India has good cause to be optimistic about the WTO Ministerial Meeting to be held in Seattle in November 1999. India’s most important objective was to gain market access as an outcome of Seattle discussions. This is because the kind of market access for developing countries that was supposed to come out of the Marrakesh Ministerial never materialised, for various reasons, Mr. P.P. Prabhu Commerce Secretary said at a National Seminar on "WTO: Indian Industry’s Agenda for the New Millennium" organised by the Confederation of Indian Industry (CII) on 16th September 1999 in New Delhi.

Mr. Prabhu said that India was ready with its proactive agenda, though the focus was now sector-specific mandates, covering what issues must be brought up at Seattle, and what the terms and conditions for each issue would be. These positions should be based on a process of consensus-building within the sectors. He said that India’s position was that the Seattle Ministerial should focus on the built- in agenda and its implementation.

On the issue of the internal constraints faced by Indian industry, Mr. Prabhu said that it was unlikely to be accepted under the WTO that a country needed more transition time because of internal constraints. Competition could force and expedite the process of internal reforms, felt Mr. Prabhu.

Commenting on Regional Trading Agreements (RTAs), Mr. Prabhu said that these were permitted and hopefully strong RTAs which aim to bring tariffs down would support and further the objectives of the WTO.

The Seminar was attended by over 200 delegates from all over India. The Ministry of Commerce participated with a very high level presence. Mr. Rahul Bajaj, President,

CII, outlined CII’s views. Mr. N.N. Khanna, Special Secretary (WTO), Ministry of Commerce, also addressed the Seminar.

Mr. N.N. Khanna addressed some specific sectoral concerns that were brought up. On the issue of industrial tariffs, he said the problem of tariff peaks could only be addressed at Seattle if the issue of industrial tariffs as a whole was brought up, and this was at present not on the agenda. Several countries were able to gain greater protection than India from industrial tariffs as they had agreed to industrial tariffs on a specific basis, while india had negotiated tariffs on an ad valorem basis. However, India had only bound 62 per cent of its tariffs, and still needed to bind the rest 38 per cent, said Mr. Khanna. India also needed to decide what the best approach for binding industrial tariffs would be.

Mr. Khanna said that India would seek to enlarge certain windows that existed for developing countries, However, it would not be pushing for a completely new agreement as this would be a very difficult process, he added. Mr. Khanna further said that India was very much opposed to the misuse of anti-dumping as a NTB (Non Tariff Barriers).

On the Agreement on Textiles and Clothing, Mr. Khanna said that though there was great advantage for developing countries in the integration of textiles into the rest of the world trading order, the danger of negotiating on this issue was that the full integration of this sector could be further pushed back from the present date of 2005.

Mr. Khanna outlined the issues that particularly affected industry as agriculture, tariffs and services. In particular, India must come to a negotiating position on services as the present governmental regimes governing services could be drastically changed under the multilateral trading system.

Mr. Rahul Bajaj President, CII, stressed on the importance of balancing free trade with national interest pointing out that India was a developing country suffering from severe competitive disadvantages, and thus needed a certain amount of transition period. He said that internal reform and competition should precede international competition, and said that issues such as labour laws, cost of finance, power supply needed to be addressed immediately. He also said that India should formulate a subsidies regime that was fully WTO- compatible.

Mr. Bajaj suggested that India outline the major issues that affected it and then look for support from other countries that shared that same views. Consensus on all issues was impossible, added Mr. Bajaj, so issue-wise concern must be the focus. On the Multilateral Agreement on Investment (MAI), Mr. Bajaj said that though post-establishment all foreign investors must be given national treatment, every country had the right to choose the kind of foreign investment that came into the country. Mr. Bajaj strongly opposed the proliferation of non-tariff barriers (NTBs), saying that these were against the spirit of the WTO.

