The Hindu Business Line : Regional trade and investment agreements

As WTO negotiations are becoming more difficult for the main developed country players to control, regional and bilateral deals are becoming the preferred means for large multinational capital to force open developing country markets. In this edition of Macroscan, C. P. Chandrasekhar and Jayati Ghosh describe the patterns in such recent deals and consider the implications for developing countries.

IN THE 1990s, across the world countries were induced (or pressurised) into liberalising rules for both trade and investment, on the grounds that this would lead to a virtuous cycle of expansion of economic activity.

It was also felt that the two would feed into each other positively, generating dynamic productivity growth and assisting in the convergence of incomes across rich and poor nations involved in this process.

It is now more widely recognised that global economic disparities have increased in consequence of the opening up of developing country markets and the resulting competitive difficulties of smaller producers in the developing world, as well as the volatilities and periodic crises caused by financial market gyrations.

Further, there does not appear to have been any clear-cut relationship between export growth and changes in FDI flows in the 1990s, as Chart 1 shows.

FDI flows have decreased dramatically after 2000. The huge expansion of FDI in the late 1990s was driven by mergers and acquisitions (M&As) fuelled by the privatisation drive in many countries, as large multinational corporations snapped up important state assets in a range of public services and utilities.

Since most of the FDI was concentrated in such (often non-tradeable) sectors and in acquisition of existing assets rather than greenfield investment, it is hardly surprising that the effect on exports was limited.

The peaking of the privatisation process was inevitable — most of the countries which indulged in it now have very few government assets left to sell. But it has also made more transparent, the precise nature of the global integration which was being effected through such FDI.

Meanwhile, the experience with trade expansion has also been less exciting than was expected by the proponents of globalisation. Chart 2 describes annual rates of growth of trade in goods and services. The two move together. Further, contrary to current perception, services trade does not appear to have increased at a very much faster rate than general merchandise trade. Both are clearly influenced by international business cycle patterns.

The post-1999 slowdown in world trade has not yet really reversed itself, despite the massive fiscal expansion in the US which has created a mini-recovery in that economy very recently.

Thus, world merchandise exports declined in absolute value terms in 2000 and 2001, and have continued stagnant thereafter. Services exports also declined in 2000, and subsequently have increased only marginally.

Clearly, therefore, the promises of the 1994 Uruguay Round Agreement and the WTO have been belied, in terms of failing to generate a sustained expansion of world trade. It is in this broad context that recent moves towards bilateral and regional agreements must be assessed.

The period of globalisation has also been the period of very intensive regionalisation. Regional trade agreements (RTAs) have proliferated at an unprecedented rate compared to previous decades.

By the end of 2003, nearly 290 RTAs had been notified to GATT and subsequently to the WTO. Of these, more than 190 are estimated to be in force, and another 60 or so are estimated to be operational but not yet notified.

As Chart 3 indicates, the real explosion in RTAs began in the early 1990s, and since January 1995 149 RTAs have been notified to the WTO.

The most common category is the free trade agreement (FTA) which accounts for 70 per cent of all RTAs. Partial scope agreements and customs union agreements account for 23 and 7 per cent, respectively. Bilateral agreements dominate in number.

All of the WTO's current 146 members, with the sole exception of Mongolia, are either participating in or are actively negotiating RTAs.

As a result, the WTO estimates that three-fourths of world trade is currently conducted under bilateral or plurilateral agreements.

In the recent past the US and the EU have turned to aggressive promotion of RTAs, and this tendency is now accentuated after the failure of the Cancun Ministerial Meeting of the WTO.

Already in 2003 three new trends were apparent with respect to regionalism.

First, several countries that were traditionally reliant on the multilateral route have been increasingly turning to RTAs.

Second, countries already engaged in RTAs for some time have been looking for new or additional partners, sometimes across distant regions or continents, unlike in the past.

Third, there are moves towards the creation of mega-blocs, such as the FTAA or the Euro-Mediterranean FTA, both of which are still under negotiation and both of which attempt to link large numbers of countries in continent-wide groupings.

