1.1  BI (British Invisibles) promotes the international commercial interests of UK-based financial institutions and professional and business services. BI works for the greater liberalisation of trade in services. It is in connection with these principal activities that BI would welcome a successful outcome to negotiations leading to a Multilateral Agreement on Investment.[98]

  1.2  This memorandum sets out the value of investment flows not only to the UK economy and UK-based companies but also to the developing world. The memorandum supports the case for a multilateral agreement which, by establishing standards of transparency and agreed rules, will provide fair and equal conditions for international investors.

  1.3  The memorandum concentrates on arguing the broad case in favour of a multilateral agreement. It does not enter into discussion over which might be the better forum in which to proceed with negotiations (ie the OECD, the WTO or both). It acknowledges the need to take concerns about environmental issues, labour standards etc, into account in the formulation of an agreement.

  1.4  Topics discussed in the paper are as follows:

Section 2:  Significance of Investment Flows to the UK economy;

Section 3:  Main attractions of an MAI;

Section 4:  Benefits to the developing world;

Section 5:  Globalisation;

Section 6:  Conclusions.

2.  SIGNIFICANCE OF INVESTMENT FLOWS TO THE UK ECONOMY

  2.1  Both outward and inward investment make a significant contribution to the UK economy. In 1996 the stock of UK overseas investments amounted to £209 billion and the value of overseas assets equalled almost 28 per cent of annual GDP. In the same year the UK had a stock of £140 billion of inward investment (around 18 per cent of GDP). Three quarters of the UK's overseas assets are owned by the manufacturing, energy and financial sectors. The financial sector owned 16 per cent of the UK's overseas assets in 1995 and typically has generated a surplus on direct investment.

  2.2  Since 1993 UK investment flows abroad have been second only to the USA.[99] In 1996 out of a global total of $318bn, the USA accounted for $88bn and the UK $45bn. A similar picture for 1996 is shown for recorded inflows with the USA receiving $77bn and the UK $32bn. OECD estimates[100] indicate a continuation of these trends in 1997 despite the onset of financial market problems in SE Asia. The acceleration of these problems into a global crisis will no doubt have affected investment flows in ways which will require close analysis. Despite the current crisis, however, the broad conclusion to be drawn from the experience in recent years is that the UK economy has benefited from the freedom allowed to flows of capital both coming into and going out of the country.

3.  MAIN ATTRACTIONS OF AN MAI

Financial Services Aspects

  3.1  The Agreement on Financial Services in the WTO in December 1997 reflected the importance of financial services for healthy economic growth.[101] In addition to their direct contribution to output and employment, financial services have a special function in the economy, as the lubricant or facilitator of other activities. Financial services firms mobilise and distribute savings; facilitate investment; support and encourage external trade; and protect other economic actors from external risks.

  3.2  There is increasing recognition that external competition and the presence of foreign firms helps to create a healthy and dynamic financial services sector, with benefits for the entire economy. This view is held not only in developed countries but is gaining ground in emerging markets too. This is for the following reasons:

(a)  Foreign suppliers can often provide a wider choice of products at lower prices to both industrial users and private consumers of financial services.

(b)  Foreign firms help to raise the standards of the domestic financial services industry and make it more competitive. They can provide employment, help to develop local staff and broaden the number of people who have experience of working with and for international organisations. Fears of foreign firms swamping the domestic industry have proved unfounded. Absorption of foreign firms helps the domestic market to grow and does not reduce the opportunities for domestic firms to participate.

(c)  Inflows of foreign private direct investment are vital to many countries to finance infrastructure investment. An open and competitive financial services sector helps to attract these funds on the best available terms.

(d)  Foreign financial service firms have a good record of respect for supervisory rules, giving an example to the domestic industry. This lesson has been reinforced by the Asian financial crisis of 1997.

These factors gave the impetus needed for the successful conclusion of the Financial Services Agreement in December 1997, which was not derailed by the Asian crisis. Most developing countries wanted to show themselves welcoming to foreign investors and attractive to capital which would otherwise go elsewhere.

  3.3  Thus we believe that there are benefits to be derived from an internationally agreed structure for investment. The idea behind the MAI is to broaden the rules-based system for investment which is already established to a more limited extent for services in the WTO and from which UK financial service providers are already benefiting. The main criteria for an MAI are shown in the Annex to this memorandum.

4.  BENEFITS TO THE DEVELOPING WORLD

  4.1  There is strong competition among developing countries to attract FDI since it is recognised to be such a significant element in assisting economic growth. In the developing world, the most striking figures are for China where receipts of direct investment grew almost tenfold between 1991 ($4.3 bn) and 1996 ($40.2 bn)[102]. It is of course clear that China in no way meets the desired criteria for investment set out in the Annex and there are indeed other reasons—not least the potential of a massive market which is gradually opening to the world—which attract the foreign investor to that country. But this could be said to strengthen the case for a multilateral agreement which will give confidence to investors to make a long-term commitment to many other markets in the developing world strongly in need of the finance, skills and technology which FDI can bring with it.

  4.2  As mentioned in Section 3.2 above, Asian Countries suffering from financial crisis in 1997 did not, by and large, raise protectionist barriers. On the contrary, they saw the desirability of keeping their markets open to help them through the crisis. While WTO agreements about goods cover only trade, agreements in services, like the Financial Services Agreement cover both trade and investment. The key investment category is commercial presence. The regime for commercial presence is especially important for financial services, as doing business often depends on firms becoming established in the target market.

