Need for implementation of Multilateral agreement on Investment vis-à-vis Dispute Settlement in WTO

– By Aayushi Singh*

Introduction – Cogs of the same wheel – Trade and FDI

From where do we get the much-assumed co-relation between trade and Foreign Direct Investment (FDI)?  Let us draw from the theory of Grazia Ietto-Gillies who opined that the reason for the growth of FDI and MNCs were rooted in neoclassical economics based on macro-economic principles.[1] These theories were based on the classical theory of trade in which the motive behind the trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost of production as a motive for a firm’s foreign activity.[2] The relation between trade and FDI flows from this. Analytical work has recently been developed by OECD in order to explore the nature of these links in quantitative terms.[3]

Globally speaking, the impact of FDI on trade has been much debated and studied in the literature since it provides an indication of how the international specialisation of countries is affected by globalisation and, hence, holds a clue to understanding the welfare effects.[4] If trade and FDI complement each other then it might lead to greater competitiveness of the foreign market and this is beneficial to exports from the host country, therefore, beneficial to its industries.[5]

Reinterpreting models of the multinational firms in terms of the choice between FDI and cross-border services takes into account the fact that services account for an important and stable fraction of global trade. Hence, theories explaining international trade (in services) should, in principle, also be applicable to international trade in financial services.[6]

At this juncture, it is integral to understand that FDI may enter through regional, bilateral and multilateral investment treaties. This article draws two theses regarding the viability and opportunities offered by bilateral and multilateral investments and attempts to build a case for the latter through a thorough analysis of empirical data and research gathered from financial institutions, trade organizations and research papers.

A. Limitations of bilateral FDI arrangements (Achilles Heel) as opposed to multilateral framework in the interest of member nations

UNCTAD put the number of BITs globally at the end of 2011 at 2,833.[7] Perhaps because of the large number of existing BITs already negotiated, or because of the shift towards negotiations of regional FTAs or regional treaties, the number of new annual BITs signed has declined recently, with a total of 47 new IIAs signed in 2011 (33 BITs and 14 other IIAs), compared to 69 in 2010.[8] Developing governments have been actively seeking partners for BITs as a way to promote trade and economic relations and to elicit interest in their economies as a destination for FDI.[9] Only a few countries have refrained from the BITs race, most notably Brazil, which has signed BITs with 14 countries,[10] none of which have entered into force. Brazilian authorities have feared that strong protection clauses and comprehensive investor–state dispute resolution mechanisms in BITs may restrict their ability[11] to pursue an independent national development strategy, expose the country to liabilities caused by legal claims by foreign investors and increase the complexity of policy-making. [12]

The increasingly complex global setting for international investment has resulted from the “patchwork quilt” of agreements which requires from the investors and governments to try and ensure consistency between differing sets of obligations.[13] While these agreements carry the legal force of international treaties, the legal implications of overlapping sets of various obligations are not always clear. Each agreement has its own architecture, objectives, and cultural and legal specificity, which makes it difficult to assess the global picture and the actual investor disciplines and protections for each potential investment location.[14]

A large number of investment agreements, notably the BITs, contain similar concepts (national treatment, MFN treatment, fair and equitable treatment, full protection and security), but have legal and/or textual variations that can result in divergent interpretations of the same general obligation under different agreements.[15] This can engender costs, in the form of time and inefficiencies in trying to sort through the implications of various provisions in different investment contexts, and potentially divert investment flows from more efficient to less efficient locations. Another question raised by the overlapping set of investment agreements is the possibility of “forum shopping” in the case of dispute settlement, where an investor may initiate multiple procedures on the same issue to take advantage of the potentially more favourable dispute settlement provisions available in different agreements.[16]

B. Currently, the fragmented governance of FDI contributes to the confusing landscape faced by investors and governments, thus, a multilateral agreement on investment is a viable solution

Despite its importance, the disciplines governing FDI lie in the shadow of those governing global trade. There is no single, comprehensive multilateral treaty or institution to oversee investment activity. In addition to the efforts to address the topic in the Havana Charter of 1948[17] – which ultimately failed for other reasons, a second attempt was made by the OECD through its four-year effort (1995–1998) to craft a multilateral agreement on investment (hereinafter “MAI”). The effort involved OECD Members and a few key developing countries. When made public in 1997, the draft agreement drew widespread criticism from civil society groups and developing countries.[18] The effort was suspended at the end of December 1998. A third attempt to bring investment under multilateral rules took place within the WTO itself, in the context of the Doha Development Agenda, when investment and three other “Singapore issues” [19](competition policy, government procurement and trade facilitation) were originally included within the Doha negotiating mandate.[20] However, dissension within the WTO ranks made it impossible to reach a decision. In August 2004, three of the four “Singapore issues” were dropped from the Doha Agenda, and negotiations were subsequently launched on only one subject: trade facilitation.[21]

