Opportunity at a cost: Confronting restrictions on FDI outflows

17 February 2017

Recent discussions of international investment policies, inspired by the UN Sustainable Development Goals and the Paris Agreement on Climate Change, have drawn attention to the capital needs associated with a more sustainable development path. Overall, there appears to be broad support for an internationally open, properly framed investment regime. The focus has been on investment liberalising and facilitating initiatives to be taken by potential host countries and, where needed, complementary efforts on the part of source countries. However, not everybody may be on board at all times.

Outward FDI, at least in “sensitive” sectors, might also be viewed as a menace to domestic production and employment. Among the policy initiatives recently mentioned by the US President are interventions intended to deter domestically established firms, particularly car producers, from moving productions or production segments abroad. Punitive tariffs on imports of the respective products or components might be imposed; and no further attention appears to be given to the economic and political costs involved.

Is this more than a threat? In the end, one might expect at least that no action would be taken in violation of the United States’ international obligations, including the commitment to most-favoured-nation (MFN) treatment and existing tariff bindings under the General Agreement on Tariffs and Trade (GATT).

Yet, hypothetically, there are subtler instruments that might serve the same purpose, deterring individual companies from relocating and investing abroad. Exclusions from public procurement projects or otherwise available tax benefits are cases in point. The legal status of such measures appears less evident than the imposition of punitive tariffs, in particular if merchandise trade is involved, since the respective GATT disciplines essentially deal with the treatment of products dispatched across borders rather than with domestic measures intended to affect investment flows.

What about services trade?

The General Agreement on Trade in Services (GATS) certainly covers investment-related interventions under its mode 3, “commercial presence.” However, potentially relevant disciplines, including MFN and national treatment, apply only to a WTO member’s treatment of foreign service suppliers and are subject to some additional provisos. Nevertheless, depending on the details, the GATS might apply in the current case: certain types of assembly operations (“contract manufacturing”) qualify as services under the classification scheme adopted by WTO members, and a number of the potentially affected car producers are foreign-owned.

Apart from multilateral obligations, there are other conceivable sources of investment disciplines — a wide variety of regional and bilateral trade and investment treaties. These treaties normally apply on a cross-sectoral basis. In general, however, their focus is on host country measures rather than on restrictions that home countries might impose on outward investment flows. Nevertheless, since there is no common blueprint, certain variants might indeed prove relevant in the current context.

Looking ahead: Areas for further exploration

Against this backdrop, at least four issues may warrant further attention:

  1. Is there evidence of any wider use of FDI-deterrent interventions by potential source countries e.g. for employment-related and similar reasons? If so, what are the sectors and measures predominantly concerned?
  2. What could or, rather, should be done to alert governments to the economic and political repercussions of such types of intervention? For example, is there scope for cooperative efforts of competent international organisations? What could these look like?
  3. What would be the status of outward FDI restrictions under current international obligations? Are there gaps that might need to be clarified, and eventually closed, by interested governments? If so, what would be the most suitable forum(s)?
  4. In the context of current efforts to create a coherent framework of international investment rules, with a view to mobilising resources for sustainable development, how should restrictions on FDI outflows be dealt with? Or could they simply be ignored?

Of course, these questions matter only if and insofar as governments, recognising the benefits of international cooperation, remain willing to contribute to, and comply with, a system of commonly binding disciplines. Though the current environment does not look very encouraging indeed, the resilience and adaptability of the GATT/WTO system, since 1947, should not be underestimated. But who would start the ball rolling?

Rudolf Adlung is an independent trade policy analyst and former senior economist in the Trade in Services Division of the WTO Secretariat.