Economy

At Both WTO and G20, China is Pushing for Investment Facilitation Rules

India, along with the US under the Donald Trump administration, is hesitant about the proposed investment facilitation up for discussion at the upcoming G20 Summit in Germany.

Indian Prime Minister Narendra Modi (L) shakes hands with Chinese President Xi Jinping at the West Lake State Guest House ahead of G20 Summit in Hangzhou, Zhejiang province, China, September 4, 2016. REUTERS/Wang Zhao/Pool

In an attempt to initiate discussions on a WTO instrument on investment facilitation, five proposals have been recently submitted to the General Council – the highest decision-making body of the WTO – by a group of countries led by China, Brazil, Russia and Argentina. The discussions at the General Council are aimed at initiating negotiations on a WTO instrument on investment facilitation in the near future. India, South Africa, Uganda and Bolivia have opposed these proposals on the grounds that the investment facilitation rules are beyond the WTO’s current mandate.

The momentum for a possible agreement on investment facilitation gathered pace at the WTO after the Trade Facilitation Agreement (TFA) entered into force on February 2017. The aim of TFA is to simplify customs procedures and rules thereby easing the flow of goods across borders with fewer procedural delays and lower transaction costs.

Can investment facilitation measures deliver similar benefits as in the case of trade facilitation? Should investment and trade issues be viewed as two sides of the same coin? So far the evidence suggests the answer to these questions is ‘no’. Two points are worth highlighting here. First, the procedures and institutions in the realm of investment are substantially different from those related to trade. By and large, trade facilitation measures deal with border-related procedures whereas investment measures fall under the competence of different authorities – for instance, municipalities, state government, central government and independent regulatory bodies in India’s case  – and therefore entail an inevitable element of administrative complexity that are beyond the capacity of any one nodal department or ministry.

Second, foreign investment is a far more politically sensitive issue than trade, since it essentially means foreigners exercising control over ownership of national assets and resources. Large-scale foreign investments, particularly in strategic, high technology and natural resource sectors, often raise concerns of erosion of economic sovereignty. That’s why previous attempts to establish comprehensive multilateral rules on international investments through OECD and other fora have failed miserably.

G20 and investment facilitation

After the collapse of Cancun Ministerial Conference in 2003, no discussions on international investment policy-making were initiated at the WTO or other global policy forums for almost 12 years. It was China which revived the discussions on investment issues during its G20 presidency in 2016 by establishing a Trade and Investment Working Group (TIWG) which prepared the Guiding Principles for Global Investment Policymaking. The non-binding Guiding Principles were endorsed by G20 leaders at the Hangzhou Summit in September 20016.

For the forthcoming G20 Leaders’ Summit in Hamburg in July 2017, Germany has identified investment facilitation as one of the key priorities in the areas of trade and investment. Given the reluctance of India, South Africa and the US (under the Trump’s administration) to pursue this matter at G20, it remains to be seen whether the German presidency can deliver a positive outcome on investment facilitation.

At both the WTO and G20, China’s aggressive approach on investment policy-making should be seen in the context of its transition from a net inward investor to a net outward investor. Currently, China’s outward foreign direct investment (FDI) exceeds its inbound FDI, making the country one of the world’s leading sources of FDI. In the coming years, China’s outward investment flows will rise further with the rolling out of One Belt, One Road (OBOR) initiative which will funnel billions of dollars in infrastructure projects across Asia, Africa and Europe. At a time when the Western world is retreating on global economic governance, China is willing to fill the vacuum and expand its external economic engagements on trade, investment and finance issues with the rest of the world.

The policy menu

The five proposals for a WTO instrument on investment facilitation are essentially aimed at improving ease of doing business in the host countries with greater focus on single window system, transparency in rules and the establishment of ombudsperson or national contact points. As I have discussed in a recent paper, the real challenge is deciding which measures will work within the institutional architecture of the host country. Even if some measures seem desirable, they cannot be applied on a ‘one-size-fits-all’ model.

Since most of the administrative impediments associated with investment projects are faced at the local and sub-national levels, it is very essential to develop action plans to address them at those levels. What may be required is a ‘bottom-up’ unilateral approach, beginning with reforming the local administrative procedures and practices, rather than a ‘top-down’ multilateral approach on investment facilitation.

One of the key common elements in these proposals is single window system. The single window system may not be very effective in countries where setting up a business requires approvals from different competent authorities (national as well as sub-national) as per their institutional architecture. In India, for instance, a foreign investor may have to approach different authorities – for land acquisition and building permit (local bodies but varies across states); compliance with environmental regulations (ministry of environment); licence from sectoral regulatory agencies (for example, the central bank) – depending on the nature of business. Since land is principally a state subject under Indian constitution, a single window system throughout India is unlikely to work.

One should always welcome greater transparency of investment rules and policies but it could be better promoted through much simpler mechanisms that are national in nature (such as the right to information) and on a best endeavour basis, rather than through complex and binding multilateral disciplines. Also the principles of transparency should also be applicable to foreign investors and such initiatives should go hand in hand with increased transparency of public administration.

The joint proposal submitted by Argentina and Brazil seeks the establishment of a National Focal Point or ombudsperson which will improve investment-related institutional governance. As discussed above, investors face most investment-related administrative obstacles at local levels but the competence of a National Focal Point or ombudsperson is unlikely to extend to local authorities in most host countries.

In sum, investment facilitation measures alone are not a sufficient policy instrument to attract FDI inflows into a host country. Other determinants – such as the size of domestic markets, quality of infrastructure, labour costs and productivity, trade openness, taxation policy and political environment – play a far greater role in attracting FDI inflows.

Kavaljit Singh works with Madhyam, New Delhi.