Need for mandating an MAI through WTO

If an International Investment Agreement is to emerge at some future point, then for several reasons the WTO is the logical home for it. WTO provides effective regulation of trade, but only piecemeal regulation of FDI.[22] An MAI will be effective in countering various drawbacks with the fragmented structure of FDI that presently exists and will be beneficial in the following manner:

• There is a growing unhappiness with various provisions in BITs and investment provisions in RTAs, particularly with their dispute settlement aspects. Multilateral negotiations could yield more equitable outcomes and ensure non-discrimination.
• WTO’s dispute settlement regime has worked well, especially in its most trying period during the current global financial crisis. It has a strong record with regards to member participation, different levels of development and achieving compliance.[23]
• The current proliferation of investment regimes offers arbitrage opportunities for investors who are well placed to exploit it, yet confuses many others who are not. At the same time, regulating states’ hands are increasingly tied in a confusing array of obligations.[24]

A unified system would help overcome these problems. Reflecting this groundswell of interest in multilateral investment regulation, there have been several recent attempts to reflect on what the content of such regulation should be.[25]

UNCTAD,[26] OECD, ICC and APEC[27] have all recently issued principles, recommendations and policies that could be used to effectively promote and regulate FDI. Overall, these guidelines and recommendations focus on a new development paradigm in which inclusive and sustainable development is at the centre of international investment policy-making.[28] The new trend seeks to impose obligations and responsibilities on both governments and investors; the former through proposed rules for government treatment of investment, the latter by adhering to principles of corporate social responsibility. [29]While the principles issued by the organisations are in most cases well accepted, achieving consensus on the precise approach to a multilateral investment agreement is difficult. [30]

An MAI could perhaps diminish litigation costs and cater to a better understanding of direct and indirect investment globally. Further, some states oppose agreements that contain investor–state dispute settlement obligations and often FDI is looked at with a similar perspective. Since the WTO’s dispute settlement mechanism is a state–state system, it at least has an important advantage that it is widely accepted.[31] WTO dispute settlement could also limit the scope of state obligations and responsibilities and increase the pressure to comply. [32]The downside is that companies would be reliant on their governments to bring such cases, which introduces factors other than corporate interests into the equation, thereby making the process unpredictable.[33] From the investor’s standpoint, this is an argument in favour of investor–state dispute settlement, but it would require amending the Dispute Settlement Understanding, [34] which is deliberated on in the next section.

Overhauling the Dispute Settlement Understanding Scheme of WTO

In the early years of the GATT, most of the progress in reducing trade barriers focused on trade in goods and in reducing or eliminating the tariff levels on those goods. More recently, tariffs have been all but eliminated in a wide variety of sectors. This has meant that non-tariff trade barriers have become more important since, in the absence of tariffs, only such barriers significantly distort the overall pattern of trade liberalization.[35] The presence of multiple datasets on WTO dispute settlement and FDI arbitration may bias researchers towards further research on patterns within these issue areas.[36]  Members often use dispute settlement as a mechanism to gain further clarification of the provisions of the covered agreements and as a means to try to expand the scope of existing obligations to encompass matters on which no negotiating process has been made.[37]

– Cross-border trade in services and investment are addressed in chapters devoted to each. Investment rules and disciplines cover both matters of investment protection and liberalization through market access and even these are met with much chaos.[38]

– Forum shopping in the case of dispute settlement, where an investor may initiate multiple procedures on the same issue to take advantage of the potentially more favourable dispute settlement provisions available in different agreements, is one of the most rampant issues created by the dispute settlement provisions.[39] The tabulation states:

