 WORLD TRADE  
ORGANIZATION  WT/WGTI/W/77 
25 May 1999 
 (99-2095) 
Working Group on the Relationship 
between Trade and Investment Original:   English/ 
 French/  Spanish 
 
 
 
COMMUNICATION FROM UNCTAD 
  
 Reproduced hereunder is a Note by the UNCT AD Secretariat  on "International Investment 
Agreements:  Concepts allowing for a certain flex ibility in the interest of promoting growth and 
development".  The Note is being circulated  at the request of a number of delegations. 
_______________ 
 
 
 
TRADE AND DEVELOPMENT BOARD Commission on Investment, Technology  and Related Financial Issues Expert Meeting on International Investment  Agreements: Concepts Allowing for a 
Certain Flexibility in the Interest 
 of Promoting Growth and Development Geneva, 24-26 March 1999 Item 3 of the provisional agenda  
 
    
INTERNATIONAL INVESTMENT AGREEMENTS: CONCEPTS ALLOWING 
FOR A CERTAIN FLEXIBILITY IN THE INTEREST OF PROMOTING 
GROWTH AND DEVELOPMENT 
 
Note by the UNCTAD secretariat 
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Executive summary 
 
The countries covered by international investment agreements (IIAs) are often at widely differing 
levels of economic and technolog ical development and differ from one another in many other 
important respects.  In the case of IIAs that involve developing countries, in particular, it is generally 
accepted that the promotion of economic and social  development is an essential goal. One of the 
challenges facing countries is therefore ensuring that IIAs are sufficiently flexible to serve, in addition 
to the specific objectives of each instrument, th e development needs of developing countries. 
Flexibility may be reflected in IIAs in a number of ways, for instance, by stating explicit development 
objectives, by establishing appropriate priorities, by  structuring an agreement in an appropriate 
manner, by shaping the substantive provisions so as to serve development aims, by allowing 
exceptions or by providing for differentiation in the contents or timing of the rights and obligations 
of the parties on the basis of their respective levels of development.  The principal issue for the expert 
meeting is the identification of the features of IIAs that provide for flexibilit y in these agreements in 
the interest of promoting development while, at  the same time, allowing them to serve other 
objectives. In reviewing the forms in which the con cept of flexibility is found in existing IIAs, the 
meeting will also be able to evaluate, to so me extent, the effectiveness of these forms in 
promoting development while encouraging investment.  
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CONTENTS 
 
           P a r a g r a p h s
 
 INTRODUCTION    ………………………………………………………………  1 – 5  
I. FLEXIBILITY         ………………………………………………………    6 – 10 
 II. ISSUES    …………………………………………………………………  11 – 48   A. Objectives   ………………………………………………………  14 – 17  
 B. Substantive provisions   …………………………………………   18 – 38 
  C. Implementation  …………………………………………………  39 – 43    D. Overall structure    ………………………………………………   44 – 48 
 
CONCLUSIONS     ………………………………………………………………  49 – 50   
List of boxes 
 
1.  Preamble of the General Agreement on Trade in Services 
 Preamble of the Agreement on Trade-related Aspects of International  Property Rights 2.  Preamble of the APEC Non-Binding Investment Principles 3.  Preamble of the Treaty Establishing the Latin American Integration 
 Association 
4.  Preamble of the Agreement on Trade-related Investment Measures  Preamble of the BIT between Argentina and the Netherlands 
5.  Article 3 of the Treaty Establishing the Latin American Integration  Association 
6.  Key issues addressed in recent IIAs 
7.  United States model BIT (article II), 1994 version  BIT between Canada and Trinid ad and Tobago (article II (3)) 
8.  Article 4 of the TRIMs Agreement  Article 5 of the TRIMs Agreement  Article 65 of the TRIPS Agreement 
9.  Article 259 of the Fourth ACP-EEC Convention of Lomé 
10.  Article 67 of the TRIPS Agreement 11.  BIT between Malaysia and the United Arab Emirates (article 2)  BIT between the Belgium-Luxem bourg Economic Union and Cameroon 
 (article 2 (3)) 
12.  Article XVI of GATS 
13.  Article 15 of the Agreement on Agriculture  Article 10 of the Agreement on th e Application of Sanitary and 
 Phytosanitary Measures 14.  “Flexibility mechanisms” for deve loping countries in the United Nations 
 Framework Convention on Climate Change and its Kyoto Protocol 
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INTRODUCTION 
 
1. In pursuance of paragraph 89 (b) of “A Part nership for Growth and Development”, 1/ the 
Commission on Investment, Technology and Related Financial Issues, at its fourth session (14-
18 September 1998), decided to convene an “expert  meeting on concepts - such as exceptions and 
other mechanisms - allowing for a cer tain flexibility, including in the field of technological capacity-
building, in the interest of promoting growth and development - to allow countries in different stages 
of development to benefit from international i nvestment agreements” (TD/B/COM.2/15, annex I). 
 2.  In response to this decision and in order to facilitate the discussions, the secretariat has 
prepared the present report which takes into account th e findings of the two previous expert meetings 
convened by the Commission on related subjects. Th e purpose of the report is to describe ways in 
which international investment agreements (IIAs) a ddress the issue of flexibility in the broad context 
of promoting development while encouraging investment.  3.  The principal forum in which intergovernmental discussions on issues relating to IIAs 2/ take place in UNCTAD is the Commission on Investment, Technology and Related Financial Issues. The 
Commission draws on the findings of expert meetings that serve as a forum for the exchange of 
experiences and discussion on existing IIAs and their implications for development.  Two expert 
meetings have been held so far: the first, held from 28 to 30 May 1997, dealt with bilateral investment 
treaties (BITs) (TD/B/COM.2/5) and their develo pment dimension; the second took place from 1 to 
3 April 1998, and focused on regi onal and multilateral investment agreements (TD/B/COM.2/11). The 
experts examined the nature and implications of those agreements, the range of issues addressed by 
them, the extent to which the development dimensi on was taken into account and the extent to which 
issues arising in the context of those agreements we re relevant, from a development perspective, to a 
possible multilateral framework for investment.  4.  The expert meeting on international investme nt agreements will examine  the ways in which 
flexibility with respect to development concerns has been given effect in IIAs, so that developing 
countries at different stages of development and w ith different development strategies can benefit 
from them in promoting their growth and developmen t. It is suggested that the meeting should focus 
on delimiting and clarifying the concept of flexibility in  the context of IIAs (that is, flexibility in the 
service of development), of reviewing the forms it ta kes in existing IIAs and, to the extent possible, 
evaluating the effectiveness of these forms in prom oting development while encouraging investment. 
In this context, it should be noted that an investme nt-friendly environment is, to a large extent, also a 
development-friendly environment.  5.  Participants have also been invited to br ing their own national experiences to bear on these 
questions, especially through prior written submissions.  
 
