Foreign Direct Investment



Foreign Direct Investment


Foreign direct investment (FDI) has been associated with the economic growth of many economies. However, the FDI is also purported to have disadvantages and risks associated with it. In the recent past, there has been the rise of the need for a general agreement on international trade as a way of governing foreign direct investment. Critical analysis indicates that there is no need for such. The main reason is that all previous attempts have failed.

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Foreign Direct Investment (FDI) has been described as one of the ways through which globalization of the international economy is enhanced. It is defined as a move by a foreign investor to establish an investment in another country, commonly referred to as the host country. It is also seen as the only avenue that can stimulate successfully all economies of the world, from the developed to developing economies.

Research shows that the inflow of foreign direct investment is responsible for the increase in the creation of employment opportunities, spillovers of technology and innovations across borders, and the increase in constructive competition in economies. However, the benefits of foreign direct investments go beyond the growth of an economy to other equally significant factors.

The impacts of foreign direct investments can be felt in various spheres of society, such as political, technological, environmental, and economic. These impacts are both positive and negative. The increase in popularity of foreign direct investment has led the developing states to market their countries in any available opportunity, just to attract foreign investors. To please investors, some countries have deliberately adopted a liberal stance in terms of the legal framework and restrictions, such as environmental legal frameworks and worker protection policies that often scare away investors. Foreign direct investments have also had negative impacts, and in some quotas, they have been blamed for the loss of employment, abuses of human rights, and environmental degradation. Furthermore, it has also been termed responsible for causing political unrest and cultural tensions, as well as volatility in the financial sectors of many countries.

This study endeavors to discuss the topic of financial direct investment, its origin, history, as well as the impact on society and the possibilities of a unified trade agreement between all countries in the world. Moreover, the study aims at discussing the practicability of having a general international trade without restrictions.

History of Foreign Direct Investment

The history of foreign direct investments can be traced back to the 1960s. During this period, there were lots of voices for and against the following concept. Some believed that foreign direct investments were not able to bring further development. Others believed that it was one of the best ways of enhancing economic growth. At this time, the most debated aspect of foreign direct investment was the risks that were involved, especially the political risks. Furthermore, foreign direct investment was believed to be of little or no help. It was also viewed to hurt the developing countries, especially in the sector of technology (Sauvant & Sachs, 2009).

There have been all kinds of arguments either in support of or opposition to a foreign direct investment agreement in the recent past. To build consensus on foreign direct investment and regulations, many platforms and bodies have been formed with the oldest being the General Agreement on Tariffs and Trade (GATT), the Trade-Related Investment Measures (TRIM), the Organization for Economic Co-operation and Development (OECD), and the World Trade Organization (WTO). Nonetheless, all of these have failed to achieve the key goal. Many reasons may explain why world leaders have failed to reach an agreement every time they have had an opportunity to strike a deal on this issue (Sauvant & Sachs, 2009).

Historically speaking, the origin of the modern world should be considered. The modern world has emerged from different situations, ranging from world wars, colonization, especially in Africa, the slave trade, and, most importantly, the Cold War. All these events have made some impacts on people of different nationalities, thus creating mistrust and a general misunderstanding between one another. There has also been the problem of different regimes and ideologies, such as democracy and capitalist economy, on one hand, and communism and socialist economy, on the other hand (Danang, 2011).

However, in the last two decades, the view on foreign direct investment has changed greatly. It has shifted from a negative effect to something for which value it is worth fighting. This is because the view on foreign direct investment changed to the positive side. Today, it is believed that foreign direct investment is of great benefit to the host country. This has seen most countries routing for foreign investors (Sauvant & Sachs, 2009). This has been done through the provision of incentives and attractive policies to appeal to foreign investors.

Relationship between International Law and Foreign Direct Investment

International law has a bearing on foreign direct investment simply because FDI makes people move from one place to another. It also involves the movement of property across political borders. These movements always lead to conflicts between the host country and foreign investors (Sornarajah, 2010). Therefore, foreign investors seek an edge over domestic companies using international law. This gives them a competitive advantage over even the authorities of the state.

The settlement of foreign investors into a host country makes them part and parcel of the internal affairs of the country. Thus, they influence the political, social, and economic situations of the host country differently (Sornarajah, 2010). These kinds of situations also make foreign investors face an economic dilemma when conflicts arise in the host countries. These disputes are always settled in a court of law. Such challenges and conflicts are resolved through the application of international commercial arbitration.

