One measure of this linkage is the fact that roughly one-third of the world's $6.1 trillion in merchandise and services trade (1995 figures) is intra-company trade between foreign subsidiaries of multinational companies and their domestic parent. A further one third of global trade consists of exports by these multinationals to unrelated parties. Sales of foreign subsidiaries of multinational corporations now exceed global trade.
The sharp rise in foreign direct investment from 1973 to 1995 (from $25 billion to $315 billion) has brought the issue of investment to the front of the multilateral trade debate. While all World Trade Organization member states acknowledge the connection between trade and investment, and all appreciate the importance of foreign investment to development, there is disagreement over the extent to which the WTO should be involved in setting international rules for foreign investment.
The WTO agreement, which came into force in January 1995, includes provisions pertaining to investment. The General Agreement on Trade in Services recognizes that foreign investment is an important mode through which companies deliver services to foreign markets. The GATS contains conditions providing foreign service providers the right to establish in host markets and the right of foreign services companies to national treatment with regard to the obligations and benefits of the marketplace. However, these rights apply only in those cases where WTO member countries have taken specific commitments regarding individual services sectors. Coverage in this area is far from complete.
The agreement on Trade-Related Aspects of Intellectual Property Rights, extends to foreign services companies protection for patents, copyrights and trademarks.
The agreement on Trade-Related Investment Measures aims to facilitate foreign investment by clarifying that certain regulations imposed by host governments are contrary to international trade rules. Specifically, foreign governments cannot force foreign investors to use a certain percentage of domestically produced inputs in the production process, and they may not mandate that foreign-owned companies export a percentage of their output.
A transitional period is given for the removal of such measures. Developed countries must remove these kinds of restrictions by the end of 1996, developing countries must comply by year end 1999 and the least developed countries have until the end of 1999 to end such practices. WTO member nations agreed that a review be undertaken in 2000 and that member states consider at that
time whether to begin negotiations aimed at enhancing the TRIMS accord through additional provisions on investment policy and competition policy.
Before that review takes place, member nations agree a program of study should be launched to gain better understanding of the relationship between trade and investment. But there is disagreement over which international agency should be responsible for this analysis. Significantly, the debate on this issue has not broken down along the traditional north-south divide.
Many developing nations, particularly those from Latin America, have joined the industrial nations in supporting the view that the WTO should be the forum for this study. But a core of important developing nations believe the report should be handled in the United Nations Conference on Trade and Development.
Another factor in the debate is that the 27 member nations of Organization for Economic Cooperation and Development are closing in on a Multilateral Agreement on Investment which would cover the world's richest nations and any developing nations wishing to sign on to the accord. OECD members accounted for $202 billion of the outward foreign investment in 1995. Investors in those countries hold 92% of the world's stock of FDI and the OECD nations receive 73% of FDI flows.
Further complicating the issue of rules for global investment is the fact that more 1,160 bilateral, regional and plurilateral investment agreements are already in place.
In chapter four of the WTO's annual report, a chapter dedicated to the issue of trade and investment, Director General Renato Ruggiero argues that the WTO provides the best forum for co-ordinating global rules and disciplines for investment. The WTO offers developing countries the best opportunity to shape global rules on investment, Mr. Ruggiero argues.
"A lack of rule and policy coherence poses a danger to security and predictability, which are the basic goals of trade and investment agreements ... Only a multilateral negotiation in the WTO, when appropriate, can provide ... a global and balanced framework."