Shri Narendra Modi
Shri Narendra Modi
Prime Minister of India
International Trade
WT/WGTI/W/86 22 June 2002
Working Group on the Relationship between Trade and Investment (00-2532)

Reproduced hereunder is a statement delivered by the representative of the Permanent Mission of India at the 8 June meeting of the Working Group on the Relationship between Trade and Investment.

  • Since this is the first time we are meeting after the last meeting of the Working Group in September 1999, some opening remarks of a general nature would appear to be in order.
  • It was in Singapore in 1996 that this Working Group was established with the clear mandate to initiate a study process to examine the relationship between trade and investment. The mandate also, among other things, clearly asks that the development dimension be fully taken into account in the work of this Working Group.
  • Since then the Group has had occasion to meet and discuss the various items on the Checklist of Issues Suggested for Study. After more than two years of study, while we are undoubtedly better informed than when we began the process, the following issues still need to be clarified:
    • Fundamentally, the relationship between trade and investment is a complex one and is not susceptible to easy analysis, much less, any definitive conclusions;
    • The developmental dimension is at the heart of this educational process and in the end, for developing countries this is what counts most;
    • Flexibility for pursuing various developmental options is key to the future of any developing country; anything that reduces the flexibility currently available to countries should not be an advisable course to pursue;
    • Evidence of the putative benefits from FDI is not conclusive and what we get is a very mixed picture of the advantages and disadvantages of FDI; as with many other things, a lot depends upon the specificities of the country concerned;
    • The present regime of bilateral agreements gives flexibility to a lot of countries enabling them to channel FDI into areas of priority determined by them;
    • There is no evidence that the pattern and flow of investment will change in any significant way with multilateral rules on investment. On the other hand, the bilateral investment treaties appear quite successful in protecting existing investments;
    • On the other hand, there is evidence that should there be multilateral agreement on investment it would definitely limit flexibility currently available for developing countries; and
    • Finally, FDI appears to be dependent on a host of other factors than the investment regimes per se; for example, the size of the market, skilled labour, political stability, sound legal regime and good infrastructure are some of the factors that have been mentioned by Members themselves in their various submissions.
  • In the light of the above, the question is now how to proceed in this Working Group. Even in the run up to Seattle, India had expressed itself in favour of a continuation of the work of this Working Group within the existing mandate. India believes that this is the best way to proceed.
  • India suggests that a detailed consideration could begin with the implications of the relationship between trade and investment for development and economic growth – Item I of the Checklist of Issues Suggested for Study. The impact of investment on development differs depending on the type of investment. Therefore, the first in this process must be to distinguish clearly between FDI and other types of capital flows. There is general agreement in the Working Group that discussions may centre around FDI. Therefore, the next may be to examine how trade and FDI impact upon and are also in turn impacted upon by the stage of development of the country concerned and its trading profile. What would be of relevance here is the experience of different countries, including the present industrialized or newly industrializing countries, at various stages of their development. A key related issues is how far regulation of FDI is necessary for a developing economy. Some sectors are more important than the other in terms of development priorities and what needs to be the scope of sectoral thrust in national FDI policies. There is also the need to look at the correlation between different types of FDI and the nature of the host economy and what welfare gains do each of them bring. Quality FDI in each case not only brings with it capital but also other intangible assets like technology, entrepreneurship, management skills and employment potential which can be a major source of positive change in the host economy with sizeable spillover effects. Would it not be, therefore, prudent for developing countries to have policy discrimination in favour of such FDI that promotes technology transfer, capacity building and employment? If this is true, then would it not be much better to do this through bilateral investment agreements which allow a lot of flexibility rather than through a possible multilateral agreement on investment which, by definition, can not take into account the specificities and the peculiarities of each and every country.
  • Secondly, the question arises whether mobility of labour should also not be meaningfully addressed when movements relating to the other three factors of production namely, goods, services and capital are being taken up in one form or the other. In a recent World Bank paper “Multilateral Disciplines for Investment Related Policies” by Bernard Hoekman of the World Bank and Kamal Saggi of the Southern Methodist University, it has been argued that purely from an economic view point, the arguments for free movement of labour are no weaker than those for free movement of capital. Clearly, countries that play the role of source countries in the movement of capital will play the role of host countries in the movement of labour. Both the mobility of capital and labour are two sides of the same coin and yet are being treated as two separate water-tight compartments. This is essentially because we have not yet appreciated the complementary and critical role of the relationship. The countries with a relative advantage in capital resources are keen on promoting the mobility of capital vis-à-vis the countries which are looking for opportunities to export labour services, given their relative advantage in such resources. Although the basic economies of the mobility of capital and labour call for cooperation amongst countries based on competitive advantage and relative scarcity of resources, polarisation of the issue has led to controversies in international forums. The fact remains that there is a two-way relationship between capital and labour and any discussion on the mobility of capital remains incomplete without appropriate investigation into the scope for the mobility of labour. India has in the past called on the Working Group to hold discussions to explore the nature and extent of issues in labour resources faced by different sectors. For example, the Working Group must consider ways to overcome the labour crunch in some sectors and improve productivity of capital by improving the mobility of labour by looking at ways for selected labour to move from surplus regions to deficit regions.
