An APEC or multilateral investment code?

AN APEC OR M~~TI~ATERA~ INVESTMENT

CODE?

I? J. LLOYD

This paper considers whether there should be an intemational investment code and, if so, whether it should be a regional code for the Asia Pacific Economic Cooperation (APEC) countries or a multilateral code. The APEC Eminent Persons Group recommended to APEC in October 1993 that there should be an Asia-Pacific Investment Code to regulate direct foreign investment in the region. On the other hand, there is already substantial regulation of international investment at the bilateral, regional and multilateral levels and other proposals for increased regulation are under consideration in the OECD and other fora. This paper argues that, in the long term, a Code under the World Trade Organisation would have the advantages of greater country coverage, links to other investment-related provisions of the WTO and greater enforceability. In the interim, APEC can develop and promote the principles of transparency and non-discrimination in the treatment of foreign direct investments. JEL Classification: F21.

I.

INTRODUCTION

In the last three years interest in a code to regulate aspects of government control of investment flows in the Asia Pacific region has been growing steadily. Guisinger (1991) proposed an investment code for the Asia-Pacific region. This proposal was discussed by the Pacific Economic Cooperation Council (PECC) at the May 1991 plenary session in Singapore in 1992 and in August it was referred to the Investment Study Group of the PECC Trade Policy Forum (TPF). The TPF produced a final Draft Asia Pacific Investment Code (PECC, 1993). While this draft code was received favourably, it was not adopted or endorsed by PECC (see Bora, 1994). The idea of a code was, however, picked up by the Eminent Persons Group of the Asia Pacific Economic Cooperation (APEC) forum in its report to the October 1993 APEC Ministerial Meeting in Seattle. Recommendation 3 of this Report was that “APEC should adopt

k?J. Lloyd Australia.

l

Asian Busmess Centre, Faculty of Economics and Commerce, The University of Melbourne, Parkville, Victoria 3052,

Journal of Asian Economics, Vol. 6, No. 1, 1995 pp. 53-70 ISSN: 1049-007s .__~

Copyright Q 1995 by IA1 Press Inc. All rights of reproduction in any form reserved.

53

54

JOURNAL OF ASIAN ECONOMICS 6(l), 1995

an Asia Pacific Investment Code [APIC] to reduce the unce~~nties and tr~sactions costs of trade and investment in the region” (APEC, 1993). This paper considers the proposal and looks at the alternative of a multilateral investment code under the auspices of the new World Trade Organization or some other group. Section II describes some trends in foreign direct investment flows and the deregulation at the national level of these flows as background to the subsequent examination of proposals for a code. Section III looks at the existing international regulation of international investment. There are bilateral agreements, regional agreements contained within some regional trade arrangements such as the European Union and the North American Free Trade Agreement and, at the multilateral level, some aspects of international investment flows are regulated by the OECD, the GATT and the World Bank. In the light of existing national, bilateral and multilateral regulation, Section IV examines the PECClAPEC proposal for a code. Section V considers the desirability of the APEC Code. Existing regulation by other bodies is more extensive than is commonly realized and other proposals for increased regulation are under consideration in the OECD and other fora. In the long term, a multilateral code has a number of advantages over the proposed AsiaPacific code.

II.

TRENDS IN FOREIGN DIRECT INV~TMENT

World flows of capital between countries have increased rapidly in the 1980s and 1990s. From the point of view of the relationships with international trade in goods and services, the direct foreign investment flows are of more interest than portfolio and other investments. The International Monetary Fund collates statistics of direct foreign investment. They show that total direct investment abroad has increased from $US 49 billion in 1983 to $US 349 billion in 1992 (International Monetary Fund, 1993, Table C-17). This is an average rate of growth of around 25 percent, though the flows are subject to large annual fluctuations. The US, Japan, Germany, and France and other industrial countries are the principal sources of the direct foreign investment flows. A feature of the intemation~ movement of capital by direct foreign investment is that it is two-way trade. Most countries are both a source and destination of direct foreign investment in any one year. For example, there was a surge of direct foreign investment in the US in the mid 1980s whereas previously the US had been a heavy foreign investor with little matching inflow. At the end of the decade the US had replaced Canada as the largest host investment nation in terms of the cumulative value of foreign-controlled investments. “Thus, rather than the one-way process, foreign direct investment had come to resemble trade in goods and services, with substantial flows in both directions.” (McCulloch, 1991) One is interested in the gross flows rather than the net flows as the gross flows affect production while the net flows are largely influenced by the balance of payments situation of the individual countries.

An APEC or Multilateral Investment Code?

