The Investment Facilitation for Development Agreement

Since September 2020, a group of WTO members has been negotiating a new agreement on investment facilitation disciplines, following nearly 3 years of preparatory work. The negotiations for this Investment Facilitation for Development Agreement (IFDA) have since advanced at a rapid pace, so much so that the co-coordinators of the process—South Korea and Chile—have announced that they expect the legal text of the Agreement to be finalized at the latest by mid-2023.

The rapid pace at which members are reaching consensus on some of the main elements of the Agreement has come as a surprise to some trade watchers, and whether the current July 2023 deadline is met remains to be seen. Historically, WTO members have long struggled to advance negotiations for new agreements, especially at the multilateral level—in trade jargon, those talks involving the organization’s entire membership. The IFDA, however, may prove to be an exception, with this progress potentially due to the so-called plurilateral nature of the negotiations. Rather than having all 164 WTO members engaging in discussions, the IFDA is only negotiated by a coalition of the willing, which currently includes more than 110 members of the WTO. This is more than two-thirds of the membership. The coalition includes developed economies, as well as a significant number of developing country and least-developed country (LDC) members.

The high participation of developing country and LDC members has been due to the initiative’s focus on promising that the IFDA will have a strong development dimension. The Agreement’s objective is to promote the implementation of investment facilitation measures, in the form of transparency, administration streamlining, international cooperation, and other types of efforts to facilitate the flow of foreign direct investments among members. The idea is that these investment facilitation measures will be useful for creating a more investment- and business-friendly environment, one which facilitates the entry and operation of foreign direct investment (FDI) in a country. There is also an expectation that these disciplines will be especially useful for developing country and LDC members in their efforts to attract foreign investment and may result in their increased participation in global investment flows.

What’s Been Agreed So Far

There are seven key sections in the draft negotiating text, each consisting of both clean and bracketed text. Brackets around a provision mean that the provision, or certain words within it, is still under negotiation. When language is not bracketed, it is referred to as “clean text,” which means WTO members have agreed—in principle—to the language of the article, and no more changes are expected. Beyond the brackets, WTO members also need to agree on select proposals that remain within the Agreement’s Annex. These are articles that have yet to gain broader support among participating WTO members so that these provisions can be moved to the main text.

Given that the negotiations have advanced rapidly, this means that members have produced a substantial number of “clean text” articles. By comparison, very few brackets and proposals remain subject to further negotiation. With that being said, the negotiations follow the long-standing WTO negotiating principle that “nothing is agreed until everything is agreed,” so even if many articles are “clean,” members can still revisit them later on.

The IFDA’s Objective and Scope

Section I of the Agreement outlines the IFDA’s objective and scope. In addition to the objective of increasing foreign investment in developing countries, this section includes important clarifications on how the Agreement will relate to other international investment agreements, to what type of government measures these disciplines would apply to, as well as what measures would fall outside the scope of application. For example, the section clarifies that the agreement cannot be construed as applying to matters relating to market access, investment protection, investor–state dispute settlement (ISDS), nor to government procurement and subsidies/grants unavailable to foreign investors, nor to government procurement and subsidies/grants unavailable to foreign investors.

These provisions are meant to help clarify the positioning of the IFDA within a larger landscape of international investment governance, among other purposes. For example, according to the United Nations Conference on Trade and Development (UNCTAD), there are currently 2,856 bilateral investment treaties, of which 2,244 are in force, in addition to 439 treaties with investment provisions, of which 360 are in force. The latter type of treaty often includes regional trade agreements, many of which have investment chapters. There are also active UN processes focused specifically on international investment governance, such as at the United Nations Commission on International Trade Law, and intergovernmental agencies that undertake extensive work in this area with governments, such as UNCTAD and the Organisation for Economic Co-operation and Development.

The exceptions outlined in the IFDA’s Section I, meanwhile, reflect concerns and necessary clarifications promised by the initiative’s proponents since plans for a possible investment facilitation agreement were first announced by 70 WTO members during the organization’s Eleventh Ministerial Conference in Buenos Aires, Argentina, in 2017.

Section I has benefitted from intense discussions in 2022 and still includes a number of details where members in the IFDA talks are working to achieve consensus. One of the core issues that remains unclear is the extent to which the IFDA’s obligations would apply to portfolio investments or whether the application of the disciplines will be constrained more clearly to matters relating to FDI only. Another set of particularly important brackets that members still need to agree on is whether the agreement should apply to measures that “affect” foreign direct investments or, more narrowly, to measures “related to” investments. Some members prefer a clearer and narrower approach, under which measures would have to be explicitly related to investments to be covered. Others prefer a wider approach, under which any measure that might have a direct or indirect impact on investments would be covered and subject to the IFDA’s obligations.

Transparency of Investment Measures

Section II is a core pillar of the Agreement, featuring disciplines that improve the transparency of investment measures. This is mainly done through the implementation of various publication-related disciplines. For example, members have agreed to publish information on all of their enacted government measures that have an impact on the investment activities undertaken by foreign investors in the host state’s territory. The Agreement clarifies that a government measure includes laws, regulations, rules, procedures, decisions, administrative actions, and possibly other forms undertaken by government authorities at the local, regional, and central levels, as well as by non-governmental bodies with delegated authority.

