Financial Times

Biggest economies adjusting investment policies to attract investments

The G20 countries – the world’s biggest economies - are adjusting their national investment policies to pull in falling foreign direct investments (FDI) during the global recession. This will further increase competition for FDI globally.

G20 countries – developed and developing – are also using other methods, like putting up import duties and giving subsidies to domestic producers, to protect their domestic industries, says the latest joint report on ‘G20 Trade and Investment Measures,’ by the World Trade Organisation, the UNCTAD and the OECD.

Due to the global recession, global FDI flows fell by 14% in 2008 and are expected to fall by another 30% – 40% this year. So most G20 countries have changed their investment policies to make it easier to for investors to enter their countries. The report found that 17 G20 countries took some sort of policy action in the investment area, in the form of investment measures, or investment measures related to national security, or as emergency and related measures.

For instance, the two biggest Asian economies, China and India, have already made changes to investment procedures. China has streamlined its foreign investment review process, to make it easier for foreign investors and India is facilitating investments in Indian depository receipts by foreign institutional investors and mutual funds.

Developed countries are also trying to pull-in the limited investment flows. Australia has liberalised screening requirements for foreign investors, Japan has amended laws on inward investments to make the investment process easier, and Canada is amending its foreign investment regulations. Russia has already amended its laws to issue foreign securities on Russian exchanges.

On top of changing national policies on investments, some G20 countries have also got into new international investment agreements (IIAs), or free trade agreements (FTAs), or bilateral investment treaties (BITs), also to facilitate foreign investments. Dring the reporting period, 6 G20 countries concluded IIAs. Since the beginning of the global crisis, the G20 countries have concluded 20 FTAs with investment provisions and 14 BITs.

For instance, Indian and the Republic of Korea signed an FTA and China signed an FTA with Peru and with the ASEAN (Association of South East Asian Nations) bloc of countries. Canada signed a BIT with Jordan and amended existing BITs with Latvia, Romania and the Czech Republic.

The report also indicates that the world’s biggest economies are becoming more protectionist. “In the period April-August 2009, there has been continued slippage towards more trade-restricting and distorting policies by many G20 members. There have been further instances of increases in tariffs and the introduction of a number of new non-tariff measures (such as non-automatic import licences),” said the report.

For instance, in May this year, the US re-introduced agricultural export subsidies for dairy products, to protect the US dairy industry. The European Union did the same thing earlier this year. Countries are also increasing import duties, of selected products, to protect specific domestic industry sectors.

“Agricultural products, iron and steel, motor vehicles and parts, chemical and plastic products, and textiles and clothing have been the products most affected overall by these measures,” said the report.
Countries are also increasingly using available provisions at the World Trade Organisation (WTO), to protect domestic industries. For instance, safeguard investigations have shot up in 2009. A WTO member country can use the WTO safeguarded provision to restrict imports of a product, temporarily, if its domestic industry is threatened by a surge in the imported product.

During the first half of this year the number of investigations - to use this safeguard provision - increased to 16, compared to 2 during the first half of 2008. The biggest user of the safeguard provision is India. India has already initiated 14 out of the 16 safeguard investigations this year.

These large economies have also been able to offer large fiscal stimulus programmes and industrial and financial support programmes to their businesses. Some of these measures are also favouring domestic industries.

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