication networks, freedom to move their key personnel abroad, free movement of capital and liberalization of financial services. Through the GATS and successful negotiations on telecommunications and financial services and the ITA the developed countries have achieved effective market access for their TNCs. The negotiation of an ITA also highlights the linkage between trade in goods and services. Tariffs could be important barriers to trade in services that are either embodied in goods or for goods that are necessary inputs into the production of services.

Incentives and Performance requirements [40]

68. Incentives have been used as a policy tool by both developed [41] and developing countries for a variety of reasons: (i) to compensate investors for their perceived country specific risks which would provide investors with a reason to proceed with a project which would not have been viable at the normal rate of return, (ii) to use incentives to direct FDI flows towards particular industrial sectors and to regulate the type and nature of the FDI received as a strategy to meet particular development or regional objectives, and to curtail the activities of footloose investors e.g. by tying incentives to a commitment to sequential investment in the form of additional production capacity upgrading or diversification into related products, and (iii) to improve long term competitiveness and comparative advantage by capturing the type of FDI that facilitates transfer of technology, managerial know-how, skills network access, as well as a market overseas and economies of scale.

69. A combination of incentives and performance requirements [42] are used to ensure that the flow of investment would involve also transfer of a package of assets conducive to human capital development including managerial skill as well as transfer of hard technology e.g. information processing equipment. Given the tendency of TNCs to internalize technological assets, developing countries use combination of incentives and performance requirements to ensure externalization of such assets and domestic capacity building. Therefore, retaining the flexibility in using these policy tools is of particular importance to sustainable development.[43] Therefore the combination of a variety of incentives and performance requirements is aimed at securing a balanced regulation and enhancement of foreign direct investment in the host country.[44] Furthermore, the same mixture can ensure an adequate compromise between the interests of the host country and those of the investor.[45]

70. The availability of a diverse set of incentives and conditions provides flexibility in negotiations with potential investors, and may allow a bargain to be struck in which an incentive with high value to the investor and low marginal cost to the host country (such as access to the benefit of an existing free-trade zone) is traded for a performance requirement of low marginal cost to the investor but high real or perceived value to the host country (e.g. an agreed commitment for local expenditure on research and development).[46]

71. GATS legitimizes a list of performance requirements as subjects for liberalization negotiations enumerated in Article XVI. Moreover, it permits developing countries to attach conditions when granting access to their markets in Article XIX. The TRIMS agreement only confirms that local content requirements and some trade balancing requirements are prohibited by GATT, but does not prohibit other performance requirements.[47] In the negotiations on TRIMS, developing countries considered performance requirements necessary to channel FDI according to their national development policy objectives, to offset the preferential treatment/incentives and to offset or preempt the anti-competitive practices of TNCs (see Annex I on RBPs and TRIMs designed to deal with them)

72. Performance requirements which could be considered essential for development strategies include export performance, a minimum level of local equity, joint venture, hiring of a given level of local/national personnel, transfer of technology, nationality requirement for senior management, achieving a given level or value of production, investment, sales, employment or research and development.

73. The other side of the coin from reciprocity is cross-retaliation. The WTO Dispute Settlement mechanism provides that retaliatory sanctions are not limited to those concessions resulting from the GATS, but that cross-retaliation with concessions on trade in goods and intellectual property would be permitted under certain conditions. Although developing countries initially opposed inclusion of services in the Uruguay Round precisely for this reason, a number of developing countries moved away from this position as they considered the possibility of cross retaliation could be of use to them, since they are mainly importers of services. However, most countries would find it very difficult to cross-retaliate on the "commercial presence" commitments because of the disruptive effects of withdrawing access or national treatment to foreign investors. On the other hand, the possibilities of trade offs for commitments on investment for access for goods, or for aspects of new rules should be explored. For example, developing countries could agree to negotiate commitments on investment in goods as well as services, in return for retaining development-oriented performance requirements.

