WTO members find a new (and successful) approach to negotiations

The World Trade Organization (WTO) concluded the Agreement on Investment Facilitation for Development, known to participants as "IFD," in Geneva on July 6. There was no ministerial meeting to herald it, nor was it declared as part of a celebration of the Diamond Jubilee of the multilateral trading system.¹ Despite the lack of high-level fanfare, this agreement represents important progress.

The agreement is remarkable for several reasons

First, investment is a thorny issue when tackled in large multiparty negotiations. Its inclusion in the International Trade Organization (ITO) was one of the main reasons that the US Congress did not approve, and business opposed, US participation in what would have been the first global trade organization a half century earlier than the founding of the WTO. Later attempts were made to reach agreement on international investment at the Organization for Economic Cooperation and Development (OECD) and the WTO over 20 years ago, but those efforts came to nothing.² The IFD negotiators navigated past this history of wrecked prior efforts to address some aspects of the treatment of foreign investment.

Second, the WTO record of producing agreements during its 28-year history has fallen so far short of being robust that faith in multilateral negotiated outcomes has become shaken. The most recent success in multilateral negotiation at the WTO is a qualified one. The agreement reached in 2022 to discipline fisheries subsidies does not cover all of the targeted subsidies, and it self-destructs in four years if not completed. The WTO has not updated the Information Technology Agreement (ITA). It provides duty-free treatment for a list of items established in 2015 in a part of world trade that is rapidly evolving. While 67 WTO members agreed in 2022 to a declaration concluding a negotiation of a Joint Statement Initiative (JSI) providing for procedural rules governing domestic regulation of services, they bypassed seeking approval from the full membership. The participants implemented the results in their individual schedules of commitments under the General Agreement on Trade in Services. Now a nonparticipant is blocking certification of those schedules.

WTO members have only once approved a completed multilateral negotiation where all 164 members committed to sign, ratify, and participate in the outcome. It is the Trade Facilitation Agreement (TFA), which entered into force after an effort spanning two decades in 2017. IFD negotiators used the TFA as a model.

Why did this negotiation succeed when others failed?

First, the IFD, like the TFA, does not constrain any government's regulation of investment. It does not provide any additional market access. In an era of anti-globalization, the absence of formal liberalization is an essential feature. This is an implicit nod to governments wishing to maintain their freedom to screen more intensively inward foreign direct investment.

Second, the IFD is clearly pro-development. The IFD has generated substantial enthusiasm among developing economies. Over two-thirds of the WTO's members consider themselves to be developing economies, and of these, 35 are classified as least developed. Of the WTO's 164 members, 110 participated in the IFD negotiation. Over 70 of these are developing economies and 20 of them are least developed.

Third, it is, like the TFA, an agreement that is largely about process. It is also less about constraints on behavior as much as it is about encouraging positive conduct. This departs from the structure of the General Agreement on Tariffs and Trade (GATT), a central part of the WTO rulebook negotiated in 1947, which is centered very heavily on binding commitments to refrain from inhibiting trade. Under the GATT, all WTO members must not, for example:

• Discriminate among imports based on country of origin.
• Raise tariffs above contractually bound levels.
• Discriminate through domestic measures against imports as they compete with domestic products.
• Apply quantitative restrictions to imports or exports.
• Interfere with goods in transit.

Where the TFA and IFD find common purpose with the GATT rules is in requiring members, for example, to:

• Be transparent by notifying and publishing their measures.
• Consult when another member seeks consultations.

Fourth, the taking on of obligations is multispeed, determined by the member itself upon joining the agreement.

Fifth, the negotiation was joined by those who were interested in an agreement on this subject. The normal hostage-taking, or put more delicately, horse-trading, of a major multi-subject negotiation was not a central feature of the IFD talks. As opposed to the GATT rules, the TFA applies only to members that have accepted the agreement.

Lastly, it may have helped that the IFD negotiations, like other JSIs, were convened and brought to a successful conclusion by "middle grounders" (not the largest WTO members)—in this case, Chile and South Korea. The major rounds of GATT multilateral negotiations were largely dominated by the US and Europe, with results often dictated by the two. The JSIs are far more democratic in origin and in their proceedings. As for big power involvement in this negotiation, China was a strong supporter, and the US did not join.

The new model focuses on process, specifying good behavior, and providing variable geometry

The TFA is focused on lessening the hurdle of crossing a border due to administrative burdens or lack of information. This does not prevent it from being quantifiably liberalizing in effect. While the TFA contains no traditional measures of trade liberalization, according to the WTO Secretariat, "Estimates show that the full implementation of the TFA could reduce trade costs by an average of 14.3 percent and boost global trade by up to $1 trillion per year." The text of the agreement was approved by consensus of all 164 WTO members and entered into force in February 2017. As of now, 156 WTO members have ratified the agreement.

In its new approach, the TFA offers great flexibility in the timing of the degree of obligation to be assumed. There are three categories for implementation—immediate application, phased-in application, and application depending on receipt of assistance to enable a member to undertake full obligations. The choice of the timing of obligations is for each developing-economy participant to make, reflecting the wide diversity among WTO members, from trade superpower to the very least developed. Once a signatory, flexibility is provided to shift from category B, delayed implementation, to category C, requiring assistance to undertake an obligation. A substantial grace period (eight years for category B and C undertakings) is allowed to least developed countries before they can be held accountable for their conduct under the WTO's dispute settlement provisions.

