Think Piece

Investment and Trade Regimes Conjoined: Economic Facts and Regulatory Frameworks

By Gary Clyde Hufbauer, Tyler Moran, 
July 2015
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Recent research suggests that trade and investment are closely linked as two-way economic complements. Trade liberalisation facilitates investment, but even complete trade openness will not overcome an investment environment that is otherwise unfavourable. Countries must do more to attract multinational corporations and global value chains. They need to limit the burdens placed on firms through taxation and regulation, while maintaining the revenue and policy space needed for good governance. The investment chapter in the North American Free Trade Agreement (NAFTA) announced a new era. Subsequent US FTAs elaborated upon the NAFTA template. For example, the Singapore FTA held state-owned enterprises to higher standards in terms of open procurement, transparent accounts, and independent regulation. Intellectual property rights chapters were more precise. Investor-state dispute settlement (ISDS) provisions were refined to ensure that normal environmental, health or safety regulations could not create a claim for investor compensation. However, the World Trade Organization (WTO) lingers far behind FTAs, bilateral investment treaties and double taxation treaties in addressing the nexus between investment and trade. Another weakness is that the WTO only allows member states to bring disputes, even though the overwhelming majority of cases entail state practices that arguably harm private firms. In other words, state-to-state dispute resolution is the WTO norm, unlike ISDS resolution under bilateral treaties and FTAs. As progress at the multilateral level slowed, more limited arrangements have played a larger role in setting the rules for international trade. Even if future WTO rounds become much more productive, it is likely that the next steps on some of these issues will take place outside the WTO. But rules established elsewhere can serve as baselines for future multilateral agreements.

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