These moves have been led by the US and the EU, but other countries such as Japan have also initiated efforts to expand FTAs in the region.

Meanwhile, there are also efforts by developing country groupings to expand and take on new members or partners with "observer" status, and for particular regional groups to form links with each other, such as the recent moves of Mercosur to forge alliances with Asian countries and trading blocs.

However, all these different moves towards RTAs should not presented as being similar or on par.

There is a world of difference between RTAs (especially bilateral agreements) that are initiated and pushed through by the major developed country governments under the influence of large capital, and attempts to forge trading blocs in developing countries in order to resist the hegemony of large powers in world trade.

Bilateral and regional agreements are currently being used, most aggressively by the US but also by the EU, to force developing countries to make deeper trade and investment commitments than is now possible multilaterally, given the divisions in the WTO.

Such agreements can then become a means of leverage in the WTO as well, allowing the large players to get more developing countries to accept multilaterally what they have already acceded to on a bilateral or regional basis.

There is no doubt that once a substantial number of countries have signed or accepted even more sweeping provisions with respect to investment in bilateral or regional deals, they will find it much harder to resist MAI-type agreements at the WTO, and may even prefer a situation in which they are all in the same adverse situation together, rather than being individually "picked out".

Increasingly, investment rules which give very great powers to multinational capital and reduce the power of host country governments, have been included in RTAs that were recently signed or are being negotiated.

For example, NAFTA, APEC and FTAA all contain very substantive and wide-ranging investment provisions that give great protection to corporations.

Earlier, NAFTA was widely believed to be the most stringent application of such investment rules. Chapter 11, NAFTA's powerful investment chapter, provides foreign corporations with rights to sue governments for enacting public policies or laws which they claim to affect their profitability. There is no provision for exception even for such goals as safeguarding the environment, protecting the health and safety of citizens, supporting small businesses or maintaining and increasing employment.

Under the investor rights guaranteed in NAFTA, investors are allowed to demand compensation for "indirect expropriation". This has been interpreted to include any government act, including those directed at public health and the environment, which can diminish the value of a foreign investment.

These cases are adjudicated by special tribunals, bypassing the legal system of all three member-countries.

Already, suits with claims amounting to more than $13 billion have been filed by large companies. In a typical case in 2000, the Mexican Government was ordered to pay nearly $17 million to a California firm that was denied a permit from a Mexican municipality to operate a hazardous waste treatment facility in an environmentally sensitive location.

However, while the regional agreements such as NAFTA have received some amount of adverse publicity, the numerous bilateral deals that are been signed have been subject to very little public scrutiny, even though they can go much further.

This is especially the case with bilateral investment treaties (BITs) which often receive no international attention and are often not even considered seriously in the legislative bodies that can veto such agreements in individual countries.

From the mid-1990s, after the WTO came into existence, there has been an upsurge of such treaties.

The number of bilateral investment treaties increased five-fold in the 1990s from 385 in 1989 to 1,857 at the end of 1999. By 2002 there were an estimated 2,200 BITs in operation.

The main provisions of such treaties tend to be broadly similar to those in the abandoned OECD Multilateral Agreement on Investment (MAI), and sometimes they are even more stringent.

They usually cover aspects such as the scope and definition of foreign investment; admission of investments; national and most-favoured nation status; fair and equitable treatment clauses; compensation guarantees for expropriation, war and civil unrest; guarantees of fund transfers and the recuperation of capital gains; subrogation of insurance claims; and dispute settlement provisions.

These have far-reaching and typically negative implications for host country governments and citizens, because of the sweeping protections afforded to investors at the cost of domestic socio-economic rights and environmental standards.

A common concern about investment agreements is that they subject countries to the risk of litigation by corporations from or based in another country which is a signatory to the same agreement.

This might be based on a company's objections to the host government's environmental, health, social or economic policies, if these are seen to interfere with the company's "right" to profit.

These adverse effects are already becoming evident in the increasing litigation which is facing developing country governments that seek to safeguard citizens' rights.

