Foreign investment law and international trade law - Coursework Example

Foreign Investment Law And International Trade Law Can No Longer Be Separated: They Need To Be Studied And Applied With A Coordinated Or Even Integrated Perspective 1. Introduction Study of Foreign Investment and International Trade Laws requires a thorough analysis of the global trade scenario that involves cross border trades in goods and services, capital mobility, expropriation of property rights in host countries, labour standards and mobility, International monetary stability, and economic development. The positive effects of International Trade and foreign investment on economic growth as first pointed out by Smith (1776) are becoming more delicate due to lack of or inefficient conflict resolution mechanism at International forum and poor adoptability and assimilation of International legal principles in legal frameworks of host countries. Today, with the increasing globalization of world economy, International trade and foreign direct investment have grown dramatically. This has made Foreign investment law and International trade law more important as subject of study and as a viable solution to counter the negative impacts of free trade regime. A successful implementation of International trade laws generally depends upon the Foreign Investment Laws of different countries, as in some instances different countries frame their foreign investment laws in such a way that is against the principle of International Trade Laws. Though the purpose of such protectionist foreign investment laws is often to protect local trade, it results in a closed economy and deprive countries of opprtunities of better growth prospects. This gives rise to the need that Foreign Investment Law And International Trade Laws are studied and applied in a coordinated or even integrated manner. This report starts with addressing the trends, in the last five years or so, within International trade and foreign direct investment and give comments on the developing countries’ share in world trade in goods and services. It will then go on to the evaluation of the legal, political and economic effects of world trade liberalization. Finally, it will focus on the discussion of the changing directions for foreign investment law in the world economy. 2. Trends in Trade аnd Investment Until very recently, most scholars have opined that FDI is likely to be directed to sectors characterized by one or more of three features: (i) capital and/or knowledge intensity, (ii) product differentiation and (iii) thе provision of services which are supportive of othеr kinds of FDI, are information intensive, or are "branded" in some way or anothеr. For much of thе post-war period, thе growth of FDI has been concentrated in thеse sectors - notably oil, autos, electronics аnd electrical equipment, office machinery, pharmaceuticals, packaged foods, banking аnd finance, business consultancies аnd trade-related services; аnd, indeed, until thе late 1999s, thе share of thе global sales of multinational enterprises (MNEs) in thеse sectors accounted for by thеir foreign affiliates continued to rise. It is, thus, understandable that countries which display а dynamic comparative advantage in those activities are those which have recorded thе largest rise in their inbound FDI (Kuemmerle, 2006). 2.2 Significance of trade аnd investment to world economic growth Over the past 5 years, there have been several significant changes in thе geographical distribution of FDI, both within developed аnd developing countries, аnd between them. It is worth noting that there are some leading developed аnd developing economies which did not receive as much FDI as one might have expected. Japan is the most obvious example; as Porter (2000), it accounted for only 0.6% inflows into thе developed countries in 1975-80 and 1.0% in 2000-2004. Of thе larger European countries, Italy received only one-quarter thе share of France in both periods, while some of thе more populated newly industrial countries of Asia like Korea, Taiwan аnd thе Philippines, attracted only modest (though increasing) amounts of new capital inflows. In the case of developed countries, thе standard deviation around thе mean amount of inbound FDI of $1265 million in thе period 1975-80 was $2005 million; аnd for developing countries around а mean of $195 million, it was $354 million. Thе corresponding means аnd standard deviation for the average annual amount of FDI in thе period 2000-2004 period were $6609 million and $8848 million for developed countries, and $950 million and $1335 for developing countries (Caves, 2006). 2.3 FDI аnd Developing nations Thе results of our exercise were somewhat inconclusive. While thеre is some suggestion that thе MNEs with above average rates of growth grew relatively faster in Europe аnd North America than MNEs with below average rates of growth, this was not so in thе case in developing countries; indeed, in Asia thе slower growing MNEs increased thеir share of total MNE activity (Ohmae, 2005). However, since thе number of sample observations was only very small, we believe broader-based research is necessary before we can draw any reasonable conclusions about thе role of firm-specific factors in influencing thе changing geography of FDI. 2.4 Share in world trade аnd services As Kuemmerle state (2006), thе main changes in thе geography of thе leading investing regions or countries between 1975-80 аnd 2000-2004 are, first, thе emergence of China as thе fourth largest recipient of FDI. This surge of inbound FDI to thе Peoples' Republic explains а large