55

Table 1 records the inflows into reporting or destination countries for the APEC region and, for comparison, the world total. (Statistics for Brunei, Hong Kong, and Taiwan are not reported.)’ As destination countries, the APEC region over the period of the late 1980s and early 1990s has declined sharply in importance. This is due almost entirely to the sharp fall in foreign direct investment into the United States. (There is a similar fall in foreign direct investment into Australia and New Zealand though it is much smaller in absolute terms.) This probably reflects the combined and interactive results of the recession in these countries and their reduced attractiveness as FDI destinations with a poor record of productivity growth. However, the Asian group of countries has seen steadily increasing inflows and has become more important on the world scene. China in particular has had a very rapid growth of FDI inflows and it is expected that the statistics for 1993 and 1994 will show another large increase. Looking at the two-way flows, a high proportion of the foreign direct investment flows in the Asia-Pacific region are intra-regional. Unfortunately, it is not possible to obtain a general picture of the two-way intra-regional flows in the Asia-Pacific region because the IMF does not report the breakdown of flows out of and into countries by the partner countries, but details are available for some countries from national sources, including the two most important source countries, the US and Japan. (Yamazawa, 1993, Table 6-3 ) construct a matrix of intra-APEC direct investment flows for 1980, 1985, and 1989. These show substantial intra-APEC flows but the data are dated. In the case of Japan, considerably more than one half of its direct foreign investment has been destined for other APEC countries, chiefly the US but increasingly other East Asian countries. In the case of the US, a third or a quarter is destined to other APEC countries with Canada the single most important destination and only lo-20 percent directed to East Asia. The rapid expansion of direct foreign investment flows globally and in East Asia in particular may be explained in large part by the fact that the movement of capital around the world has become much freer in recent years, chiefly as a result of national policies of deregulation of financial markets. Regrettably there are no quantitative measures of the extent of the reduction in barriers to inward flows to my knowledge. A number of features of the national regulations of foreign direct investment make it difficult to measure the extent of these restrictions. Restrictions should be viewed as discrimination against foreign domestic investors but there are multiple dimensions to discrimination against foreigners in the movement of capital.’ First, a capital investor requires the right of establishment and this is frequently denied foreign investors, in some sectors at least. Second, Outward transfers of capital and capital income after establishment may also be restricted. Third, even when there are no restrictions on capital movements across borders, there may be significant non-border differences in treatment between the operation and taxation of non-resident owned companies as distinct from the treat-

56

JOURNAL

TABLE 1.

Foreign Direct Investment

OF ASIAN ECONOMICS

6(l), 1995

into APEC Countries

1986

1987

1988

1989

1990

1991

35,630

58,220

57,270

67,870

45,140

23,972

2,370

1,217

4,198

3,795

2,626

7,638

6,592

7,757

1992

Industrial Countries United States Canada Japan Australia New Zealand Total, Industrial Countries

230

1,170

-520

- 1,060

1,760

1,370

2,720

3,484

3,920

8,013

7,770

6,884

4,763

4,968

283

293

441

1,365

1,754

682

70

40,844

67,801

68,999

78,571

63,176

37,379

17,885

Asia China, P. R. of

1,875

2,314

3,194

3,393

3,487

4,366

11,156

Indonesia

258

385

576

682

1,093

1,482

1,774

Korea

435

601

871

758

715

1,116

550

Malaysia

489

423

719

1,668

2,332

4,073

4,118

1,710

2,836

3,655

2,773

5,263

4,395

5,635

263

352

1,105

1,775

2,444

2,014

2,116

5,030

7,011

10,120

11,049

15,334

17,446

25,349

1,160

1,796

635

2,648

2,548

4,742

5,366

Singapore Thailand Total - Asia Mexico Total - APEC

47,034

76,608

79,754

92,268

81,058

59,567

48,600

Total - World

78,826

123,568

151,343

192,361

203,969

158,350

149,928

APEC as percentage of World Total

60

62

53

48

40

38

31

ASIA as percentage of World Total

6

6

7

6

8

11

17

Source:

IMF, Balance

ofPayments Statistics

Yearbook, 1993,

Part2

ment of resident companies. For example, as a condition of the establishment or operation of such FDI activities, some governments impose taxes or limit access to imports of these enterprises or impose other performance requirements such as labor training and R & D which do not apply to like domestically controlled enterprises. These are equivalent to a discriminatory tax on the inputs used in these activities. The elimination of such practices is called national treatment. It is the commitment by countries to accord to foreign-controlled enterprises operating in their territories treatment under their national laws, regulations and administrative practices which is no less favorable than that accorded to domestic enterprises. Fourth, host governments may also discriminate among the countries of origin of the foreign investment in terms of the rights of establishment and transfer or national treatment, giving more favourable treatment to some countries. The absence of this form of discrimination is called Most Favored Nation (MFN) treatment.

An APEC or Multilateral

Investment Code?

57

Free access to foreign markets for investors means the removal of barriers and discriminations in all four dimensions. This provides the standard of completely free movement of capital against which one may measure restrictions. On top of the multiple dimensions, there is another measurement problem. Unlike trade in goods, there are no taxes levied directly on cross-border capital movements. Instead, in all countries, decisions to allow a foreign direct investment across national borders are decided administratively, often with few guiding rules or principles, and the restrictions may be more severe for some industries than others. Most of the restrictions on inflow have been of the all-or-nothing kind which are equivalent to total prohibitions when there is a decision to disallow an application for foreign investment and to free movement when the application is allowed. Despite the absence of measurement, we can be certain that the barriers to international flows of direct investment have fallen as almost all countries have removed or relaxed restrictions on capital movements in the 1980s and 1990s (see OECD, 1990, 1993, chapter IV). Throughout the OECD countries and most of the Third World and recently in the countries of the former Soviet Union there has been a deregulation of financial markets and a steady relaxation of national restrictions on the inward (and in some cases outward) movement of capital flows and capital income service payments, and they have moved towards national treatment. All of the APEC countries have liberalized the movement of foreign capital in some respects at some time in the 1980s or 1990s some of them quite strongly; for example, Canada, Korea, the Peoples’ Republic of China, and New Zealand. Some governments have given incentives to foreign corporations to locate their activities and invest in the country which are not available to the domestic investors. These include tax holidays, duty-free imports of intermediate and capital inputs, and the subsidised sale of land, infrastructure and other services. Hence, there is, in some individual investments, discrimination infavor of foreign investors. Overall, it is possible that some countries on average discriminate in favor of foreign investors in the economy vis-&-vis domestic investors. What has caused the widespread reductions in barriers to foreign direct investment? When it was established in 1960, the OECD adopted a program of expansion of liberalization of international trade and international investment. Those members which signed the 1961 OECD Code of Liberalization of Capital Movements (OECD, 1992a) gave a general undertaking to “progressively abolish between one another, in accordance with the provision of Article 2, restrictions on movements of capital to the extent necessary for effective economic cooperation.” This included a commitment to national treatment which was expanded in the National Treatment for Foreign Controlled Enterprises Instrument (OECD, 1993). Although the role of the OECD as the regulator of capital flows among its members has been restricted to non-binding rules relating to non-discrimination, it has played an important part in promoting liberalisation of capital movements between nations. Similarly, both the World Bank and the International Monetary Fund have promoted liberalization of capital movements in

