Emergency Committee For American Trade - Publications

Investment

Due to increasing global economic integration, the livelihood of more workers in more companies around the globe depends on cross-border trade and investment than ever before. Over the last quarter century, expanding foreign direct investment has become an increasingly important catalyst of global economic integration and new economic growth and opportunity. According to UNCTAD statistics, global foreign direct investment rose twenty-five fold, from $14 billion to $350 billion between 1970 and 1996.

Foreign investment, both inward and outward, is of increasing importance to the American economy. It spurs U.S. productivity by promoting research and development, investment in physical capital, and new technology. The payoff is in better, higher-paying jobs and a higher standard of living in the United States. The following comparison of foreign affiliate sales of U.S. parents to total exports of U.S. parents indicates just how important continued expansion of foreign direct investment is to the continued growth and prosperity of American firms with global operations and their workers.

Foreign investment in the United States is also a major source of U.S. economic growth, as foreign-owned companies now account for nearly one-fifth of U.S. exports, totaling $141 billion in 1997, according to a recent study by the Organization for International Investment. U.S. subsidiaries of foreign firms employed over 5 million U.S. workers in 1997. In the same year, these U.S. subsidiaries invested $19.7 billion in research and development activities and $101 billion in new plants and equipment in the United States. It is vital that U.S. trade and international tax policies keep in step with the growing importance of U.S. inward and foreign direct investment in order to support U.S. economic growth and living standards.

Update of ECAT’s Study Global Investments, American Returns

One of the central missions of ECAT’s trade education program has been to encourage broader understanding of the role of U.S. foreign direct investment in producing global economic growth and higher U.S. living standards. That understanding was furthered through the release in 1998 of ECAT’s study Global Investments, American Returns (GIAR). The study analyzes U.S. foreign direct investment in the manufacturing, agricultural, and services sectors, drawing on U.S. Census data and case studies provided by 10 ECAT member companies. The study documents the ways in which trade and foreign direct investment promote U.S. productivity and living standards. The study disproves the popular myth that foreign direct investment is "hollowing out" the U.S. economy by demonstrating that the international operations of American companies generally complement their domestic operations. In fact, the evidence in the study shows that American companies need the flexibility to make foreign direct investment in order to maintain the growth of their domestic activities.

Last fall, ECAT issued a "1999 Update" of its GIAR study based on the most recent available U.S. Census data. The update bolsters the conclusions of the original GIAR, based on the trends documented over the last two decades. The key findings of the 1999 Update are set out below.

American companies with global operations make important contributions to the U.S. standard of living that in many cases are greater than those of purely domestic firms. For the last 20 years, American companies with global operations have accounted for over half of U.S. research and development, capital investments, and exports and, thereby, have helped boost overall U.S. productivity.
U.S. foreign direct investment complements economic activity here at home, thereby increasing the U.S. standard of living. Foreign affiliate activity generates purchases from U.S. suppliers, research and development here at home, and trade. Given that the U.S. and foreign activities of American companies tend to complement one another, the ability of these companies to raise the U.S.standard of living depends on their ability to invest abroad. Restrictions on foreign investment which prevent U.S. companies from expanding abroad, generally reduce U.S. parent activity and, thus, lower the U.S. standard of living.
American companies with global operations depend upon American suppliers and their American workers. For the last two decades, the U.S. parents of American companies with global operations consistently have purchased more than 90 percent of their supplies (or intermediate inputs) from U.S.-based, not foreign, suppliers. In 1997, these purchases totaled $3 trillion.

In addition to these key findings, the GIAR study and "1999 Update" also report that American firms with global operations pay higher wages than purely domestic firms. For non-production or white-collar workers the wage difference is nearly 10 percent, and for production or blue-collar workers it is even higher.

ECAT hopes that the GIAR study and the "1999 Update" will not only help to raise awareness of the positive role of U.S. foreign direct investment, but also will change the way the trade community makes the case for trade expansion. To rebuild support for trade expansion, we can no longer afford to maintain the traditional argument that more exports means more U.S. jobs. Instead, ECAT believes that we should rely on the stronger, fact-based argument that trade and investment promote U.S. economic growth and living standards. While emphasizing economic growth, this argument also acknowledges that dislocations may occur as the result of expanding trade and investment and technological advances. We must commit to addressing these dislocations through meaningful worker retraining and adjustment assistance if we are to regain broad public support for trade expansion.

Outlook for International Agreement on Investment

Since 1997, WTO members have been debating the relationship between trade and investment and whether WTO rules on investment should be expanded. The only WTO rules concerning investment are contained in the WTO Agreement on Trade-Related Investment Measures (TRIMS) negotiated during the Uruguay Round. The TRIMS agreement prohibits restrictions on foreign investment such as domestic content and export performance requirements, but does not set out any general principles--such as national treatment or the right of establishment--limiting restrictions on foreign investment.