1. Introduction

The question of establishing a legally binding Multilateral Agreement on Investment (MAI) within the ambit of the World Trade Organisation (WTO) is now reaching a critical stage in international trade discussions. There are enough indications that in the third Ministerial Conference of the WTO scheduled to be held in Seattle, later this year, the industrialised countries will put pressure on the developing countries for the launching of a comprehensive new round of trade negotiations in the WTO in the year 2000, to be called the ‘Millennium Round’. The establishment of multilateral rules and disciplines in the area of foreign investment will certainly be a major demand of the industrialised countries in setting the negotiating agenda for the Millennium Round. Two comparatively recent developments have paved the way for industrialised countries pushing ahead with their demand for an MAI: the decision taken at the WTO Singapore Ministerial Conference of December, 1996, and the OECD negotiations on an MAI launched in September, 1995. Although the Singapore Ministerial Declaration has only mandated an examination of the relationship between trade and investment without any pre-judgement as to whether negotiations will be initiated in this area after the two-year study period, there is little doubt that it has sown the seeds for inscribing foreign investment on the agenda of the WTO. As for the OECD negotiations, the idea behind the negotiations was to establish an MAI with very high standards for the treatment and protection of foreign investment; the MAI was to be a free-standing international treaty open for accession both to the 29 OECD member countries undertaking the negotiations as well as to non-OECD countries wishing to join it.

After nearly thirty months of negotiations, the OECD member countries could not reach an agreement on some key issues and the OECD-MAI effort is virtually dead now. But the draft that has emanated from these negotiations on many issues, and more importantly, the philosophy that has under-pinned them, will propel the demands of the industrialised countries when the scene shifts to WTO for establishing multilateral rules on investment.

Against this background, the discussion paper seeks to analyse the options available to India in responding to the demand for an MAI, the key issues of an MAI, and the possible approaches that we can consider in dealing with those issues. It is important for us to understand why the industrialised countries are pushing for an MAI and what are the critical elements of the MAI being demanded by them. It is also important for us to understand how far the demands of the industrialised countries differ from our own autonomous policies on foreign investment and how they will impinge on our freedom to follow our policies.

There are, first, the traditional reasons for industrialised countries wanting an Mai. They are the main capital-exporting countries. Nearly 85 per cent of the global outflows of foreign direct investment (FDI), which touched $ 400 billion in 1997, emanate from the industrialised countries. They are the home countries of the large transnational corporations (TNCs) whose strategies and operations are increasingly becoming globalised and therefore whose demands for unrestricted access to markets around the world for their goods, services and technology are rising. Related to this, there is rising trend in the volume of FDI flows and their destination to developing countries.

Be this as it may, the real reason behind the current push of the industrialised countries for an MAI, because of which the MAI being demanded by them focusses more on the issue of the liberalisation of inward foreign investment by host countries, is that foreign direct investment is now seen by them as a key ‘market access issue’ . They see FDI as a crucial ingredient for their enterprises, especially their TNCs, to gain and consolidate market access opportunities around the world, especially in developing countries that offer a good market and investment potential. Due to the advancements in various kinds of technologies, FDI is increasingly becoming more important than trade for delivering goods and services to foreign markets, and in addition, it is becoming an important vehicle for TNCs in organising their production, distribution or functional activities on an international basis to maintain their competitive strength.

Moreover, integrated international production is increasingly becoming a key element of the operational strategies of TNCs, which means that TNCs look for countries not only for selling their outputs but also for sourcing their inputs, such as for example, supplies of components, parts and even finished items, computer software, and services. Nearly one-third of the world trade is intra-firm trade between affiliates of TNCs, while another one-third of the world trade is between TNCs and non-affiliated enterprises. It is only the remaining about one third of the world trade which remains outside the control or influence of the TNCs.

To sum up, FDI now has multiple objectives in seeking market access opportunities around the world: natural resource seeking, market seeking, efficiency seeking, and input or asset seeking, depending on the strategies of the TNCs and the potential offered by the host countries.

Main Components of an MAI as advocated by industrialised countries

The MAI as advocated by the industrialised countries and as evidenced by the mandate and draft of the OECD negotiations will have four major components (a) the liberalisation of foreign investment regimes by host countries; (b) fair and equitable treatment of investment; (c) legal security for investment; and (d) effective dispute settlement procedures. Furthermore, the definition of investment for an MAI will be as wide as possible. The draft OECD-MAI defines investment as "every kind of asset owned or controlled, directly as indirectly, by an investor", while "investor" means any natural or legal person of a Contracting Party, with the legal person being any kind of entity constituted or organised under the applicable law of a Contracting Party. Such a definition of investment is purposely intended to go far beyond the traditional notion of foreign direct investment (FDI). The definition will cover not only equity investment (regardless of whether it is above or below any specified threshold level), but also portfolio investment, debt capital, monetary and financial transactions, and more importantly, every form of tangible and intangible asset, including, in particular, intellectual property rights, concessions and licences.