58

JOURNAL OF ASIAN ECONOMICS 6(l), 1995

developing countries; for example, they have made liberalization of capital movements a condition of loan agreements with some countries. The main reason for capital liberalization has been a marked change around the world during the last two decades in perceptions of the benefits of direct foreign investment. Prior to this, many economists had emphasized negative aspects of foreign investment such as the effects of foreign monopolies on market sharing and export franchising, the possibility of immiserizing growth and avoidance of corporate income taxation by transfer pricing. Many governments were suspicious of foreign investors and doubted the benefits of foreign investment. Today foreign investment is seen by governments as an important agent of economic growth through the transfer of technology and management skills, improved access to export markets and increased competition. A third factor in recent years is the fear of “investment diversion.” As other countries liberalized their restrictions and sought to attract foreign investors, those with greater restrictions became fearful that investment would be diverted to the former group of countries. The fear of investment diversion has been most pronounced in association with the regional freeing of commodity trade and foreign investment. In particular, East Asian countries are fearful that the preferential access to commodity markets in the US granted to Canada and Mexico under the NAFTA will divert investment by countries such as Japan from countries outside NAFTA to the US, Canada, and Mexico. Some of the simultaneous inward and outward direct foreign investment is within the same production industries. This two-way intra-industry investment parallels the intra-industry trade flows for commodity trade and may indeed by related to it, as noted by Grubel (1979). This suggests too that the growth of direct foreign investment may be due in part to the reduction in border restrictions on commodity trade as well as to the liberalization of the capital flows themselves3 From 1980 to 1992 world merchandise trade expanded steadily at an average compound rate of five percent per year in nominal terms. This is impressive but much slower than the increase in FDI. In particular, it appears that the regional reduction in trade barriers and other measures to achieve equal access for all producers within regions such as the European Union and NAFTA have led to a surge of direct foreign investment into these regions.

III. INTERNATIONAL REGULATION OF DIRECT FOREIGN INVESTMENT The international regulation of national government actions relating to investment flows between nations takes place at three levels-bilateral, regional, and multilateral or plurilateral. There are agreements made at each of these levels which seek to regulate in some way the restrictions which individual countries impose on investment inflows and outflows. Fortunately for the purposes of this paper, APEC (1993) has

An APEC or M~lf~laferal investment Code?

59

published details of the investment regimes of 15 APEC countries (not including Mexico, Papua New Guinea, and Chile) in 1993. This publication was designed to improve the transparency of the national investment procedures and regulations as a way of increasing foreign investment in the region. Bilateral agreements come in several different forms. Some are binding treaties, such as bilateral investment treaties or investment protection treaties or investment guarantee treaties as they are variously known, and friendship treaties. Some are of less than treaty status such as framework agreements or other statements of general principles. Typically bilateral investment agreements provide for rights of establishment and national treatment, sometimes with exceptions or exclusions, and some provide gu~antees for the free transfer of profits and capital funds in and out of the countries, compensation in the event of exprop~ation and other matters. F~endship, commerce, and navigation treaties are broader and cover trade and consular and navigation and other matters besides investment. There other bilateral agreements which are restricted to particular aspects of these flows such as double taxation treaties or agreements on international competition or dispute settlement. All of the countries in the APEC region survey except Brunei have bilateral agreements with one or more countries. These agreements are of most concern to the investing source country and are almost always initiated by it. The United States had signed 24 Bilateral Investment Treaties and 47 Friendship, Commerce and Navigation Treaties by 1993. “By the early 1980s however, the U. S. government decided that because of lack of established multilateral rules governing the treatment of investment it was necessary to develop a bilateral treaty instrument to provide protection for U.S. investment abroad” (APEC, 1993). The countries with which the US has signed bilateral agreements include some APEC countries such as Korea, Thailand and Indonesia. Japan has fewer bilateral agreements. Within the APEC region, it has a Friendship, Commerce and Navigation Treaty with Australia and a Bilateral Investment Treaty with China. Regional trading agreements sometimes contain provisions relating to foreign investment as the free movement of capital is desirable to obtain the maximum benefitfrom the free trade provisions. The European Union (formerly the European Co~unity} has provided the precedent for other such agreements. The 1957 Treaty of Rome provided for the free movement of capital among members as one of the “four freedoms” but many barriers to the free movement of capital remained. Subsequently and most importantly after the 1985 White Paper, policies have evolved to establish a Single Market. The Single Market includes a single market for capital in which all investments of all members are treated alike in all respects. This covers tax treatment, competition policy, and other business laws as well as national treatment and rights of establishment, Tbe guarantee of the free movement of capital and access to markets in the EU are the most comprehensive and binding of international agreements at any level. Under the European Economic Area, these freedoms have been extended effectively to the EFTA countries.

