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Investment

Investment in the WTO: The Working Group on the Relationship Between Trade and Investment (WGTI)

At Doha, Ministers recognized the importance of a multilateral framework to secure transparent, stable and predictable conditions for investment, and agreed to launch investment negotiations after the next WTO Ministerial conditional upon an agreement on negotiating modalities. Paragraphs 20-22 of the Doha Declaration set out the mandate for the WTO Working Group on the Relationship Between Trade and Investment (WGTI). The WGTI was established by Ministers during the WTO Ministerial held in Singapore in 1996. It is for this reason that the subject of investment in the WTO context is commonly referred to under the rubric of Singapore issues. The other three areas that fall under this heading are competition policy, transparency in government procurement and trade facilitation.

In accordance with the mandate set forth in the Doha Declaration, the work in the WGTI focussed on clarifying possible elements of a multilateral framework on investment (MFI): scope and definition; transparency; non-discrimination; modalities for pre-establishment commitments based on a GATS-type, positive list approach; development provisions; exceptions and balance-of-payments safeguards; consultation and the settlement of disputes between Members. In addition, the Group placed considerable emphasis on developing a strategy to provide developing and least-developed countries (LDCs) with greater support for technical assistance and capacity building in this area. The next WTO Ministerial will take place in Cancun, Mexico in September 2003.

Meetings of the WGTI post Doha

The WGTI met six times following the Doha Ministerial. The meetings were well attended and characterized by broad and constructive participation in the discussion of the various topics on the agenda. A number of papers were submitted for discussion at these meetings, including papers by Canada on all the elements. (The papers are available on the WTO web site.)

POSSIBLE ELEMENTS OF A MULTILATERAL FRAMEWORK ON INVESTMENT

Scope and Definition

The scope and coverage of many investment treaties is defined and delineated in three ways: through definitions of key terms in the treaty; in the substantive provisions themselves, including exceptions; and through the way in which commitments to the provisions are made. Definitions can also be complemented by an article or provision on scope itself, wherein the coverage of the agreement as a whole is addressed. This can help set out the framework for an agreement and set the stage for the rest of the provisions.

The debate in the WGTI is divided between those who advocate a narrow enterprise-based approach to the definition of investment (i.e., only including foreign direct investment (FDI)) and those who argue for a broad asset-based definition (i.e., FDI plus portfolio investment, such as, stocks, bonds, and mortgages to name a few). A large majority of Members believe that short-term, speculative flows are outside the mandate of the WGTI, both as defined by the Doha Declaration and by the fact that they are taken up elsewhere (e.g., the WTO Working Group on Trade, Debt, and Finance). In addition, there is general agreement that careful thought will have to be given to the relationship between any prospective MFI and other WTO agreements with a bearing on investment matters, particularly the General Agreement on Trade in Services (GATS), in order to ensure equal coverage for goods and services investment, as well as the Agreements on Trade Related Investment Measures (TRIMS) and Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Canada's position is that any definition of investment should be realistic, practical, and indeed flexible enough to encompass the contemporary business dynamics associated with investing.

Submissions on scope and definitions:

Transparency

Transparency in international commercial treaties generally involves two core requirements: making information on relevant laws, regulations, and other policies publicly available; and notifying interested parties of relevant laws and regulations and changes to them. There is general agreement among WGTI Members regarding the importance of transparency for creating a predictable, stable and secure climate for foreign investment. Several Members have cited national surveys suggesting that increased transparency in national and international investment rules is a primary objective for their business communities.

A large number of WGTI Members agree that transparency should be a central element of any prospective MFI with developing countries stressing the importance of technical assistance. There is still considerable debate, however, over the scope of a potential transparency obligation. Some Members advocate a more ambitious approach to transparency obligations; while others call for a more modest approach (coupled with technical assistance) as a means of mitigating the administrative burden and resource/cost implications on developing countries.

