House of Commons - Trade and Industry

Select Committee on Trade and Industry Third Report

II DO WE NEED AN MAI?

Types of Foreign Investment

18. Foreign investment can be divided into two broad categories:

Foreign Direct Investment (FDI), which involves "the lasting interest of a resident entity in one economy in an entity resident in another economy" covering "the initial transaction between the two and all subsequent transactions between them and among affiliated enterprises" and in which the investor intends to have an effective voice in the management of the enterprise.[15] Examples of direct investment into the UK would include a number of different types of transactions, including an overseas company: establishing a branch or subsidiary in the UK (e.g. Nissan in Sunderland); buying (in full or in part) the equity of an existing UK firm (e.g. BMW purchasing Rover); or an overseas parent company putting more capital into its UK subsidiary or allowing the subsidiary to retain profits which would normally be remitted to the parent.
Portfolio investment, which "covers transactions in equity securities and debt securities". The former does not give the investor an effective voice in the management of the enterprise and the latter encompasses "bonds and notes, money market institutions and financial derivatives".[16]

Both types of foreign investment have increased significantly during the 1990s.

Foreign Direct Investment

19. The total stock of FDI rose by 10% in 1997 to reach $3,500 billion. These assets are owned by around 53,000 transnational firms, which have established between themselves some 448,000 foreign affiliates. Approximately 43,000 of the transnational firms are based in developed countries while about 352,000 of their foreign affiliates can be found in the developing world. Consequently, 90% of FDI stock is owned by firms based in the developed world.[17] The flows of FDI exceeded $400 billion in 1997 and are nearly twice as great as they were in 1990.[18] 85% of FDI outflows in 1997 originated from developed countries; but 58% of inflows were invested in the same countries, not the developing world. In 1996 the United States was both the world's top source of FDI and the primary destination for such investment.[19]

20. The UK is a major source and recipient of FDI. British Invisibles told us that, in 1996, the stock of UK overseas investments amounted to £209 billion and that the stock of UK inward investment was worth £140 billion.[20] In the same year, the flow of direct investment out of the UK was worth $34.1 billion, second only to the US; and the flow of direct investment into the UK totalled $26 billion, behind China and the US.[21]

Portfolio Investment

21. Information about portfolio investment is less easy to collate than that regarding FDI, but the same trends can be discerned. The total stock of debt securities in March 1998 has been estimated at $3,700 billion, 82% higher than in 1993, of which 91.5% was issued by developed countries. Gross flows of portfolio investment, in and out of G7 nations, reached $1,000 billion in 1997, more than treble the flows recorded in 1990, and comfortably greater than corresponding FDI flows.[22]

Protection of Foreign Investment

22. All investment involves economic risk, but foreign investment can be inherently riskier than domestic investment because of the different ways in which foreign and domestic investors are treated by host governments. The desire of investors is not so much that governments should always treat investors the same regardless of nationality — there may be good grounds for discrimination, for instance in relation to national security — but that governments should deal with foreign investors according to clear, well-established rules rather than on an arbitrary basis. As Mr. Bate of ICC(UK) told us, "the business community needs to have a level playing field so that they can feel confident when they were going into a country to invest their funds that that investment will be protected."[23]

23. Investment protection is currently provided by a web of international agreements and understandings at various levels:

Multilateral agreements, including elements of various agreements negotiated under the auspices of the World Trade Organisation (WTO), such as the General Agreement on Tariffs and Services (GATS), the Agreement on Trade-Related Investment Measures (TRIMs) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) which were all concluded during the Uruguay Round of talks and the Agreement on Financial Services which was concluded in December 1997.[24]
Plurilateral arrangements, such as the European Union, the North American Free Trade Association (NAFTA) and MERCOSUR (the Common Market encompassing Argentina, Brazil, Paraguay and Uruguay), and the agreements reached between them, such as that involving the EU and MERCOSUR in December 1995 and between MERCOSUR and Canada in June 1998.[25]
Bilateral agreements, of which 1513 have now been concluded. Almost half of these are between developed and developing countries; the rest involve only developing countries.[26] None has been signed between developed countries. The UK has signed 90 bilateral investment promotion and protection agreements since 1975. These are all based on an OECD model text and deal with a range of issues including expropriation and national and most favoured treatments, subject to country-specific exceptions. Commitments made in these treaties are binding and subject to international dispute settlement.[27]

24. The OECD's draft MAI negotiations are far from being the only on-going efforts to provide new arrangements for investment protection. Other recent initiatives include:[28]

the negotiations for a Free Trade Agreement of the Americas, launched on 19 April 1998 and expected to be concluded in 2005, which will include a Negotiating Group on Investment.
the launch of the Association of South East Asian Nations' Investment Area, which was expected by the end of 1998.
the work of the WTO Working Group on the Relationship between Trade and Investment, established following the WTO Ministerial meeting in Singapore in 1996.
UN Conference on Trade and Development's (UNCTAD) work on a possible multilateral framework on investment, commenced following the 1996 Midrand Declaration.

