The WTO in 2003: The Rocky Road to Cancun

Towards Multilateral Investment Rules? Key Issues in the Post-Doha Agenda*

* This paper is based on research undertaken by the author in his capacity as a senior adviser to the UNCTAD Series of Papers on Issues in International Investment Agreements and as part of the continuing work of UNCTAD arising out of its role under the Doha Declaration. The views expressed are solely those of the author and in no way represent the policy of UNCTAD.

The present paper is designed to discuss the principal issues relating to the possible adoption of new multilateral rules on investment in the context of the WTO. It takes as its starting point the investment provisions of the Doha Ministerial Declaration (WTO, 2001a). Through that Declaration, Members of the WTO agreed, among other issues, on a work programme on investment which is to culminate in possible negotiations after the Fifth Session of the Ministerial Conference, due to take place at Cancun in September 2003. It is clear from the Doha Declaration that a new kind of instrument is being considered, as compared to existing investment agreements. In particular, the development dimension is a prominent element, which suggests that any future rules on investment in the WTO may well go beyond a traditional investor/investment protection and promotion oriented model that has been used in the preponderance of existing international investment agreements (IIAs). In order to meet this goal, the Doha Declaration requires the provision of enhanced support for technical assistance and capacity building in this area for developing and least developed countries, through seminars and conferences designed to highlight the implications for development of the adoption of investment rules. The development dimension is further emphasised in paragraph 22 of the Doha Declaration which states that:

“Any framework should reflect in a balanced manner the interests of home and host countries, and take due account of the development policies and objectives of host governments as well as their right to regulate in the public interest. The special development, trade and financial needs of developing and least-developed countries should be taken into account as an integral part of any framework, which should enable Members to undertake obligations and commitments commensurate with their individual needs and circumstances. Due regard should be paid to other relevant WTO provisions. Account should be taken, as appropriate, of existing bilateral and regional arrangements on investment."

The implications of this approach will be considered in the present paper as an integral part of the discussion of the specific issue areas that require consideration. Given the constraints of space, the principal focus of the paper will be on three main issue areas. First it will review those core issues, concerning the protection of investors and their investments, which will offer the greatest challenges to negotiators and which raise special problems concerning how such protection should be provided for in a development oriented instrument. Secondly, the development dimension itself will be discussed, taking into account specific measures that involve explicit development policy implications. These include such issues as performance requirements, incentives, transfer of technology and special and differential treatment for developing countries. Thirdly, given the range of debate that is to be encountered in relation to the regulation of foreign investment, certain further issues, not specifically highlighted in the Doha Declaration, must be addressed, albeit briefly. These can be brought together under the umbrella concept of “corporate social responsibility” and include core labour rights, human rights and environmental concerns, as exemplified in the UN Global Compact and other relevant international instruments (See further UNCTAD, 2001c).

(1) “Core” Issues Concerning Investor/Investment Protection

Paragraph 22 of the Doha Declaration lists certain issues as requiring the focus of the WTO Working Group on Trade and Investment in preparation for the Fifth Session:

“In the period until the Fifth Session, further work in the Working Group on the Relationship Between Trade and Investment will focus on the clarification of: 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.

This list, though itself wide-ranging, does not clarify the degree of controversy surrounding each issue. The main issues of contention for negotiators that are listed relate to: scope and definition, admission and establishment, non-discrimination and dispute settlement. To this list should be added the taking of property which was, until recently, seen as a “dead” issue, but which has become increasingly significant in the context of “regulatory takings”, a matter directly related to the “right to regulate” mentioned in the Doha Declaration. Issues relating to transparency and balance of payments safeguards do not appear, at the time of writing, to be as contentious as these other issues and so will not be discussed in this paper. Consultation is mentioned in passing under dispute settlement below.

1. Scope and Definition

The starting point for any multilateral rules on investment depends upon the definition of the types of investors and investments covered under the applicable legal rules. This raises the following issues. First, which types of foreign investors are covered? Secondly, which types of investments are covered? The definitions of the terms “investor” and “investment” refer to the major dimensions of the economic activities to which the IIA applies. They are central to the operation of the agreement in that they play an important role in determining the normative content of the agreement. In such agreements these terms always refer to “foreign” investment. They do not affect the manner in which purely domestic investment is defined (UNCTAD, 1999e, at p.5-6).

Turning, first, to the coverage of “investor” in IIAs, the scope of the definition of this term is based, first, on the link of nationality with a particular country that is a party to the agreement. In relation to natural persons, this will be based on their legal nationality and/or domicile, and, in cases of dual or multiple nationality, the closest connection with a particular country from among those in question. As to legal persons, the definition may use the organisation, seat or place of incorporation to determine nationality. In some cases an ownership or control test might also be used. This is of especial importance where indirect control, through a holding company located in an intermediary country that is not party to the agreement, is regarded as sufficient to extend the protection of the agreement to the controlling interest (see further UNCTAD, 1999e, at pp.32-44).

As regards the term “investment”, the commonest approach is to use a broad, asset-based, definition, though this might be qualified, for example, through an ownership and control limit. Equally, certain IIAs narrow down their asset based definition through a range of devices such as for example, restricting the definition to those investments permitted under the national laws of the host country, or through the exclusion of certain types of investment, or by reference to the size of the investment or the sector in which it is found (see further UNCTAD, 1999e, at pp.17-30). Here there has been a continuing debate, of direct relevance to the expressed concerns of developing countries, over whether FDI protection should be restricted to direct investment, where the investor has not only a financial input into the investment but also a capacity to control the management of the investment, or whether it should also extend to portfolio investment, where the investor has a financial interest to protect but does not have sufficient control to be involved in the management of that investment (UNCTAD, 1999e, at pp.7-8; Muchlinski, 1999 p.12; UNCTAD, 1997, chapter III). Other ways of narrowing down the definition of investment include enterprise based definitions, which restrict protection to, for example, “companies”, and transaction-based definitions, which do not protect assets as such but the transactions through which assets might be transferred across national borders.