Canada's view is that a commitment to transparency should be a central tenet of any prospective MFI. What any prospective transparency obligation would entail should be a matter for negotiations. Canada also supports the need to provide developing and least developed countries with the necessary technical and capacity-building assistance to enable these countries to undertake and implement any prospective transparency obligations.

Submissions on transparency:

Non-Discrimination

The principle of non-discrimination, as it applies to investment, can be defined as the treatment of foreign investors and their investments like domestic investors and their investments under similar situations or like circumstances. WGTI Members agree that the principle of non-discrimination is at the core of most international commercial treaties and its application is typically subject to carefully defined conditions. These conditions allow governments to give preferential treatment to domestic products, producers and investors, and to certain commercial partners but not to others. Countries can also retain the ability to pursue domestic policy objectives that could not be realized without practising some degree of discriminatory treatment. The scope of the application of non-discrimination can be affected by a number of factors, including: the definition of investment in an agreement; the range of assets to which non-discriminatory standards apply; exceptions¹ taken; and specific commitments made under the agreement's provisions.

The application of the principle of non-discrimination in an international investment agreement (IIA) is achieved by implementing two important standards: National Treatment and Most Favoured Nation (MFN). The National Treatment standard requires that a host country (i.e., the country receiving the investment) extend to foreign investors treatment that is as favourable as the treatment that it accords to domestic investors in like circumstances. The MFN standard requires that a host country treat investors from one foreign country no less favourably than investors from any other foreign country in like circumstances.

In the WGTI, a large number of Members favour the MFN standard being applied to the entire lifetime of an investment: that being its entry, establishment and operation, and liquidation. The MFN standard would guarantee equality of treatment for foreign investments; create a more transparent and uniform system of investment rules; and maintain consistency with other WTO agreements, including the GATS. There is, however, a greater difference of opinion on the application of the National Treatment standard. Some Members feel that National Treatment should be extended to the entire lifetime of an investment, while others believe that host countries, particularly developing countries, should be able to differentiate between domestic and foreign investors, and to retain the freedom to control, screen and channel foreign investment in line with national policy objectives. A number of WGTI Members believe that the application of the MFN or National Treatment standards should only take place in the context of existing or established investments.

As with the principle of transparency, Canada believes that non-discrimination must remain a cornerstone of any prospective MFI in the WTO. While Canada supports exceptions to the principle of non-discrimination, such exceptions should be determined in the context of negotiations. Canada also believes that all WTO Members should have sufficient policy space to pursue regulatory, developmental, prudential, and other goals in the public interest.

Submissions on Non-Discrimination:

Modalities for pre-establishment commitments based on a GATS-type positive list approach

The term modality can be understood to mean a process or a manner in which to undertake obligations. Pre-establishment commitments are those obligations and measures that would apply to investors and their investments at the entry and establishment stage. A GATS-type positive list approach is a specific method by which countries undertake obligations in an investment agreement. The basic premise of the GATS-type positive list approach is that signatories to an agreement enumerate or list those industries or measures in respect of which obligations are to be undertaken. Therefore, when WGTI Member speak of Modalities for pre-establishment commitments based on a GATS-type positive list approach, they are in fact discussing ways of undertaking obligations that would affect investors and their investments at the entry and initial establishment stage.

The alternative approach to the GATS-type positive list approach is the MFN/National Treatment or negative-list approach. In the negative list approach, signatories agree on general obligations that will apply to all industries and sectors, following which they list industries and sectors that will be exempted from those obligations. The positive list and negative list approaches are not mutually exclusive. Investment agreements can be structured so as to incorporate both methods, for example, obligations could applied in a positive-list style on pre-establishment commitments, while using the negative-list method for post-establishment commitments.