 
I. FLEXIBILITY 
6.  The countries covered by IIAs are often at  widely differing levels of economic and 
technological development and differ from one another in many other important respects. While it is 
widely recognized that IIAs need to take into account the interests and concerns of all participating 
parties (UNCTAD, 1996b), the asymmetries among them re quire special attention to ensure that the 
aims of such agreements are actually achieved.  7.  Most IIAs - and particularly  BITs - have as their main objective the intensification of 
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 promoting and protecting foreign direct investment (FDI), which is expected to contribute to the 
economic prosperity of the countries involved. In the case of agreements that involve developing 
countries, in particular, it is generally accepte d that the promotion of economic and social 
development is an essential goal. One of the cha llenges facing countries is therefore ensuring that 
IIAs are sufficiently flexible to serve adequate ly, in addition to the specific objectives of each 
instrument, the development needs of developing countr ies. 3/ Flexibility may be reflected in IIAs in a 
number of ways, for instance, by stating explicit development objectives, by establishing appropriate 
priorities, by structuring an agreement in an appropriate manner, by shaping the substantive 
provisions so as to serve development aims, by allo wing exceptions or by providing for differentiation 
in the contents or timing of the rights and obligations of the parties on the basis of their respective levels of development. These ways are explored in chapter II below. Through such flexibility - and in 
the broader context of development concerns - IIAs could be adapted to the particular conditions of 
developing countries, which would increase their positive influence on the development of these 
countries, while minimizing any negative effects. This  is not to say, however, that every country will 
automatically use the flexibility built into IIAs to the fullest extent possible; the extent to which they 
will do so depends on the particular devel opment strategies pursued by each country. 
 8.  To respond to the needs and concerns of de veloping countries, IIAs need therefore to be 
designed from the start with development consid erations in mind. However, the principal 
responsibility for the design and implementation of  development objectives and policies remains with 
the individual countries concerned. IIAs have in the ma in an indirect effect and are complementary to 
national policies, not a substitute for them.  
9.  It is of course recognized that IIAs are onl y one factor that can influence investment flows 
(UNCTAD, 1998a). Other - typically more important  - determinants include the size of the host 
country market, its rate of growth, its politi cal conditions and macroeconomic stability, the 
availability and cost of resources (such as labour an d skills) and, increasingly, such created assets as 
innovatory capabilities and technological know-how, as well as an adequate legal, administrative, 
physical and business infrastructure. For their part , IIAs are important as confidence-building signals 
to foreign investors, since, by clarifying the rights and obligations of the parties involved in 
international investment and by providing mechan isms for the settlement of disputes, they help 
establish a favourable investment climate. They al so can facilitate the integration of host economies 
into the international market.  
10.  The principal issue to be di scussed at the expert meeting is th erefore the identification of the 
features of IIAs that provide for flexibility in these agreements in the interest of promoting 
development while, at the same time, allowing th em to serve other objectives, such as providing 
security and predictability to investors, avoiding unn ecessary restrictions and promoting stability. To 
serve both types of objectives, IIAs need to define the concepts they utilize, and shape the substantive 
rights and obligations of the parties in such a ma nner as to reconcile, on the one hand, stability and 
predictability for the host economy and for foreign investors and, on the other, flexibility in the 
interest of development.  
II. ISSUES 
11.  A major issue that arises from an examina tion of IIAs is that, while the parties to an 
agreement are formally equal (legal symmetry), they may be at different levels of economic 
development (economic asymmetry). 4/ A way to deal with this situation is to allow for a recognition 
of the real differences between the parties thr ough, inter alia, a degree of flexibility in such 
agreements as they apply to devel oping countries participating in them. 
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  12.  The question is therefore how and by what means existing IIAs have provided the flexibility needed by developing countries to promote their gr owth and development. This section examines 
existing IIAs in this respect.  More specifically, th e promotion of development can be reflected in: 
  (a)  Objectives :  typically, the preamble of an agreement is the repository of its aims and 
purposes. It can spell out specific objectives that elaborate on general development themes or it can introduce development concerns for the first time in an agreement; 
 
 (b)  Substantive provisions :  development concerns can serve to determine which issues 
are included in an IIA and which are not, as well as the manner in which the issues included are dealt 
with;  (c)  Modalities of implementation and technical assistance :  these relate to the ways in 
which agreements operate to furt her development objectives. This can include technical assistance, 
not only as regards the implementation of agr eements but also beyond. Development-oriented 
considerations can, furthermore, be the basis for exceptions and derogations as well as transitional 
periods for compliance by developing countries;   (d)  Overall structure :  here it is the very design of an agreement, not merely its 
substantive content, that can further development. 
 13.  Illustrative examples from existing IIAs in re spect of each of these approaches are examined 
below. 5/ They are intended to be indicative rather  than exhaustive. They do not, however, include an 
evaluation of their relative importance and effec tiveness - an issue the expert meeting may wish 
to address. 
 
A.  Objectives 
 
14.  In accordance with the Vienna Convention on the Law of Treaties (United Nations, 1987, 
article 31 (2)), the preamble is part of a treaty for th e purposes of interpretation. It is the repository of 
the general aims and purposes of an agreement, a nd offers a summary of the grounds upon which the 
agreement is concluded. It is, therefore, an impor tant aid to the interpretation of specific provisions, 
offering insight into the objectives and purpose of an agreement. Consequently, where the preamble 
of an IIA refers explicitly to development, the substantive provisions of the agreement should be 
interpreted so as to further development goals. 
 
15.  Numerous examples of preambular provisions  that mention development goals can be found 
among IIAs. They occur both in agreements betw een developed and developing countries and, 
significantly, in agreements among developing countri es. Such provisions can be broadly classified as 
follows:  
 (a)  A generally worded recognition of th e special needs of developing and/or least 
developed country parties requiring flexibility in the operation of obligations under the agreement, 
especially as regards the content of national laws an d regulations (box 1), 6/ the investment regime 
(box 2) or without reference to na tional laws and regulations (box 3); 
 
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Box 1.  Preamble of the General Agreement on Trade in Services 
 
“Recognizing the right of Members to regulate, a nd to introduce new regulations, on the supply of 
services within their territories in order to meet  national policy objectives and, given asymmetries 
existing with respect to the degree of development of services regulations in different countries, the particular need of developing countries to exercise this right.” 
 
Preamble of the Agreement on Trade-related Aspects of International Property Rights 
 
“Recognizing also the special needs of the least-d eveloped country Members in respect of maximum 
flexibility in the domestic implementation of laws and regulations in order to enable them to create a 
sound and viable technological base.” 
 
  
 
Box 2.  Preamble of the APEC Non-Binding Investment Principles 
 
“Acknowledging the diversity in the level and pace of development of member economies as may be 
reflected in their investment re gimes, and committed to ongoing effo rts towards the improvement and 
further liberalization of their investment regimes.” 
 
 
 
Box 3.  Preamble of the Treaty  Establishing the Latin American 
Integration Association  
 
“Aware that it is necessary to ensure a special tr eatment for countries at a relatively less advanced 
stage of economic development.” 
 
 
 (b)  An expression of a more specific way to contribute to economic development through, for example, progressive liberalization or  certain standards of treatment in investment 
matters which is seen to contribute to development (box 4). 
 