Risks Associated with Foreign Direct Investment

Political Risks

One of the most frequently mentioned risks in determining the nature of foreign direct investment in developing countries is the political risk. In general, political situations and institutions in a country have an impact on their foreign investment potentials (Dutta & Roy, 2011). Political risks and weak political institutions and policies concerning foreign investments can endanger foreign investments and lead to losses or even total pullout of investors from a market. Political risks have always been attributed to the kinds of regimes that are in power in different countries. For instance, democratic regimes have been found out to limit the rates of expropriation as compared to other forms of government (Li, 2009).

Expropriation and Nationalization

Political risks come in different forms, for instance, expropriation. It is considered to be very severe since the government of the host country can decide to seize all the assets of a foreign firm. The extent of the risk can be great if the company is resource-based since the government might fail to offer compensation for such companies (Asiedu, Jin & Nandwa, 2009).

The mining and petroleum industries remain the most affected as expropriation is concerned. This is always because the industries are treated with relatively more importance by the host countries than other industries, especially about the output of the industries. The major reasons concerning justifications for expropriations are the sunk costs relating to resources and the volatility of mineral prices (Engel &Fischer, 2010), varying uncertainty over project returns at its various phases (Asiedu et al, 2009), and challenges associated with the economic security of a country alongside strategic political objectives (Shafer, 2009).

Apart from domestic political factors, expropriation is caused by other factors, such as enterprise factors, government capabilities, and time horizons, national economic conditions, and temporary characteristics among others (Marshall & Stone, 2011). A good example is an expropriation that petroleum companies have faced in the UK and the USA, even though these are politically stable countries. Despite the political stability, these companies still suffered expropriation to a higher degree as compared with other industries, for instance, the manufacturing and service industries. However, political conditions remain the main reason behind the risks. Moreover, it is worth noting that expropriation of foreign-owned companies in developing countries has also happened as a result of the fall in the GDP per capita and state capacity (Mintz & Weichenrieder 2010).

Environmental Concerns and Foreign Direct Investment

The relationship between the environment and foreign direct investment is viewed as a two-way relationship. This is because the presence of foreign investments in a country brings some opportunities and challenges to the people’s welfare, as well as the environment (Goerzen, Sapp & Delios 2010). Apart from the threatening global climatic changes that are considered to be caused by the accumulation of greenhouse gases, like carbon II oxide, it is also believed that foreign direct investments are at the center of the environmental crises in the world.

It has always been conceded that developed countries often pollute their immediate environments and cause hazards in the less developed countries. The enabling factor that makes it possible for such investments to be done is the lack of proper environmental laws in the host countries (Sornarajah, 2010; Goerzen, Sapp & Delios, 2010). The lack of proper environmental laws and, sometimes, the presence of inhibiting factors in the host country make it easy for foreign investors to establish such environmentally unfriendly firms in the developing countries (Goerzen, Sapp & Delios 2010).

Thus, this causes more pollution in developing countries than in developed ones. This has made foreign direct investments be viewed as one of the main causes of environmental degradation. It has also been seen as one of the frontline contributors to the depletion of resources. This has raised an alarm on the well-being and welfare of the people who live around the firms and the world at large (Goerzen et al, 2010). Several countries are examples of this claim. China, the second most preferred country for foreign direct investment, has hit the headlines as one of the most polluted countries in the world (Zhang, 2010).

Despite the nature of the debates on the negative effects of foreign direct investments on the environment, the latter also propels growth and development in developing countries. This is because, through foreign direct investments, the host countries enjoy several favors, for example, the development of the infrastructure of the country. This is mostly done to support the companies that are constructed in the host country (Bandyopadhyay et al, 2011). Moreover, through foreign direct investment, the country nationals benefit from the provision of employment opportunities.

Foreign direct investment has also been recognized as one of the major front players in the promotion of awareness on the importance of preserving the environment (Dijkstra et al, 2011). This has been done through their involvement in the corporate social responsibility initiatives that lobby for a safe environment for the sustainability of investments. Moreover, these companies have been at the forefront of lobbying for the use of clean and sustainable energy in powering the world to another level of economic growth (Goerzen et al, 2010). The campaigns have targeted major firms hosted in foreign countries.