WGTI Members have differing views on the manner in which to schedule commitments in a prospective MFI. One view is that the GATS (or positive-list) approach to scheduling market-access commitments and related policy obligations represents a realistic and balanced way of approaching negotiations in the area of investment. It would facilitate the eventual task of integrating a possible investment agreement with the GATS. Another view is that most existing IIAs that cover the pre-establishment stage of investment use a negative-list model, based on exemptions from, rather than commitments to, market access and policy obligations. There is also the view that neither approach is desirable, on the basis that developing countries are not in a position to accept international disciplines on the pre-establishment treatment of foreign investment².

Canada believes that there are a number of approaches to draw upon when considering in which manner Members should undertake obligations at the pre and post-establishment stage. At this stage it is important to keep all options open. Whatever the approach taken in the WTO, Canada believes that developing countries and LDCs may require more focused technical assistance and capacity building from developed countries in order to compile commitments, exceptions, and reservations.

Submissions on Modalities for pre-establishment commitments based on a GATS-type positive list approach:

Development Provisions

Development provisions are those measures and elements in an IIA that provide developing and least-developed countries with flexibility in meeting specific obligations and commitments, as well as for individual policy objectives. These measures can range from special provisions that provide LDCs with longer time periods for implementing specific obligations to exemptions from certain obligations altogether. The purpose of development provisions is ultimately to facilitate the full compliance of developing and least-developed countries to an IIA.

WGTI Members view the integration of development provisions into a prospective MFI as a cross-cutting issue. The Working Group is discussing ways in which flexibility for development purposes could be integrated into a framework of transparent and predictable investment rules. While views differ over the nature of development provisions, there is broad agreement that such provisions should be complements to, not substitutes for, policy disciplines. There is a widely shared view that development provisions should form an integral part of any MFI, particularly its substantive obligations.

Areas where developing countries are seeking flexibility in a possible MFI are in the regulation of entry of foreign investment (through general screening, selective restrictions, and conditions on entry) and in using policies to enhance the contribution that foreign investment makes to their economic and social development needs and objectives (through performance requirements, investment incentives and preferences for domestic investors).

Canada believes that the development provisions of a prospective MFI will depend on how WTO Members structure the scope of the framework and the obligations that are agreed to. The elaboration of the development provisions should be guided by two fundamental principles, that of flexibility and transparency. This ensures a balance between countries' need to retain the ability to maintain or apply measures for national policy objectives and investors' interest in transparent, stable investment regimes. Canada believes that technical assistance and capacity-building could be most constructive in assisting with this process.

Submissions on Development Provisions:

Exceptions and balance-of-payments safeguards

Exceptions are provisions in investment agreements that provide for rules to deal with sensitive areas of public policy, such as public health and national security. Exceptions allow governments to undertake measures that might otherwise be inconsistent with the obligations of an investment agreement. Balance of payments safeguards (or BOPS) can be thought of as a very specific exception. The balance of payments is an accounting of all the economic transactions between one country and the rest of the world over a given period, this includes the export and import of goods and services, the sale and purchase of capital assets (e.g., stocks, bonds, and physical assets, such as factories) and the exchange of other monetary reserves (e.g., gold, US dollars and other foreign currencies). A balance of payment safeguard is intended to suspend, for example, any capital transfers when an economy is hit by a financial crises, such as the one that hit many East Asian countries in the late 1990s.

WGTI Members affirm that flexibility for governments to respond to public, security, or balance-of-payments concerns need to be an integral part of any MFI, reflected in its basic structure as well as its relevant provisions. Therefore, the WGTI is examining ways in which general, security, and regional integration exceptions as well as BOPS might be incorporated in a prospective MFI. There is a broadly shared view that similar formulations to the kind of general and security exceptions found in the WTO are applicable to any MFI. At the same time, Members feel that there need to be clear conditions attached to these provisions to ensure that they do not involve arbitrary or unjustifiable discrimination, or create disguised restrictions.

Canada is of the view that exceptions would also feature in any prospective MFI, a precedent of sorts already exists in the GATS. One of the principles behind exceptions is that they are usually (but not always) generic and apply to all parties. The specific conditions that apply to the use of exceptions would be subject to negotiations. Canada also believes that BOPS should be included in negotiations on a MFI.