The definition of terms in IIAs has a significant impact on the future evolution of these instruments, especially in relation to their effectiveness in meeting the development concerns of host countries. The following issues, in particular, are highlighted in definitional provisions: first, the need to permit a measure of flexibility on the part of investors as to how they choose to organise and finance their investments; secondly, the need for a policy space for developing countries to regulate the types and modes of investment and the sources of investors, where this may be advantageous to their development, subject to the caveat of not over-regulating and creating unnecessary barriers to beneficial FDI; third, the possibility that controlling FDI through limitations on definitions of investor/investment may not be as useful as adopting broad definitions and either (i) retaining powers to screen under admission and establishment provisions and/or (ii) to control abuses by investors through post-entry regulation applied on a non-discriminatory basis.

2. Admission, the Right of Establishment and the Right to Control Entry

The first point of contact between national FDI policy and foreign investment by transnational corporations (TNCs) and other investors arises at the border when such investors and their investments seek to enter the host country. Here there exists a policy choice regarding the degree of regulation or openness that the host country might adopt in relation to the admission, establishment and control of FDI. Under international law, a State has an absolute right to control the admission and establishment of aliens, including foreign investors, on its territory. This right can be qualified through the unilateral action of the host country and/or through international agreement with other countries. Thus a State has a free choice as to the degree of open admission and the extent of rights of establishment it sees fit to offer to foreign investors. Equally, it is free to regulate the entry and establishment of FDI through forms of conditional entry. The economic rationale for granting open admission and rights of establishment is to allow for the efficient allocation of productive resources across countries, through the avoidance of market distorting policy controls that may serve to discriminate between foreign and domestic investors and/or investors from different home countries. On the other hand, controls over entry and establishment, or conditional entry based on specific requirements that must be observed by the foreign investor, may be motivated by a need to preserve national economic policy goals, national security, public health and safety, public morals and other essential public policy goals such as environmental or consumer protection. Indeed, some developing countries may wish to retain a degree of control over the admission and establishment of FDI on their territory. This can be explained by a reluctance to open up their domestic markets to potentially damaging penetration on the part of economically dominant foreign firms by reason of an overbroad right of unconditional entry, or as a result of an excessively speedy process of admission that does not allow sufficient time to analyse the potential economic (and possibly social) advantages and disadvantages of the investment in question (See further Conklin and Lecraw 1997).

However, such motives may also be used to justify what are little more than measures designed to insulate inefficient or monopolistic national industries from competition at the cost of consumer welfare and productive efficiency. Thus national policy on FDI may be used for protectionist purposes that may not be in the long-term interests of national economic development.

At least five major approaches to this issue can be identified in IIAs. The investor control approach preserves full State control over entry and establishment, leaving the issue to the full discretion of the host country’s national FDI laws. This is the most widely used approach appearing in most bilateral investment treaties (BITs) other than those concluded by the United States and, more recently, Canada. The selective liberalisation approach offers limited rights of entry and establishment only in sectors that are included in a “positive list” of open sectors in the schedule of commitments of each Contracting State. This is the approach used in the GATS in relation to market access in service industries. The regional industrialisation approach offers reciprocal rights of entry and establishment based on national treatment for investors from member countries of a regional economic integration organisation (REIO) only for the purposes of furthering such a programme. It has been used by a number of REIOs in Africa, the Caribbean and Latin America. The mutual national treatment approach offers full reciprocal rights of entry and establishment based on national treatment for all natural and legal persons engaged in cross-border business who are operating from member countries of the REIO. The best example of this approach is the EU. The combined national treatment/most-favoured-nation treatment approach offers full rights of entry and establishment based on the better of national or most-favoured-nation treatment, subject only to a reserved “negative list” of sectors, entered in the schedule of commitments of each Contracting State, to which liberal rights of entry and establishment do not apply. This approach is favoured by the United States and Canada in their BITs and in NAFTA.

The most significant issue, from the perspective of developing countries, in relation to IIA provisions in this field, is whether to follow a restrictive policy on entry and establishment by using the investor control approach, which preserves the State’s sovereign right to control, or even to exclude, FDI in accordance with the provisions of national law, or to enshrine rights of entry and establishment through international agreement, thereby limiting national policy discretion over these matters by reason of the adoption of international treaty obligations to accord such rights to investors and investments from other States party to such an agreement. Here a further choice arises, in that it is not necessary for the developing host country to accord the fullest rights to investors and investments, as exemplified by the combined national and most-favoured-nation treatment approach. Rather, a choice exists between that approach and the selective liberalisation, regional industrialisation and mutual national treatment approaches. Indeed, it may even be possible to offer a mix of these approaches and to create a hybrid agreement, with different legal regimes of entry and establishment for investors and investments from different countries or regions (See further UNCTAD, 1999a, p.42-4).