 
Box 4.  Preamble of the Agreement on Trade-related 
Investment Measures  
 
“Desiring to promote the expansion and progressive liberalization of world trade and to facilitate 
investment across international frontiers so as to increase the economic growth of all trading partners, 
particularly those developing country Members, while ensuring free competition.”  
Preamble of the BIT between Argentina and the Netherlands 
 
 “Recognizing that agreement upon the treatment to be  accorded to such investments will stimulate 
the flow of capital and technology and the economic development of the Contr acting Parties and that 
fair and equitable treatment of investments is desirable.”  
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  16.  IIAs may also include “general objectives” cl auses dealing with development issues in their 
initial parts. These may elaborate upon themes in the pr eamble or they may be the first indicators of 
development concerns in an agreement, although th is would be uncommon. Three sets of issues are 
important in this connection:   (a)  Whether the objectives of an IIA ar e in fact concerned with development; 
 
 (b)  Whether the objectives distinguish between different categories of signatories; 
  (c)  Whether principles that refer to broad de velopment issues are included, and, if so, the 
extent to which their formulation gives a certain degree of flexibility to the contracting parties to 
respond to these issues.  
17.  In some IIAs, there are formulations that  refer to broad development issues; the question 
remains, however, as to what extent and under what conditions they could be applied to all commitments undertaken in an agreement. In order to measure the degree of flexibility for the parties 
concerned, it may be necessary to look at the issue in the context of other provisions of the particular 
agreement. The Lomé Convention,  for example, states numerous development objectives in the 
opening provisions: the promotion of economic, cu ltural and social development of the African, 
Caribbean and Pacific (ACP) States; a more just a nd balanced international economic order (article 
1); the right of ACP States to determine their deve lopment principles and strategies in all sovereignty 
(article 3); respect for human rights as part of th e development goal (article 5); and special treatment 
for the least developed ACP countries (article 8). The Agreement on Trade-related Aspects of 
Intellectual Property Rights (the TRIPS Agreement) states that contracting parties “may, in 
formulating or amending their laws  and regulations, adopt measures necessary to protect public health 
and nutrition, and to promote the pu blic interest in sectors of vital importance to their socio-economic 
and technological development” (ar ticle 7); another article makes the formulation of laws in the field 
of socio-economic and technological development subject to consistency with the Agreement 
(article 8 (1)).  A number of principles can also be found that refer to broad development issues, as 
exemplified by the Treaty Establishing the Latin American Integration Association (box 5). Read 
together, the provisions in this agreement appear to  seek to establish a balance between the objectives 
of economic integration and growth coupled with the need for flex ible and individual responses to the 
development needs of the parties to the agreem ent. It is noteworthy that these countries are 
differentiated by their level of development and th at more freedom is given to the least developed 
countries which are signatories to the Treaty. 
 
 
Box 5.  Article 3 of the Treaty Establishing the Latin American 
Integration Association 
 
“In the implementation of the present Treaty and the evolution towards its final objective, member 
countries shall bear in mind the following principles:  (a) Pluralism, sustained by the will of member 
countries to integrate themselves, over and above the diversity which might exist in political and 
economic matters in the region; (b) Convergence, meaning progressive multilateralization of partial 
scope agreements by means of periodical negotia tions between member countries, with a view to 
establishing the Latin American common market; (c) Flexibility, characterized by the capacity 
to allow the conclusion of partial scope agreements , ruled in a form consistent with the progressive 
attainment of their convergence and the strengthening of integration ties; (d) Differential treatment, as 
determined in each case, both in regional and pa rtial scope mechanisms, on the basis of three 
categories of countries, which will be set up taking into account their economic-structural 
characteristics. Such treatments shall be applied in a determined scale to intermediate developed 
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economic development; and (e) Multiple, to make possible various forms of agreements between 
member countries, following the objectives and duties of  the integration process, using all instruments 
capable of activating and expanding markets at regional level.” 
 
 
 
B.  Substantive provisions 
 18.  The contents of IIAs are the principal mean s by which concepts such as flexibility are given 
effect, both in terms of the issues they address and the manner in which these issues are addressed. 
 
19.  When concluding an IIA, countries make choices about the type of issues they wish to include 
and those they wish to keep outside the scope of an agreement, to deal with them in specialized 
agreements (e.g. on double taxation) or as a matter of  national law and policy. Even when they decide 
to include certain issues in an IIA, countries ma y wish to retain some flexibility regarding the 
commitments they make. They may therefore use formulations that allow them some discretion to 
pursue their national policies while keeping in line with  the broad principles of an agreement. This is 
illustrated below in reference to four selected is sues (for a more comprehensive listing of issues 
addressed in IIAs, see box 6):   (a)  The types of investments, investment transactions and activities that are covered under an IIA; 
 
 (b)  The admission of investment;   (c)  Performance requirements;  
 (d)  General standards of treatment of foreign investors, such as national treatment. 
  
 
Box 6. Key issues addressed in recent IIAs a/ 
 
Admission and establishment Competition Dispute settlement (investor-State, State-State) Employment Environment 
Fair and equitable treatment 
Funds transfer Home country measures Host country operational measures Illicit payments 
Incentives 
Investment-related trade measures Modalities and implementation issues Most-favoured-nation treatment National treatment 
Scope and definition 
Social responsibility State contracts WT/WGTI/W/77 
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Taking of property 
Taxation 
Transfer of technology 
Transfer pricing Transparency  __________ 
a/ The inclusion of an issue in this list does not  necessarily mean that all recent IIAs address it. 
 
 20.  While these issues are central to investment-host country relations, they can also have 
important implications for the policies and strategies of develo ping countries. Recent IIAs have 
sought to formulate these issues more or less flexib ly in order to accommodate development concerns. 
The following are a few illustrations of the various ways in which this has been done. 
 
 1.  Definition of investment 
 21.  IIAs often define investment in a way th at is both broad and open-ended (UNCTAD, 1999a). 
The broadest definitions embrace every kind of asset. They include in particular movable and immovable property, interests in companies (including both portfolio and direct investment), contractual rights (such as service agreements), in tellectual property rights, and business concessions. 
The implications of a broad definition of inve stment in an IIA are substantial. Although 
developmental concerns can be addressed in part by narrowing the definition of investment, this is not 
the only approach in every case. In th is respect it is important to remember that the ultimate effect of 
an investment agreement results from the interac tion of the operative provisions with the provisions 
on definitions (UNCTAD, 1999a).  
22.  Some definitions of investment have excluded certain types of investments, such as portfolio 
investment, from the application of IIAs, thereby a llowing host countries discretion to deal with those 
types of investment differently. In cases where th e definition of investment is circumscribed to 
“foreign direct investment” only, this has been defi ned by the International Monetary Fund (IMF) as 
“international investment that reflects the objectiv e of a resident entity in one economy obtaining a 
lasting interest in an enterprise resident in another economy. (The resident entity is the direct investor 
and the enterprise is the direct investment enterprise .) The lasting interest implies the existence of a 
long-term relationship between the direct invest or and the enterprise and a significant degree of 
influence by the investor on the management of the enterprise” (IMF, 1993, para. 359). The BIT 
between Denmark and Lithuania (article 1 (1)) de fines investment as “every kind of asset connected 
with economic activities acquired for the purpose of establishing lasting econom ic relations between 
an investor and an enterprise ...”. Similarly, the BI T between Germany and Isr ael (article 1 (a) (i)) 
defines investment as "investment in an enterp rise involving active participation therein ...”. 
 23.  Another way to limit the scope of the definition of investment has been to specify that investment is covered in an agreement only if ma de in accordance with the laws of the host country. 
For example, the model BIT used by China provides that “The term investment means every kind of 
asset invested by investors of one Contracting Part y in accordance with the laws and regulations of 
the other Contracting Party in the territory of the latter ...” (article III.1). This approach is also 
followed by the ASEAN Agreement for the Promotion and Protection of Investments (article II.1). 
 
