Putting it to Work in Developing Countries - Nathan Associates

FREE TRADE AND REGIONAL
INTEGRATION AGREEMENTS
Free trade agreements (FTA) and regional integration
agreements (RIA) focus on trade liberalization
but often have important effects on
investment liberalization. First, their trade-liberalizing
provisions create a broader market for
goods and services than the one that exists in
any single country participating in the agreements.
With this broader market, greater
economies of scale can be achieved in production
of goods and services, and investors have an
opportunity to earn greater returns. And several
RIAs include investment promotion provisions,
featuring, for example, the exchange of information
with regard to investment opportunities
such as privatizations.
Second, these agreements may also contain provisions
for liberalizing investment. Indeed, such
agreements often go beyond BITs to liberalize
investment policies or at least to eliminate specific
investment restrictions. This is important.
As emphasized in Chapter 5, these restrictions
introduce market distortions that discourage
FDI and hamper or dilute its effects on development.
6 FTAs and RIAs are often an effective
framework within which to improve such policies,
with substantial benefit to the investment
climate and an opening up of opportunities for
foreign investment. Some developing countries
welcome this reform while others consider it an
imposition. But a great number of FTAs or
RIAs containing of rules on investment have
been concluded.
For example, the North American Free Trade
Agreement (1994), FTAs between the United
States and Chile, Singapore, Oman, Morocco
and Australia, and others recently concluded
with the Dominican Republic and Central
American countries, as well as with Peru and
Bilateral Trade and Investment Framework Agreements (TIFAs)
NAFTA negotiations. It also signed TIFAs
with countries in South and Central
America and the Caribbean well in advance
of negotiations for a Free Trade Area of the
Americas (FTAA). In recent years, the
United States signed TIFAs with Algeria,
Egypt, Ghana, Mozambique, Nigeria, Saudi
Arabia, South Africa, Sri Lanka, Tunisia,
Yemen, the West African Economic and
Monetary Union, and the Common Market
for Eastern and Southern Africa. The
ASEAN countries recently concluded simi­
lar agreements with Korea, Japan, Australia,
and New Zealand; Canada and Korea both
have bilateral agreements with developing
countries that promote investment; and the
EU has bilateral cooperation agreements
that aim to increase trade and capital flows
with developing countries.
Like other countries, the United States uses
TIFAs to structure bilateral consultations on
trade and investment. These are often considered
a first step toward a BIT or an FTA.
With their broad coverage of services,
investment, and intellectual property, FTAs
often require trading partners to undertake
challenging internal reforms. The TIFA program
can help identify reforms and reform
strategies. Through a TIFA, the United
States and a trading partner express certain
broad interests such as a desire to expand
trade in goods and services, adopt measures
to encourage trade and create conditions
favorable for long-term development, or
encourage private sector contacts and investment.
The TIFA provides a consultative
mechanism for regular dialogue. The United
States signed its first TIFA in November
1987 with Mexico, nearly four years before
73