The remaining question is how far IIA provisions in this area matter for the purposes of development. Again the answer to this question will depend on the policy choice taken by a developing host country. Should it wish to remain cautious about the rapid opening of domestic markets to foreign inward investment, it can use a treaty provision that preserves its inherent legal rights to do so, by retaining its discretion to subject FDI to national laws and regulations upon entry, and by not-extending the protection of the IIA to the pre-entry stage. On the other hand a country that is dedicated to a liberal, open market, approach to FDI can enshrine this policy in a provision that protects the right of entry and establishment for investors and investments from other countries party to the agreement. This will not only constrain existing government departments and agencies from refusing entry and establishment, usually on the basis of the non-discrimination standards of Most-Favoured-Nation (MFN) and national treatment, but will also bind future administrations on the basis of international legal commitments that cannot be disregarded through an inconsistent application of national laws and administrative practices.

The future role of provisions concerning admission, establishment and the right to control entry lies at the heart of development concerns as they arise in international investment negotiations. Indeed, this issue has already caused controversy among developed countries during the negotiations for the Multilateral Agreement on Investment (MAI). More recently, the issue has been discussed in the WTO Working Group on Trade and Investment, where the possible use of a GATS type “positive list” approach to pre-establishment issues has focused attention on the precise architecture that any future investment rules pertaining to this area should adopt (See further WTO 2002). Some developing and developed countries, including the EU, have expressed their support for this approach while some developed countries have suggested that a combined national and most-favoured treatment approach with “negative lists” of exceptions should be preferred. Other significant questions in this area concern the scope, speed and nature of liberalising provisions. Thus, as suggested by the GATS approach, the range of sectors or industries to be liberalised can be addressed, the speed of liberalisation can be controlled by transitional provisions that offer specifically agreed lead times for the process to take full effect, and the binding or non-binding nature of commitments towards liberalisation of entry and establishment provisions can be considered, for example, by using a “best endeavours” clause that does not commit to a legally binding policy change but allows for a gradual change of attitude without the possibility of creating binding legal rights for investors. Finally, the scope of restrictions on entry and establishment rights may need to be considered further. A particular new issue here may arise in relation to environmental restrictions related to entry.

3. Non-Discrimination

The principle of non-discrimination is a core standard of protection for investors and their investments in IIAs. It consists of two main elements: the Most-Favoured-Nation (MFN) standard, which ensures that investors and investments from one country are treated in the same, or no less favourable, manner than like investors/investments from other countries (see further UNCTAD, 1999c), and the national treatment standard, which ensures that investors and investments from outside the host country are treated in the same, or no less favourable, manner than like investors/investments from inside the host country (see further UNCTAD, 1999d). Thus the non-discrimination standard aims to ensure that all foreign investors and investments are guaranteed at least equality of competitive conditions with other foreign investors/investments and domestic investors/investments in like situations. In addition, where national FDI policy uses the “no less favourable” standard in the case of national treatment, it is possible to ensure better competitive conditions for foreign as compared to domestic investors. As regards the MFN standard this formulation may permit more favourable treatment for investors/investments from certain countries, though this is usually achieved by special preferences that have been introduced as an exception to MFN. The principle of non-discrimination may also be enhanced as an aspect of the general standard of fair and equitable treatment, which can be distinguished from MFN and national treatment on the basis that it is an unconditional standard, while the latter are conditional on the existence of other investors/investments, whether foreign or domestic, that are in a like situation to the investor/investment that is protected by the relevant standard (see further UNCTAD, 1999b). From a development perspective, the issue of non-discrimination is highly contentious, especially in relation to differential treatment between domestic and foreign investors, given that developing host countries may seek to protect the development of indigenous industrial production and service provision in the face of potentially negative competitive pressure from powerful foreign investors.

In relation to the development implications of the non-discrimination standard, it is important to distinguish the kinds of measures that might be applied to MFN as opposed to national treatment, as they tend to create different degrees of policy sensitivity, especially as regards the scope, nature and extent of exceptions to the standard concerned. Thus MFN is less likely to be the subject of exceptions than national treatment, reflecting the fact that host countries generally find it more difficult to treat foreign and domestic investors/investments equally than to provide for equal treatment among investors from different home countries (UNCTAD, 1999c, at p.31).

The most frequent exceptions to the MFN standard relate to international networks of obligations, such as those arising from bilateral tax treaties or membership of regional economic integration groupings, where a degree of preferential treatment for the investors and investments of the other contracting parties is usual. In addition, some countries have chosen to prefer investors from a particular country. This may be explicable on the specific facts of the case, though it is not always clear why investment from one set of investors would be more desirable than from another set. Countries favouring liberal development policies will usually follow an unconditional MFN standard without any restrictions being placed on investors on the grounds of their nationality (UNCTAD, 1999c, at p.38-9).

By contrast, national treatment may elicit more exceptions than MFN. These will include certain general exceptions based on national security or public health or morals (which may also apply to MFN treatment), subject specific exceptions relating to certain fields that require reciprocity of treatment from home countries of investors, such as taxation or intellectual property, or which are excluded for reasons of national policy, such as incentives or public procurement, and industry specific exceptions which exclude or limit the participation of foreign investors in certain types of activities of industries on the basis of national economic and social policy.