24.  Definitions of investment have also been limited by excluding investment established prior to 
a certain date, such as the date the agreement is signed or enters into force. For example, the 
Convention Establishing the Inter-Arab Investment Guarantee Corporation provides that investment 
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 of insurance contracts ...” (article 15.4). 25.  Some agreements cover specific sectors and th is has implications of course for the definition 
of investment. For example, article 1 of the Ener gy Charter Treaty provides that “investment” refers 
to any investment associated with  an economic activity in the energy sector and to investments or 
classes of investments designated by a contracting party in its area as “Charter efficiency projects” and so notifies the secretariat. Similarly, the Gene ral Agreement on Trade in Services (GATS) applies 
in the services sector only. 
 
 2.  Admission 
 
26.  Admission clauses have important impli cations for development. Under customary 
international law, a host State has a wide margin of discretion when deciding on whether and under 
what conditions to permit the entry of foreign invest ors. Entry controls, restrictions and conditions for 
entry are some of the ways by which host countries  give expression to their development strategies 
with respect to FDI. In contrast, the process of globalization is exerting increasing pressure on host 
countries to grant market access to foreign investors on the basis of national treatment. Over the years, 
several broad approaches have emerged and presently co exist in IIAs to provide a degree of flexibility 
in order to deal with development c oncerns over the question of admission. 
 
27.  Traditionally most IIAs have left the question of entry and establishment to be determined by 
the national laws of the signatory countries, while committing signatories to the creation of a favourable investment climate (UNCTAD, 1999b). This  approach is followed in most BITs, old as 
well as recent, such as the BITs signed by France,  Germany, the Netherlands, Sweden and the United 
Kingdom, as well as most BITs signed between de veloping countries (UNCTAD, 1998b). It is also 
found in many regional agreements, for exampl e the ASEAN Agreement for the Promotion and 
Protection of Investments (article III.1), the ME RCOSUR Protocol on the Promotion and Protection 
of Investments from Non-member States of MERCOSUR (article B.1), the Agreement on the Promotion, Protection and Guarantee of Investments among Member States of the Organization of the Islamic Conference (article 2), the Treaty Establishi ng the Common Market for Eastern and Southern 
Africa (article 101.1), and the World Bank Guidelines on the Treatment of Foreign Direct Investment 
(article II.3).  28.  A second approach involves an “opt-out” procedure, which provides for certain rights of entry and establishment while stipulating ways by which th e parties can retain more or less control over 
admission in certain activities.  The BITs signed by the United States and Canada do so by extending 
national treatment and most-favoured-nation (MFN ) treatment to the pre-entry phase of an 
investment, subject to country- specific exceptions on industries and activities included in an annex 
(box 7). This approach is also followed in th e North American Free Trade Agreement (NAFTA) 
(chapter XI, articles 1102-1104 and 1108) and the MERCOSUR Protocol of Colonia on Investment 
(Intrazone) (article 2.1). The APEC Non-Binding Investment Principles contain “best efforts” 
commitments to admit investment on the basis of national and MFN treatment, but with exceptions as 
provided for in domestic laws and policies. When  the Energy Charter Treaty was concluded, it 
contained a similar "best efforts"  commitment, coupled with a commitment to negotiate fully-binding 
pre-national and MFN treatment rights in a supplementary treaty.  
 
Box 7.  United States model BIT (article II), 1994 version 
 
“1.  With respect to the estab lishment, acquisition, expansion,  management, conduct, operation 
and sale or other disposition of covered invest ments, each Party shall accord treatment no less 
favorable than it accords, in like situations, to inv estments in its territory of its own nationals or 
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of a third country (hereinafter 'most favoured nation treatment'), whichever is most favorable 
(hereinafter 'national and most favored nation treat ment'). Each Party shall ensure that its State 
enterprises, in the provision of their goods and services, accord national and most favored nation 
treatment to covered investments.  2.  (a)  A Party may adopt or maintain excepti ons to the obligations of paragraph 1 in the 
sectors or with respect to the matters specified in  the Annex to this Treaty. In adopting such an 
exception, a Party may not require the divestment, in whole or in part, of covered investments existing 
at the time the exception becomes effective.”  
BIT between Canada and Trinidad and Tobago (article II (3)) 
 
“Each Contracting Party shall permit establishment of a new business enterprise or acquisition of an 
existing business enterprise or a share of such enterp rise by investors or prospective investors of the 
other Contracting Party on a basis no less favourable th an that which, in like circumstances, it permits 
such acquisition of establishment by: (a) its own invest ors or prospective investors; or (b) investors or 
prospective investors of any third state.”  
 29.  A third approach involves the concept of “progressive liberalization” through an opt-in procedure, whereby each contracting party exte nds market access commitments only to those 
activities that it specifies in its schedule to an agre ement. The main example is GATS, which provides 
for such discretion in article XVI (see section D be low). This is reinforced by article XVII, whereby 
national treatment extends only to those sectors sp ecified in the schedule and is subject to any 
exceptions taken by the contracting party in its schedule. This modality allows each country to 
negotiate the liberalization of individual service industri es or transactions that it is ready to open up in 
pursuance of long-term progressive liberalization.  Mo reover, article XIX (2) provides that the process 
of liberalization will take place with due respect  for national policy objectives and the level of 
development of individual parties both overall and in  individual sectors. Thus, flexibility is foreseen 
for individual developing countries.  
 3.  Performance requirements 
 
