Three reasons why a WTO Agreement on Investment Facilitation for Development is important
by
Karl P. Sauvant*
After several years of preparatory discussions, negotiations on an Investment Facilitation for Development (IFD) Agreement were formally launched in September 2020. They are open-ended plurilateral negotiations, but they aim at a multilaterally applied agreement in accordance with the most-favored-nation principle. Driven by developing countries,[1] the negotiations are scheduled to be concluded by the end of this year (2022). This would indeed be very desirable, given the urgent need to increase investment to help advance the Sustainable Development Goals, the first of which is ending poverty.
The negotiations focus entirely on a range of specific, practical measures across all sectors covering the whole investment lifecycle. They are meant to help increase foreign direct investment (FDI) flows. Specifically, the negotiations seek to “improve the transparency and predictability of investment measures; streamline and speed up administrative procedures and requirements; and enhance international cooperation, information sharing, the exchange of best practices, and relations with relevant stakeholders, including dispute prevention.”[2] Explicitly, the negotiations exclude issues related to market access, investment protection and investor-state dispute settlement.[3] While the text of the Agreement as it stood in November 2022 is not publicly available, its main elements are listed in the box accompanying this article, and it has been described in a relatively recent publication.[4]
|
Box. Proposed Disciplines on IFD Consolidated Text ('Easter Text') |
|
Preamble |
|
Section I: Scope and General Principles |
|
- Scope of application; exclusion of market access, investment protection and ISDS; - Firewall provision (aimed at insulating the Agreement from investment agreements); - Most-favoured-nation (MFN)/non-discrimination |
|
Section II: Transparency of Investment Measures |
|
- Publication of measures and relevant information (including online publication) - Publication of proposed/draft measures and opportunity for comments - Single information portals - WTO notification |
|
Section III: Streamlining and Speeding up Administrative Procedures |
|
- General principles for authorization procedures - Processing of applications, acceptance of authenticated copies; authorization fees; submission of applications online - Independence of competent authorities - Appeal or review |
|
Section IV: Focal Points, Domestic Regulatory Coherence and Cross-border Cooperation |
|
- Focal points for assisting investors and persons seeking to invest - Promoting domestic regulatory coherence - Domestic supplier databases - Cross-border cooperation on investment facilitation |
|
Section V: Special and Differential Treatment for Developing and Least-developed country (LDC) Members |
|
- General principles on SD&T - Notification and implementation based on categorization of provisions - Technical assistance and support for capacity building |
|
Section VI: Sustainable Investment |
|
- Responsible business conduct (RBC) - Measures against corruption |
|
Section VII: Institutional arrangements and final provisions |
|
- WTO IFD Committee - Exceptions - Dispute settlement |
Source: WTO, Investment Facilitation for Development in the WTO: Fact Sheet” (Geneva: WTO, Nov. 2021).
Against this background, this note focusses on three important reasons why an IFD Agreement is important for individual WTO Members and why, therefore, all Members should join the negotiations: it helps countries to retain and attract more and higher quality FDI flows; it constitutes a credible reform commitment device that sends a positive signal to international investors; and it provides for flexibility and technical assistance and capacity building to upgrade investment facilitation. The note ends on three positive externalities the conclusion of the Agreement would generate.
- An IFD Agreement helps countries to retain and attract more and higher quality FDI flows…
The principal determinants that influence the locational decisions of international investors are (1) economic factors that allow investors to make a profit; particularly important are such factors as the size of the market, the quality of human resources and the quality of infrastructure. Assuming the economic FDI determinants are favorable and (2) the regulatory framework for FDI is enabling, (3) investment facilitation becomes important:[5] it would directly change one of the sets of FDI determinants (by making it easier for international investors to establish themselves in host countries) and therefore increase the likelihood of higher FDI flows.
