Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues by
the Vale Columbia Center on Sustainable International Investment
No. 117   March 17, 2014

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Shawn Lim ([log in to unmask])
Multilateral investment disciplines: Don’t forget the GATS!
Rudolf Adlung*
"To see what is in front of one's nose needs a constant struggle."  
 – George Orwell
A number of recent studies have discussed the implications of most-favored-nation (MFN) clauses in bilateral investment treaties (BITs) and the possible need for, and role of, a multilateral framework for investment. Surprisingly, the relevance of existing multilateral disciplines, in particular under the General Agreement on Trade in Services (GATS), is seldom acknowledged in this context.
Pursuant to its Article I:1, the GATS applies to "measures by Members affecting trade in services". In turn, trade in services is defined in terms of four modes of supply: conventional cross-border trade (mode 1), consumption of services abroad (mode 2), as well as services supplied via commercial presence (mode 3) and the presence of natural persons (mode 4). Mode 3 is further specified to mean any type of commercial or business establishment, including through the constitution, acquisition or maintenance of a juridical person or a branch or representative office. With the exception of certain market-access commitments and transparency disciplines, it is difficult to find elements in this definition and the ensuing obligations that are not also covered by BITs.[1]
Investment in services, within the remit of mode 3, is subject to the GATS’s cross-cutting MFN requirement. Moreover, in those sectors inscribed in their schedules of GATS commitments, WTO members are bound to respect the specified levels of market access, including in terms of foreign equity participation and national treatment. In the absence of inscribed limitations, national treatment consists of extending to foreign services and service suppliers the same competitive conditions that are afforded to their domestic counterparts—across all stages of a commercial project.
In addition, in sectors subject to specific commitments, WTO members need to respect certain additional obligations that are essentially intended to protect the commitments from being undermined by excessively restrictive regulations or administrative practices, foreign exchange restrictions, monopolistic arrangements, and the like. Similar provisions can be found in BITs. For example, the obligation under GATS Article VI:1 concerning the reasonable, objective and impartial administration of measures of general application is conceptually similar to the notion of fair and equitable treatment found in BITs.
Of course, it is disturbing that current WTO disciplines cover only commercial presence/investment in services. The increasing “servicification” of production processes that seamlessly integrate goods- and services-related operations certainly calls for uniform treatment. Cross-sectoral consistency is all the more important as the definitional distinctions are blurred. Manufacturing processes that are conducted on a "fee or contract basis", i.e., using inputs not owned by the producer, show up in the classification generally used for GATS commitments. Depending solely on an ownership criterion, such processes thus qualify as services productions even though they are otherwise completely identical to conventional manufacturing operations.[2]
A comprehensive multilateral investment regime would ideally be informed by the GATS. Why re-invent the wheel if some two-thirds of the world's FDI stocks are in services and, thus, largely covered by an existing framework?[3] Furthermore, this framework appears flexible enough to accommodate at least some of the issues that are typically addressed in BITs, including compensation for expropriation, for which no direct equivalents exist in the GATS (“additional commitments” under Article XVIII could complement any scheduled market access or national treatment obligations). However, while ever more regional trade agreements (RTAs) contain investment chapters covering goods and services, WTO-focused initiatives are currently subject to a particular constraint: in reference to the relationship between trade and investment and two other proposed issues, the WTO General Council decided in 2004 that there be "no work towards negotiations" during the Doha Round.[4]
In addition to the multilateralization effects associated with MFN clauses in BITs, it is important also to consider the existence of an external “multilateralizer”—the GATS. As noted before, whenever a measure affects trade in services as defined in the GATS, its MFN obligation kicks in, regardless of the scheduling of specific commitments. Consequently, in areas of mutual overlap, the most advantageous conditions contained in a member's BIT are to be extended to the full WTO membership.
Apart from RTAs, the GATS allows for additional departures from MFN treatment. In particular, WTO members had the right to list MFN exemptions at the Agreement's entry into force or upon accession. Among the WTO’s 160-odd members, close to 100 have done so for a variety of measures. While not all entries are equally precise, at least 17 members clearly exempted, to varying degrees, their BITs from MFN treatment. Apparently, the governments concerned were not only conscious of the scope of the GATS, but also felt uncomfortable with its possible multilateralization effects. They saw, and acted upon, what was in front of their nose.

* Rudolf Adlung ([log in to unmask]) is former senior economist in the Trade in Services Division of the WTO Secretariat. He is grateful to Kathryn Gordon, Sophie Nappert and Pierre Sauvé for their helpful peer reviews, as well as Martin Molinuevo, Peter Morrison and Elisabeth Tuerk for highly inspiring comments on a personal basis. The views expressed by the author of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
[1] See Rudolf Adlung and Martin Molinuevo, "Bilateralism in services trade: Is there fire behind the (BIT-)smoke?", Journal of International Economic Law 11(2) (2008); Martin Molinuevo, Protecting Investment in Services: Investor-State Arbitration Versus WTO Dispute Settlement (New York: Kluwer Law International, 2012).
[2] Rudolf Adlung and Weiwei Zhang, "Trade disciplines with a trapdoor: Contract manufacturing," Journal of International Economic Law 16(2) (2013).
[3] UNCTAD, World Investment Report 2013 (New York: United Nations, 2013).
[4] WTO, Decision Adopted by the General Council on 1 August 2004,Document WT/L/579.
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Rudolf Adlung, ‘Multilateral investment disciplines: Don’t forget the GATS!’ Columbia FDI Perspectives, No. 117, March 17, 2014. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).” A copy should kindly be sent to the Vale Columbia Center at [log in to unmask].
For further information, including information regarding submission to the Perspectives, please contact: Vale Columbia Center on Sustainable International Investment, Shawn Lim, [log in to unmask] or[log in to unmask].
The Vale Columbia Center on Sustainable International Investment (VCC), a joint center of Columbia Law School and the Earth Institute at Columbia University, is a leading applied research center and forum dedicated to the study, practice and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches and solutions, as well as to analyze topical policy-oriented issues, in order to maximize the impact of international investment for sustainable development. The Center undertakes its mission through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools. For more information, visit us at www.vcc.columbia.edu.
  • No. 116, Gary Hufbauer and Sherry Stephenson, “The case for a framework agreement on investment,” March 3, 2014.
  • No. 115, Joachim Karl, “The ‘spaghetti bowl’ of IIAs: The end of history?” February 17, 2014.
  • No. 114, Louis T. Wells, “Government-held equity in foreign investment projects: Good for host countries?” February 3, 2014.
  • No. 113, Anthea Roberts, “Recalibrating interpretive authority,” January 20, 2014.
  • No. 112, Sheng Zhang, “The China-United States BIT negotiations: A Chinese perspective,” January 6,
  • 2014.
All previous FDI Perspectives are available at http://www.vcc.columbia.edu/content/fdi-perspectives.

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Vale Columbia Center on Sustainable International Investment
Columbia Law School - Earth Institute
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