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Regulation of Investment in the Trade
RĂ©gime: From ITO to WTO
Petros C Mavroidis*
1. Introduction
The Havana Charter that was supposed to give rise to the International Trade Organization (ITO) was characterized by the spirit of grand economic institution building with heavy regulatory content. As widely known, it failed to see the light of the day. Even if the Havana negotiations had gone well, by 1948, the political environment in Washington had changed from what it had been just a few years earlier. More than two years had passed from Congressâs extension of the Reciprocal Trade Agreements Act ( RTAA) in June 1945 to the completion of the General Agreement on Tariffs and Trade ( GATT) negotiations in October 1947. The era of grand economic institution building culminating with the Bretton Woods conference in 1944, had passed, and the heady optimism of the early post-war period had given way to the Cold War. Policymakers in Washington had begun to focus on the Marshall Plan in 1948 and the creation of the North American Treaty Organization (NATO) in 1949. In January 1948, British officials reported that:
Clayton admitted very frankly that he had found considerable difficulty in getting United States authorities at Washington to take any concerted interest in the Charter, their attention being almost entirely directed to Marshall Aid. This was one of the reasons why he was, he said, most apprehensive lest [the] Charter would be crowded out unless completed very shortly (Toye, 2003, p. 294).
Claytonâs sense turned out to be correct. The US Congress insisted that the 1945 RTAA did not authorize the creation of any international trade-related institution or US participation in any trade-related organization. Hence, the GATT was envisioned as an interim arrangement, not an organization, until the ITO charter could be formally approved by Congress. The GATT was not a treaty or an organization, but merely a trade agreement put into effect by executive order. It is thus unsurprising (it is actually very much intended) that it did not reproduce the various ITO provisions and was limited to regulating a tariff bargain and whatever was deemed necessary to support the tariff bargain struck. Investment was featured in specific ITO provisions, it was not in the GATT.
The advent of the WTO (which with an almost 50 years delay occupied the place of the ITO) signalled, among other thing, a revival of the discussion on a multilateral agreement on investment. For reasons that were never fully revealed, this initiative was not successful. There is an institutional platform allowing WTO members to negotiate international investment flows in the context of GATS. There is nonetheless, no comprehensive agreement protecting investment under the aegis of the WTO. As a result, trading nations remain essentially free (from a WTO perspective) to regulate investment to their liking.
In Sections 2, 3 and 4, we present the ITO, GATT, and WTO regime adopting thus a chronological order for our discussion. Section 5 briefly refers to extra-WTO initiatives to regulate investment, whereas in Section 6 we include our conclusions.
2. Investment Regulation in the Havana Charter
Investment was not regulated in comprehensive manner in the Havana Charter. Two provisions (Arts. XI and XII) in Chapter 3 entitled âEconomic Development and Reconstructionâ deal with this issue, and the placement of investment-related provisions in this chapter probably denotes the over-arching objective that investment regulation should serve. The regime was thus not geared toward protecting property rights, although this would have been the natural outcome; it was more thought as investment protection as a tool to promote economic development faithful to the âdirigisteâ spirit of the ITO.
The provisions are all of hortatory language leaving ample discretion to interested parties to adopt specific measures the content of which is not specified ex ante:
(a) ITO members could reflect on the appropriateness to sign bilateral or even multilateral agreements protecting international investment, the possibility for one multilateral agreement being retained;
(b) In the meantime, they should strive to provide foreign investors with equitable treatment, the parameters of the treatment remaining unspecified.
In that, the ITO charter is incomplete, to be completed through subsequent practice.
There are also two more specific provisions, whereby:
(a) ITO members should reflect on avoiding double taxation as means to promote international investment;
(b) They should further reflect on the appropriateness to avoid discriminating against foreign investors (the benchmark of comparison being domestic investors).
Again the language was hortatory. Anyway, the non-advent of the ITO1 meant the de facto irrelevance of these provisions: we say de facto and not de jure because, by virtue of Art. XXIX GATT, GATT contracting parties undertook to observe, pending the entry into force of the ITO, to the fullest extent possible the general principles of Chapters 1â6 of the Havana charter. These provisions became de jure irrelevant as well as of January 1, 1995 with the advent of the WTO.
3. The GATT-Era
The GATT is of course a tariff bargain with some supporting act: domestic instruments have been contracted as means to ensure that the tariff bargain will not be undone through subsequent unilateral action. The GATT is quintessentially a negative integration contract, where domestic instruments (policies) will be defined unilaterally and, to the extent that they exhibit negative international spill-over (a condition which is always met), they will have to observe the non-discrimination obligation.
Activists would like to think that the non-discrimination obligation is quite meaningful and it could even oblige WTO members to treat domestic and foreign investors alike in all respects. They would point to the term âaffectingâ appearing in Art. III.4 GATT, and argue that the non-discrimination obligation extends to any measure affecting trade. There should be no doubt, so the argument goes, that investment and trade could be complements2 and/ or substitutes,3 and thus one might affect the other. Similar arguments were put to rest by a GATT Panel, the Panel on Canada â FIRA (Foreign Investment Review Act).
In this case, the US had challenged the consistency of the Canadian FIRA with various GATT provisions, including Art. III.4 GATT. The Canadian Act subjected approval of foreign investment into Canada only if it had previously been demonstrated that the investment would have had âsignificant benefit to Canada.â4 In this vein, foreign investors would be required to make specific undertakings, whereby they would be promising, inter alia, to purchase Canadian goods (in essence, to ensure a certain level of Canadian added value in their production process). The Panel explained in three different places the limits of the coverage of investment-protection under the GATT (Sections 5.1, 5.9, 6.5):
In view of the fact that the General Agreement does not prevent Canada from exercising its sovereign right to regulate foreign direct investments, the Panel examined the purchase and export undertakings by investors subject to the Foreign Investment Review Act of Canada solely in the light of Canadaâs trade obligations under the General Agreement.
The purpose of Art. III.4 is not to protect the interests of the foreign investor but to ensure that goods originating in any other contracting party benefit from treatment no less favorable than domestic goods...
... the national treatment obligations of Art. III of the General Agreement do not apply to foreign persons or firms but to imported products.
The last sentence is key: the non-discrimination obligation does not extent t...