The corner-stone of the MAI being demanded by industrialised countries is the liberalisation of the foreign investment regimes of host countries through a legally binding adoption of the principle of non-discriminatory treatment (i.e. the principle of "national treatment") as between domestic and foreign investors. According to a paper circulated at the WTO by the European Union, the purpose of an MAI is to create a "level playing field" for foreign investors around the world so that they are legally assured that they will stand on the same footing as domestic investors when they wish to make an investment in a host country. This principle of non-discriminatory or national treatment is to apply to all stages of an investment, namely, entry, establishment and operation of an investment...

Differences between the proposed MAI and our own foreign investment regime

The key and the most critical difference between our own foreign investment regime and the MAI demanded by the industrialised countries lies in the ‘pre-establishment phase national treatment’ issue, i.e. non-discriminatory treatment as between foreign and domestic investors at the stage of entry and establishment of an investment.

Our entire legal system embodies the national treatment principle only in the post-establishment or operation phase of an investment. Once an investment is made and a business entity is established, our laws apply equally regardless of whether the entity is wholly or partially national or foreign owned. There is therefore no major problem for us so far as the principle of national treatment in the post-establishment phase is concerned.

But the proposed principle of national treatment in the pre-establishment phase is wholly contrary to our present policies and regulatory frame work for foreign investment. Our existing framework is based on (a) screening and approval of foreign investment (b) exclusion of foreign investment from certain sectors or activities and (c) domestic ownership requirements, including limitations on foreign portfolio investment in existing enterprises. It is true that we have the ‘automatic approval’ process for foreign direct investment but it is only an exception to the normal screening and approval procedures and it still involves a foreign investor going through a process that is not applicable to a purely domestic investor. Thus, the pre-establishment phase national treatment standard will cut at the roots of our existing policy and regulatory framework for foreign investment.

The second critical area of difference lies in the definition of investment. The intention of the industrialised countries is to have the widest possible definition for investment so that it covers every conceivable kind of an asset, tangible or intangible, that is owned or controlled by a foreign investor. Our existing regulatory framework for foreign investment is basically a framework for foreign direct investment (FDI), i.e. FDI as per the definition of IMF for balance-of-payments statistics, which covers only equity investment with a long term interest and with a view to controlling or influencing the management of the enterprise. For portfolio equity investments by foreign debt capital, we have a different set of regulations, and for raising foreign debt capital, we have yet another set of regulations. The policy considerations, the regulatory authorities, the approval processes and the applicable conditions differ among these three routes. But so far as the issues relevant to an MAI are concerned, our present regulatory framework limits foreign investment to the traditional FDI only. A broad definition, as envisaged in the draft OECD-MAI, will therefore have significant implications for the range and nature of obligations to be undertaken by us...

The third major area of difference is in respect of performance requirements. As of now, we are committed only to the avoidance of the performance requirements prohibited by the TRIMS* Agreement of the WTO, namely, local content and trade-balancing requirements. But, the proposed MAI will go far beyond the TRIMS Agreement in listing and prohibiting performance requirements.

Possibly the best option for us is to question the need for an MAI at this juncture and to argue for the continuation and strengthening of the current trends and arrangements relating to investment, namely, the autonomous liberalisation of their FDI policies and regulatory framework by developing countries supported by the bilateral, regional and inter-regional treaties that they may conclude on their own volition to promote and protect foreign investment. Generally speaking, developing countries are competing for FDI and are liberalising their FDI policies as part and parcel of a broader set of reforms that include the opening up of their economies, liberalisation of their foreign trade regimes, focus on attaining international competitiveness, and deregulation. The current upsurge in the flows of FDI to developing countries is basically due to the autonomous liberalisation of their FDI policies by developing countries coupled with the broader economic reforms that they have undertaken. Being voluntary in nature, these autonomous policies have acquired certain strength, durability and acceptance in the host economies. At the same time, they have the merit of each country being in a position to pursue its liberalisation policies according to its own individual needs and perceptions and at a pace that is best suited to its own circumstances...

