Negotiating free-trade agreements: a guide
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manufacturing industries cannot put their goods on the market
without the use of services of all kinds of services. Sheltered or
inefficient services sector make them less competitive.
Agreements sometimes also distinguish between foreign direct
investment (FDI) and portfolio investment. The former usually
implies direct participation by the investor in the management of
the investment. The latter refers to minority holdings, usually less
than 10%, of shares, bonds or other securities. Whether a free-trade
agreement covers portfolio investment depends on the wishes of
the parties. Inclusion is now quite common. A look at the definitions
in the investment chapter usually clarifies the situation quickly.
Box 8.1: A definition of investment
Free-trade agreements usually define “investment” with a high degree
of precision. The definition used in the Australia–United States free-
trade agreement is fairly typical:
Investment means every asset that an investor owns or controls,
directly or indirectly, that has the characteristics of an investment,
including such characteristics as the commitment of capital or other
resources, the expectation of gain or profit, or the assumption of risk.
Forms that an investment may take include:
(a) an enterprise;
(b) shares, stock, and other forms of equity participation in an
enterprise;
(c) bonds, debentures, other debt instruments, and loans;
Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the
characteristics of an investment, while other forms of debt, such as claims to payment that are
immediately due and result from the sale of goods or services, are less likely to have such
characteristics.
(d) futures, options, and other derivatives;
(e) turnkey, construction, management, production, concession,
revenue-sharing, and other similar contracts;
(f) intellectual property rights;
(g) licences, authorisations, permits, and similar rights conferred
pursuant to the applicable domestic law; and
Whether a particular type of license, authorisation, permit, or similar instrument (including a
concession, to the extent that it has the nature of such an instrument) has the characteristics of an
investment depends on such factors as the nature and extent of the rights that the holder has under
the applicable domestic law. Among the licenses, authorisations, permits, and similar instruments
that do not have the characteristics of an investment are those that do not create any rights protected
under domestic law. For greater certainty, the foregoing is without prejudice to whether any asset
associated with the license, authorisation, permit or similar instrument has the characteristics of an
investment.
The term investment does not include an order or judgment entered in a judicial or administrative
action.
(h) other tangible or intangible, movable or immovable property, and
related property rights, such as leases, mortgages, liens and
pledges.
In the case of trade in goods and services, negotiators need to
work within the frameworks of the General Agreement on Tariffs
and Trade (GATT) and the General Agreement on Trade in Services
(GATS). The free-trade agreement in both cases builds on the well-
understood multilateral trade disciplines.
The case is different for the investment provisions. There is as
yet no multilateral agreement governing all aspects of international
investment flows. However, the numerous investment promotion