The WTO Working Group on the Relationship Between Trade and Investment has examined the range of existing international instruments governing investment, primarily bilateral investment treaties, as well as the efforts to negotiate a Multilateral Agreement on Investment (MAI) in the OECD. The MAI negotiations, initiated in 1995, were intended to build on existing OECD instruments covering investment to create both a uniform set of high multilateral standards of investor protection and a dispute settlement system covering both governments and individual investors. The proposed MAI contained a broad definition of investment, including enterprises, real estate, portfolio investments, and other financial instruments and intangible assets, and required transparency and the extension of both national treatment and most-favored-nation treatment to investors. MAI negotiations collapsed in October 1998, for a number of reasons, including disagreements with the EU over exemptions for cultural industries.

Based on the working party discussions, a number of proposals have been made regarding the initiation of WTO negotiations on investment. The major elements of these proposals are:

Negotiations should cover only foreign direct investment;
Development provisions would be a key part of the framework of any rules and disciplines agreed to;
The agreement should respect the ability of governments to regulate the activity of investors;
The agreement should address trade-distorting and investment-distorting measures;
Commitments on access to investment opportunities in host countries should be negotiated "bottom-up," similar to the approach taken in the negotiation of the General Agreement on Trade in Services (GATS); and
WTO dispute settlement provisions should apply but only to government-to-government disputes.

The EU and Japan have been the major proponents of launching negotiations on investment in the WTO. The EU’s proposal to include negotiations on investment in a new round met with wide cynicism during the Seattle Ministerial meetings, as many WTO members believed that the proposal was largely intended as part of a broader strategy to avoid a round focused largely on agriculture negotiations. Another view of the EU proposal is that it is motivated by the EU Commission’s desire to strengthen its jurisdiction over investment regulation within the member states. Meanwhile, there is widespread developing country opposition to the negotiation of an investment agreement in the WTO on the grounds that such an agreement could encroach on development objectives and compound the burden of compliance with WTO rules.

In light of the increasing importance of international investment flows, it is important to have a strong set of rules to provide transparent regulation and non-discriminatory treatment of investment. The rules must set standards, which are at least as high as those in effect under existing bilateral investment treaties. While there is not sufficient consensus to proceed with negotiations on investment in the WTO, analysis of the issue should continue to determine the most appropriate venue for achieving an agreement with a set of high standards.

ECAT POSITION: ECAT supports a continuing effort to build a consensus for an international agreement on investment that will provide a high standard of protection for investors which meets or exceeds protections currently provided under U.S. bilateral investment treaties. ECAT believes that U.S. trade and international tax policies should recognize the vital importance of U.S. foreign direct investment to U.S. economic growth and should promote the expansion of U.S. trade and investment.