74. Given the unique characteristics of financial services - in that all economic activities are dependent on access to such services - and its key role in development, GATS Annex on Financial Services contains a "prudential carve out". The legitimacy of domestic regulation to protect investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial services supplier or to ensure the integrity and stability of the financial system was recognized. Many countries have scheduled prudential measures to ensure legal defense in case these measures would be challenged in future. Liberalization of investment in the financial services sector should take into account the legitimate functions served by capital market regulation, including ensuring the safety and soundness of the financial system and promoting investment by certain underserved groups and sectors e.g. minorities, SMEs, low-income housing or rural areas. During the negotiations developing countries highlighted that improved structures, better supervision and more prudential regulation and management skills are all necessary to capture the benefits of international financial flows. The recent turmoil in Southeast Asia illustrated the importance of above-mentioned reforms as a precondition for liberalization (in particular in new financial instruments) and the downside of international capital mobility. It should be noted that the importance of good regulations is not confined to financial services sector (GATS Preamble, paragraph 4).[48]

75. Discussions on subsidies, emergency safeguards (ESM), and government procurement were particularly difficult for reasons such as heavy subsidization of specific services sectors by developed countries e.g. construction, communications, and transport; lack of data and statistics, and fears that ESM may result in divestiture, use of government procurement for discriminating in favour of domestic service suppliers (particularly education, data processing, professional services, construction) e.g. Buy American Act, cargo reservation requirements. Discussions on ESM have proven that in the area of services given the sensitive, social and infrastructural character of many services the ESM would not only be needed when injury occurs to domestic enterprises as a result of increase in imports but also in circumstances of structural adjustment and assistance to emerging service sectors.

76. In the absence of provisions on emergency safeguard measures countries have built in such safeguards into their schedules of commitments. The financial services schedules contain many built-in-safeguards in the form of economic needs test or case by case examination of commercial presence, setting limits on equity ownership or quotas on the value of the resources or assets of the banking system held by foreigners. e.g. at all times 70% of the resources or assets of the banking system should be held by domestic banks which are at least majority owned nationals. Disciplines on ESM would encourage countries to further liberalization, particularly in the commercial presence and movement of persons modes. However, it would set important precedents in the area of investment policy as it will define the circumstances in which governments can intervene despite national treatment commitments, to favour domestic firms over foreign firms established in their territories.

77. The decision to establish Working Groups on "Trade in Investment" and "Trade Competition Policy" serves to accelerate the TRIMs built-in agenda. Many of the issues that came up during the Services and TRIMS negotiations and were left unresolved or were included in the built-in agenda have also come up during MAI negotiations. Their resolution has not proven more easy and it seems that the MAI would not include all the ambitious proposals on a high standard agreement but a more diluted type of agreement on investment. Some of the more difficult issues may be included in the built-in agenda of MAI e.g. subsidies, corporate practices, investment incentives. The issue of cultural exception which came up during the discussions on GATS and audiovisual services has also not proven easy to resolve in the context of the MAI.

78. Article XIX:2 of GATS provides that prior to the next round on progressive liberalization of trade in services, the Council for Trade in Services shall carry out an assessment of trade in services in overall terms and on a sectoral basis, with reference to the objectives of GATS, including Article IV. This study could assess the extent to which market access had been achieved in each of the categories listed in GATS Article XVI:2, including those related to foreign ownership.

ANNEX I: RESTRICTIVE BUSINESS PRACTICES BY TNCS IN DEVELOPING COUNTRIES, THEIR POSSIBLE OUTCOME AND TRIMS DESIGNED TO DEAL WITH THEM [1]

1 Hardeep Puri and Philippe Brusick, "Trade-related investment measures: Issues for developing countries in the Uruguay Round", Uruguay Round: Papers on Selected Issues (UNCTAD/ITP/10), 1989, p. 219.

1 The application of the Agreement on Subsidies and Countervailing Measures and incentives in the area of trade in goods needs further consideration.

2 Removal of restrictions, however, is not sufficient condition for attracting investment. Important factors relating to locational decisions relate to size of the market, geographical location, political and social stability appropriate legal and physical infrastructure, quality of labour force.

3 See Trade and FDI Policies: Pieces of a New Strategic Approach to Development, Manuel R. Agosin and Francisco J Prieto, March 1993.

4 See in this regard provisions of the UNCTAD Set of Multilaterally Agreed Principles and Rules for the Control of Restrictive Business Practices, Draft codes of conduct on transnational corporations and transfer of technology which provide elements for rules on anticompetitive behaviour.

5 Trade-related investment measures first made an appearance as a specific issue for debate in GATT in 1981. This was in the context of discussions on structural adjustment and trade policy. In the Consultative Group of 18 the United States submitted a report on investment performance requirements and incentives. In the report the US expressed concern that the increasing world wide use of such measures might also effect third countries' trading interests, even to the point of impairing benefits negotiated under the GATT. Report of the Consultative Group of Eighteen, GATT Doc. No. L/ 5210 , reprinted in GATT BISD 28th Supp. at 75-76 (1982).