Repatriation of Capital and Foreign Direct Investments

It is the risk that emanates from the notion that a country might not be in a position to pay back its foreign liabilities. It has been noted that countries with a high financial risk are likely to face a financial crisis. The biggest challenge for foreign direct investment is that it cannot be speedily withdrawn from a country when a financial crisis strikes (Abbott et al, 2012). Thus, it becomes a number one priority for foreign investors to know the rate of financial risk of the host country before investing in it (Quer et al, 2012).

The increase in the amount of foreign debt means that a country risks being unable to repatriate its debts. This automatically increases the country’s financial risk, thus lowering its GDP, too. This situation in a country might make it less attractive to foreign investors (Hanson, 2009). Furthermore, the situation gets worse when the country in question has a chronic debt crisis with the foreign debt and current account deficit (Abbott et al, 2012). This too exposes the country to a financial crisis, thus making it less attractive for foreign direct investment.

Research indicates that instability in the exchange rates of a country makes it less attractive for foreign direct investment. This is because it elevates the rate of uncertainty in the financial planning of foreign companies (Abbott et al, 2012). The other condition that prevents foreign investment in a country is the high inflation rates. Foreign direct investments lower the rate of the expected output in the business. This comes as a result of the reduction in the value of the local currency, which, in turn, lowers the expected returns (Alfaro et al, 2010).

Workers' Rights and Foreign Direct Investments

People, especially the human rights watch groups, have expressed increasing concerns on the human rights issues that arise because of foreign direct investments. This is because most of the negotiations on foreign direct investments usually focus on the provision of a favorable environment for a smooth flow of foreign investments in the world. This has seen most of these negotiations leaving out the topic of worker security, which is of equal importance. It has been noted that the clauses on agreements about social matters are always just declarations. This means that they have no legal implications since they are not legally binding.

Foreign direct investments always affect the working population in many ways. Workers can lose their jobs through the presence of a foreign firm. This is possible due to the competitiveness of the foreign firm. Most foreign firms always have an edge over the local firms because of technological expertise (Figini, 2011). The expertise makes the foreign firm get the quality products as compared to the local companies. Moreover, their technological advancement enables them to produce on large scale. In the long run, the local companies are edged out since they cannot be abreast with the foreign firm. This might lead to employment ‘(Blanton & Blanton, 2012).

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The move by developing countries to attract foreign investments has also played a major role in making workers vulnerable. This is because the relevant governments often fail to provide necessary legal protection against workers' exploitation by foreign investors (Figini, 2011). The workers may suffer because of poor working conditions. For instance, the following has mostly been observed in the mining and petroleum industries. Moreover, the workers may also be given poor wages and provided with deplorable working conditions that influence human dignity and welfare. This problem has led to many industrial actions, especially in developing nations.

Ideally, foreign direct investments should be able to promote the social well-being of the host country by observing and promoting workers’ rights. The presence of foreign direct investments should also allow improving the working conditions of the public (Blanton & Blanton, 2012).

Previous Attempts at a Multilateral Agreement on Foreign Direct Investment

The quest for a multilateral treaty to govern international investment flows began in 1995 when the member states of the Organization of Economic Cooperation and Development (OECD) came up with a proposal to promote the idea. Initially, it was thought that the process would be a smooth one since it was just about the coding of the already existing rules (Woodward, 2009). Moreover, it was thought that getting the WTO members to cooperate would not be an uphill task as it was previously since there were no more suspicions. Unfortunately, the quest reached a deadlock. This was because confrontations came up, instead of cooperation from potential members and partners, This failure is greatly attributed to the lack of a collaborative network (Trebilcock et al, 2012).

Emerging from the era of mistrust between nations, the idea of the multilateral trade agreement had stalled given the failure of the GATT obligation. This was because potential countries feared that the presence of foreign investors in their economy would prompt the exploitation of their economic resources. Furthermore, there was also the fear that it would result in political captivity by foreign investors. However, at the onset of the 1980s, the view changed since it was believed that the presence of foreign direct investments in a country was a precondition that would lead to economic growth. It was also seen as a way of acquiring technical know-how from the developed countries (Woodward, 2009). This led to a race for foreign investors by the developing countries. The developed countries, on the other hand, grabbed this opportunity to impose rules on the developing states. As the agenda of investment had been put for further discussions, it became apparent that there was a need for a multilateral agreement to secure the international investment flows (Trebilcock et al, 2012).