  • Thirdly, investment protection at present is guaranteed by a host of bilateral investment promotion and protection agreements (BIPPAs) that countries have entered into with other countries. Many governments look upon these bilateral instruments as on the one hand giving policy flexibility for themselves while assuring foreign investors a degree of comfort and safety for their investments. Indeed, FDI in the last one decade has more than doubled itself in the absence of any multilateral rules. During the period 1985-90, the average annual flow of FDI into developing countries accounted for barely 18 per cent of the global FDI inflows and its volume was US$25 billion. This percentage doubled in the five year period 1993-97 and the volume has increased nearly six fold. It is far from clear that a multilateral agreement on investment will either provide the same degree of flexibility and comfort that the bilateral instruments currently provide to developing countries or it will necessarily lead to significant increase in inward flows of investment.
  • Fourthly, custom duties on imports are often used for providing a level of protection to the domestic industry from imported products. If entry of FDI is, however, totally free in a host country, a foreign investor can easily access its market through investments which will not have to face the tariff barriers. This may, in turn, have some impact on the domestic industry in the host country depending on its level of development. In particular, if the technology in use by the domestic industry is not up to date or there are other constraints, as it happens in developing economies, the domestic industry could be adversely affected. In such cases, host country governments do come up with certain performance requirements to be fulfilled by foreign investors that would help in creating a level playing field while the performance required (in terms of employment, minimum exports or technology transfer) would provide welfare gains to the host country. In other words, such performance requirements act as a kind of tariff equivalent for entry of FDI. The study process therefore needs to examine the positive role played by such policy instruments before arriving at any conclusion.
  • Fifthly, the argument that multilateral rules will lead to efficiency gains, lower costs and prices which are in the interest of both home and host countries does not take into account the costs for host countries in terms of costs of adjustment and impact on social gains that could otherwise have accrued in many cases? Global welfare gains do not necessarily translate into national welfare gains for the host country. What is therefore the benefit for the host country in becoming a party to such a multilateral agreement?
  • Sixthly, it is interesting that in a recent joint paper “Multilateral Disciplines for Investment Related Policies” Bernard Hoekman of the World Bank and Kamal Saggi of the Southern Methodist University have, after a comprehensive evaluation of the potential benefits of such international disciplines, come to the conclusion that in their view priority should be given to exploiting the potential offered by GATS before seeking to negotiate general disciplines on investment policies (FDI). They believe that once substantial further progress has been made to liberalize trade in goods and services, it will become much clearer whether the potential benefits of seeking general rules on investment policies are large enough to justify launching multilateral negotiations in this area. This seems an interesting point for the study process to pursue.
  • Seventhly, the question of investment incentives is an important issue and needs to be reflected upon carefully by all WTO members.
  • Eighthly, there is also the very important question of foreign investors’ obligations. This issue assumes particular significance since nearly one-third of world trade is intra-firm trade between affiliates of Trans National Corporations (TNCs) while another one-third is between TNCs and non-affiliated enterprises. This issue is often met with the suggestion that multilateral competition laws will address this issue. The discussions of the Working Group on the Interaction between Trade and Competition Policy have, however, unfortunately not looked upon this as a principal issue of its focus. It has also not come up with enforceable recommendations against private sector enterprises indulging in restrictive business practices. On the other hand, pressure has been mounted in this Working Group as well to move towards a multilateral agreement on competition which may be used as yet another vehicle for market access by developed countries seeking national treatment. So, the relationship between investment and competition policy also needs to be looked at more critically.
  • In conclusion, most of the above issues have not received definitive answers. Without any hard evidence, however, proponents for multilateral rules on investment have laid stress on non-discrimination, predictability and transparency as the main basis for their call to progress towards negotiation on this subject. Some have also argued in favour of freeing investment policies from performance requirements, incentives or other conditionalities that they regard as distorting investment flows and hence do not contribute to global welfare or efficiency. Pre-establishment and post-establishment rights are other important elements that have been focussed with suggestions for top-down or bottom-up approaches being made with reference to pre-establishment commitments. Some have also submitted that multilateral rules on FDI would contribute to achieving WTO’s core trade-related objectives. Many of these arguments may be relevant for countries at similar levels of development and which have already crossed a certain threshold in their development process. But if issues are not addressed from the viewpoint of the entire membership then it is possible that any premature move in this regard would only widen the developmental disparities to which today’s globalization paradigm have provided no clear solutions yet. It is therefore important that many of these issues are revisited and discussed more intensely and views exchanged by the Working Group before specific conclusions can be arrived at.
  • India would be happy to critically examine the above and related issues with other delegations with a view to arriving at a better and common understanding of the complex relationship between trade and investment.