  4.3  Industrial countries generally have open regimes both for trade and for investment in financial services. In developing countries BI has noted that the interest of both governments and foreign firms tends to be greater in investment, so commercial presence becomes more important. Governments in these countries see this as the best way to attract the foreign direct investment that they need, while they retain greater control over the foreign firm if it is established locally. In contrast they are less liberal and open in allowing the cross-border supply of similar services.[103]

  4.4  While the December 1997 Agreement achieved significant advances for financial service providers, the current WTO regime does not extend as far as the desired criteria set out in the Annex particularly for example in regard to dispute settlement and to investor protection. It is also the case that the position of professional services (eg accountants and lawyers) is not so satisfactory as it is for financial services. The free flow of investment in and out of a country is assisted by the availability on a broad basis of professional services of an accepted international quality. There are many barriers to this around the world and many areas where adequate professional services cannot readily be assumed. Thus it would seem to us that the achievement of the objective of easing the flow of investment in part depends upon the freedom of commercial presence for professional firms.

5.  GLOBALISATION

  5.1  Claims are made that in the global economy that now exists, multinational companies are in a position to move capital around the world at will and could therefore be accused of escaping all forms of control and potentially of enjoying the protection of an MAI without an appropriate balance of rights and responsibilities. We would challenge this. In the main, international companies and investors look for stable, well regulated environments in which to make their long-term commitments. An MAI would help achieve this. The tide of globalisation cannot be turned without an unwelcome return to protectionism and the re-introduction in national economies of anti-competitive and restrictive regulatory systems and controls. This would deter international investors and send them in the direction of safer havens for their long-term commitments. It would act to the detriment of countries needing to develop their economies in the interests of the welfare of their inhabitants.

  5.2  We support efforts to ensure that the MAI encourages all participants to maintain proper environmental and labour standards. But the work to be done to raise those standards internationally should be carried forward in other, more appropriate, fora.

  5.3  An argument can be made that the activities of multinational companies might be better monitored under the terms of a multilaterally negotiated agreement than in the absence of one which is the situation at present. It is a moot point in our view whether an MAI would or would not affect the power of the multinationals.

  5.4  The most important point to emphasise in this context is that a key objective of an MAI is to remove discrimination between domestic and foreign companies. Foreign and domestic companies would be treated in the same way as each other and sovereign governments would retain the right to introduce new regulation provided it is non-discriminatory.

6.  CONCLUSIONS

  6.1  The impact of last year's crisis in Asian financial markets has spread this year to take on global dimensions, and is having an effect on international trade and investment. The temptation, understandable though it might be, for countries to resort to protectionist measures, has to be resisted. The way out of the crisis has to be through efforts to stimulate trade and investment flows, reduce the risk of protectionism and to do this transparently through strengthening the multilateral system. Constructive efforts towards achieving a multilateral investment agreement should continue to be made in support of this response.

  6.2  In summary, BI believes that such an agreement would benefit investors and host countries alike by providing a level playing field based on transparent local practice and an internationally accepted system of rules subject to a dispute settlement mechanism. This would give security to investors and particular to small and medium sized firms to place their business abroad, would favour long-term commitment to investing in any country signing the agreement and would bring greater competition under fair domestic regulatory practices, yielding the provision of cheaper and better quality goods and services to the consumer in those countries.

  BI believes that an MAI containing the following elements will bring benefits not only to the UK but to the global economy.

  (a)  An obligation on countries to treat foreign investors and their investment no less favourably than they treat their own (National treatment).

  (b)  No discrimination among investors or investments of different parties to the agreement (Most-favoured nation treatment).

  (c)  The obligation to make laws, regulations and procedures public (Transparency).

  (d)  Investment-related payments, such as capital, profits and dividends freely permitted to and from the host country.

  (e)  Permission to key personnel from abroad to work in the country temporarily.

  (f)  Adequate compensation for assets expropriated.

  (g)  Binding dispute settlement mechanism between host and home states and between the investor and the host state.

  (h)  No performance requirements eg requirements that a company must source a minimum of its raw materials locally, or be required to export a certain proportion of output.

  (i)  Adherence to environmental and labour standards ie for example environmental regulations which are non-discriminatory will not be affected by the MAI. To expand briefly on this, the MAI would not call into question a country's right to impose regulations about pollution as long as such environmental regulations do not discriminate between domestic and foreign companies.

  (j)  Privatisation, Monopolies, Concessions to be conducted in a non-discriminatory manner.

  (k)  Provision in the MAI for countries to apply general exceptions on a permanent basis (eg for reasons of national security); safeguard clauses (temporary measures in circumstances eg of balance of payment crisis); and country-specific exceptions (lists of derogations where eg a country deems it necessary to protect a vulnerable domestic sector. The aim would be to reduce these exceptions over time).

  (l)  Providing certainty that existing open regimes for investment would be preserved (ie "standstill") and not worsened by later policy decisions.

4 November 1998

99   IMF 1997 Balance of Payments Statistics Yearbook Table B-24. Back

100   OECD: Financial Market Trends, June 1998. Recent trends in Foreign Direct Investment. Back

101   "Opening Markets for Financial Services" The BI Guide to the Financial Services Agreement in the World Trade Organisation, September 1998 (pp 4-5). Back

102   IMF 1997 Balance of Payments Statistics Yearbook. Back

103   "Opening Markets for Financial Services," the BI Guide to the Financial Services Agreement in the World Trade Organisation, September 1998 (pp.6-7). Back