Because of your interest in the subject I attach an early but well-done draft
on the subject (Tab B),3 and a summary thereof (Tab A).
It was prepared by my staff, and has only now been floated outside Treasury.
However, any reaction from you even at this early stage
would be of great value to our work.
On the substance, there is already underway the rudimentary beginning of a
sort of “GATT for Investment” through
efforts on different parts of the issue in different forums: discrimination
in the “national treatment” section of the OECD code, international arbitration in ICSID,4 multilateral insurance via cooperation among the
national OPICs, transfer pricing via an OECD working group, tax harmonization via a series of bilateral
treaties, antitrust via bilateral understandings between the United States
and several other industrial countries, corrupt practices in the ECOSOC negotiations, etc. But these are
only a very tentative start:
—Some issues are not covered at all (e.g., tax incentives to foreign
investors and “performance requirements”).
—Many which are covered have no enforcement teeth.
—There is no coordination among the many parts of the overall issue.
Hence there is clearly room for a major initiative, or series of initiatives,
in this area. I will forward further material to you next month.
Tab A
Paper Prepared in the Department of the
Treasury5
Washington, July 29, 1977
A GATT For
Investment
SUMMARY
Despite the fact that it has become a major vehicle for the transfer of
resources between countries, international investment is not effectively
governed by multilateral rules. As a consequence, national governments
intervene to tilt the benefits of investment in their favor, thus
producing harmful competition and a progressive erosion of the free
market system.
Against this background, it is useful to review the possibilities for
international cooperation through a “GATT for Investment.”
Current Situation
There are a few international agreements aimed at regulating government
intervention in the investment process. The U.S. has a wide network of
treaties of friendship, commerce, and navigation (FCN treaties) which prohibit
discrimination against American investors and have been negotiated
principally with developed countries. The effectiveness of the few
multilateral agreements such as the OECD Code of Capital Movements, the International Center
for the Settlement of International Disputes, and the OECD Declaration on International
Investment and MNEs, is quite limited.
U.S. Interests
The U.S. has traditionally not taken an active role with respect to
foreign investment, in accordance with our general free market
philosophy. This philosophy is not shared, however, by other governments
which often intervene in investment to and from the United States. The
interventions which have the most conspicuous effect on our national
interests are the performance requirements imposed on firms by host
governments, including quantitative and qualitative job quotas, minimum
export quotas, “local content” requirements, and limitation of
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capital and local ownership.
The United States is not necessarily worse off as a result of such
intervention than it would be in the absence of foreign investment, but
it is very likely worse off with foreign intervention than without
it.
Interests of Other Governments
Cooperation of other governments in pursuing a GATT for Investment would depend on the specific contents
of our proposal and the force with which we pursued our objective. Our
case should be based on the general proposition that unregulated
competition among governments in the investment area is just as
detrimental as it would be with respect to trade, and on the proposition
that we will no longer passively accept the interventionist policies of
other nations. No explicit threats would be necessary, but we would have
to make it clear that we are ready to take measures such as regulating
the outflow of investment and technology in accordance with our national
interests.6
Substance of Negotiations
The various possibilities for topics which could be included in the
GATT for Investment fall into
three general categories: investor protection, government intervention,
and regulation of MNE activities. The
specific topics include the following:
1. Investor Protection
—A judicial remedies convention could be negotiated which would be
designed to ensure that goods produced from expropriated mines and
factories can be judicially seized if shipped to the markets of the
signatory countries.
—We can strengthen the International Center for the Settlement of
Investment Disputes or other similar panels.
—We would face the question of to what extent and in what form we should
press for inclusion of the principles of national and most favored
nation treatment and treatment according to the minimum standards of
international law. These are sticking points particularly with the IDCs
[LDCs?], who argue that only local remedies
should be available to a foreign investor.
—Consideration could be given to several possible approaches for
establishing investment insurance on a multilateral basis, but the
history of negotiations on such proposals does not give grounds for
optimism.
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2. Government Intervention
—The United States managed to get only a weak agreement with respect to
incentives and disincentives for investment in the OECD. However, a binding agreement might
conceivably be negotiated in this area that was similar to the GATT arrangements with respect to
trade.
