A Multilateral Agreement on Investment (MAI) is under negotiation out there, a subject of much apprehension in this country. The fear is that a regime is on its way, to force developing countries to fully open up to foreign investment. The MAI's radicalism is real enough. The cause for fear is less so.The known facts about the MAI are that it aims at cross-border-investor protection and is being negotiated in the Organisation for Economic Cooperation and Development (OECD). And there is disagreement in the Indian Government about whether it should dovetail its foreign investment ambitions to this ``free-standing'' agreement. (``Free-standing'' means that countries which are not OECD members can become party to it.) There is also the vague idea that the MAI would require foreign investors to be treated on a par with domestic firms (so-called ``national treatment'') on the right to establish a business, and on the treatment they receive post-establishment.Is it bad for India?India believes - rightly - that signing the MAI would leave it with no freedom to discriminate between domestic and foreign firms. But should this be a fear? Opening up means not discriminating between domestic and foreign investors and rule-bound treatment of investors. India is heading that way anyway. The only problem is timing.The Finance Ministry's argument, which favours India signing, is based on the country's ambition of $10 billion in foreign direct investment. Given the intense competition for foreign capital, it is hard to see this happen unless India welcomes foreign investors enthusiastically.Then again, isolationism does not work well for India. In the drug patents negotiations in the Uruguay Round, India was successively deserted by Brazil and China. On the MAI itself, India has had a taste of `betrayal'. At the WTO ministerial meet in Singapore last year, Malaysia dropped its insistence on not starting an educative process on investment after saying the opposite all along.Diplomatic gameThe OECD has pushed its MAI deadline from this summer to next May. The OECD's expectation is that the MAI would be signed by about 10 countries apart from OECD members. Chile and Argentina have indicated that they will sign. International negotiators say they ``are hoping for a domino effect''.Asia - read ASEAN (Association of South-East Asian Nations) - is more wary. Talks are underway also in the Asia-Europe Meeting (ASEM). ASEM is comprised of the 15 European Union countries, the seven ASEAN countries (before Laos and Myanmar joined), China, Japan and South Korea.ASEAN insists that national treatment for foreign investors in the MAI has to be voluntary. But the EU says the argument is about investor protection. ASE-AN wants a focus on rule-making for existing investment regimes not incremental liberalisation.The countries in the forefront of the liberalisation effort in the OECD are the US, the Netherlands, Germany and Britain. America opposed talk of an MAI in the WTO fearing that its radicalism would get diluted there. More hesitant are Canada, Australia and new members such as Mexico and South Korea.A two-speed MAI?The EU even demands a Regional Economic Integration Organisation (REIO) for some members who could liberalise investment among themselves faster than other MAI signatories. Such a group would not have to extend the liberalisation they agree among themselves to third parties (most-favoured nation treatment). This is opposed by the United States, Canada and Japan, who say that would mean one set of rules for one half of the membership, another for the other half.So what's at stake?The MAI is nothing if not ambitious. Its bottomline is to win national treatment - treatment for foreign investors at least as good as that for domestic firms. This could mean - depending on the MAI's final shape - that governments will not be free to put ceilings on foreign investment, impose export or indigenisation obligations on foreign investors, subsidise domestic producers, or tax them at differential rates. India is culpable on every single count - but so are a lot of other countries.There is resistance to many proposals in the OECD itself. The list of reservations submitted by member countries is as thick as a telephone directory. It is clear that on the right to establish a business, full national treatment would have to be offered. But post-establishment treatment is a web of controversy. Consider:* More than 150 pages of reservations are devoted to national treatment on investment liberalisation alone. Countries have doubts about treating foreign firms on a par with domestic ones as they liberalise investment, even if they are willing to accord national treatment in their existing regimes. For India, national treatment in even the existing regime is a radical step.* Ceilings on foreign investment: inherently in conflict with national treatment. India has such ceilings. About 85 per cent of foreign direct investment is cleared by governments through a screening mechanism. If these are outlawed and India signs, it will call for radical liberalisation.* Entire sectors closed by national governments to foreign investment: banking, insurance, transportation, telecoms, air traffic, maritime transport, etc. This would have to change. India is under fire for its closed insurance and relatively closed banking markets. A WTO agreement and the MAI could oblige it to fully open up its financial services.* Subsidies: Domestic subsidies contravene national treatment, yet most governments want them for their firms to do research in new technology. If adopted, Indian accession would mean end of public-sector subsidies unless these are also extended to foreign investors!* Privatisation: Disagreement remains about whether to let foreign firms pick up stake from the outset in companies that are privatised. Imagine the fun if India, which cannot even agree on disinvestment, has to combine privatisation with the possibility of foreign ownership of erstwhile crown jewels.* Taxation: The discussion is about whether taxes can be kept completely out of the MAI's scope. Many OECD members argue that taxes are ruled by international tax agreements such as those on avoiding double taxation. But the EU wants national treatment on taxation. For India, this could mean end of discriminatory taxation.