The MFN and national treatment standards are essentially treaty-based standards. They are covered in most IIAs, principally in relation to the post-entry stage of investment, though the practice in North American bilateral and regional agreements extends these standards to the pre-entry stage as well. There, the approach is to provide for the protection of MFN and national treatment subject to general and country specific exceptions as described earlier. Similarly, the GATS Agreement protects MFN on this “opt-out” basis. On the other hand, in relation to national treatment, it provides for an “opt-in” by way of an express commitment to extend national treatment to those sectors that a contracting party chooses to open up to full market access (UNCTAD, 1999c, at pp.14-15; UNCTAD, 1999d, at pp.18-25). As regards exceptions, virtually all regional and inter-regional IIAs contain general national security and public health/morals exceptions to the non-discrimination standard though bilateral investment agreements (BITs) generally do not (UNCTAD, 1998, at p.86).

The core, development oriented, issue in this area concerns the extension of non-discrimination to the pre-entry stage of investment. As such it is intimately related to the issue of admission and the right of establishment. Other important, development oriented issues for the future concern the range and extent of exceptions. Traditionally, in order to retain the maximum effective discretion for regulatory purposes, it has been considered that certain exceptions and qualifications are necessary to the non-discrimination standard. On the other hand, changes in the nature and structure of national markets, and in particular, their increasing integration into global chains of production and distribution puts into question whether high levels of discriminatory regulation are in fact desirable. Hence a balance needs to be sought out between necessary exceptions, based on overriding regulatory requirements, and overbroad ones that may serve to undermine the positive integrating effects of economic openness and may, indeed, be little more than protectionist devices for inefficient national industries and firms.

4. Taking of Property

The power of a government to take foreign owned private property, either into State ownership through nationalisation, or into new, usually local, private ownership through expropriation has a long history. Indeed, major takings of foreign owned property in the course of the twentieth century, particularly by socialist States, led to the development of certain rules of customary international law that aimed to control the conditions under which such a taking could be lawfully effected (UNCTAD, 2000c, at p.5.). These rules are not without controversy. In the past, certain countries have denied the legal validity of international rules in this area, asserting that only national law could determine the validity of a governmental taking of foreign owned property. Nonetheless, in more recent years certain basic principles have been universally accepted and many countries will refer to these as the legal basis of their national laws and practices. These are as follows: the taking should be for a public purpose, it should be non-discriminatory, it should follow rules of basic due process and compensation should be payable in the event of a taking. On this last point there is no hard and fast agreement among States as to the appropriate level and method of calculating the compensation payable. Some countries favour a high level of State discretion in this matter, referring to principles of “appropriate” or “just” compensation and using a book value method of valuation, while others, mainly the major capital exporting countries, favour a standard of “prompt, adequate and effective” compensation based on actual market values of the property taken (UNCTAD, 2000c, at p.13-14). Thus the principal regulatory issue in this area is whether, and how far, a national regime for the taking of foreign owned property, whether located in general compulsory purchase laws, or in specific acts relating to particular firms or industries, conforms to basic international legal standards.

In recent years outright nationalisations and mass expropriations of foreign owned property have not been a significant national economic policy, whether in developed or developing countries, though their renewed use cannot be ruled out completely (See, UNCTAD, 2000c, at p.5; Penrose, Joffe and Stevens, 1992). Rather, the dominant trend has been towards privatisation and deregulation of State-owned assets with foreign investors often being encouraged to buy those assets. On the other hand, increasing attention has been paid to the possibility of so-called “creeping expropriation”, where the economic value of the investment is gradually neutralised by incremental regulatory interference in the investment that falls short of divesting the investor of their legal title in the investment, and of “regulatory takings” which arise out of the exercise of policing powers of the State or from other measures such as those regulating the environment, health, morals, culture or economy of the host country (UNCTAD, 2000c, at pp.11-12). Here the major problem is to distinguish between a legitimate exercise of governmental discretion that interferes with the enjoyment, or leads to the expropriation, of foreign owned property and an illegitimate act of unlawful taking.

The majority of IIAs contain provisions on the taking of property. Generally, these define a “taking” as including not only traditional notions of nationalisation or expropriation, but also indirect takings of the type associated with regulatory takings (UNCTAD, 2000c, at pp.19-24). The latter may or may not be qualified by a carve-out for normal regulatory powers. If such a clause is included it may subject the carve-out to an obligation that the regulatory powers must be carried out in a non-discriminatory manner (UNCTAD, 2000c, at p.23). Furthermore, the majority of such agreements require observance, by the contracting parties, of the principal elements of a lawful taking, namely, public purpose, non-discrimination, and compensation (UNCTAD, 2000c, at pp.24-6). However, there is no uniformity as to the standard of compensation to be applied, reflecting the absence of full consensus among States on this issue and, also, the relative bargaining positions of parties to IIAs. Thus some agreements refer to “appropriate” or “just” compensation, while others refer to “prompt adequate and effective compensation” or similar phraseology. The trend in recent years has, however, increasingly moved towards the latter approach, whether in bilateral or regional agreements (UNCTAD, 2000c, at pp.26-31). Finally, may treaties deal with the “due process” requirement, though only United States agreements expressly use this terminology. Many agreements require the availability of judicial review before national tribunals though this is usually restricted to a review of the taking after it has occurred. It does not extend to a review of a proposed taking (UNCTAD, 2000c, at pp.31-2).

