Foreign Investment Issues in the WTO

CRS Report for Congress
Received through the CRS W eb
Foreign Investment Issues in the WTO
Specialist i n International T r ade and Finance
Foreign Affairs, Defense, and T r ade Division
Ne go t i a t o rs remain deeply divided over efforts t o d evelop a framework for
discussing foreign i nvestment issues for t he W o rld Trade Organiz ation’s (W TO) Fi fth
Ministerial m eeting i n C ancun i n S eptemb er, 2003. Members h ad agreed at the Fourth
Mi n i s t e r i a l a t Doha that foreign i nvestment would not be a p art o f t he formal
nego tiations at Cancun, but that foreign i nvestment issues and a f r a m e w o rk for
nego tiating t hose i ssues would b e agreed upon at Cancun so that nego t i a t i ons could
begi n. The Doha Declaration also established J anuary 1, 2005 as t h e d e a d l i n e for
completing t hose negotiations. One stat ed purpose of t he negotiations is to develop a
multilateral framework of rules on i nvestment to secure “t ransparent, s table, and
predictable” conditions for foreign investment. U.S. n egotiators are pushing to achieve
a number o f b road objectives on foreign i nves t m ent t h at are s peci fi ed i n t h e T rade Act
of 2002 (P.L. 107-210). A number o f countries and groups, i nc l u d i n g t h e European
Union, J apan, South Korea, Swi t z e rland, and Norway are pushing to complete the
needed work so that foreign i nvestment can be added t o t he nex t round of W T O t rade
talks. African nations and s ome Asian and C aribbean countries oppose i ncluding any
discussion of investment at Cancun, which p resents a sign ificant hurdle i n l aunching an
agreem ent on t his i ssue. Absent a b ro ad multilateral agreem ent, nations likel y will
continue liberalizing foreign investment restrictions in competition with other countries
or through b ilateral i nvestment treaties. This report will be updated as events warrant.
Additional i nformation about the W TO is av ailable o n t he C R S E l ectronic Briefing
Book on Trade at: [ h ttp://] .
In creasingl y, developed and developi ng co untries have come to view foreign
investment as an important stimulant to ec onomic growth and as an important force for
gl obaliz ation. Nevert heless, foreign i nvestment issues have long defied consensus i n
international forums. Foreign i nvestment often p roduces sharp d ifferences between the
developed and developing countries, b ecause it acts as a channel t hrough which different
countries’ l egal systems and s o ci al an d economic values collide. In addition, public
debates o n foreign investment often focus on such perceived n ega t i v e e ffects as
environmental d egradation, the t ransfer o f t echnology, the erosion of cultu re, t he potential

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loss of employment, and the i nability of national governments t o regulate o r t ax economic
activity. In s ome cases, public opposition t o broad multilateral investment agreements
stem s from concerns that such treaties encourage firms to shift m ore of t heir investment
spending abroad, ultimately shifting j obs out of the United S tates and leading t o fewer
jobs and l ower incomes i n t he United S tates rel ative t o economies abroad.
Similar concerns s p arked i ntense public opposition t o foreign investment in 1997
and 1998 during d ebates within the OECD over a pro p o sed agreement o n i nvestment,
known as t he Multilateral Agreement o n Investment, or M A I. As a result, the Doha
Decl arat i o n t asks t h e W TO W o rki n g Group on t h e R e l a t i o nshi p Bet ween Trade and
Investment with cl arifyi ng a group of core issues : t he s c o p e an d definition of forei gn
investme n t ; t r ansparency, or openness of laws and government regu lations; non-
discrimination; possibilities for developing a GATS-type list of pre-establishment investor
commitments; development provisions; ex ceptions and s afeguards; consultation and the
settlement of disputes between Members; and t he proces s of negotiations, i ncluding the
way i n which nations may choose t o p articipate. 1
According t o t he U n i t e d N ations, foreign investment is carried out by more than
65,000 multinational corporations with over 850,000 affiliates abroad. 2 Spending on
foreign i nvestment by all countries increas ed more than seven times during t he 1990-2000
period, rising from $200 billion i n 1990 to $1.5 trillion i n 2000. In 2001, however, s uch
flows d ropped b y n early h alf t o $700 billion, reflecting t he slow down i n economic
growth by t h e U n ited S tates and other developed countries. The annual amounts o f
foreign i nvestment flowing t o d eveloping countries dur i n g t his p eriod i ncreased nearly
five times, from about $50 billion i n 1990 to $240 billion i n 2000, but falling t o $200
billion i n 2001. By 2001, the t otal accu m u l ated amount of foreign i nvestment in al l
countries, or t he total positi on, was estimated at $6.8 trillion.3 Accordi n g t o t h e U . S .
Department of Commerce, on a historical cost basis t he total U . S . d i r ect i nvestment
abroad position i n 2001 was $1.38 trillion, slightly ahead of the t otal foreign direct
investment position i n t he Un ited S tates of $1.32 trillion. 4
Given t he huge amounts o f funds and assets at stake, most countries not only favor
forei gn i nvest m ent , but t h ey oft en com pet e aggressi vel y wi t h each ot her for i nvest m ent
projects and funds. Often this co m p e tition t akes the form of tax and other types of
financial i ncentives , and it can incl ude relax i ng restri c t i o n s on investments i n certain
industrial s ectors o r areas of economic activity. Also, many countries now view foreign
investment and i nternational t rad e a s c o m plementary: as one rises, so does t he other.
C u rrent estimates i ndicate t hat one-third of world t rade is conducted b y m ultinat i o n a l