Drawing from the previous attempts, the push for the agreement was greatly championed by the United States and the developed countries. It was centered on the idea that despite foreign direct investment being the best option for economic growth, its implementation was being jeopardized by the lack of liberalized markets. The multilateral agreement was meant to develop very clear rules, as well as regulations governing liberalization and investor protection (Paniagua, 2013). It also aimed at providing a comprehensive framework for dispute settlement. This was a way of putting off many barriers that existed, thus encouraging foreign direct investment. This would, in turn, put incentives on the economic growth through foreign direct investment (Trebilcock et al, 2012).

The main features of the proposal were the national treatment provision. It championed equal treatment of both foreign and domestic companies. According to the proposal, extensive rules on the protection of investments and expropriation were suggested. It also provided compensation for the expected profits. Moreover, it influenced the discussion on possible disputes and how they would be solved (Trebilcock et al, 2012). Furthermore, the proposal held that signatories would be under obligation to follow it for at least five years. In addition, the agreement stated that a country that would opt out of the agreement would remain bound to observe the regulations for another 15 years. The negotiation proposal also adopted a top-down approach to foreign direct investment. This means that the only exceptions to the general rules were those explicitly listed at the time of agreeing.

The negotiations concerning the proposal officially began in the year 1995 with 29 member states of the OECD present. The negotiations were expected to take an average of one year because there was no apparent expectation of a standoff between the negotiators. However, the negotiations went on for another year and were later suspended for further consultations. The negotiations ended in the fall of 1998 when member states began withdrawing from the talks. France was the first country to opt-out of the negotiations (Fatouros, 1995). The OECD also failed to reach a consensus on the framework for multilateral foreign investment.

Reasons for the Failure of the Multilateral Agreement on Investment

According to many scholars, the failure of the multilateral investment agreement did not come as a surprise. They argue that it was an expected thing. Several justifications are given for this. One of the key justifications is the policy of non-inclusion of some very influential potential stakeholders in global trade relations. This created a vacuum in the global public policy network (Dolzer & Schreuer, 2012). Its failure would be as easy as exposing the secret talks, thus resulting in a public outcry.

Lack of Negotiation Experience of the OECD

The choice of the Organization of Economic Cooperation and Development (OECD) as the platform of negotiations was seen as the first reason behind the failure of the talks. In as much as the organization had previous experience in the negotiations, such as the OECD codes of liberalization of capital movement and current invisible operations, it did not have enough experience to carry out this task. This is because the OECD is often viewed as the organization that only promotes economic prosperity (Fatouros, 1995). It uses market-driven flows of international trade, investment, and capital to achieve the set goals.

The drafting of the proposal was done by different groups within the OECD. These same groups that had done the preparatory work never featured in the negotiations. This was because a special negotiations group was set up to carry on with the negotiations. The group consisted of diplomats from the OECD member countries. Other detailed work was done by smaller groups. This caused a lack of congruence and harmony in the negotiations.

Failure of Involving Other Players in the Negotiations

Given the nature of its structures, the OECD lacked the tradition of consultations. The only existing consultation groups within its framework, such as the Business Advisory Committee (BIAC) and the Trade Union Advisory Committee (TUAC), were only consulted at will. The OECD had misjudged the participation of other powerful organizations. The most notable organizations that the OECD failed to involve in the negotiations were the non-governmental organizations (NGO) (Fatouros, 1995). The failure to involve the NGOs in the negotiations was a result of the nature of the multilateral investment agreement. The negotiators did not see the need for them to be involved since they felt it was not a political issue (Dolzer & Schreuer, 2012).

This is because the NGOs were notably active in human rights and political issues and had little involvement in the investment sector. Moreover, the negotiators, who were investment experts, had little experience with the political world. They, therefore, decided to keep the public and politics out of the negotiations. This led to the NGOs being kept in the dark as the negotiations went on (Drabek, 2009).