We need to emphasise that the advocacy of this option does not in any way imply a negative or restrictive attitude towards foreign investment. It does not mean that developing countries should lessen their commitment to the liberalisation of their FDI regimes or dilute the standards for the equitable treatment and effective protection of FDI. Nor does it mean that developing countries should not treat foreign investors on par with domestic investors. The advocacy of this option only means that in pursuing their policies for the liberalisation and treatment of FDI, developing countries retain their freedom and flexibility to ensure that they are in accordance with their own developmental, political and social objectives.

A question may be asked whether India may lose its competitive edge in attracting FDI if it were not a party to an MAI (as demanded by industrialised countries) and if some other developing countries agree to be a party to it. Even if this were to happen, there is no reason to believe that FDI flows to India will be adversely affected by it. Our strength lies in the potential size of market.

Our existing policy is to welcome foreign direct investment, especially in the infrastructure, high technology and export oriented sectors, and to minimise the procedural and other impediments to the inflow of FDI. We are constantly expanding the areas where FDI is welcome even with 100 per cent foreign ownership.

We are also continuously expanding the list of "priority industries"where FDI will be automatically approved with 51 per cent or 74 per cent foreign ownership. We had even indicated an objective of attracting $ 10 billion of FDI every year as compared to about $ 2 to 3 billion that we are receiving currently.Our legal framework and the bilateral investment treaties that we are readily concluding, guarantee national treatment to foreign investors in the post-establishment phase of an investment.

Fair and equitable treatment of foreign investment, its legal protection, and dispute resolution mechanisms do not pose a problem under our existing policy, legal and judicial framework. We have a large domestic market, coupled with human and natural resources, that will induce foreign enterprises to access our market through investment and local production than through exports from abroad. Thus we have both the investment opportunities and the investment climate to attract large volumes of FDI that will serve our development and growth interests.

It is, therefore, extremely important that the views we advocate and the stand we take in international fora on the question of an MAI are in harmony with the policies we actually follow or plan to follow towards foreign investment. Our chief concern is that our sovereign right and freedom to screen, approve and regulate foreign investment, i. e. our right to regulate the entry and establishment of foreign investment according to our own policies, should not be curbed by any multilateral agreement. It is not our case that the host country environment, or a multilateral arrangement if it comes into being, should not be "investor friendly". Rather, it is our case that investment-friendliness can be ensured even without interfering with the sovereign right and freedom of host countries to regulate inward foreign investment. It is, therefore, important that we articulate our views from a positive rather than a negative angle. In case we overlook this aspect, we may unwittingly create a negative image about our attitude towards foreign investment that may be inconsistent with the policies that we are actually following on our own.

The WTO was closed for vacation during the month of August 1999 and therefore there was no specific activity to report for the second fortnight of August 1999.

During the first fortnight of September 1999, the General Council met informally on September 8, to consider the leftover agenda items from the July meeting mainly relating to environmental issues, Technical Barriers to Trade (TBT), Trade Related Intellectual Property Rights (TRIPS), technical assistance, capacity building, coherence, industrial tariffs etc. At this meeting new proposals submitted by Members were briefly considered. It was also decided that though the majority of the proposals had already been submitted by Members, the second phase of the preparatory process should be allowed to continue, at least till the end of September, so that Members could submit their remaining proposals.

At the end of this meeting, the Chairman of the General Council (GC) circulated a draft outline of the Ministerial text to the Members, which he explained that he had prepared on his responsibility and which was not intended to prejudice the position of any Member. One important feature of the outline is that ‘implementation’ has been included under the section titled "Future WTO Work Programme" . In addition there is also a reference to "immediate action on certain implementation problems". Since we have from the outset of the preparatory process been highlighting the importance that we attach to the redressal of implementational issues, the above reference would provide a suitable entry point for our endeavour in this regard. The comments of the Members on this draft Ministerial text will be discussed in the next GC meeting.

A small group of developing countries continued to meet under the auspices of UNCTAD to develop a possible "positive agenda" for the Seattle Ministerial Conference. Members highlighted the problems that they have been facing in the implementation of various agreements and discussed the possible ameliorative action that could be taken in this regard.