Provisions dealing with the taking of property can be expected to continue in future IIAs. Indeed, given the need to determine the proper balance between legitimate regulation and improper interference with private property rights through regulatory acts such provisions appear to gain importance. They will be central to a fuller understanding, and legal expression, of the “right to regulate” in the context of the development priorities of host countries. In particular, the distinction between regulatory and other types of takings will cause concern in future in relation to the duty to pay compensation. For example, a punitive taking, that was properly and lawfully imposed, would loose all effectiveness if it were to be subject to compensation under international obligations. Indeed, some instruments exclude such takings from the compensation obligation, for example, punitive tax measures On the other hand non-punitive regulatory measures may be subject to compensation, in which case difficult questions as to the precise measurement of that compensation arise. Another significant future issue is whether, and how far, IIAs should permit international review of takings by host country authorities: should these be subject to a prior requirement to exhaust domestic remedies or should international review be available as a matter of right? This issue is further discussed in relation to dispute settlement.

5. Dispute Settlement

The settlement of disputes between investors and host countries is an issue that is central to national FDI policy, and more broadly to national developmental concerns, in that the availability of effective dispute settlement acts to reinforce the rights of investors and adds to the reduction of investment risk, thereby making the host country more attractive to investors. Accordingly, the host country needs to ensure that such disputes can be effectively resolved. Usually a host country will provide dispute settlement procedures and remedies as a part of the general law of the land. However, investors may, in certain circumstances, perceive host country laws and procedures not to be sufficient as a means for the resolution of disputes with the host country. They may prefer an internationalised approach to dispute settlement. This allows the investor the freedom to choose between national and international dispute settlement mechanisms. The latter usually takes the form of international arbitration between the investor the host country. This may be ad hoc arbitration, based on an arbitral panel and procedure that is agreed between the investor and the host country. In the alternative, there may be an institutional system of international arbitration that can apply to the dispute in question. The most important system in the field of investment disputes is the International Centre for the Settlement of Investment Disputes (ICSID) set up under the auspices of the World Bank.

National policies on investor/host country dispute settlement will vary from those that require the exclusive use of national procedures and remedies , those that require the prior exhaustion of domestic remedies in the host country before recourse to internationalised dispute settlement systems is permitted and those that offer free choice between national and international dispute settlement to the investor (See UNCTAD, 2003a, forthcoming). National investment laws will often expressly permit such internationalisation of investment disputes by enshrining investor choice in a specialised dispute settlement provision in the relevant FDI legislation. On the other hand many FDI laws are silent on this issue and the investor is thus required to use the internal legal remedies available to them under host country law. The same is true of countries that have no specialised FDI laws as such. In these two latter cases international remedies may, however, be available on the basis of the international treaty obligations undertaken by the host country in IIAs to which it is a party. Thus a dispute settlement clause in a BIT that allows the investor choice between national and international procedures will bind the host country as a matter of international legal obligation. Equally such an international obligation can be made enforceable before national tribunals where the investment contract between the investor and host country includes a dispute settlement clause that incorporates the latter’s international treaty obligations to allow the use of internationalised systems of dispute settlement.

IIAs can cover two sets of issues under the rubric of dispute settlement: State-to-State disputes over the interpretation and application of the agreement in question, which appear in virtually all such agreements, and disputes between investors and States. The latter were virtually unknown before the introduction of the ICSID system in 1965. Since that time, however, a majority of bilateral and many regional agreements have included provisions on this issue. The usual approach is to specify that the parties to the dispute must seek an amicable negotiated settlement of the dispute. Only where such an approach fails to resolve the dispute the parties can resort to arbitration. This may be on an ad hoc or an institutional basis. Agreements differ on the extent of choice in this matter. The precise terms of the agreement must be perused to determine which types and systems of arbitration are permitted. Equally agreements differ on the extent of investor choice over the applicable means of dispute settlement. Some agreements require agreement by both parties on an applicable method. On the other hand, an increasing number of IIAs now permit investor choice on the basis of a prior unilateral offer by the host contracting State party to the agreement that it will respect the unilateral choice of dispute settlement method by the investor should amicable means fail to resolve the dispute between them (UNCTAD, 2003a, forthcoming). In this regard may agreements refer to the ICSID system of investor-State dispute settlement. That system offers a structured procedure for international investment disputes covering matters of jurisdiction, initiation of proceedings, establishment and selection of panels, choice of applicable law, rules of procedure and evidence and recognition and enforcement of awards (See further UNCTAD, 2003a; Schreuer 2001).

Such an institutionalised approach has the advantage of offering a predictable and stable system of international dispute settlement which avoids the dangers of an ad hoc approach to arbitration, in particular that of delay and possible stalemate due to the inability of the investor and host country to agree to the organisation and conduct of the procedure. On the other hand, it may be said that a system such as ICSID may take the dispute too far outside the sovereign control of the national legal system of the host country and may thus tend towards an overemphasis on the application of international standards of treatment for investors and their property which, as noted in relation to takings of property above, may be controversial. In this regard it is essential that international tribunals are sensitive to the public policies of host countries and ensure a balance between investors rights and the “right to regulate” that is acknowledged as a legitimate source of host country action.

A major issue for future development is the extent to which investor freedom and choice in this field may be allowed to inform the content of dispute settlement clauses, or whether a degree of increased host country control over investment dispute settlement methods is desirable, especially in the light of concerns over the scope of the “right to regulate”, and also in the light of the possibility that national legal systems can evolve increasingly effective local dispute settlement mechanisms. Another development oriented issue that could be more fully addressed concerns the role to be played by the recently established regional dispute settlement centres in certain developing countries. The possibility of including recourse to these centres could be considered in future negotiations, thereby giving a strong injection of support for these initiatives (See further Asouzu, 2001). A further new area, hitherto not considered by existing IIA provisions, concerns the extension of dispute settlement mechanisms to third parties who may have a stake in the outcome of an investor-State dispute. This is likely to impact on development concerns where such third parties may be the very individuals or groups that are most directly affected by the development implications of a given investment. For example, where an investor and a host country are in dispute over the application of environmental regulations to the investment in question, local communities affected by the environmental performance of that investment might wish to participate as interested third parties. This can be accommodated through rights of audience before national tribunals in countries where there is a strong tradition of access to justice by interested third party individuals or groups. However, where the investor exercises a treaty-based right to international arbitration, interested third parties may have no standing before such a body and will be denied the possibility of a hearing. Given the significance of stakeholder perspectives on investment issues and disputes, particularly concerning the development dimension, this may need to be considered in future IIA negotiations.