The failure to consult the NGOs was a fatal mistake since these organizations had a lot of influence on the public. Furthermore, the nongovernmental organizations could politicize issues and might confront governments and business players to provide public accountability on their undertakings. Immediately after learning about the negotiations, the NGOs around the world sprang into action. They launched campaigns and lobbied for the stalling of the talks that were already ongoing. The main leverage was on the secrecy of the talks. This saw the launching of the anti-negotiations campaigns that were named the Dracula strategy (Fatouros, 1995).

Lack of Proper Communication between Officials, Negotiators, and the Opposition

It is one of the reasons behind the total failure of the negotiations. This was because of the nature of the interaction between the negotiators. The negotiators had a problem with cooperation due to poor interactions. When the OECD finally started its consultation with the NGOs, it was evident that openness and trust were a possibility, especially because of the constant consultations with the NGOs. However, the situation changed when some negotiators started pushing for some of the concerns that were raised by the NGO community (Fatouros, 1995).

Consequently, some of the main players in the negotiations became reluctant to hold more consultations with the NGO community. This gave way to a confrontation by the NGOs to be included in the negotiations. This gave way to a direct meeting between the negotiators and the NGOs in October 1997. The meeting did not realize much even though the negotiators and the OECD officials had agreed to take into account the concerns of the NGOs. This is because the NGOs had lost trust in the OECD and had given up their push for negotiations (Dolzer & Schreuer, 2012).

Moreover, there was fear by the NGOs that the OECD would use them to rebuild their face in the public eye. Therefore, when the choice of either negotiating with the OECD and the negotiators or campaigning against the MAI presented itself, they all chose to campaign against the proposal. It was one of the major blows that the OECD faced in the quest for a multilateral investment agreement. In the end, the situation became impossible to save, thus leading to the pulling out of many negotiators from the negotiations (Dolzer & Schreuer, 2012). Subsequently, the talk just stopped.

The General Agreement on Tariffs and Trade (GATT) Articles

GATT implies the agreements were reached by the states that are signatories and committed to the General Agreement on Tariffs and Trade (GATT) in 1947. The member states were to help in raising the living standards of people in the host countries. This involved ensuring fastness and steadiness in the growth of those economies, creating employment opportunities, spearheading the development of the full use of resources in the world, and working as a single unit to expand the production and exchange of goods from one point of the world to another, especially within the member states (WTO, 2013). This was only going to be possible through the reduction of tariffs and other trade barriers. Moreover, they were working towards eliminating any treatment characterized by discrimination in international commerce.

Even though the document has many articles, special attention should be paid to two articles which, among other articles, have been a point of controversy. These are Articles 3:4 and 11:1.

Article 3:4

Article 3:4 was used to lobby for equal treatment of both imported and domestic products. It gave provisions that these kinds of products (imported products) were to be accorded the same favor as the ones that had been produced within the same country. Equal treatment was to be reflected on all the laws of the country (WTO, 2013). Moreover, the conditions were supposed to be favorable for the products in terms of their transportation, distribution, sales, purchase, as well as use. Any possible regulations or requirements that would hinder the smooth flow of the product were, to be solved. The article clarified that the cost of transporting the product was not to be imposed on the product concerning its nationality but about the economic operation of the means of transport (WTO, 2013).

Article 11:1

According to this article, free interaction between contracting parties should be provided whenever there was a flow of products across their borders. It stated that the contracting parties were not supposed to put any restrictions and sanctions or regulations against the imported products from countries that are partners within the same trading body. Neither were they supposed to prohibit the flow of products. Some of the restrictions that were prohibited by the agreement included: quotas, licenses of importation, or exportation among other measures. However, the member countries were allowed to impose duties, taxes, and other related charges on the products (WTO, 2013).

These articles were also broad enough to address general issues of the investment measures. The articles were not explicit on some very important issues, such as restrictions and prohibitions on foreign direct investments. Moreover, these articles were to protect foreign investors and their investments. This led to the failure of the agreement to fulfill its mandate since it was seen as jeopardizing the nationality or sovereignty of a state.

It is worth stressing that Article 11:1 drew a lot of speculations. This is because it left a gap in the flow of all kinds of products. It was argued that drug cartels, for example, would make use of this loophole in the law to traffic their goods without much control. In addition, some countries could ship substandard products to the markets of contracting parties. It could also be used as an avenue for finding other dumping sites in the member states. Without regulations of provisions of that kind, it was evident that the quality of products flowing in the markets of the contracting parties would be greatly breached.