It is precisely the objective of the IFD Agreement to facilitate FDI flows, with a view toward retaining FDI and increasing incoming FDI flows and benefiting from the tangible and intangible assets associated with such investment. Countries seek to retain and attract FDI to advance their sustainable economic development. That is the principal reason for which developing countries initiated the negotiations of this Agreement and are driving the negotiations.
To this effect, the IFD Agreement identifies a number of concrete, practical measures that governments can take to facilitate FDI flows, primarily by reducing transaction costs for international investors[6] and making the re-investment[7] and investment climate more welcoming. These measures (as prescribed in the initial mandate for the negotiations cited earlier) focus on increasing the transparency of the investment framework; streamlining and speeding up administrative procedures; and enhancing international cooperation, information sharing and the exchange of best practices.
In fact, the concrete investment facilitation measures identified under these headings amount to a mini-inventory[8] and benchmark of best investment facilitation practices. Investment facilitation does, indeed, reduce transaction costs for international investors and hence can help increase FDI flows, be they undertaken by host countries regarding inward FDI or home countries regarding outward FDI. Research[9] has shown that developing countries, and especially the least developed countries (LDCs) among them, will benefit from the implementation of host country investment facilitation measures.
Moreover, the exchange of experiences and peer-learning foreseen in the Investment Facilitation Committee to be established in the WTO will offer an additional global forum to identify suitable investment facilitation measures that can be implemented by WTO Members. Given the WTO’s convening power, it can be expected that the deliberations of that Committee will be influential.
It should be noted that any improvements regarding investment facilitation benefit international investors from all countries, regardless of whether they are headquartered in signatories of the eventual Agreement or, for that matter, are members of the WTO, and regardless of whether international investors are headquartered in developed or developing countries.[10]
Moreover, in a section entitled—remarkably—“sustainable investment”[11]—the Agreement provides for responsible business conduct in accordance with applicable international principles, standards and guidelines. Particularly important here are the United Nations Guiding Principles on Business and Human Rights, the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy and the OECD Guidelines for Multinational Enterprises. They deal (among other things) with issues of special importance to developing countries, including employment, the transfer and diffusion of technology, taxation the environment and human rights.
Thus, the IFD Agreement recognizes that the issue is not only that countries seek more FDI, but are particularly interested in higher quality FDI.[12] Advancing sustainable development with the help of sustainable FDI[13] is of special interest to developing countries. A strong provision on responsible business conduct in the Agreement is therefore particularly important. (This would be the first time that a responsible business conduct provision would be included in a WTO agreement.)
- …while constituting a credible reform commitment device that sends a positive signal to international investors…
It goes without saying that many of the concrete and practical measures identified in the IFD Agreement can be implemented by governments unilaterally. Many have done this, but highly unevenly so, with developing countries lagging behind.[14] It could be argued, therefore, that governments do not need to join an international agreement for this purpose.[15]
However, signing up to a WTO Agreement implies a serious and credible long-term commitment on the part of governments to actually do what they commit themselves to doing, by anchoring this commitment in a shared international approach and making it subject to dispute settlement (binding therefore also the hands of future less reform-minded governments). By actively improving one set of the FDI determinants, they increase the likelihood that FDI flows will rise.
Moreover, having signed up to such an IFD Agreement provides governments with a lever to deal with vested domestic interests that may be opposed (for whatever reasons) to, for instance, the streamlining of certain administrative requirements. In other words, the Agreement becomes a reform tool that helps FDI-competent authorities to move forward and undertake improvements in the domestic investment environment.
And this, in turn, sends a positive signal to international investors that value stability, predictability and the efficient treatment of their investments, and it increases their confidence in a given investment location. Committing themselves in an international Agreement to certain actions gives signatories of the Agreement an advantage in the highly competitive world FDI market when seeking to attract such investment.
