WORLD TRADE
ORGANIZATIONWT/WGTI/W/125
28 June 2002
(02-3621)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 27 June 2002, has been received from the Permanent
Delegation of Japan.
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MODALITIES FOR PRE-ESTABLISHMENT COMMITMENTS
I. SIGNIFICANCE OF FURTHER LIBERALIZATION
1. As noted in our submission on non-discri mination (WT/WGTI/W7124), the reduction of
foreign investment constraints and the creation of a freer investment environment will bring greater
predictability for investors and, consequently, lead to  greater investment inflow in the future.  Further
liberalization of foreign investment would therefor e offer considerable benefits to both foreign
investors and host countries, improving the economic welfare of the host countries as well as the
entire world.
2. The reality is that WTO members stand at different levels of development, and we can
understand the concern expressed by a number of developing countries over a balance between the
amount of discretion left to them with regard to  national development policies and their commitments
under the WTO and other international agreements .  At the same time, with the advance of
globalization, taking corporate economic activities beyond national borders to enable companies to
select the best production sites in the world, and placing constraints on investment would not seem to
be an appropriate decision even from the perspective of development policy.  National development
objectives are better achieved by promoting liberalization and thereby stimulating domestic
investment activities.
3. This is not to underestimate the fact that gove rnments are feeling the need to limit the entry of
foreign capital in specific sectors and economic activities within their national territories.  The desire
to introduce or maintain temporary constraints on foreign investment in light of a country’s industrial
policy priorities or social system constraints is understandable.
4. As this holds true not only for developing countries but also for developed countries, virtually
all countries would probably have some concern over including non-discrimination, particularly
national treatment obligations, in an investment agreement.
5. In examining the prospects for an investment ag reement, we will therefore need to take into
consideration each country’s particular circumstances in terms of the need for particular liberalization
reservations.WT/WGTI/W/125
Page 2
6. Naturally, aside from these individual national circumstances, certain restrictions based on
special reasons such as national security and maintaining public order will need to be instituted as
general exceptions for both developed and developing countries.
II. POINT OF VIEW ON LIBERALIZATION RULES
7. Given the above considerations, it would seem vital that any WTO investment framework has
the flexibility to respond to member countries’ specific circumstances.  The WTO embraces more
than 140 members.  Given the differences in their stages of development, economic structures, and
policy priorities, how to secure the flexibility to deal adequately with such differences must be a key
point.
8. Paragraph 22 of the Doha Ministerial Declaration calls for “modalities for pre-establishment
commitments on a GATS-type, positive list approach”, and directs the Working Group to clarify this.
Here we examine four key issues in considering possible approaches.
A. P RE- AND POST-ESTABLISHMENT
9. National treatment and liberalization of foreign in vestment could be considered in two stages,
namely the stage before a foreign investor has established a presence in the host country (pre-
establishment), and the stage following the esta blishment in the host country where the foreign
investor engages in business activities (post-establishment).
10. Detailed discussion will be required on how to technically distinguish the pre- and post-
establishment status of investment activities.  With regard to the post-establishment stage, it is
familiar to both foreign investors and host countrie s to have the national treatment rule included in
international investment rules.  Considering that foreign companies have established a presence in the
host country, creating jobs and producing economic benefits there, it is difficult to find a rationalreason for according to them unfavourable treatment compared to domestic companies.
11. On the contrary, the issues which need more careful consideration by WTO members, are the
kind of rules which should be applied to the pre-establishment stage of investment, and the degree of
liberalization which should be pursued.
12. For example, some recent bilateral and regional investment agreements that covers
liberalization prescribes the extension of national treatment on “establishment or admission of foreign
investment” and thereby include liberalization at the pre-establishment phase..
13. Pre-establishment rules are a key element for investors in that they determine the degree of
investment risk they face when entering a new market.  Obviously, clear and transparent rules
increases predictability.  At the same time, there is the question of to what extent host countries are
prepared to admit “alien” parties which (potentia lly) have an impact on the domestic industry, and
how these investors should be placed in relation to the host countries’ domestic development policies.These are not issues which should be determined on a case-by-case basis; rather, they need to be
decided considering the country’s plans for its industrial structure and the impact on domestic
industry from a medium- to long-term perspective.
14. In considering a future WTO investment framew ork, we need to aim for a highly effective
framework which will increase predictability for investors and, at the same time, respond to theconcerns of the host countries.WT/WGTI/W/125
Page 3
B. POSITIVE LIST APPROACH AND NEGATIVE LIST APPROACH
15. To date, international investment agreem ents which includes national treatment and
liberalization at the pre-establishment stage have generally adopted lists and schedules indicating
specific reservations and commitments related to the fulfilment of agreement obligations, as
appendixes to the agreement.