Other Shortcomings of the GATT

The rulings in the courts of the General Agreement on Trade Treaties (GATT) have a negative history with both the plaintiff and defendant countries. This is because the defendants always choose to dismiss the rulings instead of complying. On many occasions, the defendants always seek to settle the matters with the plaintiffs outside the court. However, when their case goes ahead and a ruling is made, they simply turn back and refuse to comply with the rulings of the court. In most of the cases, the defendant countries were reported to have violated either Article 3:4 or Article 11:1 of the GATT. This has led to many people viewing the GATT as a meaningless court since its rulings do not make a difference to the situation (Leitner & Lester, 2010).

In most cases, when a matter arises, the plaintiff country (home country of foreign direct investment) decides to approach the GATT court and complains about the prohibitions or restrictions of the host country (the defendant). The GATT tries to make them come to terms or reach a compromise. When the two countries fail to reach a bilateral solution, the plaintiff country goes ahead and requests the GATT to form an ad hoc panel (Leitner & Lester, 2010). The panel is formally charged with the mandate of making a legal ruling on the case. The panel can end up not making a ruling. However, if the dispute is still going on, the panel makes a ruling. As it has always been the case, the defendant countries have never observed the court rulings. They ignore and continue keeping the status quo.

Some examples include the United States vs Canada and the United States vs Japan (Leitner & Lester, 2010). In the case between the United States vs Canada, which lasted from 1988 to 1991, the United States complained about the restrictions that Canada had placed on the import of ice cream and yogurt. The GATT panel made a ruling, instructing the Canadian government to cancel restrictions. This was after the Canadian government refused to settle the matter with the US government outside the panel. As expected, the Canadian government refused to concede. It just left the restrictions in place (WTO, 2013).

The GATT panel court has been considered as not very influential. The guilty country has the audacity of not complying since the court lacks bailiffs to enforce the sentence. As it has been observed, the court does not have a jailhouse; neither does it have bail bondsmen. Therefore, any verdict by the court is like a punch into the air (Bello 1996). As a matter of fact, from 1947 to 1994, out of all 91 rulings that were made by the GATT panel in favor of the plaintiffs, 53 defendant countries downplayed the verdict and left their restrictions and prohibitions in place (Leitner & Lester, 2010).

The situation is more serious since even the plaintiff countries also fail to observe the rulings of the GATT panel. This is because within the same period, out of all 23 rulings that were made in favor of the defendants, only 2 plaintiff countries conceded defeat. The remaining 21 plaintiff countries decided to retaliate, and most of them were reported to have created counter restrictions and prohibitions on the defendant countries (WTO, 2013).

One would, therefore, argue against the need of having rules that cannot be upheld. This means that the GATT rules cannot be sufficient in covering investment measures since it is biased and provide for more protection of foreign investments.

The Agreement on the Trade-Related Investment Measures (TRIMS)

These are the domestic rules and regulations that are applied by a country to foreign direct investment of firms. They are sometimes viewed as part of the industrial policy that the countries apply to foreign direct investments. This agreement was reached by all the member states of the World Trade Organization (Fatouros, 1995). The TRIMs were formulated to make foreign direct investments easier to embark on. This is because of the application of the rules to restrict the preference of domestic firms to foreign firms in a host country. The formation of the TRIM has resulted in conflict between GATT articles and TRIM requirements (Morrissey & Rai, 1995). This is because these rules violate Articles 3:4 and 11:1 of the GATT agreement.

The local content requirement is one of the violations of the GATT Article 3:4. It provides the measures that give priority to the purchase and use of domestic products by an enterprise. This requirement is applied to all goods, irrespective of the specifications of the terms, volume, or value of the products. The terms of a proportion of volume or value of a product and its local production are also not considered (Shenkin, 1993; Paniagua, 2013). The other violation of this article is the first part of the TRIM requirement that restricts consumers in the hoist countries from purchasing or even using goods and services. The TRIM requirement states that a firm cannot import a larger volume of products that exceeds its exports.

