Trade Related Investment Measures Bijit Bora Trade Analysis Branch UNCTAD

Uruguay Round Provided a mandate for the first time to discuss: –“Following an examination of the operation of GATT Articles related to the trade restrictive and distortive effects of investment measures, negotiations should elaborate, as appropriate, further provision that maybe necessary to avoid such adverse effects on trade” Previous attempts at incorporating investment provisions included the Havana Charter in 1947

Issues During Negotiations Major problem was the lack of definition and clarity in the mandate due to the work in identifying which measures were trade related. Developed countries took a broad view of investment and investment measures Some developing countries took a much narrower view, especially in the context of policies such as technology transfer requirements

Investment and Trade The issue is whether or not a policy with a particular target - in this case an investment measure - can affect trade. Are there different degrees of trade effects? Export performance requirements, local content schemes and foreign exchange balancing - ok

Examples of TRIMS Market access –Ownership or equity restrictions –Joint venture requirements Performance Requirements –Local content schemes –Export performance requirements –Foreign Exchange balancing

The TRIMS Agreement Structure Content

Legal Framework The TRIMs agreement does not provide any new language It focusses on two Articles that were identified in a previous case under the GATT –Article III (National Treatment) –Article XI (Quantitative Restrictions)

Aims of the Agreement Desiring –to promote the expansion and progressive liberalisaiton of world trade and to facilitate investment, while ensuring competition Take into account –trade, development and financial needs of developing countries, particularly least developed countries Recognising –certain investment measures can cause trade- restrictive and distorting effects

Structure –Nine Articles and an Annex –Art I - clarifies that the agreement applies only to trade in goods –Art 2 - applies Articles III or XI and refers to the Annex list –Art 3-4 deal with general exceptions and Art XVIIIb –Art 5 Notification and transition periods –Art 9 - Review

GATT Articles –Article III (GATT) National treatment of imported product, unless specified in other agreements Subjects the purchase or use by an enterprise of imported products to less favourable conditions than the purchase or use of domestic products –Article XI (GATT) Prohibition of quantitative restrictions on imports and exports Part of the general trend in textiles and agriculture to phase out the use of quantitative restrictions

Illustrative list - Para 1 Para 1 (a) covers local content TRIMs which require the purchase or use by an enterprise of products of domestic origin or domestic source. Para 1(b) covers trade balancing TRIMs which limit the purchase or use of imported products by an enterprise to an amount related to the volume or value of local products that it exports.

Ilustrative list- Para 2 2(a) deals with border measures that deal with trade balancing. 2(b) restrictions to trade that arise from foreign exchange access restrictions such as balancing requirements 2 (c) deals with measures that restrict exports.

Notification Governments of WTO members, or countries entitled to be members within 2 years after 1 January, 1995 shouold make notifications within 90 days after the date of their acceptance of the WTO agreement.

Transition periods Members are obliged to eliminate TRIMs which have been notified. Such elimination is to take place within two years after the date of entry into force of the agreement for developed countries –five years for developing –seven years for LDC

Standstill TRIMS introduced less than 180 days before the agreement do not benefit from transition period. Members are also not allowed to change measures that have been notified if these changes are inconsistent with the agreement. The same TRIM can be applied to a new investment.

Implementation Notification Disputes Transition

Notification Argentina* Barbados Bolivia Chile* Colombia Costa Rica Cuba Cyprus Dominican Republic Ecuador Egypt* India Indonesia Malaysia* Mexico* Nigeria Pakistan* Peru Philippines* Poland Romania* South Africa Thailand* Uganda Uruguay Venezuela

Disputes Three disputes –Indonesia vs EU, Japan, US –Canada vs. Japan and EU –Panama vs EU (Bananas)

Indonesia Automotive sector National car policy –required the manufacturer to have local content –Lower sales tax –Subsidy issue was also involved.

Canada Automotive sector - Canada-US Auto Pact Required a company to have local content levels beyond the North American Free Trade Agreement in order to have a lower tariff rate Result was the tariff was increased to MFN rate

Implementation Difficulties Difficulties in identifying TRIMs that violate the agreement Difficulties in identifying alternative policies to achieve the same objective Difficulties in accounting for non- contingent outcomes such as the financial crisis in Asia and Latin America Difficulties in meeting the transition period deadlines

Development Dimension of the TRIMS agreement Only developing countries notified TRIMS Most frequent sector was the automotive industry The most frequent policy was local content schemes

Applying for Extensions of Transition Periods Chile Romania Egypt Argentina Colombia Thailand Malaysia Philippines Pakistan

Where to from here? Developing countries are serious about not moving ahead on TRIMS until the agreement has been implemented The focus is on how to proceed with the review.

Investment and the WTO Options –Leave the agreement as it is –Extend the illustrative list –Complement the TRIMs agreement with new rules on investment that have features of BITs and NAFTA chapter 11.

Status Quo There are two dispute panels have clarified precisely the role of TRIMs and GATT. We have a clear specification of the consistency of policies in the annex list an the GATT Guidance on transition periods

Renovation Annex list is not exclusive of policies that are inconsistent with III:1 and XI:4 Seek to expand the list –Export performance requirements Require a clarification of “restrict” versus “distort” trade.

New Architecture Proposal to expand the role of provisions related to market access and operations of foreign affiliates. Two models –BITS –NAFTA chapter 11

Components Three components of an investment architecture –Market access Pre and post establishment –Operations National treatment with respect to policies –Dispute resolution NAFTA type investor-state model Unworkable in the WTO context

Study Goods Council has requested a joint UNCTAD/WTO Secretariat study on the “development effects of TRIMs”. Joint with Trade Analysis Branch (UNCTAD) and Trade and Finance (WTO).

Development effects I Identify and define TRIMs II Historical experience with TRIMS III What is ‘development’? –Include employment –Technology transfer –Establishment and development of industry –Growth Neutrality of the study.

FDI and poverty alleviation FDI and growth - parallels with trade and growth literature –Data is worse. Composition of FDI flows –labour-intensive (poor intensive) sectors Not a huge amount of total flows, but important for developing countries “Crowding out” domestic investment and domestic firms –likely more important in the context of large scale industries –Auto industry - seat covers, wiring harnesses

EU-LDC Networks Networks –Access to researchers and data case studies are hugely important Economists are terrible at doing this kind of work. –Specialists have knowledge of past studies to contribute to step II –Developing a research agenda on development dimension of TRIMs