Members also agree to publish information on laws and regulations that are in the process of being developed. Beyond publishing information, members also agree to certain good regulatory practice provisions, which involve the implementation of certain “best practice” processes for developing and implementing regulations. Most notably, members agree to facilitate comments from interested stakeholders, including from foreign investors, during their regulatory development process. While members are required to facilitate such inputs, they are not obliged to implement the comments.

Streamlining and Speeding Up Administrative Procedures

Another key pillar of the Agreement is Section III on “streamlining and speeding up administrative procedures.” For instances when an authorization is required for a foreign investment to enter and operate within a country, this section clarifies how governments should develop measures for such an authorization, and, more specifically, provides guidance on how competent authorities should treat applications that may be submitted as a part of authorization procedures. By implementing such disciplines, the expectation is that the authorization procedures will become more efficient, namely by reducing “red tape,” and also will be implemented in a more transparent and reliable manner.

Members also agree to implement a range of disciplines aimed at improving governments’ collaboration with foreign investors. These fall under Section IV on focal points, domestic regulatory coherence, and cross-border cooperation. Examples of these disciplines include establishing a contact point that responds to enquiries from investors on matters pertaining to the IFDA, as well as creating a database that makes it easier for these investors to find information on local suppliers. In addition, the IFDA would encourage members to implement programs that would improve the capacity of local suppliers so that they can better respond to the needs to foreign investors.

Cooperation, Sustainable Investment-Focused Efforts

Not only are cooperation efforts expected in relation to investors, but the IFDA also targets improving cooperation among participating WTO members themselves. Members would be required to set up an enquiry point to respond to questions that other members submit on any measures covered by the Agreement, as well as to facilitate the exchange of best practices and experiences on their efforts to implement the Agreement. These points are set out in Section IV and Section VII on Institutional Arrangements and Final Provisions, respectively.

While all of these measures are expected to facilitate FDI, participating WTO members recognize that there is also a need for more specific disciplines that focus on promoting the flow of sustainable investments. These are also referred to as higher-quality investments that are more effective in achieving development related outcomes. Members have therefore agreed to include two articles for such efforts through Section VII on Sustainable Investments. Under these provisions, a member would be required to encourage foreign investors and businesses entering or operating in its territory to voluntarily incorporate international standards, guidelines, or principles focused on responsible business conduct (RBC) into their own business practices and policies. Members would also be required to develop government measures aimed at tackling corruption and possibly money laundering.

Proponents of these articles argue that including such disciplines is important for the IFDA to incorporate sustainable development priorities.

While participating members generally agree that such articles are valuable, sources familiar with the talks note that some members have voiced their disappointment that the article would not extend the RBC requirement to home states, but rather to limit its application only to host states. They argue that home states, which are mainly capital-exporting countries, typically tend to be wealthier, and therefore are in a better position to both encourage their investors to incorporate RBC practices, while also monitoring and sharing information of their businesses’ efforts in this area. While negotiators had initially considered including more robust home state measures, they ultimately did not attain consensus among the full group, as some members argued the scope of the agreement should primarily focus on host state requirements.

The final section of the Agreement includes a range of articles, from detailing the functions of the Investment Facilitation Committee that would be set up at the WTO, to providing clarity on how the participants of the Agreement would have access to WTO’s state–state dispute settlement mechanism to resolve any disputes that may arise under the Agreement.

The Development Dimension

Section V is a very important section from a development perspective, as it focuses on the particular flexibilities that developing country and LDC members can access. What this section recognizes is that developing country and LDC members are often not in a position to implement the various obligations of the Agreement right away. Instead, these members may need more time, as well as targeted capacity-building support, in order to be able to implement the agreement. In WTO jargon, this is known as special and differential treatment (S&DT).

At the WTO, any member can self-designate themselves as a developing country for a given WTO agreement and avail themselves of these inherent flexibilities. LDCs often have access to additional flexibilities, and the WTO in this instance uses the UN classification for whether a given economy is an LDC.

The IFDA’s section on S&DT is based on the model used under the WTO’s Trade Facilitation Agreement (TFA), a multilateral accord aimed at streamlining customs and border procedures for trade in goods, which has been in force for just over 6 years. The TFA’s approach to S&DT was considered as ground-breaking for having moved beyond the usual approach of implementing uniform exemptions or standard implementation periods. Under the TFA, developing country and LDC members can determine for themselves which of the obligations of the Agreement they can implement immediately—or after 1 year, in the case of LDCs—upon the TFA’s entry into force. They would then schedule these provisions under Category A. They can also designate which provisions they would need some time to implement under a so-called Category B, as well as which obligations they can only implement upon having attained capacity-building support and/or additional time. This last classification is known as Category C.

To determine this scheduling under the IFDA, developing country and LDC members need to do a needs assessment analysis, also referred to as a regulatory gap analysis. This exercise will allow them to analyze to what extent their domestic framework is already aligned with the provisions set out through the IFDA framework, so they can then determine which provisions should be placed under what category.