(2) The Development Dimension

As noted in the introduction, the development dimension forms a central feature of the Doha work programme. It has already been seen that the “core” investor/investment protection issues raise development related questions. In this section some further issues will be discussed which all have, as a common theme, the regulation of national economic policy through development oriented instruments.

1. Performance Requirements

Performance requirements are one class of measures that comes within the generic category of host country operational measures. They are stipulations, imposed on investors by the host government, requiring them to meet certain specified goals with respect to their operations in the host country. These may act as conditions for the entry and establishment of the investor in the host country, they may cover many types of measures, they are specifically designed to affect FDI and they usually apply to the post-entry phase of the investment (UNCTAD, 2001b, at p.10-11). As such they represent an act of State intervention in the investor’s economic choice of how to structure the organisation and arrange the operation of their investment. They are usually justified on the basis of the host country’s need to minimise the possible disadvantages, and maximise the potential benefits, of the investment in line with its economic and developmental policies. They are often criticised as an unwarranted interference, though governmental action, in the process of economic decision making on the part of investors and that they will result in a distortion of that process with detrimental results to productive efficiency (see Muchlinski, 1999, at pp.257-60). This approach has gained some ascendancy with the adoption of the WTO Agreement on Trade Related Investment Measures (TRIMS) which seeks to prohibit certain classes of performance requirements that are seen as being inconsistent with the national treatment obligation and the prohibition against quantitative restrictions in the GATT (See further UNCTAD, 2001b, at pp.17-26).

Performance requirements have been extensively used, by both developing and developed countries, to further their industrial and investment policy goals (Muchlinski, 1999, at pp.257-9). Such measures have, in particular, been employed by developing countries to secure the types of investment needed for their development priorities, to protect balance-of-payments against distortions caused by profit remittances or payments for goods and services and to control possible restrictive business practices on the part of foreign firms related to their market power and ownership of technology (Raghavan, 1990, at pp.147-8, UNCTAD, 2001b, at pp.5-6). By contrast, while developed countries have used performance requirements for similar purposes, these countries tend to rely more on incentives, or regulation or restrictive business practices, to achieve such ends. Developing countries may not have sufficient capital reserves or fiscal revenues to be able to offer extensive incentives. Nor do they necessarily have controls over restrictive business practices. Thus they have tended to prefer the use of performance requirements as tools of economic and investment policy.

Most IIAs do not cover performance requirements. However, North American bilateral and regional agreements have introduced restrictions and prohibitions on the use of certain types of performance requirements. At the multilateral level, as noted above, the TRIMS Agreement prohibits certain types of trade distorting performance requirements. In such agreements, performance requirements are dealt with either by way of an outright multilateral prohibition, as in the TRIPS Agreement, or a prohibition at the bilateral or regional level but not at the multilateral level, as in the abovementioned North American practice. There then remains a category of performance requirements that are generally not contested in IIAs (UNCTAD, 2001b, at pp.2-3, 12-14, 16-54). The major question form a development perspective is whether the current prohibitions in the TRIMS Agreement ought to be maintained or reduced so that developing countries can attain greater freedom and flexibility in the conduct of their FDI policy and, in particular, their approach to conditional entry and establishment of foreign investments, or whether they should be increased so as to ensure the least possible freedom for countries to intervene in the economic processes through which FDI is conducted. Other possible issues concern the possibility of special and differential treatment for developing country parties to IIAs with, for example, longer phase out periods for prohibited performance requirements, or possible development exceptions allowing developing country parties to maintain certain performance requirements indefinitely as where their vital national economic interests so require (UNCTAD, 2001b, at pp.62-71).

Equally the question of whether controls over performance requirements should be linked to controls over the use of investment incentives should be considered, especially given the existing regulatory imbalance in IIAs between provisions that address performance requirements, used principally by developing countries, while at the same time omitting any provisions that would introduce disciplines in the operation of incentives that would predominantly affect developed host countries.

2. Incentives

Incentives are used by governments to attract investment, to steer investment into favoured industries or regions, or to influence the character of an investment, for example, when technology-intensive investment is being sought (UNCTAD, 1996, at p.1). They can take two major forms, fiscal incentives, based on tax advantages to investors, and financial incentives based on the provision of funds directly to investors to finance new investments or certain operation or to defray capital or operational costs. Other types of incentives may not be easy to discern but they can have a positive effect on the overall profitability of an investment. These may include general infrastructure development by the host country, market preferences or preferential treatment on foreign exchange (UNCTAD, 1996, at p.5). The major issues that incentive policies raise in the context of development concern the practical value of using such techniques as a means of attracting FDI. Where a tax advantage is offered this will entail the foregoing of revenue by the host country. Where a financial incentive is offered this will entail a positive application of public funds to the investment in question, thereby preventing the opportunity of those funds being applied to other public purposes. In either case the host country government reduces the amount of public finance available to it for its activities. Consequently, the host country must be sure that the offering of tax or financial incentives is actually warranted in economic terms. A further issue concerns competition between countries for FDI through the use of incentives. This may lead to “incentive races” to attract internationally mobile investments. This can be particularly problematic for developing countries that may have limited public finances to be able to compete with sufficiently attractive incentive packages.