30.  To encourage the beneficial effects of  FDI, countries have often sought to impose 
performance requirements on foreign investors. Traditi onally, IIAs did not explicitly regulate the use 
of performance requirements, and most existing IIAs are characterized by this approach. In these 
cases, host countries had discretion to use these re quirements in a manner they found appropriate. 
31. Recently the use of such requirements has been regulated in certain IIAs. These allow more or less 
flexibility for host countries to pursue their developmen t strategies in this area by following various 
approaches, as illustrated by the following examples:   (a)  Prohibiting certain types of performance requirements : the Agreement on Trade-
related Investment Measures the (the TRIMs Ag reement) prohibits some requirements (namely 
measures inconsistent with articles III and XI of the General Agreement on Tariffs and Trade 
(GATT)); but those mentioned in the illustrative list annexed to the Agreement do not include 
transfer-of-technology requirements (which are among the most significant for upgrading the technological capabilities of host developing count ries) and export-performance requirements. 
Provisions prohibiting various types of performance requirements can also be found in BITs signed by 
the United States and Canada and, recently, in so me BITs between some de veloping countries as well 
(for example, the BIT between El Salvador and Peru ). In a number of cases (BITs signed pursuant to 
the 1994 United States model BIT), the prohibition does not extent to performance requirements required as a condition for the receipt of an advant age or incentive, thus allowing freedom for host  WT/WGTI/W/77 
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 countries to impose performance requirements in exchange for incentives (although they may be 
subject to MFN obligations). Article 1106 of NA FTA follows a mixed approach since it prohibits 
seven types of mandatory restrictions, four of which it also prohibits when they are voluntary 
conditions linked to incentives;   (b)  Discouraging the use of performance requirements : the BITs between the United 
States and Zaire (now the Democratic Republic of  the Congo) and between Malaysia and the United 
Arab Emirates require the host country to use its b est efforts to avoid imposing such requirements. At 
the multilateral level, the World Bank Guidelines discourage performance requirements and other 
types of discriminatory operational conditions , and under the APEC Non-Binding Investment 
Principles the use of these requirements should be mi nimized. At the regional level, the Declaration 
on International Investment and Multinational Ente rprises and related decisions of the Organisation 
for Economic Cooperation and Development (OECD)  prescribe the progressive elimination of 
performance requirements that are inconsistent w ith national treatment and discourage requirements 
linked to incentives;   (c)  Providing for special treatment (temporal  derogation) for developing countries : 
the TRIMs Agreement allows a period of grace for developing countries in eliminating prohibited 
requirements (see also below). 
 
 4.  National treatment 
 
32.  The standard of national treatment - which pr ovides that foreign investors receive in a host 
country treatment no less favourable than the treatment given by that country to its national 
companies - is an important principle for foreign in vestors. However, it may be a cause for concern to 
some countries, since such treatment may enable fo reign enterprises, especially large transnational 
corporations, to compete in the local economy, so metimes to the detriment of domestic enterprises. 
Moreover, host Governments sometimes have special  policies and programmes that grant advantages 
to domestic enterprises in order to stimulate the deve lopment of a national industrial base. To address 
these concerns, host countries have often sought to qualify or limit the application of national 
treatment in a variety of ways, thus avoiding the potentially detrimental effects on their local 
enterprises.  33.  Some agreements which otherwise provide st andards of treatment for foreign investors do not 
grant national treatment. This is the case in the ASEAN Agreement for the Protection and Promotion 
of Investments and the majority of BITs signed by China.  34.  The principle of national treatment is a re lative standard. Often nati onal treatment provisions 
contain an explicit reference in this respect by limiti ng their application to investments that are "in the 
same circumstances" or "in like situations", thus m itigating some of the most sweeping effects of the 
application of the standard. The OECD Decision on National Treatment and treaties concluded by the 
United States are examples of this approach ( see the 1994 model BIT by the United States, quoted 
above).  35.  Some agreements exclude from the applicati on of the standard any benefits and advantages 
given to local investments. An example of this approach is the BIT between Denmark and Indonesia 
(article 3), which does not refer to "treatment " but rather to the "imposition of conditions". 
 36.  A different approach is to excuse one country (or a number of countries) from the obligation to grant national treatment on account of its economic situation. This approach is found in Protocol 
No. 2 of the BIT between Indonesia and Swit zerland, which allows derogation from national WT/WGTI/W/77 
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  treatment of Swiss investors "in view of the present stage of development of the Indonesian economy". 
37.  The most common approach in recent IIAs a ppears to be to exclude certain industries or 
activities from the application of national treatment . This is the approach followed in NAFTA and 
United States BITs. In GATS, national treatment is  to be negotiated progressively, in the same 
manner as market access, as included in national schedules. The OECD National Treatment instrument provides for limited exceptions subject to standstill. 
 
38.  It should be emphasized that the above discussion of some key issues on IIAs is illustrative only, both in terms of the issues covered and in terms of the approaches and examples provided. The 
intention is merely to show that existing IIAs provide for a variety of approaches to introduce a 
certain flexibility into key provisions of IIAs.  C.  Implementation  
39.  The modalities of implementation of an IIA  are quite important with respect to the 
development effects that such agreements are intended to serve.  Implementation mechanisms may depend on the particular characteristics of an ag reement, including whether they are stand-alone 
agreements (like BITs) or parts of a larger body of commitments. An important question here is how 
an implementation process can be structured so as to  promote development objectives. In addition, in 
order to ensure that implementation is as effectiv e as possible, it may be necessary to put in place 
special arrangements for technical and financial assistance.   1. Exceptions and derogations 
 
40. One way to provide for flexibility in the impl ementation of an agreement in the interest of 
development is to allow for exceptions or der ogations from the obligations of the agreement. 
Exceptions and derogations in IIAs may be divided into two broad cat egories for the purposes of this 
report: 
 
 (a)  Exceptions and derogations that are open to all contracting parties regardless of their 
level of development. These can be divided into three types:   (i)  General exceptions  based on public health, or der and morals, and national 
   security. Such exceptions are present in virtually all investment agreements, 
   but they are not necessarily related to development; 
   (ii)  Subject-specific exceptions, which exempt specific issues from the  
   application of specific provisions. For example, national treatment and MFN    clauses may contain exceptions in rela tion to intellectual property, benefits 
   arising from membership in a regi onal economic integration scheme, taxation 
   provisions, or temporary macroeconomic safeguards; 
   (iii)  Country-specific exceptions allow a contracting party to reserve, for example, 
   the right to distinguish between domestic and foreign investors for reasons of    national economic and social policy; 
 
 (b)  Temporal (phasing) provisions special ly aimed at permitting derogations from IIAs 
disciplines for a specified transitional period. Such provisions aim at allowing a period of grace for developing countries to adapt their policies and la ws to the standards required of them in an 
agreement.  They represent an acknowledgement that  developing countries ma y not always be in a 
position to act in the same manner as develope d countries, given their weaker economic and 
competitive situation (box 8).  WT/WGTI/W/77 
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Box 8.  Article 4 of the TRIMs Agreement 
 
“A developing country Member shall be free to devi ate temporarily from the  provisions of Article 2 
to the extent and in such a manner as Artic le XVIII of GATT 1994, the Understanding on the 
Balance-of-Payments Provisions of GATT 1994, an d the Declaration on Trade Measures Taken for 
Balance-of-Payments Purposes adopted on 28 November 1979 (BISD 26S/205-209) permit the 
Member to deviate from the provisions of Articles III and XI of GATT 1994."  
Article 5 of the TRIMs Agreement 
 
“1.  Members, within 90 days of the date of entry into force of the WTO Agreement, shall notify 
the Council for Trade in Goods of all TRIMs they are applying that are not in conformity with the provisions of this Agreement. Such TRIMs of gene ral or specific application shall be notified, along 
with their principal features.  
2.  Each Member shall eliminate all TRIMs which are notified under paragraph 1 within two 
years of the date of entry into force of the WTO Agreement in the case of a developed country 
Member, within five years in the case of a developing country Member, and within seven years in the case of a least-developed country Member.  
3. On request, the Council for Trade in Goods may extend the transition period for the 
elimination of TRIMs notified under paragraph 1 for a developi ng country Member, including a 
least-developed country Member, which demonstrates particular difficulties in implementing the provisions of this Agreement. In considering such a request, the Council for Trade in Goods shall take 
into account the individual development, financia l and trade needs of the Member in question. 
 