The words "shall not" without any qualification do not appear very often in the TFA. These prohibitions occur only about a dozen times, of which a substantial number deal solely with goods in transit. Moreover, none results in much of a constraint on the conduct of trade policy. The provisions are largely about cutting red tape, protecting against overcharging for a service, and avoiding trade distortions through discriminatory or unduly burdensome import procedures. Examples of prohibitions (undiluted by such phrases as "to the extent practicable") include not charging fees until they are published and not charging more for a guarantee than the amount to ensure payment of duties. These are hardly draconian requirements. They do not constitute a straitjacket to constrain substantive policy choices—such as limiting or otherwise regulating imports.

The positive obligations, over 90 in all, dwarf the number of prohibitions. The positive requirements often center on providing transparency, for example, by promptly publishing necessary information in a nondiscriminatory and easily accessible manner in order to enable governments, traders, and other interested parties to become acquainted with them, providing this information online, maintaining inquiry points, and allowing comments to be filed on proposed regulations. The right of appeal is to exist, and reasons for decisions are to be made available to the persons to whom they are applicable. Reasons for the detention of goods are to be promptly notified to the carrier or importer. The procedures are to be nondiscriminatory.
In short, this is a code of good behavior.

The IFD carries the TFA model forward.³ The use of "shall not" mainly appears in the context of where the agreement shall not apply. The agreement is about what a developing economy desiring to attract foreign investment should do, not much about what it should not do. Nondiscrimination is required but this is about process being nondiscriminatory, not the substantive regulation of investment.

By its terms, the IFD only applies to parties, and no WTO member is required to join. However, as with the TFA, nonsignatories will likely benefit along with signatories who have ratified the agreement, because it is unlikely that procedures and practice, such as publication of regulations or providing notice can readily be confined to participants of the agreement. There are two significant benefits of being a signatory: first, enforcement is only available to parties; and second, and likely more important, signing the agreement indicates that the party has adopted this code of good conduct and may be a better place to invest.

As opposed to the GATT/WTO rules, negotiated largely based on consideration of receiving reciprocity, under the two new agreements of the TFA and IFD, for a developing-economy participant, it is likely that a primary benefit is due to improving its own conduct. Balance is achieved not because developed and developing economies each contributed concessions as in traditional trade negotiations, but because all shared a general interest in reducing the unintended impact of redundant, opaque, or unnecessary processes governing international exchanges, one set in an agreement for trade (TFA), the other in an agreement for investment (IFD).

It's not clear sailing yet

Before celebrating the achievement of a new agreement at the WTO, it needs to be noted that some WTO members opposed even the launch of this type of negotiation among like-minded members.⁴ These countries found, however, that they could not block the take-off of this type of negotiation. They have clearly indicated a desire to be able to block its landing. The ability to stand in the way of like-minded members concluding an agreement beneficial to the trading system remains possible. This is because it is not clear how to embed a new agreement in the WTO other than by consensus. Consensus has been taken to mean having no member object to whatever is being proposed.

However, the IFD may prove to be difficult to block as a political matter, as a high number of developing economies support this negotiated outcome. Not blocked, the IFD could be adopted as an open plurilateral agreement to be administered at the WTO as part of the WTO canon, such as was the case for the ITA (applied on a most-favored-nation basis) or the Agreement on Government Procurement (with access to purchasing limited to signatories). A potential struggle lies ahead with the outcome still uncertain.

Nevertheless, is the new agreement a way forward?

There are several fracture lines within the WTO. One has been the strong differences of views on how global rules should apply to the Global South. The TFA model, emphasizing good conduct for its own sake, now picked up and used in the IFD, has found a way to strike a balance. The emphasis is on what to do, not what not to do. There is no duress to join the IFD as there was to join the WTO and GATT in 1994. The North/South divide evident in many other areas of the WTO's rulebook was replaced by recognizing mutual interest in fostering trade and investment.

Essential to the future of the world trading system, to the WTO, is that it demonstrate that it can produce results. It is not clear if food security (a climate change response), other environmental issues (such as constraining ocean pollution or carbon border adjustment mechanisms), and the need to deal with future pandemics can follow this path. These subjects must be addressed, and the TFA/IFD model is one that needs to be examined as an approach that has now worked twice to deliver agreements at the WTO.

Notes

1. There seems to be no such celebration to mark the system's 75th anniversary, in stark contrast to the 50th anniversary for which world leaders gathered in Geneva.

2. Attempts at addressing investment were noteworthy failures in modern international economic history: the Multilateral Agreement on Investment cratering after a three-year effort at the OECD (talks started in 1995 and ceased in 1998). Investment was also placed on the WTO agenda in 1996 as a "Singapore Issue" (one of four issues initiated at the Singapore Ministerial Conference), it was dropped during efforts to reach an agreement on the Doha Round Agenda in 2004.

3. The text is not publicly available, but presentations have been made about what has been negotiated.

4. India and South Africa have raised questions about the legitimacy of the JSI approach and question how the negotiated results can be added to the WTO acquis, its set of agreements.