The use and operation of incentives is generally not covered in IIAs, whether at the bilateral or multilateral levels. The only related policy devices that have received some attention, mainly in North American bilateral and regional treaty practice, are performance requirements. On the other hand, at the regional level the need to curtail the abuse of national incentive policies has been recognised as an important aspect of creating a truly integrated regional economy. The leading example is the EC, which operates controls over market-distorting, anti-competitive, state aids to investment under the Treaty of Rome. Only such aids as are listed in Article 87 as being compatible with the creation of a common market are permitted. These relate to: aid having a social character; aid to make good the effects of natural disasters; aid to promote economic development in areas where the standard of living is abnormally low, or where these is serious underemployment; aid to promote an important European interest or to remedy a serious disturbance in the economy of a Member State; aid to facilitate economic activities in certain economic areas, provided that such aid does not adversely affect trading conditions and aid to promote culture and heritage conservation where this does not adversely affect trading conditions and competition. Clearly there is much in this list that could be of relevance to developing countries, in that many of the permissible criteria for the award of state aid in the EC are development related criteria, or emergency criteria that may well apply to the economic and social realities of the least developed countries.

The major advantage of new multilateral disciplines in this area would be to create a degree of general agreement as to the permissible limits of State aid policy in the investment field. It would thus set some basic ground rules for the operation of incentive regimes that would be as economically efficient as possible, through examining whether a given policy was market distorting, but offering certain public interest exceptions, where a degree of such distortion would be tolerated for socio-economic reasons. Clearly, this would be a significant issue for developing countries as it might help reduce the incidence of market-distorting incentive races, which many developing countries would probably never win, while at the same time permitting such countries to offer development oriented incentives, where these are seen as absolutely essential for the increase of development friendly FDI into the developing host country concerned. Short of a multilateral arrangement in this field, bilateral arrangements such as, for example, clauses in BITs covering incentives might be of use, especially if they elicited agreement as to the limitation of levels of incentives and a simplification of types of incentives on offer (UNCTAD, 1996, at pp.79-80).

3. Transfer of Technology

The transfer of technology continues to be a central concern of developing country economic policy. Access to technology is a foundation of economic growth. However, the presence of adequate and appropriate technology in a national economy is not always possible, given the nature of international markets for technology, which tend to favour developed economies with high levels of corporate research and development (UNCTAD, 2001d, at pp.89-94). In this process less developed countries will have relatively limited access to technology. They are unlikely to meet all their technological needs from domestic sources, which may not even exist in the least developed economies, and they are therefore more dependent on outside sources of technology than more developed countries. Indeed, in the absence of alternative sources, a majority of developing country technological needs are met by FDI undertaken by TNCs, the leading creators and owners of proprietary technology in global markets (UNCTAD, 2001d, at pp.11-16). This raises the issue of how the technology that is indispensable to economic development can be supplied to such a country. This, in turn raises at least four sets of related issues: how best to treat proprietary technology; how to encourage technology transfer; how to deal with the competition related issues that the existence of market power on the part of technology owners creates; whether special host country technology related measures are needed to deal with certain development priorities related to the transfer and dissemination of technology such as, for example, performance requirements related to these matters.

IIAs have traditionally remained silent on questions of technology transfer. This means that the range of responsibilities owed by the host country to the investor in relation to their technology is limited to the observance of the standards of protection specified in the agreement, on the basis that the technology comes within the definition of assets that are within the protected subject matter of the agreement. On the other hand this approach does not include in the agreement any internationally agreed commitments for TNCs, or their home governments, to cooperate in the promotion of the generation, transfer or diffusion of technology to the host country or to the control of undesirable terms and conditions in technology transfer agreements (UNCTAD, 2001d, at p.95). In the TRIPS Agreement, certain development-oriented provisions have been included. For example, this Agreement contains, in Articles 66 and 67, a duty on the part of home countries to promote the transfer of technology to the least developed county members and to engage in positive programmes of cooperation with the developing and least developed countries in order to implement the substantive terms of the TRIPS Agreement. In addition the TRIPS Agreement offers transitional provisions allowing developing countries an extended period in which to ensure compliance with the disciplines introduced by the Agreement.

The introduction of technology transfer issues into future IIAs may be necessary as a means of remedying the continuing imbalances of the international market of technology. Hence it may be desirable to further develop special and differential treatment provisions, for which the TRIPS Agreement offers an initial model, that can address this issue in favour of the interests of developing countries in acquiring effective, appropriate and affordable technology. At present the TRIPS Agreement offers only rather limited commitments. It may well be that such commitments may need to be extended into full technology transfer policies based on a legally binding commitment to ensure adequate access to technology. In this regard the continuing debate over pharmaceutical patent protection and access to essential life saving medicines in developing countries offers an important case-study (See further WTO 2001b).