60

JOURNAL OF ASIAN ECONOMICS 6(l), 1995

Within APEC, the most impo~~t regional agreements from the point of view of investment as well as trade are the Canada-U.S. Free Trade Agreement and the North American Free Trade Area. Both of these contain a number of provisions relating to direct foreign investment. One of the objectives of NAFTA is to “increase investment opportunities” and the Agreement contains an Investment Chapter. For the member countries (Canada, US, and Mexico) and from 1 January 1994, this provides national treatment including rights of establishment, most-favored-nation treatment, free movement of funds and binding international arbitration, prohibits expropriation except for “public purposes” and a number of performance requirements such as domestic content and domestic sourcing and exclusive supplier requirements. There are some important exclusions; for example, Canada retains the right of review of direct acquisitions. NAFTA also contains a chapter on regional competition policies. Regional agreements relating to investment have been signed by the ASEAN (Association of Southeast Asian Nations) members but they are limited to the promotion of joint ventures and industrial cooperation under several schemes-ASEAN Industrial Project, ASEAN Industrial Complementation, and ASEAN Joint Ventures. They do not provide explicitly for national treatment. The Singapore Declaration of 1992 declares that “ASEAN recognizes the complementarity of trade and investment opportunities and therefore encourages, among others, increased cooperation and exchanges among the ASEAN private sectors, and the consideration of appropriate policies for greater intra-ASEAN investments” but this has not yet been translated into concrete measures. The only other regional trading a~angenlent in the APEC region, the Closer Economic Relations Agreement between Australia and New Zealand, is unusual in that it contains no provisions relating to the movement of capital or investments, though the possibility has been discussed since the formation of the agreement. Bilateral and regional investment agreements in the APEC region together provide investment protection in the form of rights of establishment and national treatment and some other benefits for a small fraction of intra-APEC direct foreign investments.4 At the multilateral level, the main attempt at regulation of government actions has been made by the OECD. The OECD rules and guidelines are contained in several documents. In 1961, as part of its program to liberalize the movement of capital internationally, the OECD members agreed upon the Code of Liberalization of Capital Movements and the Code of Liberalization of Current Invisible Operations. The Code of Liberalization of Capital Movements (OECD, 1992a) sets out member countries’ obligations with respect to the right of establishment in foreign countries and the movement of capital. It encourages members to liberalize capital movements and states that no member shall discriminate among countries. It also provides a statement that members shall endeavor to give national treatment to all non-resident-owned assets. The Code of Liberalization of Current Invisible Operations (OECD, 1992b) provides the same rules for “current invisible operations’.’ which include, inter alia, all movements of income from capital, that is, dividends and shares and profits and inter-

An APEC or Multilateral

Investment Code?

61

est payments. It encourages member countries to liberalize the international movement of income from capital. Between them these two codes cover all investment transactions, both for direct investments and portfolio investments, and three dimensions of non-discrimination. However, member countries were permitted to lodge reservations and temporary derogations to both Codes. The National Treatment for Foreign-controlled Enterprises was introduced in 1976 as one element of a broader agreement, the Declaration on International Investment and Multinational Enterprises’ which was adopted by the OECD Ministers in 1976, and strengthened in December 1991. All members of the OECD have adopted the National Treatment Instrument. National Treatment is intended to avoid discrimination against foreign-controlled enterprises and is a vital part of free and equal access to the markets of other countries. Exceptions are permitted for public order, national security, and other exceptions lodged by member countries. The revision of the OECD National Treatment rules in 199 1 introduced a requirement for notification and transparency of all non-conforming measures. The World Bank has also played a role in the development of principles relating to flows of foreign direct investment. In 1992 theworld Bank adopted a set of Guidelines on the Treatment of Foreign Direct Investment (World Bank, 1992). Like the OECD principles, these are a set or principles for implementation on a voluntary basis. They cover rights of establishment and transfers of capital and capital income, MFN and national treatment, and expropriation and the settlement of disputes. In relation to the settlement of foreign investment disputes, the US, Japan, and most APEC countries are parties to the International Centre for Settlement of Investment Disputes (ICSID) Convention . This is an international organization under the aegis of the World Bank. The United Nations Commission on International Trade Law (UNCITRAL) may also be used to resolve disputes. Both of these institutions require that the parties agree to use the facility and that decisions are not binding. The GATT also deals with measures that breach national treatment through some government measures relating to imports and exports of goods. Article III of the GAm deals with National Treatment on Internal Taxation and Regulation and dates back to 1947. It proscribes the use of import measures such as taxes and restrictions on the purchases of imports which are used to provide protection to domestic production and discriminate against foreign-controlled enterprises if they are a part of the conditions on which they are allowed to operate. GATT articles are binding on all members of the GATT. The recently concluded Uruguay Round includes two further agreements relating to aspects of foreign investments, the Agreement on Trade-related Investment Measures or TRIMS and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (GATT, 1994). TRIMS is the name now given to traderelated measures which are inconsistent with Article III of the Agreement. Article III of this TRIMS Agreement proscribes such measures: an illustrative list cites such examples as domestic content provisions and restrictions on the use of imported inter-