Conversely, governments that are not signatories of the IFD Agreement would not benefit from the effects of such a credible reform commitment device and would not be sending a positive signal to international investors. It could even be argued that, given the non-controversial nature of the obligations in this Agreement, choosing to stay out of it would send a negative signal to the international investment community regarding a country’s commitment to transparency, efficient governance and other measures facilitating FDI flows.
- …and providing for flexibility and technical assistance and capacity building to implement reforms…
It is of course one thing for WTO Members to commit themselves to undertake certain reforms and implement various investment facilitation measures in order to benefit from the IFD Agreement. But it is another thing to actually do so, given the implementation burden involved—and this is a particularly challenging issue for developing countries and especially the LDCs among them.
One important reason is that implementing various reforms—for example, establishing an efficient domestic focal point in the form of a one-stop shop for foreign investors—is expensive (as we know, for example, from the implementation of the WTO’s Trade Facilitation Agreement).[16] At the same time, the budgets of investment promotion agencies (IPAs)—the single most important FDI-competent institutions most likely in charge of the implementation of the Agreement—is quite limited.
More specifically, IPAs’ annual budgets, on average, are US$21 million for upper-middle-income countries, US$5 million for lower-middle-income countries and US$2 million for low-income countries.[17] The budgets of sub-national IPAs are often below US$1 million or even below US$500,000. It is clear, therefore, that FDI-competent institutions in developing countries—and especially the LDCs—will need substantial technical assistance and capacity building to implement the Agreement and hence benefit from it.
The Agreement recognizes the need for flexibility and assistance by providing for special and differential treatment of developing countries. Specifically, and first of all, it allows signatories to self-designate the pace at which they implement the Agreement’s various provisions. This creates considerable flexibility in implementing the Agreement.
Beyond that, and importantly, as part of the self-designation process, Members can identify the measures whose implementation depends on the availability of technical assistance and capacity building. To determine the need for such assistance, the WTO Secretariat—together with other competent international organizations—has already begun to develop a self-assessment tool through which Members can identify their technical assistance and capacity building needs. Hopefully, this tool will be available soon, and the need assessments can begin, including to build an investment facilitation constituency in individual Members.
It is therefore important that WTO Members in a position to do so should, as soon as possible, make a firm commitment to make substantial funds available for the need assessments and the technical assistance and capacity building support required for the implementation of the Agreement.[18] Perhaps this could be done through an updated Joint Ministerial Statement, or a statement by key donor countries. Such a statement could commit donors to provide substantial technical assistance and capacity building to developing and least developed Members that commit themselves to the implementation of the Agreement. It could perhaps be facilitated by the Co-coordinators[19] of the negotiations process. This could be done at the end of this year, when the negotiators will presumably report about the progress achieved by then, or (at the latest) in time for the WTO’s next ministerial Conference in June 2023.
Naturally, technical assistance and capacity building are only available to signatories of the Agreement.
- …and generating positive externalities.
Beyond these three principal reasons why an IFD Agreement is important for individual WTO Members and why, therefore, all Members should join the negotiations, there are also a number of what one could call positive externalities (in the sense that the benefits go beyond those reaped by individual Members) that the conclusion of this Agreement would have:
- Most importantly in these troubled and volatile times, concluding this Agreement would show that multilateralism works: it would show that governments—in this case, led by developing countries—can agree on issues of mutual interest.
- The Agreement will set the standards—and become the model and benchmark—for bilateral and regional stand-alone investment facilitation agreements that will be negotiated in the future. The negotiations of the first-ever such agreement were concluded in mid-November 2022,[20] and more are likely to follow. It will also become the standard for national investment facilitation efforts.
- Finally, if and when concluded, the IFD Agreement negotiations show that developing countries can actively and successfully use the WTO to develop new rules and advance their interests. If the outcome[21] takes the form of a plurilateral agreement, it would also strengthen the WTO’s negotiation function and, in this manner, contribute to the WTO reform process. It may help that, among the four Joint Ministerial Statements,[22] the one on investment facilitation for development has the most signatories (over 110, including 77 from developing countries, of which 20 LDCs). In other words, the investment facilitation for development negotiations are the most inclusive[23] ones among the Joint Ministerial Statements negotiations.