6 In an attempt to ensure that the investment issue is addressed specifically in the GATT, the US requested on 31 March 1982 that the GATT Council establish a panel "to examine certain trade distorting practices in the implementation of Canada's Foreign Investment Review Act (FIRA)".

7 GATT Doc. No. PREP.COM (86)/W/35 (June 11, 1986).

8 At the Latin American Consultative Meeting the US proposal on investment was discussed and it was said that "This United States proposal is closely related to the services issue since, as has been shown in various studies, services delivery, that is to say, trade in the sector, normally requires some form of investment in the place where the service is to be delivered. consequently, an international trade regime on trade in services also implies a consideration of matters related to investments. This has, in fact been one of the main reasons why the developing countries have been opposed to the inclusion of the service issue in the negotiations. Latin American Consultation Meeting on Multilateral Trade Negotiations, GATT Doc. No. PREP.COM (86)/W/44/Add.1 p.33.

9 See submissions by the United States, documents MTN.GNG/NG12/W/1, W/2, W/4, W/5, W/9, W/11, W/14, W/15, and W/24. United States defined the effects of TRIMs under categories which (a)prevent, reduce or divert imports by limiting the sale, purchase and use of imported products, (b) restrict the ability to export by home and third country producers, and (c) artificially inflate exports from a host country, thereby distorting trade flows in world markets. See submissions by Japan, documents MTN.GNG/NG12/W/7, W/12 and W/20. See submission by Switzerland MTN.GNG/NG12/W/16, 7 July 1989. The Swiss proposal also called for comprehensive disciplines on TRIMs based on categorization of such measures in three groups namely, (i) Category A: prohibited investment measures i.e. those that influence the business behaviour of the investor during the production process and are thus inherently trade distorting e.g. local content, trade balancing, manufacturing, product mandating, and export requirements; (ii) Category B: permitted investment measures: i.e. all investment decisions per se, that influence decisions to invest, such as limitations to foreign investment and investment incentives for regional development; (iii) Category C: actionable measures, i.e. measures on which agreement could not be reached and ways and means to be agreed on to reduce their number. The proposal established formal methods and criteria for treating a given TRIM under a specific category based first on a classification by each country in the light of macroeconomic and trade conditions, and subsequently on multilateral negotiations. For category C, Switzerland proposed a request/offer exchange of concessions.

10 The United States attempted to categorize the effects of TRIMs as those which: (i) prevent, reduce or divert imports by limiting the sale, purchase and use of imported products; (ii) restrict the ability to export of home and third country producers; and (iii) artificially inflate exports from a host country, thereby distorting trade flows in world markets. It also requested that the applicability of some trade policy concepts to TRIMs should be considered, namely non-discrimination (MFN and national treatment), prohibition (as implicit in Articles I, II, XI, and XVI), transparency, and dispute settlement.

11 See submissions by the EC, documents MTN.GNG/NG12/W/8, W/10 and W/22, and the submissions by the Nordic countries, documents MTN.GNG/NG12/W/6 and W/23.

12 See Meeting of 30 October - 2 November 1987, document MTN.GNG/NG12/4, pp. 11-12, where some developing countries' positions have been summarized as follows: "the delegation could not accept the view that the objective of negotiations was to establish within GATT a new system to regulate trade-related investment measures or to provide for a smooth development of the international exchange of investment, as had been stated in the submission by the Japanese Government (MTN.GNG/NG12/W/7). The objective of the Group's work was to clarify the operation of GATT Articles and to elaborate such further provisions as may be necessary. This could not be construed as a license to create a new regime or agreement. It was clear that the negotiating mandate could not provide a basis to question the sovereign right of governments to regulate foreign direct investment and lay down conditions of establishment for foreign enterprises. Nor could it allow national policies on investment, industrialization and treatment of foreign capital to be questioned on the grounds that these were trade-related" and the "Second of these participants stated that the focus of discussions should be the examination of direct, significant, negative effects on trade caused by investment measures. In order to make GATT Articles applicable, such effects must necessarily bring about a concrete negative result on trade since investment measures per se were not covered by the General Agreement. The absence of a real link to trade for some effects of investment measures was leading some countries to apply subjective elements of presumption of eventual harm to trade flows. This was the case of such measures such as remittance restrictions, technology transfer requirements, licensing requirements and others. Measures of this kind related to issues of foreign capital treatment, in the scope of industrial policies, which were not of GATT's competence."