62

JOURNAL OF ASIAN ECONOMICS 6(l), 1995

mediate inputs which had become quite widespread. The Article covers exports as well as imports and it also contains a reaffirmation of the commitment of the Contracting Parties of the GATT to obligations of transparency under Article X of the GATT. Intellectual property rights are rights relating to the use of private intellectual property. They are important in the transfer internationally of knowledge through foreign investments. TRIPS guarantees national treatment and most-favored-nation treatment with regard to the protection of intellectual property. There are other bilateral, regional, and multilateral agreements on other aspects of government control of international investment or business. For example, there are many bilateral double taxation agreements and a much more limited number of bilateral agreements on competition policy; for example, the US-EC Agreement on Antitrust Co-operation (see Lloyd 8z Sampson, 1994, personal communication, for a review of international competition policies.) In summary, there are numerous bilateral, regional, and multilateral agreements which regulate or restrict in some way national government actions relating to international investments. However, the coverage of these agreements is uneven in terms of the countries which are covered, the principles on which the agreements are based and the enforceability of the provisions. There is undoubtedly a need for a more uniform set of rules.

IV.

THE APECX’ECC PROPOSAL

The Report to APEC Ministers of the Eminent Persons Group (1993) included among its recommendations that APEC should adopt an Asia Pacific Investment Code or APIC. It declares that the Code should be based on the fundamental principles of transparency, non-discrimination, right of establishment, and national treatment. The Eminent Persons Group did not seek to draft a Code, but suggested that the PECC draft Code could be used as one basis for developing the APEC Code. The PECC draft Code is therefore the only detailed proposal that can be considered. There are two sections of the draft PECC Code which contain substantive guidelines. The first and central section deals with the responsibilities of the signatory nations and the second with the responsibilities of the investors. There are also sections dealing with dispute resolution, extensions of the Code, relations to other agreements and institutions, and participation. The Code is intended to apply to all forms of international investment. It is described as voluntary and non-binding, that is, participation is voluntary and the code is non-binding for participants. The section of the PECC (1993) draft Code dealing with the “responsibilities” of signatories contains eight such responsibilities. These are 1. 2.

Transparency Most-Favored-Nation

Treatment

An APEC or Multilateral Investment Code?

3. 4. 5. 6. 7. 8.

63

Establishment of Investments National Treatment Transfers Nationalization and Compensation Performance Requirements Taxation and Investment Incentives

The very first is the principle that, whatever is done by national governments to restrict or regulate foreign investments, it should be transparent. Responsibilities 2, 3, 4, and 5 deal with what has been called above the four dimensions of non-discrimination in investment. Incentives under Responsibility 8 are the reverse forms of industry intervention which discriminate in favor of foreign investors if they are not offered to domestic investors and Performance Requirements under Responsibility 7 are listed separately from National Treatment though they are a breach of national treatment since they are not normally required of domestic investors. Finally, Nationalization is in effect disestablishment by transfer of ownership to the government of the host country and in most cases domestic enterprises are not simultaneously nationalized. All eight Responsibilities may, therefore, be considered as a set of policies which pursue non-discrimination and transparency. The Introduction to the draft Code states that “International investment is recognized by all regional economies to be mutually beneficial. Promoting investment based on market-consistent commercial decisions is a positive sum game.” (PECC, 1993, p. 5). This is a strong pro-foreign investment statement. In relation to non-discrimination, it is helpful to consider this term in its broad sense with the four dimenstions listed above. Responsibilities 2 and 5 of the Code contain simple statements of the desirability without exceptions of the principles of most-favored nation treatment and outward transfers of capital and capital income. (If there were restrictions on the movement of capital or current funds by domestic investors out of the country, this would give foreign investors in such instances a right not enjoyed by domestic investors. Such restrictions exist in some countries with exchange control systems, but they have been removed in most industrial countries.) The most basic of all four aspects of non-discrimination is the right of establishment. The establishment of a foreign investment activity is the first aspect of nondiscrimination with national treatment becoming relevant after establishment and the right of establishment is the right of entry into the markets of the host country which is important to promote competition in these markets. Responsibility 3 of the draft Code states “Signatories will facilitate foreign investment in all commercial fields and activities other than those explicitly specified...” (italics added). It does not, therefore, adopt the principle of unrestricted rights of establishment. There are a number of economic and non-economic grounds on which governments in many countries restrict the entry of foreign owners, especially in such industry as the media, real estate, and financial enterprises.

