Docking investment in international trade policy
I spy with my little eye something beginning with “I”...it is about trade and it moves across borders.
No, one would probably not guess “investment” in response. Foreign direct investment is neither visible nor tangible. Yet, reaching $2.4 trillion globally in 2009 according to UNCTAD, the result of it is. Investment generates jobs and is a vital component in promoting welfare and economic growth. It is also an inseparable part of global supply chains. A global policy approach is thus needed.
Trade policy has not kept pace with the increasing importance of investment in international trade. There is much focus in Europe and the United States on balances for trade in goods, or rather, on imbalances. But trade is no longer mainly about large containers of goods being shipped across borders. Instead, companies invest on location to set up offices, production and distribution channels. In contrast to the past, it is not primarily a question of avoiding custom duties at the border. Market presence is vital in competitive and rapidly changing markets. Companies seek to reach out to their clients, consumers and entrepreneurs abroad. According to the World Bank, around 55-60% of the total trade volume in the world is related to commercial presence, i.e. foreign direct investment.
Investment is also a crucial component in the internationalisation of production chains. The scale of the trade within companies as well as between companies in the same sector is significant, particularly in internet- and technical services. OECD figures show that intra-firm trade represented almost 50% of U.S. total imports in 2009, and almost 30% of total export.
Despite the significant increase in investment flows, a wide range of restrictions and regulations limit investment in foreign markets, including everything from taxes on imported goods, local content requirement for goods or services, certificates and testing requirements, and obligations for companies to invest proceeds in R&D activities in the host country. Moreover, as companies move abroad, they often want to bring workforce, at least at a first stage. However, cumbersome procedures and restrictions for visas or work permits imply significant costs. This has a particularly hampering effect on the internationalisation of small and medium-sized enterprises.
Companies need predictable and secure environments if they are to invest. Firms are obviously not interested in completely unregulated markets, but basic regulatory aspects such as transparency and non-discrimination. In light of recent events in Argentina, companies must be guaranteed that their invested capital is protected against expropriation without compensation or other malpractices. There must also be forums to settle legal disputes, in case commercial conflicts arise between companies and state authorities.
The question is how to bring about a coherent international regulatory framework for investment. Even if the multilateral Doha negotiations were to resume in the WTO, ‘trade and investment’ has not been on the table since the so called ‘Singapore issues’ were dropped in 2004. Naturally, policy makers from developed countries have been seeking other venues to respond to business’ interests. Preferential trade agreements and bilateral investment treaties therefore dominate alongside the general provisions in the Agreement on Trade Related Investment Measures (TRIMs), GATT and in GATS.
Global welfare could benefit from a defragmentation of the present patchwork of investment regulations. It is particularly important to get the emerging economies on board. Foreign direct investment is increasing rapidly to the BRICS countries. FDI inflows to China increased by 8% in 2001, and 31% to India, according to UNCTAD. The emerging economies are however the ones that apply the most restrictive barriers to investment as part of their national industrial policies. But it is in their interest, as well as in everybody else’s, to address these issues in a comprehensive international rules-based system for investment. Such an accord would help countries attract foreign assets and know-how. It would also reassure companies that are considering expanding their business and investing abroad.
The recent initiative between the EU and the US on Shared Principles for International investment can be a flagship in the spreading rules-based and transparent practices. This is a positive development particularly in light of the EU’s struggle to form a coherent investment policy since the Lisbon Treaty placed investment under exclusive community competence. Being the biggest players in the field of foreign direct investment, EU-US mutual investment stocks amounting to over €2 trillion, their leadership in spreading good practices is vital. Such principles can be extended to form the basis on an international agreement in the near future. In a world of changing economic patterns and power structures, safeguarding the principles of a rules-based system is of ever so great importance.