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 You are in: Special Report: 1999: 11: 99: Battle for Free Trade
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Tuesday, 23 November, 1999, 13:48 GMT
Investment puzzle for WTO
Could investment could damage the environment?

Rules on investment could make it easier for business to put their money in developing countries and stimulate world foreign investment.

The battle for free trade
The European Union, in particular, hopes that a set of ground rules for foreign direct investment can be agreed at the next round of trade talks.

In an uncertain world, investors need all the certainty they can get before they put their money anywhere.

But while investors argue that clear rules are needed before they commit their cash, developing countries say these rules benefit multinationals only and could rob them of their right to refuse investment they don't want.

Added to this mix are trade unionists who want rules that protect workers rights, and green activists who fear that foreign investors wreck the environment.

Given the contentious nature of the debate on investment rules, investment could become one of the most controversial elements of any agenda.

And even among rich countries, disputes concerning foreign investment (for example between Britain and Germany over Vodafone's hostile takeover bid for Mannesmann, the industrial giant) can create a poisonous atmosphere.

MAI failure

The EU's move to put investment rules in place, follows the collapse last year of the OECD's attempt to put together a set of investment rules. The think tank for the world's29 richest countries attempted to reach agreement without consulting developing countries.

The OECD tried to agree investment rules
The Multilateral Agreement on Investment (MAI) sought to ensure that companies investing abroad would receive compensation if they were nationalised as well as equal treatment with domestic firms.

Failure to agree these rules can in part be attributed to the effective lobbying by non-governmental organisations.

Lobbyists can provide plenty of emotive and colourful reasons why the WTO should not pen a set of rules.

The World Development Movement's Barry Coates points to the proposed MAI rules. "It would have restricted governments from being able to screen any foreign investment coming into the country," he said.

Colombia restricts foreign investment in toxic waste processing, essentially to prevent the dumping of toxic waste. Under the MAI rules, Mr Coates said, Colombia may have lost its right to restrict that investment.

While more countries get to voice their views if the rules are forged in the WTO than in the OECD, the flipside is that finding consensus could be even more difficult.

A force for good?

Foreign direct investment is often seen as a force for good, especially after the Asian crisis, which saw short-term traders pulling out of crisis-ridden economies only to make the situation worse.

China is now set to join the WTO
In contrast, foreign direct investors are usually there for the long haul, having built a factory and made a commitment to the country's economy.

For a developing country, the arrival of foreign investors can mean higher wages as well as the transfer of technology and managerial skills.

Investors, in return for the promise of future profits, often operate in uncertainty, unclear if political change will negate their profits.

If the WTO agrees rules that offer business some certainty, it can only help trade, the EU says.

Not such a good idea

Some protestors question the received wisdom on the benefits of foreign direct investment.

China is now set to join the WTO
About 85% of foreign direct investment is in the form of mergers and acquisitions, which often leads to jobs being lost, not created.

Some sceptics argue that there is not necessarily a clear relationship between the existence of rules and the amount of foreign investment a country receives.

China, though now set to become a member of the WTO, has long been one of the most restrictive regimes in the world, but still enjoyed 40% of investment to the developing world.

Patchwork of agreements

Already about 1700 bilateral agreements exist, the United Nations agency Unctad says.

This patchwork of agreements leads to gaps and inconsistencies and provide one of the strongest arguments in favour of agreements.

Rules may also allow investment spoils to be divided more evenly between recipient countries.

So far, a limited number of countries have accounted for the bulk of FDI flows.

Rules may help countries who don't get the as much investment as they would like as well as small and medium-sized enterprises that might otherwise hesitate to invest outside familiar territory.

But then, the length of time it would take to negotiate on an agreement could reduce FDI flows
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