ISSN 2330-717X

Can WTO Talks Revive Global FDI? – Analysis

By

By Simon J Evenett and Johannes Fritz*

Advancing global talks on investment facilitation has long been a goal of many governments in the Asia Pacific. During its G20 presidency in 2016, China gave the matter renewed priority. Since the 11th WTO Ministerial Conference in December 2017, diplomats in Geneva have been negotiating a multilateral framework for investment facilitation. These talks have advanced far enough that an ‘Easter text’ was circulated among negotiators this year. But even if a large enough fraction of the WTO membership signed this deal, would it make a difference?

To answer this question, we must consider what’s not included in the proposed multilateral framework text and the current state of global foreign direct investment (FDI) dynamics.

With respect to the former, participating governments declared in both 2017 and 2019 that ‘these discussions shall not address market access, investment protection, and Investor-State Dispute Settlement’. Coupled with the growing resort to investment screening mechanisms, these are significant omissions.

With respect to the latter, the findings of the recently published 27th Global Trade Alert report puts current foreign direct investment dynamics in perspective. The report documents the trend decline in global FDI inflows (especially when sensibly benchmarked against global GDP, global investment levels and world trade) and reveals the low or falling returns on FDI in every emerging market region except the transition economies. UNCTAD-produced data (based on balance of payments data) support the latter finding in the report, along with an extensive but rarely used US government dataset on American multinational enterprise performance abroad.

Governments can affect foreign direct investors in many ways. They can limit access to certain sectors or activities or impose conditions on their entry. All too often they apply localisation requirements on foreign investors, such as mandating local hiring and sources.

After establishment, a foreign investor may find they have to comply with different, typically stricter, rules than those competing firms must comply with. Import barriers also indirectly alter the incentive to engage in FDI in the first place, as exporting a good or service from abroad may be a viable alternative to establishing a production facility in a country. Information on all of these policy interventions is needed when preparing a comprehensive, contemporary picture of government treatment of FDI.

Over the past five years public policies have generally worsened the treatment of foreign investors. Using detailed information in the Global Trade Alert database on thousands policy interventions affecting the viability of FDI, the 27th report emphasises six trends.

First, it is clear that governments have introduced fewer public policies conducive to inward FDI. This is true of the G20 nations and other groups of nations, including the Least Developed Countries. Second, with the exception of China, most governments policies towards outward FDI are consistently supportive.

Third, policies encouraging barrier jumping FDI are declining in importance. Fourth, localisation requirements affecting foreign direct investors became more far-reaching over the past five years, as have policies affecting the entry, screening and regulation of FDI. 38 governments seem to have introduced or tightened FDI screening policies since 2015. Seven governments have changes to FDI screening in the works.

Fifth, fewer policies in service sectors encourage FDI when compared to goods sectors. And sixth, businesses have faced mounting regulatory risks over the past decade.

To be clear, not every policy change treats FDI worse. Still, on balance, over the past five years governments have made life more difficult for foreign investors.

So, while diplomats in Geneva negotiate to ‘facilitate’ FDI, back home their governments are throwing sand in the wheel of this once-important feature of globalisation. One has to ask if there is a disconnect between the good intentions in Geneva and the reality on the ground. Put differently, there is little hope that current WTO talks will revive FDI when those negotiations fail to address the policy dynamics summarised above.

One could argue that the worsening treatment of FDI provides a stronger rationale for new multilateral disciplines. That argument would be considerably stronger if the scope of the current investment facilitation talks in Geneva were not limited in the first place.

Fortunately, governments and international organisations keen on promoting FDI need not wait for the conclusion of a multilateral accord. Implementing three steps will improve the commercial prospects of FDI in development-sensitive sectors.

First, having shown why returns on FDI are so low in a developing country, or why such returns are falling, dialogue between the World Bank, regional development banks and host governments should identify which policies and corporate practices must change and the technical support required to effect them.

Second, governments and international organisations should target any state-provided financial support for FDI at priority sectors where sustainable development benefits are deemed greatest by host governments in developing countries. This applies to financial incentives for outward as well as inward FDI.

And third, governments should progressively de-risk FDI by thoroughly reviewing and benchmarking existing regulatory policy and enforcement practice. Particular attention should be given to the implementation of recently approved FDI screening policies.

If governments and international organisations heed this advice, the commercial viability of FDI will improve significantly.

*About the authors:

  • Simon J Evenett is Professor of International Trade and Economic Development at the University of St Gallen and Founder of the St Gallen Endowment for Prosperity Through Trade (SGEPT), the institutional home of the Global Trade Alert.
  • Johannes Fritz is CEO of the St Gallen Endowment for Prosperity Through Trade.

Source: This article was published by East Asia Forum

Click here to have Eurasia Review's newsletter delivered via RSS, as an email newsletter, via mobile or on your personal news page.

East Asia Forum

East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centred on the Asia Pacific region. It consists of an online publication and a quarterly magazine, East Asia Forum Quarterly, which aim to provide clear and original analysis from the leading minds in the region and beyond.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.