13 Two performance requirements were identified as having direct trade effect, (not necessarily adverse effect) i.e. export performance requirement and local content/local manufacturing requirements.

14 See submissions by Malaysia, Singapore, India, Mexico and Bangladesh (MTN.GNG/NG12/W 13, 17, 18, 19, and 21). Mexico proposed that the effects of two TRIMS i.e. export performance requirements and local equity requirements be empirically tested. See also joint submission by developing countries (Argentina, Brazil, Cameroon, China, Colombia, Cuba, Egypt, India, Tanzania and Yugoslavia) and draft declaration on TRIMs submitted by Bangladesh, Brazil, Colombia, Cuba, Egypt, India, Kenya, Nigeria, Pakistan, Peru, Tanzania and Zimbabwe (MTN:GNG/NG/W/25 and 26).

15 The issues include: (i) relationship between trade and investment and its implications for growth and development e.g. transfer of technology, effects on BOP, investment and competition, and investment and employment (ii) economic relationship between trade and investment, determinants of FDI and the nature of interaction between trade flows and investment flows, (iii) existing international arrangements on trade and investment, (iv) assessment of the need for future initiatives .e.g. obligations between home and host countries and between investors and host countries.

16 Fast Track opponents, many of whom could turn out to be MAI opponents, did not want to extend fast-track privileges to an investment agreement that could not be amended or extensively debated. Vangrasstek Communications, Washington Trade report, volume V, Number 23, November 18, 1997.

17 The EU is the main proponent of negotiating investment rules in WTO. The US, however, preferred to negotiate a high standard agreement on investment in the OECD.

18 The US negotiating objectives included a new concept of reciprocity, that of the achievement of commercial opportunities in foreign markets substantially equivalent to those accorded by the US.

19 Mobilizing the private sector involvement is one of the most challenging aspects of the negotiations. Particularly ensuring that they identify concrete "commercial interests" in particular target markets. Creation of coalitions of private sector service industries to act as focal points for detecting their commercial interest if of major importance. To establish what you want to export? how you want to export? and to which markets you want to export? is key to identifying barriers and real negotiating interests.

20 The financial services negotiations is a clear example of influence being directly exercised by developed countries transnational e.g. AIG in the process and the results of the negotiations.

21 There was no serious effort to establish alliances during the continuation of sectoral negotiations . This meant that developing countries failed to establish linkages amongst the sectors and mode of supply of natural persons and to obtain reciprocal benefits. Major trading partners, however, coordinated their efforts on basic telecommunications and financial services. This resulted not only in substantial market access results but also additional commitments in the form of reference paper on competitive safeguards in basic telecommunications.

22 Presently, a group referred to as "invisibles" has been established at the initiative of major trading partners to discuss and coordinate position on issues on the trade agenda. Some developing countries have been invited to participate in this group e.g. India, Brazil.

23 The scope and definition in the GATS of investment is supposed to be a narrow definition but it is subject to few exceptions, whereas the broad definition of investment adopted in the MAI which is broad asset based definition was only acceptable subject to a wide possibility of exceptions, safeguards and reservations.

24 It was decided that work on definition would proceed in light of the following: (a) cross-border movement of service and payment (b) specificity of purpose; (c) discreteness of transactions; and (d)limited duration.

25 i.e. technology transfer, new foreign markets for joint exports, financial capital, more efficiency and competition. These benefits would accrue if the recipient country has provided an appropriate policy and regulatory framework in particular in relation to competition policy

26 The MAI also provides for movement of intracorporate transferees. Given the negative list approach in the MAI the provision on key personnel constitute the ultimate objective, there would be no framework for requesting liberalization in excess of that provided for in the MAI. In other words, the MAI provides for free movement of capital, but restricted movement of persons. The MAI, however, provides that no party may require that an enterprise appoint to senior management positions and membership on boards of directors individuals of any particular nationality. There is also an employment requirement that provides that investors and their investments shall be permitted to employ any natural person of the investor's or the investment's choice regardless of nationality and citizenship provided that such person is holding a valid permit of sejour and work delivered by the home country of the investor or investment. It should be noted that countries including developed countries have scheduled limitations to market access and national treatment relating to the nationality of managers as well as citizenship or residency requirements.