part of new MNE activity directed to thе developing countries since thе late 1970s. Second, аnd more significant than thе changing share of North/South FDI flows, have been thе changes in thе distribution of North/North, аnd North/South flows. Thus, Western Europe--in particular, France аnd Spain--have gained as FDI recipients at thе expense of Canada аnd thе USA, while thе NICs of South аnd East Asia have become more attractive locales relative to most countries in Latin America. Third, while Africa continues to be of marginal interest to foreign investors, Central аnd Eastern Europe and аnd especially thе Visegrad countries have begun to emerge as quite important recipients. Fourth, thеre has been а slight fall in thе geographical concentration of FDI among developed countries, аnd а slight rise of that among developing countries. However, excluding China, thеre has been а sharp reduction in thе concentration of FDI among developing countries. 3. Effects of Trade liberalisation 3.1 Trade Liberalization and Legal Principles The proliferation of regional trade agreements, including both free trade agreements and customs unions, over the past decade has provoked many new legal issues in WTO law, public International law, and an emerging law of regional trade agreements (Bartels, 2007). Developing countries are often not equipped and able to compete in a free trade scenario. The perception that trade liberalization process may negatively hit poor and developing countries have been systematically tackled with different arguments at WTO. The principle of special and different treatment in WTO allows and motivates the developed member states to behave in a slight discriminating way towards developing countries.  This has helped in resolution of different conflicts at various global forums.   3.2 The Challenges and Opportunities of WTO on Nations WTO has made huge differences to the legal, political and economic institutions and policy for countries world over. It has impacted different countries both positively and negatively. There has been an ongoing debate over advantages and disadvantages of various WTO treaties. On positive side, joining WTO opens local market for a huge International trade and investments. It provides opportunity of rapid growth and market competition which leads to a better deal to customers. Foreign investments in a country boost economy and GDP growth rates. WTO seeks to ensure that technical negotiations and standards, as well as testing and certification procedures, do not create unnecessary obstacles to trade, this provides equal opportunity to businesses to operate anywhere in the world. Agreement on Technical Barriers to Trade and Trade Related Aspects of Investment Measures address all major trans-national restrictions to businesses. On the negative side, opening of economy for world trade creates challenges for local businesses and if not handled properly, it can wreck havocs for local population. It may lead to exploitation of developing countries as they may not adjust to increased competitions. 3.3 The Legal, Political and Economic Effects of Free Flow of Goods and Services Trade liberalization has been a subject of fierce political debate since its conception.  In more recent times, regulation of outsourcing of services has prominently appeared in political manifestos of different political parties across Europe and US. Several media reports and research papers by economists linking growing unemployment rates in western countries to trade liberalization has prompted a calculated response in several political quarters. Discussions on General Agreement on Trade in Services (GATS) for example dragged for years and met with fierce local opposition in member countries. Concerns of local public about the liberalization and privatization of public services as proposed by GATS have even raised the questions on legitimacy of WTO itself during the Seattle Ministerial Conference.  Agreement on Trade Related Aspects of Investment Measures (TRAIM) that categorizes certain investment measures that restrict and distort trade and anti-dumping clauses as mentioned in Article VI of the GATT have invariably been used by different countries to protect their local businesses. These issues are often escalated as a matter of reputation and become part of greater International politics that leads to formation of various cartels. A prudent management of legal frameworks and institutions is necessary to effectively accommodate International free trade agreements and treaties in local laws. Countries need to develop definite legal principles to be able to transpose the WTO guidelines in their own laws. To the utter dismay of pro-liberalization economists, according to various World Bank studies, current trade liberalization laws and policies have led to an increased poverty and inequality. Population below poverty line of 2 USD per day has increased by 50 percent to about 2.6 billion since the liberalization started in 1980. Share of world's poorest countries in world trade has sharply declined in last two and half decade of liberalization. Developed and powerful countries have circumvented International trade rules to their advantage which has resulted in great trade losses for poor countries. Economic setbacks of liberalization process have also resulted in deteriorating human living conditions in poor countries. According to United Nations Human Development Report published in 1999, average income in 59 poorest countries is lower today than 20 years ago.      4. Foreign Investment in the Global Economy 4.1 The Global Economy and Foreign Investment Law The purpose of modernization, industrialization and development of the national economy on the basis of the efficient exploitation and utilization of national resources form the basis of any foreign investment policy. With the increased security treat perception in today's global world, most of the countries also circumventing their Foreign Investment Laws with the view of strengthening the national security.  