4. During the transition period, a Member shall not modify the terms of any TRIM which it notifies under paragraph 1 from those prevailing at the date of entry into force of the WTO Agreement 
so as to increase the degree of inconsistency with the provisions of Article 2. TRIMs introduced less 
than 180 days before the date of entry into for ce of the WTO Agreement shall not benefit from the 
transitional arrangements provided in paragraph 2. 
 
5. Notwithstanding the provisions of Article 2, a Member, in order not to disadvantage 
established enterprises which are subject to a TRIM  notified under paragraph 1, may apply during the 
transition period the same TRIM to a new investment  (i) where the products of such investment are 
like products to those of the established enterprises,  and (ii) where necessary to avoid distorting the 
conditions of competition between the new investme nt and the established enterprises. Any TRIM so 
applied to a new investment shall be notified to the Council for Trade in Goods. The terms of such a 
TRIM shall be equivalent in their competitive effect to those applicable to the established enterprises, 
and it shall be terminated at the same time.” 
 
 
Article 65 of the TRIPS Agreement 
“1.  Subject to the provisions of paragraphs 2, 3 and 4, no Member shall be obliged to apply the 
provisions of this Agreement before the expiry of a general period of one year following the date of 
entry into force of the WTO Agreement. 
 
2. A developing country Member is  entitled to delay for a further period of four years the date of WT/WGTI/W/77 
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application, as defined in paragraph 1, of the provisi ons of this Agreement other than Articles 3, 4 and 
5. 
 
3. Any other Member which is in the process of  transformation from a centrally-planned into a 
market, free-enterprise economy and which is undertaki ng structural reform of its intellectual property 
system and facing special problems in the prepar ation and implementation of intellectual property 
laws and regulations, may also benefit from a period of delay as foreseen in paragraph 2. 
 
4. To the extent that a developing country Me mber is obliged by this Agreement to extend 
product patent protection to areas of technology not so protectable in its territory on the general date 
of application of this Agreement for that Memb er, as defined in paragraph 2, it may delay the 
application of the provisions on product patents of Se ction 5 of Part II to such areas of technology for 
an additional period of five years. 
 5. A Member availing itself of a transitional peri od under paragraphs 1, 2, 3 or 4 shall ensure 
that any changes in its laws, regulations and practi ce made during that period do not result in a lesser 
degree of consistency with the provisions of this Agreement.” 
  
 2.  Promotional measures, including technical and financial cooperation 
 
41. Provisions that spell out development-orient ed measures and policies that parties to an 
agreement can take to further enhance developmen t-friendly effects of IIAs. One approach is to 
promote investment and technology flows to deve loping countries through appropriate home country 
measures. The 1989 Lomé Convention, for example,  contains a number of provisions concerning 
investment promotion and investment financing wh ich are meant to encourage private investment 
flows from the European Union to ACP States; th e Convention also addresses measures that home 
countries should take at the national level (box 9) . Similarly, implementation may benefit from the 
completion of other tasks, such as the conclusion of agreements relating to specific projects.  
 
Box 9. Article 259 of the Fourth ACP-EEC Convention of Lomé 
 
“In order to encourage private investment flows a nd the development of enterprises, the ACP States 
and the Community, in cooperation with other intere sted bodies, shall within the framework of the 
Convention:  
 (a)  support efforts aimed at promoting Europ ean private investment in the ACP States by 
organizing discussions between any interested ACP State and potential investors on the legal and 
financial framework that ACP States might offer to investors;   (b)  encourage the flow of information on investment opportunities by organizing investment promotion meetings, providing period ic information on existing financial or other 
specialized institutions, their facilities and conditi ons and encouraging the establishment of focal 
points for such meetings;   (c)  encourage the dissemination of info rmation on the nature and availability of 
investment guarantees and insurance mechanisms  to facilitate investment in ACP States; 
 
 (d)  provide assistance to small and medium-s ized enterprises in ACP States in designing 
and obtaining equity and loan fina ncing on optimal terms and conditions;  WT/WGTI/W/77 
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 (e)  explore ways and means of overcom ing or reducing the host-country risk for 
individual investment projects which could contribute to economic progress; 
  (f)  provide assistance to ACP States in:    (i)  creating or strengthening the ACP States' capacity to improve the quality of 
   feasibility studies and the preparation of projects in order that appropriate 
   econoic and financial c onclusions might be drawn; 
   (ii)  producing integrated project ma nagement mechanisms covering the entire 
   project development cycle within the framework of the development  
   programme the State.” 
 
 42.  The TRIPS Agreement, too, provides an exam ple in this respect (UNCTAD, 1996c). It calls 
upon developed contracting parties to provide incenti ves to their enterprises a nd institutions for the 
purpose of promoting and encouraging technology transf er to the least developed countries in order to 
enable them to create a sound and viable technol ogical base (article 67).  In order to facilitate 
implementation, it goes even further in detailing technical cooperation (box 10). 
 
 
Box 10.   Article 67 of the TRIPS Agreement 
 
“In order to facilitate the impl ementation of this Agreement, developed country Members shall 
provide, on request and on mutually agreed terms and conditions, technical and financial cooperation 
in favour of developing and least developed coun try Members. Such cooperation shall include 
assistance in the preparation of laws and regulations  on the protection and enforcement of intellectual 
property rights as well as on the prevention of thei r abuse, and shall include support regarding the 
establishment or reinforcement of domestic offices and agencies relevant to these matters, including 
the training of personnel.”  
 43. Some BITs describe specific actions that one  or the other contracting party should take to 
promote investment. An example of this approach is article 2 of the BIT between Malaysia and the 
United Arab Emirates (box 11).  A different approach is that found in article 2 (3) of the BIT between 
the Belgium-Luxembourg Economic Union and Came roon (box 12). This provision acknowledges the 
asymmetrical nature of the relationship between  a capital-exporting developed country and a 
developing country, for it does not impose a similar obligation on Cameroon to promote investment in 
the Belgium-Luxembourg Economic Union.  
 
Box 11.   BIT between Malaysia and the United Arab Emirates 
(article 2) 
 
“(6)  The Contracting Parties shall periodically consult between themselves concerning investment 
opportunities within the territory of each other in various sectors of the economy to determine where 
investments form one Contracting State into the other may be most beneficial in the interest of both Contracting States.  (7)  To attain the objectives of the Agreemen t, the Contracting States shall encourage and WT/WGTI/W/77 
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facilitate the formation and establishment of appropr iate joint legal entities be tween the investors of 
the Contracting States to establish, develop and ex ecute investment projects in different economic 
sectors in accordance with the laws and regulations of the host State.” 
 