Submissions on exception and balance-of-payments safeguards:

Consultation and the Settlement of Disputes between Members

Most IIAs contain provisions whereby Members to those agreements can settle their disputes by consultations or, should that fail, through a formal arbitration process. Some agreements only address disputes by Member governments (this is known as a State-to-State arbitration, an example of this is the WTO), while others have mechanisms that allow private investors to launch a dispute against governments (this is referred to as Investor-to-State arbitration, an example of this is found in the investment chapter of the North American Free Trade Agreement (NAFTA)).

A majority of WGTI Members are of the view that the rules and procedures of the WTO Dispute Settlement Understanding (DSU) should apply to any prospective MFI. The application of the existing dispute settlement system of the WTO to a MFI would help to ensure greater coherence in the treatment of investment-related policies, and avoid drawing arbitrary and artificial distinctions between services and manufacturing-related investments. To the extent that existing WTO agreements such as the GATS and the TRIMS Agreement include investment-related provisions, the WTO provisions on dispute settlement are already applicable to investment.

Some Members are of the belief that, at this stage, it is difficult to determine the kind of provisions on dispute settlement that could be applied to a prospective MFI. While others think it is important to explore ways to strengthen consultation mechanisms.

Canada supports the position that the WTO DSU should be applicable to any prospective MFI. Moreover, it would be inappropriate to provide for an alternative dispute settlement mechanism, such as an investor-state dispute settlement option, that would, in all likelihood, be applicable only to the obligations and commitments contained in a MFI. That would mean that the provisions of a potential MFI could be governed by fundamentally different dispute settlement provisions than investment-related provisions under other WTO agreements, such as the GATS, the TRIPS and the TRIMS. Under this scenario, an arbitrary and artificial distinction would be drawn between services- and manufacturing-related investment, for example, which would not reflect the reality of investment activity.

Submissions on consultation and the settlement of disputes between Members:

Other Documents of Interest

Communication from Canada, Costa Rica, and Korea on Negotiating a Multilateral Framework on Investment (WT/WGTI/W/162)
Update of Technical Activities by the WTO Secretariat (WT/WGTI/W/135)
Update of Technical Activities by the WTO Secretariat (WT/WGTI/W/151)
Communication from the OECD (WT/WGTI/W/116)
Annual Report (2002) of the Working Group on the Relationship Between Trade and Investment to the General Council (WT/WGTI/6)
WTO Secretariat Note on Foreign Direct Investment and the Transfer of Technology (WT/WGTI/W/136)
Communication from China, Cuba, India, Kenya, Pakistan and Zimbabwe on Investors' and Home Governments' Obligations (WT/WGTI/W/152)
Communication from the European Communities and its Member States on Policy Space for Development (WT/WGTI/W/154)
Communication from Japan on the Relationship between the future Multilateral Investment Rules and the GATS (WT/WGTI/W/156)
Communication from Canada on the Interrelationship and Emerging Infrastructure of a prospective WTO Multilateral Framework for Investment based on elements identified in paragraph 22 of the Doha Declaration (WT/WGTI/W/157)
Communication from Japan on Consideration of the Necessity of Multilateral Investment Rules from Diversified Viewpoints (WT/WGTI/W/158)

Previous WGTI Documents

• Annual Report 2001 (MSWord)
• Annual Report 2000 (MSWord)
• Annual Report 1999 (MSWord)
• Annual Report 1998 (MSWord)

For other WGTI documents, including WTO Secretariat analysis and country submissions, search using "WGTI" on WTO Documentation Dissemination Database.

1. For a better understanding of exceptions, see section marked Exceptions and Balance of Payments Safeguards.

2. Established or existing investments in a host country are those that fall under the category of the post-establishment phase. The pre-establishment phase refers to the period prior to which an investment enters or is established in a host-country. Discussion of pre-establishment commitments are generally viewed in the context of negotiations on market access.