27 It is of interest to note that in a study by Bob Hamilton and John Whalley on efficiency and distributional implications of global restrictions on labour mobility, it is held that when barriers to movement of labour are removed, labour reallocates and efficiency gains occur. In some cases, annual gains can easily exceed existing worldwide GNP generated in the presence of labour mobility restrictions. While all gains do not accrue to developing countries, the size of the gains nonetheless suggests that this issue may be much more important to these countries than other issues raised thus far in the North-South debate. Journal of Development Economics Vol. 14, Nos. 1-2, Jan/Feb 1984, pp.60-75).

28 i.e. with respect to market access through the modes of supply identified in Article I, each Member shall accord services and service suppliers of any other Member treatment no less favourable than that provided for under the terms, limitations and conditions agreed and specified in its Schedule.

29 The United States, however, has included an MFN exemption to its schedule of commitment on insurance (headnote 4 provides: Commitments in this sector do not cover measures set out in the entry applicable to "Insurance" in the United States list of exemptions from Article II.)

30 The draft MAI also follows the same approach i.e. the basis of negotiations is the principle of standstill providing for the possibility of maintaining existing non-conformity measures through national exceptions and reservations. Moreover, articles on national treatment and MFN do not apply to any measure with respect to certain specific sectors and subsectors and activities contained in an annex.

31 The text reads "Measures according differential treatment in regard to the expansion of existing operations, the establishment of a new commercial presence or the conduct of new activities, in a circumstance in which a member adopts or applies a measure that compels, or has the effect of compelling a person of the United States, on the basis of its nationality, to reduce its share of ownership in an insurance services provider operating in the Member's territory to a level below that prevailing on 12/12/97". For example in the insurance sector Philippines provides for grandfathering by including in its schedule "limitations in market access listed ... shall not apply to existing wholly or majority-owned authorized insurance/reinsurance companies as of the entry into force of this WTO Financial Services agreement." These limitations relate mainly to equity participation (limited to 51% in life and non-life and 40 percent in auxiliary services and reinsurance). Thailand in relation to Banking and other financial services (excluding insurance) commercial presence for foreign bank branches provides no limitation for existing foreign bank branches under present share holding structure. Moreover under local incorporated banks it is provided that the Bank of Thailand may relax limits on maximum foreign equity participation and combined shareholding of an individual and related persons, subject to the terms and conditions announced by the Minister of Finance ... such equity participation will be authorized for a period of up to 10 years with foreign shareholders who enter in this period being grandfathered thereafter with respect to the absolute amount of their equity holding."

32 For example under the negative list approach long list of reservations would be submitted, or new services would be automatically covered by GATS discipline unless explicit action would be taken to exclude them.

33 NAFTA has adopted the negative list approach and it contains hundreds of pages of Annexes of reservations. This shows the difficulties encountered with the negative list approach for WTO. The MAI has also adopted the negative list approach which already has resulted in 600 pages of reservations for a few of the OECD countries only.

34 The BITs with some developing countries reflect the concerns that extension of national treatment would curtail their ability to control their domestic economies. These BITs contain limitations on the application of national treatment by subjecting it to the economic policies of the host country and by allowing derogations in certain circumstances.

35 It should be noted that in the late eighteenth and nineteenth centuries, the European powers and the United States set minimum standards for the protection of foreign investment based on treatment superior to national treatment, according to which the host countries were not permitted to interfere with foreign assets and seizure and expropriation were prohibited. The standards of treatment were established in a number of commercial treaties, and were often enforced through political pressure or military intervention. These standards diverged from the general principles of international law, under which foreigners were subject to local laws and not entitled to a higher standard of justice than nationals. Interference with the property of foreigners was permissible subject to independent judicial review and full compensation.

36 Peru in its schedule of commitment on financial services provides that foreign capital my not make claims through diplomatic channels, in respect of business or operations which they carry out in Peru, on the basis of rights derived from their nationality.

37 See United Nations Conference on Trade and Employment, held at Havana, Cuba, from 21 November 1947 to 24 March 1948, Final Act and Related Documents (Lake Success, N.Y., Interim Commission for the International Trade Organization, 1948), United Nations document E/Conf. 2/78.