BIT between the Belgium-Luxembourg Economic Union and Cameroon 
(article 2 (3)) 
 
“Aware of the importance of investments in the promotion of its policy of cooperation for 
development, the Belgium-Luxembourg Economic Uni on shall strive to adopt measures capable of 
spurring its commercial operations to join in th e development efforts of the United Republic of 
Cameroon in accordance w ith its priorities.” 
 
 
D. Overall structure 
 
44. The types of provisions in IIAs discussed so far are significant because they can give an 
agreement the flexibility necessary for enhancing its positive effects on development. Ultimately, 
however, the development orientation needs to be reflect ed in the very structure of an agreement. That 
structure is important because it reflects, a nd thereby determines, the overall design of the 
relationships between the parties. International agreements are generally based on reciprocity and 
legal symmetry, that is, the rights and obligations of the parties are generally the same, or “mirror 
images” of each other. Where the parties are at different levels of deve lopment, however, formal 
symmetry can obscure an underlying economic asymme try. International practice in the past half-
century has sought to take account of that asymme try by developing a number of ways in which 
differences in the level of development among parti es may be taken into account in the operation of 
an agreement. This can be done through particular provisions of the kinds discussed above; it can also 
be reflected in the very structure of an agreement. 
 
45. The extent to which such structural flexibilit y is found in international agreements varies 
widely. As far as IIAs are concerned, BITs do not a ppear to make a structural distinction between the 
rights and obligations applicable to developed a nd developing contracti ng parties. Their actual 
provisions do, however, sometimes offer, as not ed earlier, varying degrees of flexibility for 
development. Moreover, some of their provisions ar e meant to apply only to relationships between 
developed and developing countries. An instance of th is is the provisions found in BITs concerning 
subrogation by the home country to claims for pa yments made on the basis of the issuance of 
investment guarantees, which are normally availabl e only for investment in developing countries. 
 46. On the other hand, the Convention Estab lishing the Multilateral Investment Guarantee 
Agency (MIGA) is based on a distinction betw een developed and developing countries. More 
specifically, MIGA can cover investments made in the territory of developing member countries only 
(listed in schedule A of the Convention). 7/ The Convention is exceptional among IIAs in that such agreements do not generally distinguish, in th eir structure, between developed and developing 
countries. Another important exception in this resp ect is the Lomé Convention mentioned above. This 
Convention includes: in part one the general provi sions and principles for EEC-ACP cooperation; in 
part two, the areas of cooperation are presented; in  part three, the instruments of cooperation are 
listed; and part four deals with the instituti ons for EEC-ACP cooperati on that the Convention 
establishes. Of particular note is title IV of part three, wh ich distinguishes further among the 
developing contracting States, with provisions on the least developed, landlocked and island ACP 
States. 
 47. Another basic approach to provide for flex ibility involves the use of “positive” and “negative” 
lists. The former list those sectors or measures in re spect of which obligations are to be fulfilled; the  WT/WGTI/W/77 
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 latter list sectors or measures to which obligations do not apply. An example of a positive list can be 
found in GATS, where no party is compelled to permit market access or national treatment but has the 
right, under articles XVI and XVII, to list in its schedule those service sectors in which it is willing to 
make such commitments (box 12). This approach re flects the fact that the commitments are negotiated 
on the basis of reciprocity, which can be provided in other service modes of supply or in access for trade in goods. By following this approach, GATS encourages the increased participation of 
developing countries in trade in services by facili tating their efforts to liberalize their service 
industries as they are able to obtain reciprocal  commitments in other areas of negotiations. An 
example of a negative list can be found in NAFTA, where parties accept a set of principles and then 
negotiate sectoral exceptions.  This approach may re sult in a long list of reservations submitted by the 
parties. Under this approach new activities are au tomatically covered by an agreement unless explicit 
action is taken to exclude them. It  should be noted that these approaches are not mutually exclusive. 
An agreement could contain both approaches; GATS , for example, also has a negative listing for 
limitations on market access and national treatment with respect to those sectors and subsectors 
included in the schedule.  
 
Box 12. Article XVI of the GATS 
 
“1. With respect to market a ccess through the modes of supply identified in Article I, each 
Member shall accord services and service suppliers of  any other Member treatment no less favourable 
than that provided for under the terms, limitations and conditions agreed and specified in its Schedule. 
 
2. In sectors where market-access commitments are undertaken, the measures which a Member 
shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire 
territory, unless otherwise specified in its Schedule, are defined as:   (a) limitations on the number of service s uppliers whether in the form of numerical 
quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test; 
 
 (b) limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;   (c) limitations on the total number of servic e operations or on the total quantity of service 
output expressed in terms of designated numerical units  in the form of quotas or the requirement of an 
economic needs test;   (d) limitations on the total number of natu ral persons that may be employed in a 
particular service sector or that a service supplier may employ and who are necessary for, and directly 
related to, the supply of a specific service in the form of numerical quotas or the requirement of an 
economic needs test;   (e) measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service; and 
 
 (f) limitations on the participation of fore ign capital in terms of maximum percentage 
limit on foreign share holding or the total value of individual or aggregate foreign investment.”  
 
48. It is generally recognized that the positive lis t approach offers the possibility for trade-offs 
and facilitates the achievement of reciprocal be nefits. It provides developing countries with WT/WGTI/W/77 
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  considerable flexibility; for example, GATS does not prohibit performance requirements, and the 
TRIMs Agreement does not apply to services. 
 
CONCLUSIONS 
 
49. IIAs, whether bilateral, regiona l or multilateral, by their very nature impose certain disciplines 
and commitments which affect the ability of Go vernments to pursue their policies. Where both 
developing and developed countries ar e involved in an agreement, the formal symmetry of the parties 
is combined with an asymmetry in their underlying economic conditions. As a result, a certain degree 
of flexibility is required, particularly by devel oping countries, to take into account this economic 
asymmetry and permit them to benefit fully from an agreement. This report has examined the various 
ways in which existing IIAs provide for such flex ibility, without, however, evaluating their relative 
importance and effectiveness. 
 
50. The same problem is, of course, also fam iliar from international economic agreements in 
other areas. For instance, trade agreements within  the World Trade Organization (WTO) provide for 
special and differential treatment, which can take the form of allowing developing countries not to 
comply with certain disciplines foreseen in an ag reement for a period of time, taking into account the 
special needs of the developing countries concerned (see, e.g. box 13). Another interesting example is 
the recent United Nations Framework Convention on Climate Change and its Kyoto Protocol 
(box 14). The relevance of such agreements to IIA s is a subject that deserves further attention. 
 
 
Box 13. Article 15 of the Agreement on Agriculture 
 
“Special and Differential Treatment 
 
1. In keeping with the recognition that differen tial and more favourable tr eatment for developing 
country Members is an integral part of the negotiatio n, special and differential treatment in respect of 
commitments shall be provided as set out in th e relevant provisions of this Agreement and 
embodied in the Schedules of concessions and commitments.  2. Developing country Members shall have the flexibility to implement reduction commitments 
over a period of up to 10 years. Least-developed country Members shall not be required to undertake 
reduction commitments.” 
 
