RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/W/34
8 April 1998
(98-1413)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 30 March 1998, was received from the Permanent
Mission of Japan with the request that it be circulated to Members.
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Abstract
The previously distributed Secretariat's note (WT/WGTI/W/22) has provided a valuable
overview of existing investment treaties.  In addition to the first part of the Secretariat's note, we
present some details regarding Japan's bilateral investment treaties (hereinafter "BITs") with the aim
of deepening the understanding of the Working Group participants with regard to investment treaties.
In the following section, we make full use of the Secretariat's note to identify elements common to
recent investment treaties (including Japan's BI Ts), and introduce the elements of the investment
treaty that will potentially be required in the future.  We conclude the paper by indicating particular
issues relating to the elements identified in the previous section in the hope of providing a concrete
proposal regarding the direction of future debate within this Working Group.
1. Japan's Bilateral Investment Treaties (BITs)
Japan currently maintains five BITs.  Bilateral investment treaty negotiations are also in
progress with some other countries in response to an increased demand from Japanese companies.
Below we have outlined some of the elements common to Japan's current BITs;  these details
essentially correspond what we describe later as a typical, traditional BIT.
(1) Definition of "investments"
All five treaties specify investments as being "every kind of assets", representing a broad
concept of "investment".
(2) Admission of investment
Foreign investment is required to be admitted in accordance with domestic law.  A conferring
of a most favoured nation (MFN) status is also required.
(3) Treatment of investments
The following items are disciplined according to the conferring of national treatment and a
MFN status:
(i) investments and business activities;WT/WGTI/W/34
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(ii) right to take legal action;
(iii) compensation regarding expropriation and nationalization.
(4) Conditions regarding nationalization and compensation
Expropriation, nationalization, or other measures having the tantamount effects to them, are
not permitted, except where the measures are taken for a public purpose, on a non-discriminatorybasis, under the due process of law and against payment of compensation.  Compensation must be
equivalent to the normal market value of investment assets and returns.
(5) Subrogation of the right or claim
If a payment is made under guarantee by a contracting party, it is permitted that any right or
claim will be transferred to guarantors.
(6) Companies of third countries with substantial interests
Companies of any third country in which investors have a substantial interest must be
accorded a certain level of treatment within the territory of the other contracting party.
(7) Dispute settlement
An investor-state dispute settlement mechanism is  provided in addition to a state-state dispute
settlement mechanism.
2. Common Elements of Existing Investment Treaties
Traditionally, bilateral and regional investment treaties have been centred around laws
relating to investment protection, but in recent years, economic globalization and increased corporate
investment activities have led to calls for investment treaties which address investment liberalization.
Below, we identify some elements common to existing investment treaties, and classify them
according to whether they relate to investment protection or investment liberalization.
(1) Elements relating to investment protection
Based on details provided in the Secretariat's note, disciplines pertaining to investment
protection in existing investment treaties (inclu ding Japan's BITs) can be roughly summarized as
follows:
(i) Definition of "investment".  Generally, "investment" is defined very broadly
with a list of examples.
(ii) Admission of investment.  Treaties typically stipulate that investment should
be admitted in accordance with domestic law.
(iii) General standards relating to the treatment of investments.  Parties are
generally required to accord covered investments fair and equitable treatment
and full/constant protection and security, and to refrain from impairing by
unreasonable or discriminatory measures on investment.
(iv) Expropriation and compensation.  Direct or indirect expropriation is
prohibited except in cases where expropriation is implemented  for a publicWT/WGTI/W/34
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purpose, on a non-discriminatory basis, under due process of law and against
payment of compensation.
(v) Free transfer of payments.
(vi) Dispute settlement procedures.  Investor-state dispute settlement procedure is
often provided in addition to state-state dispute settlement procedure.
(2) Elements relating to investment liberalization
In recent years, the United States, the world's largest investor as well as the largest investment
recipient, and, even more recently, Canada, have entered into a number of BITs with disciplines
governing a broad range of investment liberalization measures.  In addition to such BITs, the NAFTA
treaty, for example, incorporates liberalization measures, and the MAI currently being negotiated in
the OECD is also centred around investment liberalization measures.  Below, we list a number of
items pertaining to investment liberalization that are commonly found in existing investment treaties.
(i) Prohibition of performance requirements:
- local content requirements;
- trade-balancing requirements;
- export requirements;
- technology transfer requirements.
(ii) Right of temporary entry and stay for managerial personnel.
(iii) Prohibition of nationality restrictions regarding the employment of key
personnel.
(3) Items that may need to be incorporated into investment treaties
The quantity of BITs has increased rapidly during the 1990s (of approximately 1,300 BITs
currently in place, over two thirds have been entered into since 1990).  The quality of such treaties has
also changed, with traditional types of investment treaties that emphasize investment protection,
giving way to "high standard" treaties emphasizing investment liberalization.  Economic globalization
has provided the background to this trend, and there is likely to be an increasing demand in coming
years for such "high-standard" treaties.  In Japan, although companies have always had an interest inthe conclusion of investment treaties (see, for example, our previous contribution paper,
WT/WGTI/W/11), the need for high standard investme nt treaties is growing in magnitude, despite the
investment environment becoming increasingly unclear in the wake of the Asian currency crisis.
3. Proposal regarding the direction of future discussions
Given the items listed above that are typical of existing investment treaties, it is important for
this Working Group to examine whether or not such items should be incorporated into future
multilateral treaties.  In this context, it will be usef ul to discuss items that have been subject to debate
during the past treaty negotiations, as well as items which appear to be particularly important to the
promotion of investment.  To this end, we have listed some of the specific items and issues that
should be addressed when our Group next convenes.WT/WGTI/W/34
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(1) Range of "investment"
Should consideration be limited to FDI, or s hould portfolio investment also be included?
Should indirect investment (investment via a third country) be included?
(2) National treatment and MFN status
What are the advantages and disadvantages of a positive list approach or a negative list
approach when applying national treatment to investment approval?
(3) Prohibition/restriction of performance requirements
In addition to items already disciplined under the TRIMs Agreement, items, such as those
listed below, are disciplined under existing bilateral or regional treaties.  Thus, we need to consider
whether such items should be incorporated into investment treaties, and to examine the types of
problem that might arise as a result.
(i) Export requirements:
- How should Foreign Trade Zones (FTZs) be treated?
(ii) Technology transfer requirements:
- How should incentive-added technology transfer requirements be
handled?
(Prohibit or control?)
(iii) Foreign capital restrictions:
- How should the relationship with the GATS be viewed?
(4) Right of temporary entry and stay for key personnel
(5) Tax
- How should the relationship with bilateral tax treaties and the domestic tax
system be viewed?
(6) Free transfer of payments
(7) Arrangements regarding expropriation and compensation
(8) Dispute settlement
- Should investor-state disputes be provided?  Should the scope of such
disputes be limited to "investment protection"?
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