64

JOURNAL OF ASIAN ECONOMICS 6(l), 1995

Responsibi~ty 4 of the draft Code permits exceptions to national treatment which are explicitly specified by each signatory. The remaining responsibilities are weak. The Responsibility with regard to nationalization lays downs the responsibility that nationalization be carried out on a non-discriminatory basis (that is among foreign nations), in accordance with the due process of law and on payment of compensation. Payment of compensation is an important principle. But the draft Code would permit nationalization “for a public purpose” which is broad enough to permit almost any act of nationalization. The Responsibilities with respect to Performance Requirements and to Taxation and Investment Incentives are merely an undertaking to list them explicitly and make illfo~ation available to all interested parties, as a consequence of ~~sp~en~y, and to en~o~age the h~onization of tax and incentive policies. There is no standstill and rollback provision relating to these responsibilities. The remaining sections are also weak. With respect to dispute settlement, the signatories would undertake to reduce the likelihood of disputes and to consider becoming parties to international legal conventions which are designed to reduce uncertainty and costs involved in international commercial transactions and to facilitate the settlement of investment disputes. With respect to Extensions and Relation to Other Agreements and Institutions, the signatories would merely agree to reconvene for a full review of the Code within five years and to accept the importance of not entering into subsequent obligations whose provisions are not consistent with the Code. Similarly, the section dealing with the Responsibilities of Investors would commit signatories merely to encourage foreign investors to accept a range of responsibilities and standards of corporate behavior including contributing to the development of science, technology, and human resources of host economies and to sensitivity to local community values and compliance with local laws and regulations. Hence, the draft Code is essentially a statement of the two general principles of transparency and non-discrimination as principles which should guide the actions of host country governments. The most-favored-nation and transfer aspects of non-disdamnation would hold without exception, but the signatories would be pe~tted to make exceptions in relation to rights of es~blishment, national treatment, nationalization, and incentives. It does not, therefore, advocate or pursue completely free movement of capital There is nothing in the draft Code to which exception can be taken on the grounds that it would produce a less efficient allocation of resources in the world economy, though the provisions relating to National Treatment, Performance Requirements, Taxation and Investment Incentives, Nationalization, and to the Responsibilities of Investors seem so weak that they accomplish little. The fundamental argument in favor of non-discrimination is that discrimination of all forms will, in general, lead to loss of output because it prefers less efficient producers or encourages the use of less effiicient methods of production. There is general

An APEC

OY

65

Multilateral Investment Code?

acceptance of economic gains from foreign investment, provided unfair competitive practices and other potential abuses such as transfer pricing are avoided. Much of the recent literature on New Growth Theory emphasizes the positive spillover effects of foreign direct investment on technology transfer and labor training from foreign investments. If there are government taxes or regulations or the absence of regulations in areas such as the environmental effects of production which create negative externalities or distortions, the standard advice is that these should be removed directly for both domestic and foreign investors. There may, however, be other social or non-economic objectives which justify restrictions on foreign ownership of certain assets through restrictions on the rights of establishment; for example, “cultural” industries. The argument for exceptions to national treatment after establishment seem weaker. Economists question the wisdom of some such restrictions. It is the prerogative of governments to make such decisions. However, it is desirable for governments to develop clear and consistent principles on which the right of establishment or national treatment is denied. The limitations on nationalization are acceptable. In any case, nationalization of industries has declined greatly in recent years. In many countries governments are now reversing the earlier trend towards more government ownership of enterprises which produced marketable goods and services by offering government owned enterprise for sale. Since the early 1980s the number of acts of nationalization have been outnumbered by the number of acts of privatization (United Nations, 1994, Box 1.1) The important issue in privatization cases is whether foreign investors have the right to bid, that is, to establish themselves. With regard to the responsibilities of foreign investors, it is questionable whether the Code should attempt to influence the behavior of foreign investors in this way. Foreign investors are subject to the laws and regulations of the host country and compliance with these laws is the responsibility of the host country government. It is also the responsibility of host country governments to frame the laws and regulations so that corporate behavior, by both domestic and foreign investors, does not inflict substantial harm on any other parties. Nations do not impose a code of behavior on domestic investors, other than that implicit in national laws and regulations. Consequently, the introduction of such a code could discriminate against foreign investors. The important issues are what aspects of government actions relating to intemational investment need better rules or enforcement and whether APEC or some other international body or group of nations is the best forum to pursue the codification of the responsibilities of nations hosting foreign investments.

V.

ASSESSMENT

OF THE APEC PROPOSAL

Given the unexceptionable nature of the principles in the proposed APIC, the first question is whether the Agreement should go further in terms of the scope of the

66

JOURNAL OF ASIAN ECONOMICS 6(l), 1995

Agreement. Section IV noted that the provisions relating to National Treatment, Taxation and Investment Incentives, Performance Requirements, and Nationalization are weak. The draft might strengthen these provisions. And the scope of the Agreement might be widened to include a number of related aspects of investment policies. In considering the scope of the proposed Agreement, economists commonly regard foreign direct investment as a package of inputs which are transferred to the host country. This package includes technology and intellectual property rights, management practices and marketing skills, and management personnel as well as the transfer of real resources through the capital funds. Hence, the draft Agreement might be extended to include the protection of intellectual property rights and the intemational movement of business personnel. It might also be extended to include domestic takeover and other competition policies and to international competition policies which seek to regulate the cross-border competitive practices of firms but the latter is probably better treated as a separate problem. The wider the scope of a proposal the more difficult it will be to achieve multicountry agreement. It seems sensible to limit the scope of the agreement to the main principles of non-discrimination and transparency. There will be differences of opinion among the APEC countries and none has yet considered the proposal. Various groups other than APEC have called recently for review of some aspects of international investment. The OECD has been considering the possibility of an investment instrument which would bring together its existing Codes and the National Treatment Instrument and possibly add other elements such as competition policy and intellectual property protection. The World Investment Report of the United Nations (1993) called for new international agreements on investment issues. The European Business Roundtable, a group of business leaders, revived the idea current in the early eighties of a GATT for Investment which would extend the trade covered by this body to capital movements, like the Uruguay Round extension of the GATT to trade in services. (The Economist, 1993). All of these proposals and the APIC are principally concerned with the basic rights of establishment and other aspects of non-discrimination. Thus, there is widespread agreement that the present rules relating to non-discrimination are not adequate, though they are adhered to much more frequently than was the case a decade and more ago. The two OECD Codes lay down the principles of non-discrimination with respect to rights of establishment and most-favored-nation treatment and transfers, though they permit reservations with respect to rights of establishment. The GATT Article on National Treatment is binding on all contracting parties, but it is not clear how far this extends beyond national treatment relating to import measures. Similarly, the OECD National Treatment Instrument lays down the principle of national treatment and allows for exceptions and has been adopted by all members of the OECD. The GAIT and the OECD have also been pressing strongly in recent years for transparency. Hence, APIC would not add significantly to existing OECD and GAIT principles of transparency and non-discrimination. Similarly, the coverage of principles in the

An APEC or Muifi~~fe~~l~nvesf~e~f Code?