Article 10 of the Agreement on the Application of Sanitary 
and Phytosanitary Measures 
 
“Special and Differential Treatment  
1. In the preparation and application of sanita ry or phytosanitary measures, Members shall take 
account of the special needs of developing country Me mbers, and in particular of the least-developed 
country Members.  
2. Where the appropriate level of sanitary or phytosanitary protection allows scope for the 
phased introduction of new sanitary or phytosanita ry measures, longer time-frames for compliance 
should be accorded on products of interest to de veloping country Members so as to maintain 
opportunities for their exports.  
3. With a view to ensuring that developing country Members are able to comply with the 
provisions of this Agreement, the Committee is en abled to grant to such countries, upon request,  WT/WGTI/W/77 
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specified, time-limited exceptions in whole or in part from obligations under this Agreement, taking 
into account their financial, trade and development needs. 
 
4. Members should encourage and facilitate th e active participation of developing country 
Members in the relevant in ternational organizations.” 
 
 
 
Box 14. “Flexibility mechanisms” for developing countries 
in the United Nations Framework Convention on 
Climate Change and its Kyoto Protocol 
 
Objectives 
 
Article 2 of the United Nations Framework Conventi on on Climate Change stat es that the objective of 
the agreement is “to achieve ... stabilization of gree nhouse gas concentrations in the atmosphere at a 
level that would prevent dangerous anthropogeni c interference with the climate system” and “to 
enable economic development to pr oceed in a sustainable manner”. 
 
Preamble and principles 
 
Three key principles can be discerned: 
 (1) Common but differentiated responsibilities: pa rties to the Framewor k Convention have a 
common responsibility to protect the climate for presen t and future generations. Different countries, at 
different levels of economic development, are e xpected to fulfil their common responsibilities in 
different ways. Developing countries’  emissions are expected to grow, albeit less rapidly than they 
would without the Framework Convention; 
 (2) Developing countries, particularly low-lying is land and coastal States, States with semi-arid 
areas, areas subject to floods, drought or desertificat ion, or fragile mountain ecosystems are especially 
vulnerable to the adverse effects of climate change and deserve special consideration; 
 
(3) The parties should promote sustainable devel opment, and measures to avert climate change 
should be appropriate for the specific conditions of each party and should be integrated into national 
development programmes.  Substantive provisions  
The principles identified in the preamble and pr inciples section of the Framework Convention are 
given full expression in its substa ntive provisions and those of its Kyoto Protocol. Some of these 
provisions remain to be fully negotiated, but  are likely to contain flexible approaches. 
 
Differentiated emission limitati on and reduction commitments 
 
The Framework Convention contains two cate gories of emission limitation or reduction 
commitments, the general commitments contained in article 4.1 whereby all parties must adopt 
measures to mitigate climate change and the specific commitments contained in article 4.2 (a) and (b), 
whereby the developed countries must aim to return  their emissions to 1990 levels by 2000.  The 
Kyoto Protocol goes further. It obligates Annex I Parties (developed countries) only to reduce their 
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(a) and (b) these obligations are considered legally  binding on Annex I Parties. Developing countries 
may choose, but are not required, to adopt simila r commitments.  Argentina and Kazakhstan indicated 
at the recent Conference of the Parties held in Buenos Aires in November 1998 that they will 
undertake voluntary commitments. 
Financial assistance and technology transfer 
 
A financial mechanism has been established to provide  financial assistance to developing countries in 
meeting their obligations under the Framework C onvention and Kyoto Protocol. The operating entity 
of the financial mechanism is the Global Environment Facility, which, under article 4.3 of the Convention, will pay the agreed full costs of devel oping country reporting requirements. It also pays 
the agreed full incremental cost of measures in de veloping countries to reduce emissions and or in 
other ways further the objectives of the Convention.  The parties are still discussing the modalities for 
implementing the provisions of the Convention re lating to the development and transfer of 
technologies.  
Compliance and adaptation 
 
In furtherance of principle 2, measures have b een adopted to assist developing countries adapt to 
climate change. The Global Environment Facility funds studies to determine vulnerability and 
adaptation needs, and recently has been assigned the task of helping developing countries. The Clean 
Development Mechanism to be established under the Kyoto Protocol, discussed below, must apply a portion of its proceeds to meet the adapta tion requirements of developing countries. 
 The Clean Development Mechanism and sustainable development  
 
The Kyoto Protocol establishes a Clean Develo pment Mechanism (CDM) to assist developed 
countries in meeting their emissions reduction co mmitments and developing countries in achieving 
sustainable development.  Through the CDM, deve loped countries – or private companies in them – 
pay for projects in developing countries that will reduce emissions.  The developed country investor 
gets some or all of the credit for the reductions, wh ich it can apply against its own emissions or sell to 
another party.  The project must enhance sustaina ble development in the host developing country.  
The parties are still discussing the CD M and the modalities for its operation. 
 
  
Notes
 
 
 1/  In paragraph 89 (b) of “A Partnershi p for Growth and Development” (TD/378/Rev.1), 
UNCTAD was called upon to identify and analyse th e “implications for development of issues 
relevant to a possible multilateral framework on investment, beginning with an examination and 
review of existing agreements, taking into account the interests of developing countries and bearing in 
mind the work undertaken by other organizations”.  
 2/  For a collection of IIAs, see UNCTAD (1996a), in which, unless otherwise noted, the 
regional and multilateral agreements and model bilateral investment treaties cited in this report are 
contained. Developments regarding IIAs since the pub lication of the Compendium are reviewed in the 
annual World Investment Report series (UNCTAD, 1996b, 1997, 1998a).   
 3/  It should be noted that developed countries also often seek flexibility in IIAs, for their 
own reasons.   WT/WGTI/W/77 
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  4/  This may create a tension between th e universal scope and application of such 
agreements, on the one hand, and the extent to whic h measures and policies specifically relating to the 
development of the developing countries are po ssible under their provisions on the other hand. 
 5/  For the purposes of this report, legally binding agreements as well as guidelines are included in the analysis. It should be noted that th e legal nature of an agreement can itself be an 
indicator of flexibility.  
 6/  Unless otherwise stated, the texts of all BITs mentioned in this report can be found in 
International Centre for Settlement of Investment Disputes (1972-).   7/  More broadly, in agreements concer ning development cooperati on - intended to help 
developing countries in their development efforts - the distinction between de veloped and developing 
contracting parties is often an essential part of th eir structure, reflecting their objectives. A clear 
illustration is the case of the International Devel opment Association (IDA), the World Bank affiliate 
which provides development credits to developi ng countries on particularly favourable terms. 
Members of the IDA are classed in two main groups, Part I countries, which are donors of aid, and Part II countries, most of which are aid recipients.   References 
 
International Centre for Settlement of  Investment Disputes (ICSID) (1972-). 
Investment Treaties , Dobbs Ferry, NY, Oceana. 
 
International Monetary Fund (IMF) (1993). Balance of Payments Manual: Fifth Edition , 
Washington, DC, IMF, p. 86.  United Nations (1987). “Vienna Conve ntion on the Law of Treaties”, United Nations Treaty Series , 
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UNCTAD (1996a). International Investment Agreements: A Compendium . 
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