	Investment Due to increasing global economic integration, the livelihood of more workers in more companies around the globe depends on cross-border trade and investment than ever before. Over the last quarter century, expanding foreign direct investment has become an increasingly important catalyst of global economic integration and new economic growth and opportunity. According to UNCTAD statistics, global foreign direct investment rose twenty-five fold, from $14 billion to $350 billion between 1970 and 1996. Foreign investment, both inward and outward, is of increasing importance to the American economy. It spurs U.S. productivity by promoting research and development, investment in physical capital, and new technology. The payoff is in better, higher-paying jobs and a higher standard of living in the United States. The following comparison of foreign affiliate sales of U.S. parents to total exports of U.S. parents indicates just how important continued expansion of foreign direct investment is to the continued growth and prosperity of American firms with global operations and their workers. Foreign investment in the United States is also a major source of U.S. economic growth, as foreign-owned companies now account for nearly one-fifth of U.S. exports, totaling $141 billion in 1997, according to a recent study by the Organization for International Investment. U.S. subsidiaries of foreign firms employed over 5 million U.S. workers in 1997. In the same year, these U.S. subsidiaries invested $19.7 billion in research and development activities and $101 billion in new plants and equipment in the United States. It is vital that U.S. trade and international tax policies keep in step with the growing importance of U.S. inward and foreign direct investment in order to support U.S. economic growth and living standards. Update of ECAT’s Study Global Investments, American Returns One of the central missions of ECAT’s trade education program has been to encourage broader understanding of the role of U.S. foreign direct investment in producing global economic growth and higher U.S. living standards. That understanding was furthered through the release in 1998 of ECAT’s study Global Investments, American Returns (GIAR). The study analyzes U.S. foreign direct investment in the manufacturing, agricultural, and services sectors, drawing on U.S. Census data and case studies provided by 10 ECAT member companies. The study documents the ways in which trade and foreign direct investment promote U.S. productivity and living standards. The study disproves the popular myth that foreign direct investment is "hollowing out" the U.S. economy by demonstrating that the international operations of American companies generally complement their domestic operations. In fact, the evidence in the study shows that American companies need the flexibility to make foreign direct investment in order to maintain the growth of their domestic activities. Last fall, ECAT issued a "1999 Update" of its GIAR study based on the most recent available U.S. Census data. The update bolsters the conclusions of the original GIAR, based on the trends documented over the last two decades. The key findings of the 1999 Update are set out below. American companies with global operations make important contributions to the U.S. standard of living that in many cases are greater than those of purely domestic firms. For the last 20 years, American companies with global operations have accounted for over half of U.S. research and development, capital investments, and exports and, thereby, have helped boost overall U.S. productivity. U.S. foreign direct investment complements economic activity here at home, thereby increasing the U.S. standard of living. Foreign affiliate activity generates purchases from U.S. suppliers, research and development here at home, and trade. Given that the U.S. and foreign activities of American companies tend to complement one another, the ability of these companies to raise the U.S.standard of living depends on their ability to invest abroad. Restrictions on foreign investment which prevent U.S. companies from expanding abroad, generally reduce U.S. parent activity and, thus, lower the U.S. standard of living. American companies with global operations depend upon American suppliers and their American workers. For the last two decades, the U.S. parents of American companies with global operations consistently have purchased more than 90 percent of their supplies (or intermediate inputs) from U.S.-based, not foreign, suppliers. In 1997, these purchases totaled $3 trillion. In addition to these key findings, the GIAR study and "1999 Update" also report that American firms with global operations pay higher wages than purely domestic firms. For non-production or white-collar workers the wage difference is nearly 10 percent, and for production or blue-collar workers it is even higher. ECAT hopes that the GIAR study and the "1999 Update" will not only help to raise awareness of the positive role of U.S. foreign direct investment, but also will change the way the trade community makes the case for trade expansion. To rebuild support for trade expansion, we can no longer afford to maintain the traditional argument that more exports means more U.S. jobs. Instead, ECAT believes that we should rely on the stronger, fact-based argument that trade and investment promote U.S. economic growth and living standards. While emphasizing economic growth, this argument also acknowledges that dislocations may occur as the result of expanding trade and investment and technological advances. We must commit to addressing these dislocations through meaningful worker retraining and adjustment assistance if we are to regain broad public support for trade expansion. Outlook for International Agreement on Investment Since 1997, WTO members have been debating the relationship between trade and investment and whether WTO rules on investment should be expanded. The only WTO rules concerning investment are contained in the WTO Agreement on Trade-Related Investment Measures (TRIMS) negotiated during the Uruguay Round. The TRIMS agreement prohibits restrictions on foreign investment such as domestic content and export performance requirements, but does not set out any general principles--such as national treatment or the right of establishment--limiting restrictions on foreign investment. The WTO Working Group on the Relationship Between Trade and Investment has examined the range of existing international instruments governing investment, primarily bilateral investment treaties, as well as the efforts to negotiate a Multilateral Agreement on Investment (MAI) in the OECD. The MAI negotiations, initiated in 1995, were intended to build on existing OECD instruments covering investment to create both a uniform set of high multilateral standards of investor protection and a dispute settlement system covering both governments and individual investors. The proposed MAI contained a broad definition of investment, including enterprises, real estate, portfolio investments, and other financial instruments and intangible assets, and required transparency and the extension of both national treatment and most-favored-nation treatment to investors. MAI negotiations collapsed in October 1998, for a number of reasons, including disagreements with the EU over exemptions for cultural industries. Based on the working party discussions, a number of proposals have been made regarding the initiation of WTO negotiations on investment. The major elements of these proposals are: Negotiations should cover only foreign direct investment; Development provisions would be a key part of the framework of any rules and disciplines agreed to; The agreement should respect the ability of governments to regulate the activity of investors; The agreement should address trade-distorting and investment-distorting measures; Commitments on access to investment opportunities in host countries should be negotiated "bottom-up," similar to the approach taken in the negotiation of the General Agreement on Trade in Services (GATS); and WTO dispute settlement provisions should apply but only to government-to-government disputes. The EU and Japan have been the major proponents of launching negotiations on investment in the WTO. The EU’s proposal to include negotiations on investment in a new round met with wide cynicism during the Seattle Ministerial meetings, as many WTO members believed that the proposal was largely intended as part of a broader strategy to avoid a round focused largely on agriculture negotiations. Another view of the EU proposal is that it is motivated by the EU Commission’s desire to strengthen its jurisdiction over investment regulation within the member states. Meanwhile, there is widespread developing country opposition to the negotiation of an investment agreement in the WTO on the grounds that such an agreement could encroach on development objectives and compound the burden of compliance with WTO rules. In light of the increasing importance of international investment flows, it is important to have a strong set of rules to provide transparent regulation and non-discriminatory treatment of investment. The rules must set standards, which are at least as high as those in effect under existing bilateral investment treaties. While there is not sufficient consensus to proceed with negotiations on investment in the WTO, analysis of the issue should continue to determine the most appropriate venue for achieving an agreement with a set of high standards. ECAT POSITION: ECAT supports a continuing effort to build a consensus for an international agreement on investment that will provide a high standard of protection for investors which meets or exceeds protections currently provided under U.S. bilateral investment treaties. ECAT believes that U.S. trade and international tax policies should recognize the vital importance of U.S. foreign direct investment to U.S. economic growth and should promote the expansion of U.S. trade and investment. 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