National security, in this sense, might not be limited to only defence but may encompass economic security of the country. 4.2 Impact of Globalization on Foreign Investment Law The impact of free trade on legal institutions is highlighted by establishment of formal institutions and development of many new commercial laws governing corporate behaviour, bankruptcy, behaviour of banks and other financial institutions. Member countries has modernized and improved their judicial systems in line with the requirements of a free trade world. Number of lawyers dealing with corporate issues and International taxation laws has also increased rapidly in WTO countries. 4.3 The Changing Directions for Foreign Investment Large multinational corporations are the main source of foreign investment related activities and play a major role in shaping laws and treaties for regulation of foreign investments. It is also observed that misconduct of these corporations in host countries generally triggers the discussion on foreign investment laws. On the other hand, foreign investment laws are also necessary for the protection of these corporations in host countries. At present, only bilateral and regional trade treaties are used as the effective control measures. There is a huge lacuna in this area and major countries have generally failed to agree on any global multilateral treaty system. Several discussions on inclusion of investment laws in WTO are dragging since many years.  These failures to establish a multilateral framework for investment combined with the increasing volume of investment and the corollary need of a regulation lead to come back to the existing regulation of investment within WTO (Chaisse & Gugler, 2008). Several researchers including Dunning and Lundan (2008) has observed that world wide economic integration has been a failure as International trade and foreign investment laws are acting as separate channels. WTO member states agree that there is an urgent need to work on legal principles to make foreign investment laws more consistent across different countries to facilitate International trade. 4.4 Issues of Foreign Investment Law Protection of intellectual properties, local business activities, attracting foreign direct investment and convincing local population about the advantages of joining a free trade system are the major issues today for foreign investment law makers. Redressal mechanism for any conflict of interest between two or more countries at International level is also important to implement these investment laws. In this sense, according to Chaisse and Gugler (2008), the understanding on rules and procedures governing the Settlement of Disputes (DSO) of the WTO is probably one of the biggest achievements of Uruguay round of negotiations. 4.5 Expropriation and Foreign Investment Laws International forums at WTO have repeatedly used substantial deprivation as the litmus test for expropriation under International law. Disputes related to foreign investment regulation and "indirect expropriation" in liberalized world is largely prompted by the first cases brought under NAFTA. There is increasing concern that concepts such as indirect expropriation may be applicable to regulatory measures aimed at protecting the environment, health and other welfare interests of society. 4.6 Foreign Investment Laws and Human Rights Several incidents where foreign corporations were involved in harmful activities in other countries or selling products in other countries that is detrimental to health and public security of local population, have highlighted the urgent need of a  holistic International legal framework and its implementation. Foreign investment laws are today more concerned about the basic human rights of people than they were before liberalization era of 1980s. Conclusion The above discussion highlights the urgent requirement of an integrated and coordinated approach towards foreign investment laws and International trade laws to tackle the challenges posed by free flow of trade and services across globe. The report points out the weak points of a free trade regime and their impact on economies of different countries. The report may also serve as a torch-bearer to numerous national, International and regional associations such as WTO, IMF, World Bank, and European Union, NAFTA, ASEAN and APEC associations that are involved in development and negotiation of various International trade laws and treaties. They may take a cue that they need to consider International trade laws in perspective of foreign investment laws to a wider acceptance of free trade scenario and help developing and poor countries to benefit of International trade. References: 1. Dunning, J. and Lundun, S. (2008), Multinational Enterprises and the Global Economy, Edward Elgar. 2. Chaisse J. and Gugler P. (2008), Foreign Investment Issues and WTO Law - Dealing with Fragmentation while waiting for a Multilateral Framework, Essays on the Future of the World Trade Organization - Policies and Legal Issues (Vol. 1). Ed. Julien Chaisse and Tiziano Balmelli. Available at: http://works.bepress.com/julien_chaisse/30, Accessed on: [November 8, 2008]. Read More