Putting it to Work in Developing Countries - Nathan Associates

equirement to export a certain proportion of production
or to use certain domestic inputs. Double tax
treaties often accompany BITs, and serve to mitigate the
problems of double taxation that foreign investors may
face in both the home economy and the host economy
as a result of income generated by foreign affiliates.
3 UNCTAD, “Developments in international investment
agreements in 2005,” ILA Monitor No. 2 (2006)
International Investment Agreements,
UNCTAD/WEB/ITE/IIA2006/7
4 http://www.unctadxi.org/templates/Page
____1007.aspx
5 At the end of 2006, the United States had 39 BITs in
effect and another recently concluded. Western
European countries have concluded the most BITs,
though China now ranks second after Germany and
Switzerland. The United States ranks about 25th.
6 Although countries generally seek FDI and offer
incentives (e.g., tax holidays or tariff exemptions on
capital goods or raw materials) to attract it, many also
adopt policies that impede investment. Such policies
include exclusion of FDI from certain sector (“negative
lists”), cumbersome or arbitrary screening procedures for
foreign investors, limits on percent of foreign ownership,
domestic content requirements for intermediate
inputs, employment restrictions, export balancing,
restraints on remittance of profits, even nationalization
or expropriation. These restrictions may arise from a
desire to protect domestic interests from competition or
to maintain state-run monopolies, but their economic
effects are negative.
7 The provisions vary among the agreements. For example,
the US–Australia FTA does not provide for
investor–state dispute settlement.
8 Other RIAs contain less than the full array of BIT
rules or explicitly discriminate against third-party
investors. The first regional efforts to introduce rules on
investment emphasized only free movement of capital
and the right to set up and manage subsidiaries or agencies
to pursue economic activity. The Treaty Establishing
the Caribbean Community (1973) takes such an
approach, as does the Treaty Establishing the African
Economic Community (1991) and the Treaty
Establishing the Common Market for Eastern and
Southern Africa (1993). In contrast, the MERCOSUR
states’ investment policies have emphasized development
and export promotion rather than economic efficiency.
They have adopted a protocol explicitly limiting the
rights of third-party investors, and the protocol contains
no disciplines on performance requirements. The
Andean Community and ASEAN have schemes to promote
the creation of enterprises owned jointly by member
country investors and extend preferential treatment
to such enterprises.
9 These include the Canada–Chile FTA (1997), the
revised Convention establishing the European Free
Trade Association (2000), the Japan–Singapore
Economic Partnership Agreement (2002), and the current
draft of the FTAA. The Non-binding Investment
Principles (1994) of the Asia-Pacific Economic
Cooperation incorporate NAFTA-like provisions without
a binding dispute settlement mechanism. The
Cotonou Agreement between the EU and the African,
Caribbean and Pacific States (2000) contains only general
principles on investment but envisages the negotiation
of side-BITs among signatories.
10 Major controversies in WGTI discussions have
involved very basic issues, including definitions of
“investment” and “investor,” transparency, technical
assistance, and development provisions. However, with
the indefinite suspension of the Doha Round in July
2006, the WGTI’s future may be moot, and it may simply
disband, as several developing countries advocate.
11 In May 1995 ministers of the 29 developed country
members of the OECD began negotiating an agreement
on investment. The three pillars of the negotiations were
a broad multilateral framework for investor protection,
the liberalization of restrictions on investment, and an
effective dispute settlement mechanism. Negotiators
expected that developing countries might join the agreement
once it was final. Although progress in refining
investment principles was significant, they agreed to suspend
negotiations in October 1998 in light of differences
on issues such as treatment of regional economic
integration organizations and disciplines on investment
incentives and given the need to further consider concerns
raised by environment and labor interests. The
parties terminated negotiations in December 1998.
12 Several developed countries (e.g., Japan, Canada,
Australia) have not aggressively pursued BITs. China, on
the other hand, is a major BIT participant, including
with developing countries, possibly to facilitate a strategy
to establish textile and apparel manufacturing operations
in other developing countries to better mine the
global textile quota system. Other developing countries
also participate in many BITs.
13 See World Bank, “Do BITs increase investment flows
Only a bit,” in Global Economic Prospects and the
Developing Countries, September 2003, p. 129.
14 World Bank Trade Note, “From Singapore to
Cancun: Investment,” May 29, 2003.
15 Stein, Ernesto and Christian Daude, 2001,
“Institutions, Integration and Location of Foreign
Direct Investment” in New Horizons for Foreign Direct
Investment, pp. 101-128. Paris: OECD. See also
Jaumotte, Florence, “Foreign Direct Investment and
Regional Trade Agreements: The Market Size Effect
Revisited” IMF Working Paper WP/04/206.
Washington: IMF.
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