Complaints by developed country members

Respondents – Developed – 127

Respondents – Developing – 77

Complaints by developing country members

Respondents – Developed – 72

Respondents – Developing – 53

Complaints by both developed and developing country members

Respondents – Developed – 6

Respondents – Developing – 0

Given that the largest members of WTO could not deploy these ultimate enforcement measures of suspension and concessions in the DSU effectively, the prospects for developing countries or small economies are even bleaker.[40] Over three-fourths of the WTO’s members are developing countries, thus this question assumes great importance for a large majority of the member states. [41] If instances of non-compliance go unchecked and cannot be remedied, it may not be very long before the euphoria about the WTO’s “giant leap” withers away and serious questions are raised about the efficacy of the dispute settlement procedures.[42]

Need for unified MTA – Impending a developing nations clause – Conclusion and the Way Ahead

Each year on July 1, the World Bank revises the analytical classification of the world’s economies based on estimates of gross national income (GNI) per capita for the previous year. The updated GNI per capita estimates are also used as inputs to the World Bank’s operational classification of economies that determines lending eligibility.[43] As of 1 July 2015, low-income economies are defined as those with a GNI per capita of $1,045 or less in 2014, calculated using the World Bank Atlas method;[44] middle-income economies are those with a GNI per capita of more than $1,045 but less than $12,736; high-income economies are those with a GNI per capita of $12,736 or more. Lower-middle-income and upper-middle-income economies are separated at a GNI per capita of $4,125.[45]

In academic literature, there is much discussion and analysis of the two main types of constraints faced by developing nations in the DSU, which have been thought to hold back participation of developing members in the system.[46] As expressed by Guzman and Simmons, these are “capacity constraints”, a term which includes the limits imposed by shortage of skilled human resources or lack of finance for use of outside legal assistance, and “power constraints”, a term which covers the impact of possible retaliatory action by major players if their policies or measures were challenged in the WTO.[47] These restraints can be addressed and incorporated in the system of multilateral trade agreement policies and a clause to address the needs of developing nations must be encapsulated.[48]

*[Aayushi Singh is a final year Law student at Symbiosis Law School, Pune. She has a keen interest in International Commercial Arbitration and International Trade Law and wishes to pursue a career these areas of law.]

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[1] Ietto-Gillies, Grazia (2012) Transnational corporations and international production: Concepts, Theories and Effects. Second Edition, Edward Elgar: Cheltenham, UK.

[2] Allee,  Todd and Paul Huth. 2006.   “Legitimizing Dispute Settlement:  International Legal Rulings asDomestic Political Cover.”American Political Science Review100:219–234

[3]  Fontagné, L. (1999), “Foreign Direct Investment and International Trade: Complements or Substitutes?”, OECD Science, Technology and Industry Working Papers,1999/03, OECD Publishing, http://dx.doi.org/10.1787/788565713012

[4] Ibid.

[5] Sharma, Renu, Causal   Links   between   Foreign   Direct  Investments and Trade: A Comparative Study of India and China, Eurasian Journal of Business and Economics 2013, 6(11), 75-91, www.ejbe.org/EJBE2013Vol06No11p075SHARMA-KAUR.pdf, Accessed on 30 March, 2017

[6] Claudia M. Buch, Alexander Lipponer, FDI versus cross-border financial services: The globalization of German banks, Claudia M. Buch, Alexander Lipponer,

[7] UNCTAD (2012b), p 18

[8] UNCTAD (2012b), p 8-16

[9] Ibid.

[10] UNCTAD (2011b), p 24-30

[11] Graham, E. (1996) “Global Corporations and National Governments”, Peterson Institute for International  Economics

[12] Helpman, E. (1984) “A Simple Theory of International Trade with Multinational Corporations”, Journal of Political Economy, 92(3): 451–71.

[13] Wade, R. (2003) “What Strategies are Viable for Developing Countries Today? The World Trade Organization and the Shrinking of ‘Development Space’”, Review of International Political Economy, 10(4): 621–44.

[14] Baldwin, R. (2012) “WTO 2.0: Global Governance of Supply-chain Trade”. CEPR Policy Insight No.64

[15] Markusen, J. R. (2000) “Foreign Direct Investment”. CIES Working Paper No. 19.

[16] Morisset, J. (2003), “Tax Incentives”. Public Policy for the Private Sector, World Bank

[17] Wang, Y. (2008) “The Political Economy of International Trade”, Beijing: China Market Publishing House

[18] Moore School of Business (2002) “The Economic Impact of BMW on South Carolina”.