1 Paragr aph 22 of t he Doha Declaration. A c opy of the Declaration i s a va ilable a t t he WT O
websi t e : [ ht t p : / / www.wt o.or g/ engl i s h/ t h ewt o_e/ mi n i s t _ e/ mi n01_e/ mi ndecl m] .
2 Wo r l d I nvestment Report 2002: Transnational Corporations and Export Competitiveness .
United Nations, New York, 2002. p. 1.
3 Ibid., p. 310.
4 Borga, Maria, and Daniel R. Yorga son. Direct Inve stme nt Positions for 2001, Survey of Current
Business, J uly, 2002. p. 25.

corporations and t heir affiliates.5 For t he United S tates, the percentage is much higher:
56% of U.S. ex ports and 35% of U.S. imports are associ at ed with multinat i o n al
corporations. 6
The d esire for foreign i nvestment flows, however, has tended t o divide further the
rich and poor countries on investment issues . R ifts among the richest countries have also
become more apparent, des pite the general trend t oward eli minating, or reducing, most
overt barriers t o foreign investment. For most of the richest nations, represented by the
Organiz ation for Economic Cooperation and D e v elopment (OECD), a n ew round of
investment talks i s a priority, b ecause they hope to begi n formulating an i nternational s et
of rules governing t he treatment of foreign investment. Developing countries, which have
come t o recognize t he benefits of foreign i nvestment to thei r economies, have moved
aggressively to attract foreign firms and oppose m ost effort s by devel oped c ountries to
impose m ultilateral rules that might limit thei r ability to offer s ubsidies t o attract foreign
investment in a number o f s pecified sectors.
Bo th the d eveloped and the d eveloping countries have a h u g e s take in any
discussions concerning foreign i nvestment rules. As figu re 1 i ndicates, t he latest study
on foreign i nvestment by the United Nations indicates that developed economies p rovided
94% of the t otal foreign i nvestment funds in 2001, while developing countries received
nearly 30% of those funds, u p s harply from t he 19% share recorded in 2000. The l argest
– and fastest growing – s hare of foreign i nvestment funds is circulated among the richest
countries, d espite the gains made by developing countries in liberaliz ing foreign
investment rules.
Fi gure 1. Sources and R ecipients of Fo reign Direct Investment Funds
Fl ow s of Funds in 2001 (percentage share o f total f l ow s)
Source: United Nations, New York, 2002. World I nvestment Report, 2002: Transnational
Corporations and Ex port Competitiveness .TablesB1andB2.

5 World I nvestment Report,p.1.
6 Mataloni, Raymond J . J r ., U.S. Multinational Companies: Operations in 2000, Survey of
Current Business , December 2001, p. 115.