There is also the violation of the GATT article 11:1 by the TRIM. The first one is the trade balancing requirement. On the contrary to the GATT article, the TRIM gives measures requiring that an enterprise’s purchase or use of the imported products be limited to an amount related to the volume or value of local products that it exports. The second one is the export restriction, which gives measures on domestic sale requirements (Morrissey& Rai, 1995). These measures restrict the exportation or sale of products exported by an enterprise. These products have different specifications that range from volume and value or the proportion of volume or value of their production. Finally, there is the foreign exchange restriction. This provides the measures to sanction the liberty of an enterprise to import products similar to those produced locally. Even though the GATT framework prohibited investments that violated the principles of national treatment, the extent of the prohibitions was never clear (Shenkin, 1993).

This, however, differs from the TRIM requirements that are explicit concerning these issues. As stated above, these requirements are found to be of much protection to the domestic products in a host country. Therefore, it helps in encouraging foreign direct investment and creating a better trade environment for both the investors and the domestic population (Morrissey & Rai, 1995). It is, however, important to note that the TRIM agreement was formulated to provide clarification of the GATT obligations and not to impose any new ones.

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To clarify this, the member states of the WTO were instructed to agree their foreign direct investment requirements with the GATT agreement. The member states from the developed countries' blocs were given two years to agree their requirements with the TRIM agreements. Exceptions were made for developing countries to retain the agreements that violated the GATT obligations in Articles 3 and 11 (Morrissey & Rai, 1995). However, this was on the condition that they are realigned to the provisions of Article 18. The article gives allowance to specific derogation from the GATT provisions.

This provision was made because of the economic development needs that developing countries might have. There were also exceptions on equitable provisions. These exceptions were made to maintain the competitiveness of the foreign companies that had already been subjected to the TRIM agreements (Shenkin, 1993). This meant that the governments from the member states had the mandate to apply these rules to new foreign direct investments.

International Trade Liberalization Efforts at the National Level

With the rise in the intentions of countries to engage in foreign direct investments, the developing countries have formulated ways of becoming more attractive. The move to liberalize international trade has seen these different governments applying drastic measures to be more appealing to foreign investors. Countries, for example, have decided to reduce tariffs unilaterally. This implies that they have done so without the requestor summoning by another country. This has resulted in the countries being more attractive to foreign investors. This is because such countries have a better time at the negotiation table. Moreover, it has been observed that such moves have always benefited some countries almost with an instant wave (Zhang, 2010).

Liberalization of trade has helped such countries to grow in their economy more rapidly. This is because this condition might make the country be crowded with foreign investors. The best examples of countries that underwent unprecedented economic growth include China, after 1978, and India, which experienced immediate expansion after 1991. It is important to note that the dates indicated represent the years when these radical changes took place (Zhang, 2010).

This approach of unilateral abolishment of restrictions and prohibitions on international trade has been known to have almost immediate impacts. China, for example, has experienced unprecedented economic growth since it adopted a liberal stance on international investments. The country now ranks second in Gross Domestic Product. Moreover, it has overtaken the United States as the most preferred destiny of choice for foreign investment by multinational companies (Sauvant & Sachs, 2009).

The advantage of a country like China is that on top of the removal of barriers, it has cheaper human labor, which is also large as compared to other developing countries. Moreover, the country enjoys the presence of better infrastructure that gives it leverage over other developing countries, especially the ones from Sub-Saharan Africa.

Liberalization of Trade at the Bilateral Level

T bilateral trade agreements are agreements that are reached by two countries. These agreements can be either as a result of the World Trade Organization directive or as a result of the self-desire of each partner in having an agreement. Bilateral agreements have also been seen to be of importance to both the host country and the home country, which wants to get foreign investment (Sauvant & Sachs, 2009).

The most notable foreign direct investor in China. The emergence of the Chinese economy as one of the best in terms of Gross Domestic Product (GDP) has helped the country to seek for countries to invest in it. The Chinese government has found many markets in the Sub-Saharan African world. There are several bilateral trade agreements between China and individual countries. This is what is termed as Sino-African cooperation (Sauvant & Sachs, 2009).

Liberalization of Trade at the Regional Level

Since the onset of liberalization of trade at the regional level, there has been the formation of the trade groups, such as the Preferential Trade Area (PTA), the European Union (EU), which was formerly known as the European Commission (EC) (Daugbjerg & Swinbank, 2011), and the Association of South-East Asian Nations (ASEAN). Other notable groups include the South Asian Association for Regional Cooperation (SAARC), the Economic Community of West African States (ECOWAS), the East African Community (EAC), and the Organization of the Petroleum Exporting Countries (OPEC) (Sauvant & Sachs, 2009).