Rationale for an MAI

25. Given the extensive and burgeoning range of international agreements intended to protect investments, it is not immediately obvious why OECD countries should want to negotiate an MAI, particularly as the discriminatory acts with which it might deal are usually portrayed as problems within developing countries rather than in OECD member states. The Confederation of British Industry (CBI) noted that "intra-OECD flows of direct investment are only marginally inhibited by the absence of an international investment regime".[29] Ms Johnstone of the National Consumer Council suspected that, because of the strength of the European Union's investment protection regime, "consumers in the United Kingdom would not notice much difference" if the draft MAI entered into force.[30] The LGA told us that "in most respects, the MAI if ratified would be unlikely to have significant direct effects on the current practice of local government".[31]

26. Mr. Bate of ICC(UK) argued that "the whole idea of an MAI is to bring under one umbrella all the various bilateral investment treaties" because at the moment there are "just too many and various bilateral agreements around".[32] In the first instance, however, the draft agreement could not achieve this aim because OECD countries have signed bilateral treaties with developing countries rather than with each other. The DTI stated that the aim of the OECD's negotiations was the creation of a "free-standing, high quality treaty open to anyone who wished to sign", which developing countries could sign up to in order to demonstrate the quality of their investment protection regimes.[33] ICC(UK)'s written memorandum suggested that the draft Agreement "should be capable of wide extension to other countries, perhaps under the aegis of the WTO" although the CBI described the draft MAI as "a necessary step on the road to a global investment agreement", but one which was "a complementary exercise not a substitute for eventual negotiations in the WTO".[34]

27. Several NGOs, including Consumers International, Oxfam and Save the Children, criticised the suggestion that the draft MAI would be primarily aimed at developing countries, the vast majority of whom have not been able to participate in the OECD negotiations, particularly when the negotiations commenced "following the refusal of a number of key developing countries to work in the WTO".[35] There was also criticism of the notion that developing countries might be obliged to lower standards and raise incentives in order to attract foreign investment once the draft MAI was agreed, which the Department for International Development's Fitzgerald Report suggested might be the case.[36] We endorse the Minister for Trade's call for a greater role for developing countries in international trade negotiations;[37] this should also extend to any future international investment negotiations.

28. The UK has signed bilateral investment treaties with each of the eight developing countries who were observers at the OECD negotiations of the draft MAI as well as with other major investment partners in the developing world, including China and India. It is by no means obvious why an MAI encompassing these countries would be more desirable than the current framework of bilateral ties. The DTI informed us that the "basic aim" of the draft MAI was "to liberalise international investment".[38] The business organisations also linked the establishment of an MAI with the continuing process of the liberalisation of trade and investment.[39] ICC(UK) argued that the draft MAI "has the potential to be a major step forward in the process of liberalisation of trade and investment" and that "were the MAI to fail, a message might be read that the tide of liberalisation...was beginning to ebb".[40] It appears, therefore, that the negotiations of the draft MAI in OECD were envisaged more as a starting point in a long process of global investment liberalisation, than as a largely technical process by which the differing provisions of various bilateral investment treaties could be harmonised, as some described. A persuasive case has by no means been made for a multilateral investment agreement. We recommend that, before embarking on any new negotiations of a multilateral investment agreement, the Government state clearly the rationale for an MAI, particularly in relation to the benefits it might bring to UK businesses and consumers and to the developing world.

15 Balance of Payments Manual, IMF, 1993, p41 paragraph 177 Back

16 Ibid, paragraph 178 Back

17 World Investment Report 1998, United Nations Conference on Trade and Development (UNCTAD), Oct 98 (hereafter referred to as WIP98), pp1-5 Back

18 Ibid, p9 Back

19 Ibid, pp7-11 Back

20 Ev, p82 paragraph 2.1; see also Ev, p45 paragraphs 2.4,2.5 Back

21 WIP98, p11 Back

22 International Capital Markets, IMF, Sep 98, pp186-9 Back

23 Q52; Ev, p59 paragraph 7 Back

24 Ev, pp81-4 ; details of all these agreements can be found on the WTO's website at www.wto.org Back

25 WIP98, p62; Interregional Framework Cooperation Agreement between the EC and Mercosur, Official Journal, 19 Mar 96, pp4-22. The Energy Charter Treaty, which entered into force on 16 Apr 98, is also concerned with investment in the energy sector Back

26 WIP98, p59 Back