The guide that will help WTO members undertake this analysis is currently in the process of being finalized by the WTO Secretariat in partnership with six other international organizations and will likely be circulated in April 2023. There is some uncertainty among developing country and LDC members about whether they will have enough time, and more importantly the necessary financing, to carry out the analysis needed to schedule their commitments by the deadlines that would be set out in the Agreement. This difference in opinion over the timelines by which members will schedule their S&DT flexibilities is one of the main outstanding issues left for WTO members to finalize.

Another important issue from a development perspective where negotiations are still ongoing involves whether the IFDA should include the establishment of a dedicated Investment Facilitation Facility, which would manage donor contributions for helping developing country members implement the Agreement. The TFA and the recently concluded Agreement on Fisheries Subsidies set up similar funding mechanisms, but some members are wary of implementing a similar mechanism under the IFDA. Members who argue in favour of this facility say that it can help ensure the necessary support for developing country members as they undertake their needs assessments, while serving as a valuable body for coordinating funds. Some other members are concerned that funding coordination efforts are activities that do not belong within the mandate of the WTO and should instead be carried out by other, more relevant, international organizations, such as the World Bank.

Setting up such a facility for the IFDA is also complicated by the plurilateral nature of the initiative. Should the IFDA set up this facility, it is likely to need resources from the WTO Secretariat, which is funded by all WTO members, including those not involved in the IFDA. This, in turn, raises budget allocation questions. Given that the Joint Statement Initiative (JSI) has not received the backing of all WTO members, and some members remain vocal critics of the process, it is not yet clear how and where a facility might be housed.

The Way Ahead

As mentioned, the co-coordinators of the process have targeted July 2023 as the deadline for finalizing the negotiating text. Although the text has a substantial number of clean articles at this stage, it has yet to be seen whether members can agree on the outstanding brackets and proposals under this timeframe. Many of these brackets are especially relevant from a development perspective.

Members will also need to gain clarity on the legal architecture of the agreement, more specifically on whether it will be legally feasible to incorporate the IFDA within the WTO’s existing treaty architecture. At present, members are exploring three options and, as part of such efforts, are exploring the technical and political feasibility of each option.

The first option involves integrating the IFDA as a multilateral agreement, in which case all 164 members will have to sign on to be bound by the disciplines of the agreement.

The second option is to integrate the agreement as a plurilateral agreement, in which case the disciplines and benefits of the agreements would only apply to the parties of the agreement, and not to the non-participants, similar to other plurilaterals such as the WTO Agreement on Government Procurement. The signatories, however, may choose to extend the benefits voluntarily to non-participants, and it seems this extension of rights is being promoted through the treaty text itself. This option, however, will still require consensus approval from all 164 members so that the IFDA can be added to the WTO rulebook as a plurilateral accord under Annex 4 of the Marrakesh Agreement.

The success of either of these two options essentially depends on the buy-in of the broader WTO membership, including non-signatories, as well as members who have been very vocal opponents to plurilateral initiatives so far. India and South Africa are two such members who have long questioned the legal status of these kinds of Joint Statement Initiatives, including but not limited to the IFDA. Among their concerns is the potential lack of a legal basis for discussing these initiatives at the WTO, given the absence of consensus across the membership to even begin these processes. These members argue the initiatives have been a distraction, taking members’ focus away from negotiations that have an existing multilateral mandate, namely those under the Doha Development Agenda, which remain urgent and have significant development implications.

It has yet to be seen whether the proponents of the investment facilitation negotiations can convince non-signatories to either join the IFDA, or if that fails, to approve its addition to the Marrakesh Agreement’s Annex 4. Should neither option work, proponents may have to consider the third option. Rather than including the framework as a stand-alone agreement, they would need to separate the articles and schedule them within the existing WTO agreements, notably the General Agreement on Tariffs and Trade and the General Agreement on Trade in Services instead.

This third option would involve a process of coordinated scheduling and has parallels to how the outcome of a separate JSI on domestic regulation in services is now being worked into the WTO rulebook, though this too has proven to be controversial.  Some members have voiced concerns regarding this option for the IFDA, pointing out that it would be far too difficult to coordinate and implement. They have also asked whether incorporating the IFDA articles within existing WTO agreements would weaken the scope and application of these articles.

Only five more meeting rounds remain until the current July deadline. As participating WTO members push to clinch a deal within that timeframe, they will need to clear the hurdles that remain for achieving consensus among themselves on outstanding articles and proposals, as well as clarify how they will approach these questions of legal architecture. Lastly, they will need to address any concerns that may persist on how this agreement will slot into the wider sphere of international investment governance.

The author would like to thank Sofia Baliño and Alice Tipping for their feedback and edits on earlier drafts of this article, and the World Trade Organization for the permission to use the cover photo for this article.

For an in-depth analysis of the present draft of the IFDA negotiating text, please see our latest negotiating brief, which was produced with funding by UK aid from the British Government. The Umbrella Grant is a project of the Trade and Investment Advocacy Fund (TAF2+) and is implemented by the International Institute for Sustainable Development and CUTS International, Geneva. Views expressed in the publication are the author's own and do not necessarily reflect HM Government’s official positions or those of TAF2+.