-----
By way of conclusion, let me reiterate the principal reasons why an IFD Agreement is important for individual WTO Members and why, therefore, all Members should join the negotiations. The driving—and urgent—need is to increase FDI flows to advance sustainable economic development. Assuming the economic FDI determinants are favorable and the regulatory framework for FDI is enabling, an IFD Agreement helps countries to retain and attract more and higher quality FDI flows; it constitutes a credible reform commitment device that sends a positive signal to international investors; and it will provide for flexibility and technical assistance and capacity building to upgrade investment facilitation. In addition, the Agreement—a plurilateral effort toward a multilateral outcome—would generate a number of positive externalities.
In these turbulent times, during which all countries face many challenges and seek to attract FDI in the highly competitive world FDI market in order to advance their development, developing countries in particular should take advantage of the opportunities that an IFD Agreement offers. Accordingly, all negotiators should show maximum flexibility during the remaining negotiations to arrive at a satisfactory Agreement. It would indeed be desirable if the negotiations were concluded as soon as possible, so that the process of integrating the Agreement into the WTO rulebook could begin, while WTO Members begin implementing what has been agreed upon (perhaps on the basis of a provisional-application decision). There is no room for delays, given the urgent need to increase investment to meet the Sustainable Development Goals.
* Karl P. Sauvant (karlsauvant@gmail.com) is Senior Fellow, Columbia Center on Sustainable Investment, a joint center of Columbia Law School and the Earth Institute, Columbia University. He wishes to thank Axel Berger, Hamid Mamdouh and Quan Zhao for helpful feedback on an earlier draft of this note.
[1] For the genesis of the negotiations, driving forces and the importance of the development dimension, see Evan Gabor, “Keeping “Development” in a Multilateral Framework on Investment Facilitation for Development”, Journal of World Investment and Trade, vol. 22 (2021), pp. 41-91.
[2] WTO, “Joint Ministerial Statement on Investment Facilitation for Development”, 13 Dec. 2017. It was supported by 70 WTO Members; by November 2022, that number had risen to over 110—more than two-thirds of the WTO’s membership.
[3] Ibid.
[4] See, Sofia Baliño and Nathalie Bernasconi-Osterwalder, “Investment Facilitation Talks Among WTO Members Transition to Negotiations, Adapt to Shifting Ministerial Timeline” in Lisa E. Sachs, Lise J. Johnson and Jesse Coleman, eds., Yearbook on International Investment Law and Policy 2020 (New York: OUP, 2022), ch. 6.
[5] UNCTAD, World Investment Report 1998: Trends and Determinants (Geneva: UNCTAD, 1998), ch. IV.
[6] The focus of the negotiations (and hence the Agreement) is on international investment flows. However, domestic investors would equally benefit from, e.g., increased transparency and streamlined processes. From a development perspective, this is even more important as the bulk of investment is undertaken by domestic firms.
[7] Reinvested earnings (a component of FDI flows) can be substantial. In 2021, e.g., they amounted (for a subset of countries for which data are available) to more than half of word FDI flows; see UNCTAD, World Investment Report 2022: International Tax Reforms and Sustainable Investment (Geneva: UNCTAD, 2022), p. 5.
[8] A fuller inventory can be found in Axel Berger, Yardenne Kagan and Karl P. Sauvant, eds. Investment Facilitation for Development: A Toolkit for Policymakers (Geneva: ITC, 2022), ch. 6.
[9] See, E. J. Balistreri and Z. Olekseyuk, “Economic Impacts of Investment Facilitation,” Working Paper Series 21-WP 615 (Ames, Iowa: Iowa State University, Center for Agricultural and Rural Development, 2021).