38 The reference paper is designed to ensure that the advantages of the former monopoly operator are not used to the detriment of new entrants on the telecommunications market through competitive safeguards. On the prevention of anti-competitive practices, the reference paper provides that appropriate measures shall be maintained for the purpose of preventing suppliers who, alone or together, are a major supplier from engaging or continuing anti-competitive practices. These practices include engaging in anti-competitive cross-subsidization, using information obtained from competitors with anti-competitive results and not making available to other service suppliers on a timely basis technical information about essential facilities and commercially relevant information which are necessary for them to provide services.

39 There is a proposal that this issue could be part of the built-in agenda of MAI. The same issues have arisen during the MAI negotiations. The draft MAI contains provisions on monopolies etc. but there is no text on corporate practices.

40 Developing countries tend to use TRIMs that impose requirements on investors e.g. to export or fiscal incentives, developed countries often use TRIMS in the form of subsidies to encourage investors to export or grants given their access to finance. During the TRIMs negotiations the US proposed a list of fourteen types of TRIMS including incentives to be limited. Japanese government was supportive of this list except it did not wish to limit incentives. EU proposed a list of eight measures and did not include provision concerning incentives, technology transfer, or licensing because of the use of such measure in the context of national and EU level industrial policies and regional development policies.

41 The Office of the United States Trade Representative, in its 1994 National Trade Estimate Report on Foreign Trade Barriers, identified 24 developed and developing countries that use at least one TRIM (Washington, D.C.: 1994). A UNCTC/UNCTAD study reported that European Governments offer cash grants up to 60 per cent of the cost of the entire investment; state governments in the United States have given as much as $325 million per project (or $108,000 per job) to foreign firms. While no explicit domestic content or export-performance regulations are involved, it would be disingenuous to argue that such efforts were not trade-related investment measures. The Federal Reserve Bank of St. Louis found a positive statistical correlation between the expenditures of individual states in the United States on investment promotion, on the one hand, and exports from those states, on the other. No less real is the import-substitution dimension of such policies among the developed nations. The trend, moreover, is worrisome. Average state expenditures in the United States to induce inward investment and to promote exports have grown over the past decade by more than 600 per cent. The Impact of Trade-Related Investment Measures on Trade and Development (United Nations publication, Sales No. E.91.II.A.19), 1991, p. 9.

42 TRIMs are not unique in imposing conditions of performance. A "pure" investment incentive involving, for example, a tax rebate depending on the size of local operations, or including labour-training grants depending on the size of the labour force at the local plant, behaves like a performance requirement. These kinds of quid pro quo can be found in several countries, both developed and developing.

43 Incentives (defined as the grant of a specific advantage arising from public expenditure [a financial contribution] in connection with the establishment, acquisition, expansion, management, operation or conduct of an investment) is one of the most difficult issues to be tackled in the negotiations on MAI. There are divergent views on whether a specific text is needed. Some have proposed a built-in agenda for future work in this area which is the same approach taken in the GATS and TRIMs. The draft text that has been included is that national treatment, MFN and transparency apply to incentives. Many believe that not all incentives are bad and inefficient and that the distorting effects of investment incentives on investment decisions should be balanced against their possible benefits in achieving legitimate social objectives regional development, environmental or R&D policies etc. The potential overlaps with the SCM and the GATS will also have to be considered. consideration has to be given also to the fact that most incentives are granted at sub-federal level and include tax measures on which the MAI contains a carve out.

44 United States Department of Commerce, The Use of Investment Incentives and Performance Requirements (Washington, D.C.: 1977), pp. 1-2. The 1977 benchmark survey of the United States Department of Commerce, which provided elements for the formulation of a United States negotiating position on this issue, found that 27 per cent of United States affiliates in the developing countries received one or more incentives to invest, while the figure was 25 per cent for developed countries. However, developing countries imposed performance requirements on United States firms more often than other developed countries - 29 per cent as against 6 per cent.

45 Hardeep Puri and Delfino Bondad, "TRIMs, development aspects and the General Agreement", Uruguay Round: Further Papers on Selected Issues (UNCTAD/ITP/42), 1990, p. 55.

46 Theodore H. Moran and Charles S. Pearson, "Tread carefully in the field of TRIP (Trade-Related Investment Performance) measures", The World Economy, Vol. 11, No. 1 (1988), p. 121.

47 The MAI widens the list of performance requirements including many currently permitted under GATT and GATS, but some of them would be allowed if linked to the grant of an advantage. The MAI prohibits local content and export performance requirements.

48 MAI also provides for the prudential carve out.