More than 70 WTO Members will spend the next five months trying to negotiate new rules on how governments regulate investment and treat investors in their countries as part of the ‘Structured Discussions on Investment Facilitation’.
The rules they aim to agree primarily focus on predictability, transparency, simplicity and equity in the administrative and bureaucratic procedures around foreign investments. They have specifically excluded the controversial areas of ‘investment protection,’ investor state dispute settlement and new market access.
Some WTO Members oppose work being done at the organisation in this direction, and so any negotiations and thus most likely any outcome will be plurilateral, between only a subsection of the WTO Membership – including China and the EU but excluding the US and India.
The European Union has said it plans to make a textual proposal in February to be negotiated over four rounds between March and May in the hopes of having an outcome by the 12th WTO ministerial conference in June.
If you are an investor, it is unlikely anything agreed by these parties will significantly alter your experience operating in developed, and more advanced developing countries. It will however put legal certainty behind some of the administrative procedures you currently enjoy, and likely spur improvements elsewhere. An outcome would also open the door toward more substantive negotiations in this area.
Before we go further, what does investment even have to do with trade?
Investment has always had one foot in the door of trade policy, with the first Bilateral Investment Treaty dating back to 1959.
Negotiators typically try to separate investment related provisions into two categories:
- Negotiations on the ability of an investor in one country to own a business in another that provides some kind of service. For example, whether an American law firm can establish a branch or subsidiary office in South Korea.
- Rules, regulations and protections around investment into a country more generally.
This second type of provision is more common, contained in over 2,000 Bilateral Investment Treaties in around the world. Capital exporting countries negotiate these to improve the protections and rights of their investors, and capital importing countries sign up to signal and assure their security as an investment destination.
If that’s all working, why is action needed at the WTO?
The World Trade Organization agrees a baseline set of rules that will apply globally. In the absence of such rules, the proliferation of Bilateral Investment Treaties created a baffling web of thousands of different obligations (some dating back decades) between different country pairs. It also left some smaller developing countries with more limited negotiating capacity behind.
A World Trade Organization outcome on investment could standardize a base level of commitments, applying them to all 164 Members, including those not covered by such commitments through other instruments.
Ok, so what are governments trying to do at the WTO?
The goal is to work toward an outcome which establishes some minimal commitments on the administrative procedures around investment, and on how transparent government investment decisions must be.
Examples might include:
- Ensuring investment approval criteria are clear and publicly available;
- Requiring governments to try to make all investment related administrative decisions in a reasonable time;
- Binding governments to accept forms and payments submitted electronically;
- Rules to keep regulators independent from the investors they regulate;
- Ensuring governments have an appeals procedure available to challenge decisions;
- Agreeing the establishment a national committee on investment facilitation to help coordinate domestically and internationally.
Who is opposing the initiative, and why?
As of mid-2019, the investment facilitation initiative had attracted 70 Members. These are overwhelmingly high, upper-middle and middle income, with only 5 African signatories.
Those Members who haven’t joined have differing motivations. Perhaps the most widespread objection is that of ‘policy space.’ Governments including India, South Africa and the US all argue that binding rules on investment regulation would restrict their flexibility and deny them tools they need to advance the public interest.
The US made its opposition plain when it objected to the G20’s Trade and Investment Working Group examining the issue during Germany’s 2017 host year. Beyond policy space US opposition stems from a belief the WTO’s priority should be on compliance enforcement and reforming the institution itself, and likely also aversion to what it perceives as a Chinese attempt to decrease the screening their investments face.
Some Members also argue negotiating new rules on investment is outside of the WTO’s existing mandate under the Doha Development Agenda (DDA). This is depending on your perspective either a principled position about limiting mandate creep or a cynical calculation that negotiations in other areas will detract from progress in agriculture. For some of the hold-outs like India, it’s probably a little of both.
The low membership rate among poorer developing nations stems from suspicion the investment agenda is motivated by investors in wealthier countries seeking fewer restraints on their behavior abroad and a charge that the proposed rules miss the point. Detractors charge that while it is being framed as a development initiative designed to help poorer countries attract investment, in practice the lack of binding international rules isn’t the problem.
They further argue that in practice regulating investment involves a complex milieu of legislation, regulation and procedure at multiple levels of government and that binding international rules on it would only add restrictions and legal verification problems.
If wealthier countries want to see improved sustainable investment flows into the developing world they should address shortfalls like a lack of investment screening capacity, technology gaps and challenges in identifying investments that are going to be productive, sustainable and economically inclusive.
Sounds like a weighty debate. If consensus is blocked anyway though, what’s the point?
WTO Members have worked in smaller groups in the face of consensus, generally in service to one of the following objectives:
- Agree a set of rules that operate only among the Parties, in the hopes of eventually attracting the rest of the Membership later.
- Example: The Trade in Services Agreement (TiSA)
- Agree a set of rules and offer their benefits free to all other Members, whether they signed up or not.
- Example: The Information Technology Agreement and Environmental Goods Agreement
- Demonstrate to cautious Members what an outcome on a taboo issue could look like, and that it’s nothing to fear in the hopes of eventually securing a multilateral outcome.
So what can we expect in coming months?
Back in mid-2019, the Coordinator of the process prepared a long document trying to put all the ideas and different visions for what could be in an investment facilitation outcome in one place. This 30 page monstrosity is filled with square brackets and various alternatives, indicating all the places Members are likely to disagree.
To move forward, at least one Member will need to take elements of the Coordinator’s text and submit a single proposal. The European Union has indicated it plans to do so in February, but others may also want to throw their ideas into the ring.
Members would then take these proposals and begin negotiating them, line by line or even word by word. Four negotiating sessions like this are already planned in the next 5 months.
If an agreed text emerges from this process before the late June 12th Ministerial Conference in Kazakhstan, then willing Members will likely adopt it there. If by some miracle the rest of the WTO Membership gets on board, then Nar-sultan will see a multilateral outcome on investment facilitation. Far more likely however is a plurilateral, brining together somewhere around half the WTO Membership and hoping to build upward from there.
In his exclusive Borderlex blog series, ExplainTrade founder Dmitry Grozoubinski (@DmitryOpines) takes a relentlessly pragmatic look at the World Trade Organization with one question in mind: “You’re busy, what do you need to know?”
Question: You’ve sparked my interest, where can I learn more?
- World Economic Forum Briefing on Investment Facilitation Initiative
- Pradeep S Mehta and Sanjay Kumar Mangla – Investment Facilitation at the World Trade Organization: Progress and the Road Ahead
- 2017 Joint Ministerial Statement on Investment Facilitation (download link half way down the page)
- EU DG Trade Presentation on Next Steps in Investment Facilitation
- Karl P. Sauvant – The Potential Value-added of a Multilateral Framework on Investment Facilitation for Development
- Howard Mann and Martin Dietrich Brauch – Investment facilitation for sustainable development: Getting it right for developing countries