Trade-related investment measures: U.S. efforts to shape a pro-business world legal system.

• Author: DeLuca, Dallas
• Position: The Andrew Wellington Cordier Essay

The United States transfers significant amounts of capital to both developed and developing states, through direct aid, government loans and business investment. Although money can bring benefits to the recipient, not all states are happy with what American money does in their countries, especially money from corporations, called foreign direct investment (FDI).

During the 1960s French President Charles de Gaulle was the foremost critic of American foreign investment activities. The third world states, many of them newly independent, attacked all Western investment, and many of them nationalized foreign businesses in the name of domestic control of the economy. These states resisted Western concepts of the sanctity of business, expropriating without compensation and attempting to alter international investment law to reflect their positions on foreign investment.

Restrictive investment policies are another popular measure by which states have attempted to control the activities of foreign enterprises on their territory. These generally are state policies designed to promote development goals such as an improved trade balance, technology transfer, employment and development of domestic industry. American policy makers have argued that such measures distort trade and constrict the flow of capital. In response, Washington has led an attack against third world policies that restrict investment (which the United States has labeled trade-related investment measures, or TRIMs) in both multilateral and bilateral forums.

Many Western European nations, beginning with West Germany, countered opposition to Western investment by negotiating bilateral investment treaties (BITS), which ensured special protection and treatment for investment from the contracting parties in each other's territories. The United States was slow to follow this trend, and when it did so in the 1980s its goal was different. The United States has signed a small number of treaties, with the explicit purpose not of changing the other state's laws to better protect U.S. investment, but rather of simply reinforcing the U.S. view of international law, a view which contradicts many developing states' policies and interpretations of sovereignty and international law.

In its approach to TRIMs, Washington has sought to reassert the U.S. view of international law and also to press for the interests of U.S. multinational corporations (MNCs). Its actions in bilateral and multilateral negotiations show that the U.S. government wants to guarantee property and profits for U.S. MNCs abroad to the greatest extent possible. Washington uses bilateral treaties and multilateral debates to affirm its view of a pro-investor international legal system, even when its refusal to sign treaties that do not completely conform to U.S. views of law comes at the expense of investors' rights. The principles behind U.S. policy can be recognized in the pattern of U.S. behavior in investment law negotiations.

In this article I argue that the chief motivation of the U.S. government in responding to TRIMs is to assert its view of international law and to secure greater profits for U.S. MNCs. First, the U.S. government's rhetoric that restrictions on investment diminish world welfare will be debunked. There are no data to support this position, and the total trade effects of TRIMs are asserted to be small. The United States appears to have expended disproportionate political effort on this issue.

Second, I will show through separate analyses of what the U.S. government is aiming to accomplish in bilateral and multilateral negotiations that Washington is openly trying to strengthen its view of international law. This is an attempt to garner higher profits and greater protection for MNCs without regard to the effects on world trade or the host states. U.S. negotiators concede that U.S. investment treaties have no effect on investment flows. Also, the United States is trying to prohibit abroad what it does at home. Its use of TRIMs reveals the double standard of the "restricted investments decrease world welfare" position.

Finally, I present several general recommendations for changes in U.S. policy toward Trims. Law, both international and domestic, is the result of politics.(1)

The U.S. attempt to enforce its interpretation of law is an attempt to enforce a political hegemony, albeit one tied to economic interests. This is a flawed policy that has previously proven counterproductive and will be inimical to long-term U.S. interests. There are other tactics, such as further liberalization of trade through tariff reductions, that will accomplish many of the same goals without imposing the U.S. view of law on unwilling recipients.

DEFINING TRIMS

Although there is disagreement among countries as to what exactly constitutes a TRIM, these measures could encompass literally any law affecting a company's profitability or incentive to import or export. It would appear that "there is little international consensus even over how broadly to define TRIMs,"(2) as "in principle, any investment policy distorts the global and national allocation of capital and, therefore, affects trade."(3) Basically, the idea of TRIMs is an artificial construct, encompassing measures once accepted as part of industrial or national policy but now castigated by the West, especially the United States, as subverting the benefits of the liberalized world trade regime.

In practice, TRIMs take a number of forms. All states that are hosts to FDI have rules concerning what a foreign investor is prohibited, allowed, mandated and encouraged to do. Some rules are commonplace, such as accounting requirements or prohibitions of investment in illegal activities, such as the drug trade. A rule falls under the widest definition of TRIMs when the rule mandates or restricts the firms in a way that affects output, exports, imports or profitability (profit margins affect investment decisions).

The standard list, and the one advanced by the United States and accepted for debate during Uruguay Round negotiations as policies to be prohibited, includes export requirements, local content requirements, trade balancing provisions, local manufacturing requirements, production mandates, foreign exchange restrictions, mandatory technology transfers and limits on equity participation and on remittances.(4) The United States believes such practices should be prohibited because they are incentives or disincentives to invest that have "trade restrictive and trade distorting effects."(5) Incentives tied to export performance are also high on the list of activities the United States would like to restrict.

The U.S. government's list of TRIMs is an abbreviated one and clearly could extend to almost any law that a government passes. However, no other coherent definition has emerged. One academic defines a TRIM as a state policy that "restricts the inflow of foreign investment" and thus distorts "the pattern of both production and trade."(6) Another definition is that TRIMs are a subset of [state] investment policies ... regulations tied specifically to the trade practices of multinational firms, along with other policies that may have a less explicit but nonetheless significant influence on trade flows through their effects on the location of production."(7) These are catchall definitions that could encompass almost any government policy. For example, requirements that heavy machinery conform to certain safety standards could force a foreign firm to buy local equipment instead of using its own equipment from its home operations. Moreover, differences in corporate tax rates, import tariffs and even accounting rules affect the profitability of a company and hence its decision of whether or not to invest in a given country.

A committee from the World Bank, the International Finance Corporation and the Multilateral Investment Guarantee Agency conducted extensive research on the issue of foreign investment and compiled a model guideline for foreign investment law. The only Trims mentioned and discouraged (although the term "TRIM" was not used anywhere in the 200 pages of the published report) were tax breaks and other fiscal incentives.(8)

As noted above, in principle any state investment policy affects global trade. In practice, some states consider such practices to be legitimate, while others object to some of these policies (those they themselves do not practice). Thus, what is and what is not deemed a legitimate type of TRIM thus depends on the interests of the speaker (or country). The search for the TRIM definition is a search for the will-o'-the-wisp.

THE U.S. CRUSADE AGAINST TRIMS

U.S. government officials and some U.S. economists condemn TRIMs as distortions of world trade and say they reduce welfare and should be limited. Yet no state, not even the United States, is fighting for unrestricted FDI. The United States safeguards its own special sectors, and Congress seeks to expand control over FDI in the United States.

Internationally, the attack on TRIMs is led by the U.S. government, which has identified TRIMs as the Black Plague of foreign investment, saying they distort trade patterns and reduce world welfare. Specifically, Washington objects to performance requirements such as local content, local manufacturing and export and production requirements. Trade-related performance requirements, a term from the early 1980s, refer to a specific type of TRIM that mandates output and/or export performance. C. Fred Bergsten testified before the Senate Foreign Relations Committee in 1981 that trade-related performance requirements are "clearly the most important, and most rapidly growing, problem in the area of international investment today."(9)

The United States has tried to introduce its views on international investment law into the GATT. This attempt was initiated over a decade ago, and continued without much success, to the very end of the...