16. The modalities adopted for these reservations and commitments can be broadly divided into
two types.  Under the negative list approach, memb er countries grant national treatment for all areas
in principle, registering particular areas as exceptions.  In contrast, the positive list approach registers
in commitment schedules only those areas where countries’ parties have agreed to national treatment
and liberalization.
17. For example, some recently concluded investment treaties, such as bilateral investment
treaties (BITs) and the investment chapters in free trade agreements (FTAs), have opted for thenegative list approach (e.g., Japan-Korea BIT, Japan-Singapore EPA are examples involving Japan).
GATS, on the other hand, features a positive list approach.
18. The choice between these two approaches should be made with reference to factors such as
the member countries, the objectives of the agreement, and rights and obligations under the
agreement.  As the positive list approach of the GATS allows the registration of national treatmentand market access commitments only in those areas where countries are prepared to guarantee these,
it seems to be a flexible approach making it easier to accept for developing countries concerned about
maintaining a balance with their development policies.
19. Specific schedule formats and items to be listed should be worked out as we move along with
the process of examining the overall structure of the investment agreement, but if we do intend to gowith a positive list approach, the GATS schedule (see attached) should serve as a useful reference.
C. R
EQUEST AND OFFER FORMAT
20. Where members opt for commitments based on a positive list approach, consideration will
also have to be given to the commitments schedule creation process.
21. Here we can learn from the request and offer format currently in use in the GATS
negotiations.  Liberalization requests for certain sectors or certain activities are submitted by a
member country to another member country, which examines these requests and responds with offers.
As WTO members will have already worked with this modality in the GATS negotiations, human and
other resources will already be available, reducing any additional burden.
D. INDUSTRIAL CLASSIFICATIONS1
22. Given the possibility that a positive list approach could be adopted for a future investment
framework, the Working Group will need to give so me consideration to industrial classifications.
Industrial classifications on which commitments will be  based will obviously have a major impact on
the transparency and effectiveness of those commitments.
23. Firstly, we will need to develop a standard industrial classification system among members.
For example, the employment of a different descriptive system by each member country for
                                                     
1 See Japanese Government submission to the April 2002 Working Group meeting
(WT/WGTI/W/111).WT/WGTI/W/125
Page 4
effectively the same sectors would greatly reduce predictability for investors.  Recent BITs use a
negative list format for registration of exceptions, but generally note their reservations for specific
sectors based on the industrial classifications of  both countries.  Because this system performs
adequately where both countries understand each other’s system of industrial classification, there is
no need to develop a standard system. In the case of the WTO Agreement, however, the WTO’senormous, disparate membership will absolutely require a shared industrial classification system.
24. Secondly, we will need to consider the format of industrial classifications.  Sectors which are
defined too widely or too narrowly will hinder the formation of specific commitments.
25. Our experience in developing the GATS should provide a reference for industrial
classification.  Under the GATS, schedules are created based on a service classification table
(MTN.GNS/W/120) drawn from the United Nations CPC (Central Product Classification).
2  The table
divides services into 155 categories, and for national treatment and market access commitments,member countries have denoted those service areas in which they can guarantee their commitments.
(As for transparency and most-favoured-nation (MFN),  commitments apply in principle to all service
areas, although an exception registration system has been adopted for MFN).  As was done in GATS,
a non- service (or manufacturing) classification table could be newly created to form the basis for
schedules for the future investment framework.  It would also be worth examining the use of the
Harmonized Commodity Description and Coding Sy stem which is employed for trade in goods.
26. We except to see progress made in defining the scope of a future investment framework
through the above work.
III. EXAMPLES OF EXISTING AGREEMENTS
A. BIT
S AND REGIONAL AGREEMENTS (CHAPTERS ON INVESTMENT )
27. A number of agreements first distinguish between pre- and post-establishment investment and
then stipulate different scopes and levels of obligation.
28. One concrete example is the German model BIT.  For pre-establishment investment, it
provides that “each contracting party shall in its territory promote as far as possible investments by
nationals or companies of the other contracting party and admit such investments in accordance withits legislation. it shall in any case accord such investments fair and equitable treatment.”  (Article 2.1,
German model BIT).  In the case of post-establishment investment, Article 4.1 notes that “investment
by nationals or companies of either contracting pa rty shall enjoy full protection and security in the
territory of the other contracting party”, while for national treatment and MFN treatment, Article 3.1
states that “neither contracting party shall subject investments in its territory owned or controlled by
nationals or companies of the other contracting pa rty to treatment less favorable than it accords to
investments of its own nationals or companies or to investments of nationals or companies of any
third state”.