The European Union i s not only t he largest s ource of foreign i nvestment funds in the
world, but also as the l argest re c i pient o f t hose funds. In 2001, the European Union
provided $365 billion, or 62% of worl d forei gn inves tment f unds and received $323
billion, or 44% of the i nvestment funds of ot her n at i o n s , primarily from within the
European Union and from t he United S tates. The United S t ates, as the s ingl e l argest
investor and recipient o f foreign inves tment, provided about $114 billion, or 18% of all
investment funds and received $124 billion, or about 17%, p rimarily from countries in the
Investment in the WTO
The W TO and i t s predecessor o rgani z at i on, t h e G eneral Agreem ent o n T ari ffs and
Trade (GATT), h ave not di rect l y t ackl ed t he broad i ssue o f foreign investment rules.
In st ead, GATT and t h e W TO have deal t wi t h a n arrow s et of very speci fi c i ssues, whi ch
has l eft nations to formulate their own policies, either through bilateral i nvestment treaties
(BITs) – which numbered about 2,100 at the end of 2001 –, or through s uch entities as t he
OECD. Amon g t h e i ssues addressed, GATT and the W TO have dealt with specific
aspect s o f t he rel at i onshi p b et ween t rade and investment through t he General Agreement
on Trade i n S ervices (GATS), which con c e r n s t h e s upply o f s ervices by foreign
com p ani es, and t hrough T rad e - R el at ed Invest m ent Measures (TR IMs). Bot h o f t he
agreements were nego tiated during t he Uruguay R ound of multilateral t rade talks.
T h e T R IMs Agreem ent , however, does not at t em p t t o regul at e t he ent ry a n d
treatment of foreign i nvestment, bu t applies only t o t hose m easures that impose
discriminatory t reatment on imported and ex ported goods. This Agreement recogn izes
t h at cert ai n nat i onal p ract i ces, s uch as l ocal cont ent requi rem ent s, can rest ri ct and d i s t o rt
trade and, therefore, it supports the concept of “national t reatment.” As a res u l t , the
A greem ent outlaws investment meas ures that restrict quantities, and i t discourages
meas ures which limit a company’s imports or which s et ex port t arget s . Among the
measures not covered b y t he Agreement are ex port p erformance requirements, technology
t r a n sfer requirements, and s ubsidies t o attract investments i n s pecific i ndustries o r
Until the fall of 2001, the United S tates had opposed including foreign i nvestment
issues as a formal p art o f any new round of trade t alks. U.S. n egotiators argu ed that the
W TO’s working group on trade and investment was t he best p l a c e t o h a mmer out the
multitude of differences that separate the d ev eloped and developing countries, as well as
those i ssues that divide the d eveloped c ountries. The Trade Act of 2002 (P.L. 107-210)
contains a s eries o f overall objectives that d i rect the work o f U.S. t rade nego tiations in
foreign i nvestment. In particular, U.S. negotiators are direct ed to “reduce or eliminat e
art i f i c i al or t rade-distorting barriers t o forei gn investment, while ensuring that foreign
i nvest ors i n t he Uni t ed S t at es are not accorded great er subst ant i v e ri ght s wi t h respect t o
investment protections than United S tates i nvestors i n t he United S tates, and t o s ecure for
investors important righ ts comparable to those t hat would b e available under United
S t at es l egal p ri nci p l es and pract i ce.” In o rder t o accom p l i s h t hese obj ec t i v e s , t he Act
speci fies ei ght i ssues, i ncluding: reducing or eliminating ex ceptions to the principle of

national t reatment; freeing the t ransfer of fun d s relating t o i nvestments; reducing or
eliminating p er f o r m ance requirements, fo rced technology t ransfers, and other
unreasonable b arriers t o t he esta b l i s h m ent and operation o f i nvestments; establishing
standards for ex propriation and compensa t i o n for ex propriation; establishing standards
for fair and equitable t reatment; p rovidi ng meaningful p r o c e dures for resolving
investment disputes; improving mechanisms used to resolve d isputes between an investor
and a government; and ensuring the fullest measure o f t ransparency i n t he d i spute
settlement mechanism.
Most of the d eveloped countries hope any future t alks will help eliminate numerous
restrictive foreign investment practices in developing count ries. Their list o f n egotiating
objectives includes domestic content requirements, rules o f o rigi n, regi onal s ubsidies, and
reform of antidumping regu lations. S ome m em bers al so advocat e a w i d e-rangi n g revi ew
of the TRIM s agreement, to which t he developing countries have already committed
themse l v e s , i n o rder to phase out domestic content and trade o r financial balancing
requirements and ex port p erformance requirements.
As a whole, the developed count ries, represent ed by the OEC D, favor eliminating
most of the national res trictions on inward an d outward direct investment. Ex ceptions to
this policy i nclude a desire t o retain ex emptions for i ndustries o r s ectors t hat i ndividual
countries deem to be important to their n ational s ecurity or of special national importance.
Since its inception i n 1961, the OECD h as voiced its support for free and open t rade in
goods and s ervices and i n t he free m ovement of capital b etween members. This support
is demonstrated in two l egally binding agr eements between OECD member countries: t he
OECD Code of Li beraliz ation o f C apital M ovements; and t he Code of Li beraliz ation o f
Current Invisible Operations. In 1976 the OECD also ado p t e d t h e Declaration o n
In t e rnational Investment and M ultinational Enterprises , which constitutes a policy
commitment to improve the i nvestment climate in each member country. T he Declaration
consists of four parts: the Guidelines for M ultinational Enterprises , which is a voluntary
set o f rul es; a st at em ent o n Nat i onal T reat m ent ; a st at em ent o n C onfl i ct i n g R equi rem ent s;
and a st at em ent o n Int ernat i onal Invest m ent In cent i v es and Di s i n cent i v es. Beyond t h ese
i n s t r u m e n t s , t h e O E C D M i n i s t e r s adopted in May 1 9 9 9 t h e O E C D P r i n c i p l e s o f C o r p o r a t e
Governance, which i s a set o f non-binding principles that ar e i n t e n d ed t o s erve as a
reference point for countries’ efforts t o evaluate and improve their own legal, institutional
and regul at ory fram ework.
Developing countries, however, are at odds with the m ajority o f the objectives set
out by the d eveloped countries. These countries are unlikely t o n egotiate over t he issue
of reducing i nvestment subsidies without a willingn ess o n t he part of the d eveloped
countries to consider imposing additional regul ations on their u se of rules t hat govern the
use o f l o c a t i o n a l i ncent i v es, especi al l y at t h e s ub-nat i onal l evel , and t ax hol i d ays for
investors. Fu rthermore, the d eveloping c ountries want the d eveloped countries to agree
to negotiations governing t he use of anti-dum ping regu lations and counter-vailing duties,
which m ost o f t he developed countries oppose.
The l ack of progress in formulating m ultilateral rules on foreign i nvestment spurred
most nations, i ncluding the developin g countries, t o formulate bilateral i nvestment
t reaties. As a result of t his experience, developing countri es , as a broad group, now

