WORLD TRADE
ORGANIZATIONWT/WGTI/W/149
7 October 2002
(02-5399)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM INDIA
The following communication, dated 2 October 2002, has been received from the Permanent
Mission of India.
_______________
NON-DISCRIMINATION1
1. Non-discrimination in the context of trade in cludes national treatment (NT) and most-
favoured-nation (MFN) treatment. The question of  including the MFN and NT standard in any
international investment agreements tends to raise more complex issues than including them in trade
agreements. This fact has been underlined in the Secretariat Note (WT/WGTI/W/118) as well.
2. Investment essentially involves movement of capital which tends to move in various ways
from home country to third countries and then to host countries. There may be many channels of such
movement and the ultimate investor may not be the original lender or investor. Hence the question ofnon-discrimination in capital flows becomes more complex. There is no clear buyer-seller linkage, as
is the case of goods and services, and no certainty regarding the source of funds. There is also no
certainty regarding the manner in which funds will be retained in the host country and at what point in
time, in what manner, and to what extent funds will flow out. Unlike domestic investment, where
funds remain within the country, foreign investment can flow in and out, depending on speculative
factors and short-term changes in different investment destinations. Many developing countries have,
in the recent past, faced economic crises on account of heavy outflow of funds occurring within ashort period of time. A certain degree of discrimination between different kinds of investment is
unavoidable. The effect of different kinds of foreign capital on the economies of developing countries
would obviously vary. The source of funds is also of significance from the economic as well as
political point of view. There are, therefore, severe limitations to the extension of the concept of non-
discrimination to capital flows.
3. The important issue to be clarified is whether non-discrimination is an absolute principle.
While it is universally accepted and endorsed that the principle of non-discrimination underlies the
multilateral trading system, issues have been raised by developmental economists whether such non-
discrimination provisions have to be treated in an absolute sense. Given the various channels of
                                                     
1 Members are in the process of learning in the Working Group on the Relationship between Trade and
Investment in accordance with the mandate outlined in paragraphs 20-22 of the Doha Ministerial Declaration
read in conjunction with the Chairman’s statement at th e Ministerial Conference.  The paper is a contribution to
the learning process without prejudice to India’s position on the need to establish any multilateral framework oninvestment within the WTO. India reserves the right to re vert to the subject as and when its technical knowledge
increases.WT/WGTI/W/149
Page 2
capital flows, characteristics of capital and their different socio-economic impact on the host country,
is it not essential that developing countries preserve fully their discretionary authority with regard to
investment inflows?
4. Another issue is the relevance of the WTO principles of non-discrimination to international
investment agreements. In a paper submitted to  the Working Group (WT/WGTI/W/96) Korea had
enumerated five fundamental principles of the WT O – non-discrimination; freer trade; predictability;
promotion of freer competition; and encouraging development and economic reform – and argued that
any rule in the WTO context should conform to th ese principles. When it comes to "investment" per
se as distinct from "trade" per se, the relevance of these principles is neither direct nor evident. Money
flows are essentially different in character from flows of services and goods. The money market is
considerably more opaque, less predicable, far more subject to purely speculative movements. The
principles of free trade in goods and services can not be applied to the movement of capital.
5. It is not appropriate to compare "investment" as defined and dealt with under GATS with
"investment" as proposed for negotiation by some members under the aegis of WTO. GATS follows
an "enterprise-based" definition of investment and the definition is closely linked to the mode 3 of
service delivery vis-à-vis "commercial presence" which in the context of GATS has no other purpose
than to facilitate service supply. One of the basic characteristics of service delivery in respect ofcertain categories of services is the need for the "supplier" and the "receiver" of the service to be in
contact. "Commercial presence", therefore, is the only mode of service delivery in the case of certain
types of services, e.g. banking and insurance. Another  paper by  Korea (WT/WGTI/W/123) notes in
paragraph 18 that "the GATS deals with trade in services by its nature, not investment per se.
Therefore, the "commercial presence" in a host country, even though it includes direct investment, orthe establishment of a foreign company, mainly focuses on the supply of services".
6. Commercial presence is covered under GATS only to the extent that it facilitates the delivery
of services – and that too is subject to various conditions and exemptions. What is of importance is the
commitment for market access for specific service sectors undertaken by a Member. Mistaking it as a
commitment to "commercial presence" is mistakin g the "medium" for the "message". Therefore,
inclusion of commercial presence under GATS in the WTO does not, in any way, justify the inclusion
of "investment" under "goods" in the WTO. Not surprisingly, the Korean Paper (WT/WGTI/W/96) on
the issue posed a question - How should we bridge the differences in the definition of investment
between any multilateral framework on investment (MFI) and the GATS in which investment is
defined as "commercial presence"?
7. While looking at the contrast between GATS and GATT it may be noted that specific sectors
and modes of supply to be covered under GATS contrasts with the traditional GATT approach basedon general principles.
8. When it concerns trade – in goods and in services – national treatment has a special relevance
and the multilateral trading system is established on the basis of the non-discrimination principle. On
the other hand, traditionally in international law, control of entry and establishment has been the
prerogative of national governments. Conventionally countries have treated as their sovereign rightthe right to control entry and establishment. There are only two countries (the US and Canada) that
are known to insist on "pre-establishment national treatment" provisions in their bilateral investment
treaties (BITs). International investment agreements (IIAs) also in general do not envisage national
treatment at pre-establishment stage. When certain international instruments envisage national
treatment at entry stage, i.e. at the pre-establishmen t stage, it has been noticed that such instruments
are non-binding. A case in point is the OECD Code for the Liberalization of Capital Movements in
which right of establishment was introduced in 1984. Another instance is that of the APEC non-
binding investment principle. A multilateral Agreement on Investment under the auspices of the
economically well-off countries of the OECD, which envisaged in the draft agreement bindingWT/WGTI/W/149
Page 3
national treatment obligations, did not find favour  with many of these countries, and had to be
abandoned. How then can an agreement of this nature, envisaging national treatment and MFN
provision of a binding nature, be considered in a much more heterogeneous group like WTO?
9. It was to bring services under the umbrella of the WTO that it was found necessary to devise
a specific architecture involving, inter alia , mode based definitions. It would be erroneous logic to
now reapply the GATS architecture to the goods sector. GATS is a complex Agreement. Safeguard
measures in respect of services have eluded evolution. Protection in respect of goods is possible
through tariff and other border measures, while certain modes of services are not amenable to such
measures. Given the complex nature of capital fl ows/investments, application of non-discrimination
principle as it exists in goods and services to investment cannot be automatic. Developing countries
need to retain the ability to screen and channel foreign direct investment consistent with their
domestic interests and priorities. This is the reason why bilateral investment treaties are preferred theworld over.
__________