29. A number of agreements do not distinguish between pre- and post-establishment investment,
but rather call for national treatment for all phases of investment activity (in other words, including
both establishment and admission).  Typical examples are the Japan-Korea BIT, NAFTA, and the US
model BIT.
                                                     
2 International classification standard for products. Designed to embrace in principle all goods which
could be subject to trade, including not only those goods and services produced by economic activities, but also
tangible assets such as land and intangible assets such as patent rights.WT/WGTI/W/125
Page 5
B. FRAMEWORK AGREEMENT ON THE ASEAN I NVESTMENT AREA (AIA)
30. Article 7 of the AIA provides for national treatment.  State parties must extend national
treatment to ASEAN investors and investment, including both admission and establishment.
However, each state party can submit a temporary exclusion list and a sensitive list of industries and
measures that have an impact on investment where national treatment cannot be granted and measuresthat affect investment.  The AIA also contains provisions on the review and progressive elimination of
these lists.
3
C. GATS
1. Positive list approach for national treatment and market access
31. Article XVII provides for national treatment, adopting a positive list approach.  GATS
obligates members to refrain from not only formal discrimination (de jure equality), but also effective
discrimination (de facto equality).  In other words,  the issue is not formal non-discrimination in terms
of member countries’ measures influencing the supply of services, but rather the need to provide
competitive conditions whereby suppliers of services from other state parties will not be less
favorable than for domestic service suppliers.
32. In terms of provisions concerning investment entry restrictions, a market access obligation is
prescribed in Article XVI.  Like national treatment, members’ commitments are made based on apositive list basis.
2. Most favourable nation treatment and the negative list approach (Reference)
33. Article II of the GATS covers MFN treatment.  Member countries take on the general
obligation of extending MFN treatment to measures having an impact on trade in services in all
service areas.  In other words, this is a negative list approach.  However, member countries couldregister measures to be exempted from MFN treatment when the GATS was established.  A right is
also extended to new members at the time of WTO accession.  The exemption period is up to 10 years
as a rule.
3. General and other exceptions
34. As a general exception from the above commitments applying to all members, Article XIV
provides that nothing in the GATS shall prevent the adoption or enforcement by any member of
measures taken to protect public morals, maintain public order, or protect human, animal or plant life
or health, or for reasons relating to taxation systems.
35. Article XII looks at restrictions adopted to protect the balance of payments, noting that “in the
event of serious balance-of-payment and external financial difficulties or threat thereof, a Member
may adopt or maintain restrictions on trade in services on which it has undertaken specific
commitments, including on payments or transfers for transactions related to such commitments.”
                                                     
3 Temporary exclusion lists are to be reviewed ever y two years, and member states other than Vietnam,
Laos and Myanmar must progressively eliminate these exclusions  by 2003 (accelerated  from the original date
of 2010), or 2010 in the case of Vietnam, and 2015 for Laos and Myanmar. Sensitive lists are to be reviewed byJanuary 2003.WT/WGTI/W/125
Page 6ANNEX
EXAMPLE OF SCHEDULE OF SPECIFIC COMMITMENTS UNDER GATS
Modes of supply:          1)      Cross-border supply       2)       Consumption abroad        3)      Commercial presence      4)      Presence of natural persons
Sector or subsector Limitations on market access Limit ations on national treatm ent Additional commitments
I. HORIZONTAL COMMITMENTS
ALL SECTORS INCLUDED
IN THIS SCHEDULE3) Unbound for research and development
subsidies
4) Unbound except for measures concerning
the entry and temporary stay of a naturalperson who falls in one of the followingcategories:4) Unbound except for measures concerning
the categories of natural persons referred toin the market access column
Unbound for research and development subsidies
i)Activities to direct a branch office as
its head;
Sector or subsector Limitations on market access Limitations on national treatment Additional commitments
II. SECTOR-SPECIFIC COMMITMENTS
d) Services related to
management consulting1) Unbound
2) None
3) The number of licences conferred to
service suppliers may be limited.
Unbound except as indicated in
HORIZONTAL COMMITMENTS1) Unbound
2) None
3) Unbound except as indicated in
HORIZONTAL COMMITMENTS
4) Unbound
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