67

PECC proposal is almost the same as that in NAFTA. Indeed, the APEC document has drawn on the principles contained in these earlier international agreements and codes as well as bilateral agreements. An APEC Code could, however, considerably strengthen the world rules relating to direct foreign investment in a number of ways. It could develop principles which would limit the permitted exceptions to rights of establishment and national treatment (including performance requirements). It could similarly develop principles limiting national subsidies and incentives which are proliferating as competition for foreign direct investment intensifies and which are, in my opinion, now one of the major problems with national government actions relating to direct foreign investment flows. The proposed APIC “standstill and rollback” provision for the exceptions to rights of establishment and national treatment strengthens the standstill and rollback provisions of the OECD Codes which apply to rights of establishment but not to the national treatment instrument. The second question is how the basic principles on which there has been agreement for quite a long time can be adopted by more countries and enforced. The difficulties of achieving international agreement on a principle increase as the number of countries increases. One choice in the promotion of these principles is between action at the regional level or the multilateral level. It has been argued by some academic writers that regional level agreements are likely to achieve greater scope because there are fewer countries involved (see Bora, 1992 and Guisinger, 1993). Countries in a region may also be more similar in terms of their laws and policy orientation. It is notable that the two agreements which have gone furtherest in scope and binding commitments, the European Union and NAFTA, are regional agreements among contiguous countries within a comprehensive regional trading arrangement. From this point of view of a regional or a multilateral agreement, the APEC counties are not a region in either the sense of a group of contiguous countries which trade heavily with each other or in the sense of a regional trading ~angement in the form of a customs union or free trade area. The APEC should be considered as a group of diverse and widely separated countries, essentially similar to the OECD and overlapping substantially in country membership with that group. (The discussion below is based on the premise that APEC will not become a regional trading arrangement.6) The intention of PECC and the Eminent Persons Group is that the rights accepted by members under a Code be extended to all trading partners. APIC is a multilateral7 rather than a regional code. The simultaneous discussions in the OECD and APEC of new investment guidelines or rules pose a danger of new parallel multilateral rules which will complicate the international regime. PECC itself stated emphatically that “Any new code should avoid creating a new layer of rules; it should encourage the simpli~cation, or reduction, of rules in order to facilitate international investment” (PECC, 1993). Possible overlap and conflict between OECD and APEC proposals could be avoided if APEC and the OECD cooperate.

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JOURNAL OF ASIAN ECONOMICS 6(f), 1995

Both the UECD and the draft APIC are trying to achieve the same general principles but the country mem~rship differs subst~~ally: The East Asian countries other than Japan and Korea are not members of the UECD and conversely the European countries are not members of APEC. Asian countries which are not members of the OECD should have a say in the evolution of international rules relating to foreign direct investment. On the other hand, the OECD has valuable experience in the administration of national treatment and other aspects of non-discrimination through the work of the Committee on International Investment and Multinational Enterprises which is responsible for the implementation of the National Treatment Instrument and other measures and the Committee on Capital Movement and Invisible Transactions which is responsible for the implementation of the two Codes of Li~r~i~ation. Hence, both ins~tu~ons should cooperate in the development of principtes and rules for foreign investment. At present, as noted in Section IV? the OECD, the GATT? and the World Bank all play an important part in the present regulation of government actions relating to international investment. There is an advantage to having only one multilateral organization regulating national governments in this area. In the long run, the new World Trade Organization may be the best institution in which to embed the principles and law relating to international investment. Both the PECC draft Code and the Eminent Persons report were drawn up when the prospect that the Uruguay Round would be satisfactorily concluded were uncertain. This uncertainty has been removed though the Final Act has not yet been ratified by the US and other countries. The existing GATT and the WTO are based upon the principles of non-discrimination including MFN and national treatment in relation to trade in goods and these principles have been extended to services under the GATS in the WTO. They could be extended to international investments within the one agreement. The WTO already contains the Agreement on TRIMS which covers what are called “trade-related” aspects of performance requirements in the APIC, and the Agreement on TRIPS. In addition, the WTO may consider international competition policy as a part of its future work agenda once it is established. The GA~~TU has other advantages. The country coverage of the GATT is already much larger than that of the OECD or APEC regions. It now exceeds 125 and is growing rapidly as more developing and transition economies, many of which refrained from joining or withdrew from the GATT, are joining after the completion of the Uruguay Round negotiations. More importantly, the GATT is hard binding law, unlike the OECD codes and the proposed APIC. The Final Act of the Uruguay Round distinguishes between multilateral and plurilateral agreements. Multilateral Agreements are agreements which are binding and in the context of the GATT are signed by all parties or members. (These include the GATS and TRIPS and TRIMS.) By contrast, plurilateral agreements are not binding and are accepted only by these parties or members which agree to sign them. One of the most impo~ant achievements of the Uruguay

An APEC or Multilateral investment

Code?

