History can help foreign investors and host nations find common ground on trade
The last time this column appeared it made the case for establishing a global investment agreement. The history of such efforts is rich and worth revisiting for its contemporary relevance.
The first post-war attempt to internationalise investment rules was made in the context of the Bretton Woods architecture in the late 1940s. The charter of the International Trade Organisation (ITO) – known as the Havana Charter – contained rules on foreign investment.
The United States and others wanted provisions that protected the rights of investors. The language that emerged did that, but also emphasised the rights of states to protect their national interests. No deal was possible and, in any case, the ITO itself did not survive.
The tension between investor rights and host nation interests has dogged discussions ever since. International investment issues lay dormant until ITT Corp’s support for opponents of the Allende government in Chile was considered contributory to the 1973 military coup in that country.
Not long afterwards, and doubtless in part because of the ITT affair, the United Nations established the Centre on Transnational Corporations (UNCTC). Its efforts were dedicated to controlling multinational corporations. The backdrop was developing country demands for a new international economic order.
One view at the time was captured by the first executive director of UNCTC, who wrote that foreign investments were “poisonous flowers on the dung heap of a dying capitalism”. Many on that side of the argument saw multinational companies above all as exploitative.
In the years that followed, exporters of foreign equity struck back. Efforts to craft foreign investment rules were made in several international agencies, besides the UN itself. These efforts either came to nothing or went no further than high-sounding, but non-justiciable declarations of principle and intent. By the early 1990s the UNCTC earned the rare status of becoming a disbanded UN agency.
Tension remained between welcoming foreign direct investment and circumscribing conditions under which it could operate. But in the 1980s and 1990s thinking – and economic circumstance – continued to move in favour of those seeking open access, ample freedom of action, effective legal recourse, and guarantees against uncompensated expropriation.
The General Agreement on Tariffs and Trade tried without success to negotiate a multilateral investment agreement in the Uruguay Round (1986-93). The Organisation for Economic Co-operation and Development tried to do the same in 1995, and failed in less than three years. The World Trade Organisation made its pitch at the start of the Doha Round in 2001 and dropped the idea two years later. The underlying reasons for each of these failures were largely the same.
During this time, gaps in FDI governance were increasingly filled by bilateral investment treaties. Over 130 BITs already existed in 1980, and today there are more 3000 of them.
Why might a new effort to establish comprehensive global investment rules succeed today? Four reasons suggest themselves.
Firstly, understanding has greatly improved on how investment can help development. Secondly, many foreign investors have become more sensitised to host economy aspirations and interested in building longer-term relationships in growing markets.
Thirdly, a growing number of emerging economies are becoming significant exporters of FDI and see the issue from both sides of the fence. Fourthly, the explosion of criss-crossing BITs is discriminatory, distortionary and not particularly stable. The arrangements lack transparency and carry avoidable transactions costs.
But there will always be two sides to the issue. Investors want worthwhile business opportunities, and host economies want to derive maximum benefits from FDI in terms of growth, jobs, learning and development. These objectives do not need to be antagonistic. They can nourish one another.
The core lesson from history is that neither side of this discussion can be ignored. If governments promoting investors’ interests, or those of attending to host economy aspirations, think the other side is needy enough to accept a one-sided bargain, any new rule-making effort will suffer the fate of all the others. A solid basis for a good deal is there if past experiences are allowed to inform present behaviour.
Patrick Low is vice-president of research at Fung Global Institute