[10] During 2019-2021, developing countries accounted for one-third of the world’s outward FDI; see, UNCTAD, World Investment Report 2022 (Geneva: UNCTAD, 2022), p. 210.
[11] See the discussion in Karl P. Sauvant, “How Would a Future WTO Agreement on Investment Facilitation for Development Encourage Sustainable FDI Flows, and How Could It Be Further Strengthened?”, in Kabir Duggal, Gustavo Vaughn, Elora Farias, Mateo Verdías, and Gino Rivas, eds., What Does It Mean to be “Pro Arbitration”? Reflections on George Bermann’s Legacy by Columbia Law School Community (forthcoming 2022), section II.
[12] See also the work of the OECD on “FDI Qualities Indicators: Measuring the Sustainable Development Impacts of Investment”.
[13] See, Karl P. Sauvant and Evan Gabor, “Facilitating Sustainable FDI for Sustainable Development in a WTO Investment Facilitation Framework: Four Concrete Proposals”, Journal of World Trade, vol. 55 (2021), pp. 261-286.
[14] See, Axel Berger, Ali Dadkhah and Zoryana Olekseyuk, “Quantifying Investment Facilitation at Country Level: Introducing a New Index” (Bonn: DIE, 2021), p. 10.
[15] This is a point made by, e.g., N. Jansen Calamita, “Multilateralizing Investment Facilitation at the WTO: Looking for the Added Value”, Journal of International Economic Law, vol. 23 (2020).
[16] According to one study: “the estimated total costs observed in 26 developing countries and LDCs to reach full implementation of the TFA range widely, from USD 136,000 to USD 15.4 million… In PNG [Papua New Guinea], for example, the National Trade Facilitation Committee recently estimated that the total cost of the activities to be undertaken over a period of five years to meet full compliance with the TFA, would amount approximately to USD 6.8 million, of which USD 1.4 million would accrue to the PNG government and the private sector, and USD 5.5 million which would be wholly, or partly financed by foreign donors.” See, Andras Lakatos, “Challenges for implementing the Trade Facilitation Agreement,” International Trade and Economics Series, 2016, pp. 5, 6. The establishment of a single window was the most expensive provision to implement, with costs depending on how many agencies needed to be connected and how sophisticated the system was.
[17] World Bank, “State of Investment Promotion Agencies: Evidence from WAIPA-WBG’s Joint Global Survey” (Washington, D.C.: WBG, n.d.). In a 2018 publication, it was noted that “in 2018, most of them [the IPAs surveyed] had budgets up to US$1 million”; see, Armando Heilbron and Hania Kronfol, “Increasing the development impact of investment promotion agencies”, in World Bank, Global Investment Competitiveness Report 2019/2020 (Washington, D.C.: World Bank, 2020), p. 178.
[18] As one observer asserted: “In the absence of firm commitments by donors to fund and support technical assistance and capacity building, the benefit of a WTO Framework to these states [developing country Members] is far from clear.” See, N. Jansen Calamita, “Multilateralizing Investment Facilitation at the WTO: Looking for the Added Value”, Journal of International Economic Law, vol. 23 (2020), p. 16.
[19] Ambassador Sofia Boza (Chile) and Ambassador Jung Sung Park (Republic of Korea).
[20] See, “EU and Angola Conclude First-ever Sustainable Investment Facilitation Agreement”.
[21] For a discussion of how the Agreement can be incorporated into the WTO rulebook, see Hamid Mamdouh, "Legal Options for Integrating a New Investment Facilitation Agreement into the WTO Structure”, in Axel Berger, Yardenne Kagan and Karl P. Sauvant, eds, Investment Facilitation for Development: A Toolkit for Policymakers (Geneva: ITC, 2022), pp. 43-51.
[23] Mehmet Sait Akman et al., “Boosting G20 Cooperation for WTO Reform: Leveraging the Full Potential of Plurilateral Initiatives”, T20 Policy Brief, 2021, p. 11.