The regional approach helps in the reduction of trade tariffs, quotas, prohibitions, restrictions, and taxes on imports from other member countries. Moreover, there are little or no restrictions on the flow of products across borders. Through these agreements, regional trade has been able to experience steady growth. This has equally prompted the development in the regions (Trebilcock, Howse & Eliason, 2012).

Moreover, such organizations have introduced one currency in their bloc; though, they still maintain their political boundaries. Furthermore, there are regional blocs that have allowed a smooth movement of people (investors) and products across the borders. This trend has been the case in explaining the relationship that a member country of the European Union enjoys (Daugbjerg & Swinbank, 2011). The United States of America in itself is a combination of 51 states. In as much as its formation came before the onset of international trade, it can provide the best example of the power of uniting many states together and then channeling them for a major purpose.

It has been noted that the formation and smooth operation of these regional trade organizations can be a good prerequisite of forming a multilateral agreement on international trade. This is because building an agreement from the regional blocs that have already had a common ground is much easier than building from nothing. Moreover, these regional trade organizations often have the same concern; thus, it makes negotiations much easier (Trebilcock et al., 2012).

Is There a Need for a General Agreement on Foreign Direct Investment?

Ideally, the most effective general agreement on foreign investment would be one that is comprehensive and has consistency with investment policies. An ideal agreement would be one that would limit the use of incentives to attract foreign investors and abolish tactics, like subsidy that results in problems concerning workers’ exploitation and environmental pollution.

It is, however, important to note that reaching such an agreement would attract a lot of opposition, especially from the developed world. It should be also put into account that the previous attempts have been made to reach such an agreement. The GATS defines foreign direct investments as a mode of supply. This can prompt the policymakers just to treat foreign investment the same way they treat trade policies within the GATS (Low, Luanga, Mattoo, Oshikawa & Schuknecht, 2009). The Trade-Related Investment Measures (TRIMs), on the other hand, can act as the best policy to be used to ensure that the market policies and conditions are stable. This would help in guaranteeing credibility, especially in developing countries. The Trade-Related Intellectual Property Rights (TRIP) could also be of importance in protecting the intellectual property of each country (Abbott, 2012). This would go a long way in safeguarding inventions and innovations and preventing theft of intellectual property.

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It is also important to observe that the existence and functioning of these trade agreements are indications that foreign direct investment could do without a new agreement. However, this would have to undergo improvement and extension to include every aspect of policies that would ensure smooth operations in foreign direct investment.

One more reason why there would be no need for the negotiations concerning a new agreement is that all the previous attempts have ended up stalling and negotiators have left the talks. The OECD, for example, failed on its mission for a multilateral agreement on investment because it was evident that the agreement was to some extent going to limit the political influence of the committing countries. It was also going to limit their freedom of action about foreign direct investments. In as much as it would create a favorable atmosphere for foreign direct investments, it would cause political unrest in most of the countries involved.

The different economic conditions of countries also play a major role in the formulation of these agreements. This disparity in the economic conditions has been one of the major contributing factors to the failure of reaching an agreement on foreign investment. This is because the industrialized countries already have a balanced inflow. After all, they play both host and home countries of foreign direct investments. The developing countries, on the other hand, only play host to foreign investments (Ismail & Vickers, 2011).

This disparity creates an imbalanced platform for a general agreement to be reached. The only possible way out of this situation is to have a very broad and all-inclusive process when the views and interests of all involved parties would be taken into consideration. It has to be multifaceted in that it considers the political, economic, social, and technological aspects of the whole concept. This is because of the different socio-economic, political, and technological positions of different countries (Ismail & Vickers, 2011). The main aim of having an all-inclusive talk is that it helps in making every stakeholder find his/her advantage from such participation.


In conclusion, I would like to state that there is no need of formulating a new general agreement on trade because it is very possible to handle foreign direct investments within the already existing frameworks of the WTO. Furthermore, with just a few further fine corrections to the already existing laws, there will be desirable results. The starting of another negotiation might just lead to another failure of talks. Moreover, the presence of bilateral and regional trade organizations is an indication that there is no need for such an undertaking. This is because these organizations have already been successful in carrying out trade.

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