4. Special and Differential Treatment for Developing Countries

The foregoing discussion on technology transfer highlights just one area where claims may be made for special and differential treatment for developing countries in future multilateral investment rules. More generally, development concerns, if taken seriously, will influence the entire process of drafting multilateral investment rules as such. Thus development considerations can be expressed not only through special and differential treatment provisions, but also through the objectives provisions of the IIA, as where the Preamble commits the parties to consider development issues as an essential policy goal behind the entire agreement, a commitment that will be reflected in the use of policy goals stated in the Preamble as an aid to the interpretation of specific obligations in the rest of the agreement. Equally, development considerations can be expressed through the manner in which exceptions to substantive commitments for investor/investment protection are drafted (which explains in part the preference expressed by some developing countries for a GATS type “opt-in” approach to market access commitments in future multilateral investment rules ). Finally, the modes of application of such rules can promote development concerns as where, for example, a commitment to technical assistance for developing country members is given the full force of binding legal obligation rather than being expressed through a non-binding “best efforts” provision. This overall approach has been encapsulated by UNCTAD in the notion of “flexibility for development” of IIAs, whereby the very design of an IIA can create a flexibility in the agreement that ensures the effective realisation of the special needs of developing countries. This may be essential when such countries are seeking to adapt to new disciplines in the investment field and may not be able to undertake the same range and scope of obligations as more developed countries, at least in the short term (see further UNCTAD, 2000a).

(3) Corporate Social Responsibility

A third area of possible concern to future negotiations relates to the perception that new multilateral disciplines in the field of FDI, which are in the main oriented towards greater investor and investment protection, may require an element of reciprocal regulation of corporate responsibility as the quid pro quo for such improved legal treatment. The present paper does not discuss whether or not this should occur, nor does it discuss in detail the substantive issues that such provisions can raise. Rather it seeks to identify, briefly, the main kinds of provisions that could fall under this general heading and the modalities through which these provisions might be expressed.

1. Substantive Content

As noted in the introduction, three issue areas stand out as being central to corporate responsibility: labour rights, human rights and environmental issues. However, the range of possible issues covered by the idea of corporate social responsibility is vast, ranging from corporate governance as such to fair competition, anti-corruption obligations, consumer protection and ethical business standards, to name but a few (UNCTAD, 2001c). If extensive provisions were to be included on all of these issues, multilateral investment rules would probably be impossible to adopt, let alone apply, given the extensive subject matter. There would also be the issue of institutional overlap, as many of these issues are already being dealt with by specialised intergovernmental organisations or other specialist bodies. Thus the drafters of multilateral investment rules will have to think very carefully as to how corporate responsibility provisions should appear.

2. Modalities of Implementation

Given the abovementioned problems, it is likely that corporate responsibility issues will be dealt with by means that do not seek to offer detailed provisions but, rather, provide for overall commitments to certain standards. This may be achieved in a number of ways. First a general commitment on the part of the signatory States to further the observance by TNCs of corporate responsibility standards could be included in the Preamble and/or in a specific substantive provision. Equally, where an issue is not yet fully developed, it can be expected that hortatory, best efforts provisions may be used. Secondly, international instruments and agreements that already contain a more extensive treatment of specific social responsibility issues could be incorporated as part of the new investment rules, in the manner that existing international minimum standards of treatment for intellectual property, contained in the Paris and Berne Conventions were incorporated by reference into the TRIPS Agreement. A third possibility would be to follow the practice under NAFTA and use “side-agreements” on specific social issues or to follow the precedent of the negotiations over the ill-fated MAI, where some delegations favoured appending the OECD Guidelines on Multinational Enterprises to the text of that agreement in a non-binding appendix.

Whether corporate social responsibility standards will be included in eventual multilateral investment rules cannot be predicted at this stage. On the other hand, given the extensive concern expressed by civil society groups over the lack of social responsibility provisions in the MAI, it is highly likely that some reference to corporate responsibility will be needed in future multilateral investment rules to ensure a balance between corporate rights, as expressed in the investor/investment protection provisions of such rules, and corporate responsibilities, as expressed in specialised international instruments and national legal standards. The absence of such a balance might endanger the political acceptability of those rules.

(4) Concluding Remarks

This paper has sought to highlight some of the main issues arising out of the Doha Declaration that will need to be discussed in any future negotiations concerning multilateral investment rules in the WTO. Clearly the first concern is to create workable disciplines that can bring the treatment of investors and investments in manufacturing and primary products industries into line with the treatment already available, in part, to investors in service industries under the GATS and to cross-border traders under the GATT. Such a development will complete the international architecture for the progressive liberalisation of all areas of international economic activity under the auspices of the WTO. However, such liberalisation is not without its socio-economic and political consequences. The experience of trade regulation shows that rapid and unconditional multilateral liberalisation is, in effect, impossible. Hence the GATT commitment to this long-term goal is made subject to numerous exceptions and qualifications. It would be peculiar indeed if investment liberalisation were not to follow exactly the same course and itself be a regime of gradual and conditional liberalisation, especially as this area raises more fundamental questions concerning State sovereignty over national economic policy than international trade.

This paper has concentrated, properly, on the major issues surrounding promotion and protection of FDI. On the other hand, it has also shown that the introduction of the development dimension by the Doha Declaration has generated a modified agenda on international investment issues, in which the problem of how to formulate new investment protection disciplines needs to encompass the special implications of such a policy upon developing and least developed countries, who may otherwise not accept any new developments in this field. Equally, the fact that new multilateral disciplines will benefit TNCs in particular has raised the question of whether such benefits should not be obtained at the price of greater corporate social responsibility. This too may need to be addressed in the new investment architecture. Otherwise, the public concern over the allegedly privileged status of international business in the current international political order may become even more pronounced than it was in relation to the MAI.

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