[19] Sauve, P. (2000) “Making Progress on Trade and Investment: Multilateral versus Regional Perspective”. In Services Trade in the Western Hemisphere: Liberalization, Integration, and Reform. Brookings Institution Press.

[20] Baldwin, R. (2011) “21st Century Regionalism: Filling the Gap between 21st Century Trade and 20th Century Trade Rules”., WTO Staff Working Paper.

[21] Ibid.

[22] Incentives to Attract FDI – Uri Dadush, World Economic Forum, Foreign Direct Investment as a Key Driver for Trade, Growth and Prosperity, Global Agenda Council on Global Trade, p. 23-29

[23] Helpman, E. (1984),  “A Simple Theory of International Trade with Multinational Corporations”. Journal of Political Economy, 92(3): 451–71.

[24] Ismail, F. (2012), “Towards an Alternative Narrative for the Multilateral Trading System”, South Views, 40(7), November

[25] WTO dispute settlement body, “Dispute Settlement: Index of disputes issues,” Disputes S316 and DS317.

[26] The OECD Guidelines for Multinational Enterprises established on the OECD Declaration and Decisions on

International Investment and Multinational Enterprises, http://www.oecd.org/daf/inv/mne/oecddeclarationanddecisions.html, Accessed on 30 March, 2017

[27] The APEC nonbinding investment principles.

[28] Veeramani, Choorikkad (2004), “Trade liberalization, multinational involvement, and intra-industry trade in manufacturing”, Working Paper no. 143, Indian Council for Research on International Economic Relations, September 2004

[29] Baldwin, R. (2011) “21st Century Regionalism: Filling the Gap between 21st Century Trade and 20th Century Trade Rules”., WTO Staff Working Paper.

[30] Brainard, L. (1997) “An Empirical Assessment of the Proximity-Concentration Trade-Off between Multinational Sales and Trade”, American Economic Review, 87(4): 520–44.

[31] Cline W. R. (2010) “Financial Globalization, Economic Growth, and the Crisis of 2007-09”. Peterson Institute for International Economics

[32] Horn, Henrik and Petros C. Mavroidis. 1999., Remedies in the WTO Dispute Settlement system and developing country interests.<http://www1.worldbank.org/wbiep/trade/papers_2000/BPdisput.PDF&gt;

[33] OECD (2011) “OECD Guidelines for Multinational Enterprises”, OECD Working Paper, http://www.oecd.org/daf/inv/mne/48004323.pdf

[34]  Thomas, K. P. (2011) “Investment Incentives and the Global Competition for Capital”, Columbia FDI Perspectives

[35] Ibid.

[36] Allee,  Todd and Paul Huth. 2006.   “Legitimizing Dispute Settlement:  International Legal Rulings asDomestic Political Cover.”American Political Science Review100:219–234

[37] OECD, “International Investment Agreements Multilateral Agreement on Investment”, available at http://www.oecd.org/investment/internationalinvestmentagreements/multilateralagreementoninvestment.html.

[38] Guimon, J. (2010) “It’s Time for an EU Investment Promotion Agency”, Columbia FDI Perspectives

[39] South Centre (2012) “The Emerging Crisis of Investment Treaties”. South Bulletin, 69, November

[40] WTO document,  “Update of WTO dispute settlement cases,” in particular WT/DS/ OV/25 and others.

[41] Horn, Henrik and Petros C. Mavroidis. 1999., Remedies in the WTO Dispute Settlement system and developing country interests.<http://www1.worldbank.org/wbiep/trade/papers_2000/BPdisput.PDF&gt;

[42] Article by Horn, Henrik & Mavroidis, Petros C, “The WTO dispute settlement system,  1995-2004 – some descriptive statistics.” January 2006

[43] New Country Classification, World Trade Organization, http://data.worldbank.org/news/new-country-classifications-2015, 07-02-2015

[44] Allee,  Todd and Paul Huth. 2006. “Legitimizing Dispute Settlement:  International Legal Rulings asDomestic Political Cover.”American Political Science Review100:219–234

[45] Ibid.

[46] WAGE Conference, “Power plays and capacity constraints”, article by A Guzman & B Simmons presented in May 2005.

[47]Ibid.

[48] Horn, Henrik and Petros C. Mavroidis. 1999., Remedies in the WTO Dispute Settlement system and developing country interests.<http://www1.worldbank.org/wbiep/trade/papers_2000/BPdisput.PDF&gt;