For example, the multinational infrastructure company Bechtel (which also deals in water supply services) is currently suing the Bolivian Government under a 1992 Holland-Bolivia BIT for loss of profits after the reversal of Cochabamba's disastrous water privatisation following a popular uprising in the area. A number of other developing or formerly socialist countries are facing such disputes brought by multinational companies, ranging from Pakistan to the Czech Republic.

The resolution of such conflicts is not subject to the standard juridical systems of the member countries — rather it is governed by tribunals or similar bodies specified in the treaty.

This amounts to the privatisation of commercial justice, with no democratic accountability of the decision makers in this regard.

In many bilateral agreements, the provisions state that where a dispute cannot be settled amicably and procedures for settlement have not been agreed within a specified period, the dispute can be referred to another body.

The two most important such bodies are the World Bank's private arbitration body for investment disputes, the International Centre for Settlement of Investment Disputes (ICSID) or the UN Commission on International Trade Law (UNCITRAL). Under NAFTA, complainants (usually the dissatisfied investors) are allowed to choose between these two bodies.

Domestic courts and national legal systems are completely marginalised by investors' recourse to these international arbitration panels. ICSID and UNCITRAL only allow for the investor and government parties to the dispute to have legal standing.

The public has no right to listen to proceedings or to view evidence and submissions. Both bodies require only minimal disclosure of the names of the parties and a brief indication of the subject matter, which prevents public scrutiny or popular opposition.

The record of these bodies thus far has been very investor-friendly, in awarding substantial damages and compensation to multinational corporations for "transgressions" of developing country governments.

Under these conditions, there is clearly little incentive or need for international investors to settle disputes amicably, given the highly favourable outcomes for corporations which have initiated proceedings under such agreements.

However, even these BITs do not indicate the full extent of liberalising commitments being forced upon developing countries through bilateral and regional agreements.

Many bilateral FTAs not only contain similar investment provisions, they also enforce significant coverage of sectors such as services, intellectual property, government procurement, and agriculture.

Typically, most of these provisions go well beyond WTO commitments, as in the recent US bilateral trade and investment treaties with Chile, Cambodia, Thailand and Singapore.

These so-called FTAs have what are known as `NAFTA-plus' broad definitions of investment, which make it even easier for disgruntled investors to take a case to one of the dispute tribunals. Intellectual property provisions go much further than the WTO's TRIPS agreement.

They include limitations on countries' ability to do compulsory licensing, extension of a drug company patent term beyond 20 years, and a five-year term of data exclusivity.

These rules very clearly threaten public access to affordable medicines, including life-saving HIV-AIDS drugs.

Under the US-Vietnam bilateral trade agreement, which is supposed to be only sectoral because (conveniently for the US) it does not cover textiles and textile products, US firms get wide market access to Vietnam's market for financial, telecommunications, distribution, audio-visual, legal, accounting, engineering, computer, market research, construction, educational, health and tourism services. Local competitors are likely to be forced out of business.

US companies will also get enforceable protection against expropriation. Local content and export performance requirements will be completely eliminated, while US firms will get full trading rights.

In addition, the services liberalisation envisaged in many of these bilateral trade agreements not only goes much deeper than GATS but would also be implemented much faster.

The trend is for including more services and asking for substantive liberalisation in particular sectors of direct export interest to the more powerful partner.

The EU's recent agreement signed with Mexico has a larger scope with respect to services than any other agreement the EU has ever concluded with a third country, and even exceeds the services, investment and intellectual property provisions in the NAFTA agreement.

All this suggests that we may be living in a world economy in which the use of multilateral means by imperialism to further its own aims, is reaching the end of the road, at least for the time being.

Widespread popular dissatisfaction across the world with the workings of the WTO and the newfound strength of some developing countries that are willing to work together to prevent complete domination by the developed country groupings in the WTO, have made it a tougher and harder place for imperialist agendas to be pushed through.

This does not mean that imperialist strategies at forums such as the WTO have come to an end. Rather, it suggests that these interventions at the multilateral level are now likely to be combined and buttressed with other forms of ensuring control and accessing markets across the world.

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