69

Round was that some of the previous non-binding codes were incorporated into the “single undertaking” and made binding on all contracting parties. In addition, the new dispute settlement procedures agreed upon in the Uruguay Round greatly strengthen the enforcement of its rules. PECC itself saw APIC as a basis for a subsequent set of binding multilateral guidelines, possibly in the GAIT’. The addition of comprehensive rules for non-discrimination in capital movements within the GATTAVTO will, however, be a major task that will take many years, even if the members of the WTO agree upon the issues. In the interim, APEC can certainly develop and promote the principles of a transparent and non-discriminatory treatment of foreign investment in the region and work towards the establishment of a binding multilateral agreement on investment. An APEC Code could assist the evolution of the principles, but it is doubtful that a code which is non-binding, restricted in its country coverage and scope and whose main provisions duplicate that of the OECD codes and instruments and to a considerable extent the GATT/WTO, will strengthen the observance of these principles. ACKNOWLEDGEMENTS:

I would like to acknowledge

the suggestions

made by Bijit Bora.

NOTES 1. Although they are equal conceptually, there is a substantial shortfall of the total inflows into the reporting countries compared to the total outflows from the source countries. 2. There is no agreed way of classifying these aspects of discrimination. For example, the rights of establishment may be regarded as an aspect of national treatment, as in the NAFTA chapter on foreign investment. Or, non-performance requirements may be separated from other aspects of national treatment, as in the draft APIC. 3. Some barriers may attract foreign investment as access to the markets via exports is difficult with high barriers, but such defensive foreign investment is less important now. 4. It is not possible to be more precise as the information given in the APEC volume about bilateral investment arrangements by one party sometimes conflicts with that given by the other party. 5. The Declaration on International Investment and Multinational Enterprises (reproduced in OECD, 1993c, Annex I) contains Guidelines for Multinational Enterprises. These seek to lay down principles which will be observed by the multinational enterprises rather than the governments. They are voluntary and not legally enforceable. 6. If more recent proposals from the Prime Minister of Australia and others to convert the APEC into a regional trading arrangement should eventuate this would substantially strengthen the case for an APEC Code. The commitment of the members to regional integration in this event and the development of rules relating to trade and possibly also intellectual property rights and TRIMS and other investmentrelated policies would increase the likelihood of acceptance and the effectiveness of an investment agreement within a regional trading arrangement. 7. The term multilateral is used here in the common sense of an agreement which includes many countries and is not restricted in its membership. In the new Uruguay Round terminology of the GATT, it is a plurilateral code since it is a voluntary non-binding code. See the text below.

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OF ASIAN ECONOMICS

6(l), 1995

Asia Pacific Economic Cooperation. (1993). Guide to the investment regimes of the fifteen APEC member countries (First Edition). APEC Informal Group on Regional Trade Liberalization. Singapore: APEC. Bora, B. (1992). Conceptualizing the issues regarding alternative investment arrangements. In Pangestu, M. (Ed.), Pacific initiatives for regional trade liberalization and investment cooperation. Singapore: Pacific Economic Cooperation Council. 1994. Investment cooperation in the Asia-Pacific region: The PECC Asia-Pacific investment -. code. In New directions in regional trade liberalization. Taipei: Taiwan Institute for Economic Research. Eminent Persons Group. (1993). A vision for APEC: Towards an Asia Pacific economic communi~, report of the emi~entperso~s Group to APEC ministers. October. Singapore: APEC. General Agreement on Tariffs and Trade. (1994). Uruguay round final act. Geneva: United States Government Printing Office. Grubel, H. G. (1979). Towards a theory of two-way trade in capital assets. In H. Giersch (Ed.), On the economics of intra-industry trade. Tubingen, Germany: J. C. B. Mohr. Cuisinger, S. (1991). Foreign direct investment flows in East and Southeast Asia: Policy issues. ASEAN Economic Bulletin, 8,29-46. Guisinger, S. (1993). A pacific basin investment agreement. ASEAN Economic Bulletin, 19, 176-183. International Monetary Fund. (1993). Balance of payments yearbook 1993, Part 2. Washington, D. C: Author. McCulloch, R. (1991). Foreign investment in the United States. 772eAnnals ofthe American Academy of the Social Sciences, 516, 169- 182. Organization for Economic Cooperation and Development. (1990). ~~beraZ~zat~o~ofcapital movements ~nd~nanc~aL services in the OECD area. Paris: Author. . (1992a). Code of liberalization of capital movements. Paris: Author. . (1992b). Code of liberalization of current invisible operations. Paris: Author. (I 993). National treatment for foreign-controlled enterprises. Paris: Author. Pacific Economic Cooperation Council (PECC). (1993). Encouraging international investment in the Asia Pacific region: A draft Asia Pacific code. Jakarta, Indonesia: Centre for Strategic and International Studies. The Economist. (1993). A new GATT for investment. The Economist, 18(Sept.), 73. United Nations. (1993). World investment report. New York: Author. United Nations. (1994). World investment report. New York: Author. The World Bank. (1992). Legal framework of the treatment of foreign investment: Vol. II. Guidelines. W~hington, D. C.: Author. Yamazawa, I. (1993). Economic integration in the Asia-~aci~c region and the options for Japarz. Tokyo: Japanese Ministry of Foreign Affairs.

Received:

August,

1994; Revised:

January,

1995