—GATT-type remedies might also be
appropriately applied to performance requirements placed on foreign
investors by governments.
—In the tax area we might negotiate a multilateral tax treaty or
agreements to extend the range of issues addressed in bilateral
treaties.
—The United States might have to respond to demands by other countries
that we refrain from imposing requirements on the foreign affiliates of
U.S. corporations to further our political goals.
3. Regulation of MNE
Activities
—The developing countries are particularly anxious to require
subsidiaries to act independently of parental direction on such
questions as pricing, market sharing, and sourcing of inputs. The United
States and other developed countries have argued that restrictive
business practice limitations should not be extended to intracompany
affairs.
—Tax avoidance problems have been met by the extensive international
network of bilateral treaties. A GATT
for Investment could be useful to national governments in providing a
centralized pool of information for national tax authorities.
—Increased disclosure of information by MNEs concerning their activities
would be a basic objective of host governments in negotiation of any new
agreements.
—In the event that the U.N. negotiations on an anti-bribery agreement are
unsuccessful, we could tackle the issue again in the new forum.
Forum of Negotiations
The five basic questions we should have to address in making the complex
decision as to which forum or forums we should use to pursue our
investment objectives are as follows:
1. Should we rely on a single forum or pursue our objectives in a
coordinated fashion in several forums at one time? A single new or
existing forum would focus public attention on the negotiating process
and facilitate bargaining across issues; multiple forums would result in
less politicized negotiations.
2. Should we propose establishment of a new organization for the purpose
of negotiating and eventually administering the proposed agreement or
rely on existing institution or institutions? Creation of a large new
organization would give investment issues a greater prominence in
international economic affairs approaching that of the mone
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tary, trade, and development
areas. On the other hand, we could expect to encounter resistance from
other countries on the grounds that a new initiative in the investment
area would undermine ongoing codes of conduct negotiations in the U.N.
and in the OECD. The relationship
between these exercises and the new initiative might be handled either
by keeping them separate or by folding both into a new forum.
3. Should participation in the agreement be universal or limited to a
core group of like-minded countries? Universal participation would
result in greater coverage of the agreement but might produce a tendency
for the negotiations to become politicized and for the agreements to
reflect the least common denominator. A “core group” of countries would
probably be able to arrive at a stronger agreement, but a number of host
countries would be excluded. Under either option agreement would have to
be reached on the basis for decision-making, with the two principal
models being the OECD procedures under
which each country has an equal voice and all decisions must be
unanimous, or the IMF, which has
weighted representation.
4. If we decide to use an existing forum, which should we choose? If we
propose the establishment of a new organization, what form should it
take? The OECD has a staff with
experience in the investment area, but its membership is limited and its
procedures are slow. The United Nations also has some expertise in
investment matters and wide membership, but it is highly political. The
GATT has a heterogeneous
membership and existing mechanisms and procedures which we might use as
a model; however, it has not dealt extensively with investment
issues.
5. Should we fall back from the bilateral treaty vehicle, rather than
rely exclusively on lengthy multilateral negotiations? The United States
and other developing countries have a number of FCN treaties and other countries have actively pursued
narrower bilateral investment treaties. The major advantage is that they
can be concluded with a minimum of difficulty; their fundamental
disadvantage is that the public visibility of the effort will be low.
Two options we have within the bilateral framework would be to negotiate
narrow treaties with LDCs or to negotiate comprehensive treaties which
would have the contents of and lay the groundwork for the GATT for Investment.
Sanctions
Sanctions could be used to enforce new agreements in this area which
could range from moral opprobrium to private legal action to state
retaliation. The appropriate kind of sanction would differ as between
the offender and the offense. MNEs would be subject to the local law and
sanctions in host countries, but home governments would also play a
role, as could some recognized international body. Among the options for
enforcing standards on governments are withholding eco
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nomic benefits, imposing countervailing
duties, discrimination by host governments against investors of a
violating country, and discrimination by home governments against
investments in a violating country.