question whether multilateral rules on investment are preferable t o bilateral i nvestment
treaties. According t o t he United Nations, the developing countries are i n t he midst of a
“third generat i o n ” o f inves tment promotion policies.7 In the first generation of s uch
policies, nations liberalized thei r rules o n fo reign i nvestment to provide a favorable
business environment. In the n ex t s tep, governm ent s b egan act i v el y t o a t t r a ct forei gn
investment. In t he current phase, governments are targeting forei gn investors i n distinct
industrial s ectors t hat m eet the country’s developmental p ri orities. Man y o f the
developing countries doubt that a b road multila teral agreement will provide them with the
level of flex i bility they believe i s req u i red t o pursue t heir own forei gn investment and
development policies and that they curre ntly enjoy under b ilateral agreements.
Most of the W TO par t i c i p a n ts agree t hat s omething needs t o b e done to make the
rules governing foreign invest m e n t m o r e c onsistent across n ati onal borders. Formal
nego tiations as part of the n ex t round of trade t alks, however, won’t come easily gi ven t he
wi de range o f v i ews and t he di fferences of obj ect i v es t h at pr e s e n t l y ex i s t b et ween t h e
developed and developing countries over foreign investment rules. Competition b etween
the developed and developing countries and between regions of the world for much
sought-after foreign i nvestment funds also substantially raises the s takes for all countries
i n v o l v ed and l i k el y coul d furt h er com p l i cat e t he process o f reachi n g any i n t ernat i o n a l
agreement o n a broad s et of rules governing foreign investment.
Absent a m ultilateral agreem en t on forei gn investment rules, nations likel y will
continue to rely on bilateral i nvestment agreem ents or on incorporating i nvestment rules
in regi onal, or in multi-country economic agreements to reduce ex i sting restrictions on
foreign i nvestment. T h e e c onomic incentives for countries to reach a m ultilateral
agreement, however, m ay not be substantial. Countries that reduce restrictions on foreign
investment are unlikel y t o s ee a dramatic shift i n forei gn investment s p ending in thei r
favor, b ecause so many other n ations are m aking s imilar adjustments. On the other hand,
nations that either do not reduce t heir restri ctions on foreign i nvestment, o r impose n ew
ones, l i k el y wi l l ex peri ence a not i ceabl e l ack of such i nvest m ent .
Commitments t o liberalize policies governing forei gn investment that nations made
in such international a greements as Trade-R el at ed Aspect s o f Int el l ect ual P ropert y
(TR IP S ) and t he General A greem ent o n T rade i n S ervi ces (GATS ) sparked t he t rend
toward great er use of bilateral and multinational forei gn i n vestment agreem ents.
E x peri ence wi t h t h ese agreem ent s i ndi cat es t h at nego t i at i n g a new com prehen s i v e
agreem ent on forei gn investment likel y will be time-consuming and likel y offer limited
immediate economic rewards. The alternative process o f formulating b ilateral i nvestment
agreements, alt hough more time-consuming and pi ece-m eal , l i k el y o ffers gr eat er
economic rewards o n a country-by-country basi s i n t he short t erm for U.S. firms. It is not
cl ear whet her t he collective rewards that arise from bilateral i n v estment treaties are
gr eat er than those t hat could be gai ned t hrough a multilateral agreem ent t hat offers a
smaller list o f b enefits from any one country, but ex tracts t hose b enefits from a greater
number o f n ations.

7 World I nvestment Report 2001: Promoting Linkages . United Nations, New York, 2001, p. 14.