WORLD TRADE
G/C/W/307
1 October 2001
ORGANIZATION
(01-4672)
Committee on Trade-Related Investment Measures
TRADE-RELATED INVESTMENT MEASURES AND
OTHER PERFORMANCE REQUIREMENTS
Joint Study by the WTO and UNCTAD Secretariats1
PART I
Scope and Definition; Provisions in International Agreements
1.
This document contains Part I of the joint study which the WTO and UNCTAD Secretariats
have been requested to prepare. To provide some orientation for the entire study, this Part includes an
inventory of definitions of trade-related investment measures and performance requirements as found
in relevant trade policy literature and in surveys produced by other international organizations. This
Part also addresses the treatment of trade-related investment measures and performance requirements
in international agreements and instruments, as called for in the terms of reference for the study.
2.
Part II of the study will be issued shortly; it will cover the experience of selected developed
and developing countries in the use of TRIMs and other performance requirements, the use of these
measures in specific sectors and industries, and an analysis of the rationale, incidence and impact of
the measures on trade and investment flows, and on economic growth and development.
A.
SCOPE AND DEFINITION
3.
The Annex to the TRIMs Agreement provides an Illustrative List of measures that are
inconsistent with Articles III:4 and XI:1 of GATT 1994, referred to typically as local content, trade
balancing, and domestic sales requirements. However, it contains no generic definition of what
constitutes a trade-related investment measure, and the term "performance requirement" is not used,
nor therefore defined, in the context of the WTO Agreements.
4.
In describing performance requirements imposed by some developing countries, the UN
Centre for Transnational Corporations (UNCTC) observed in 1983 that:
"The policies of some developing countries focus increasingly on the
specific contributions or performance obligations to be undertaken by
enterprises receiving foreign financial or technological
participation.… The major performance requirements generally take
1
The following terms of reference were agreed on by the Council for Trade in Goods (G/C/M/49): "To
assist WTO Members to carry out the review called for in Article 9 of the TRIMs Agreement, the WTO and
UNCTAD Secretariats are requested to prepare a joint study for the WTO Council for Trade in Goods. The
study should provide a factual and objective examination of the use that governments have made of trade-related
investment measures and other performance requirements as policy tools for industrial development, their
effects on international trade and investment flows and on economic growth and development, and the treatment
of them in other international agreements and instruments. The study should be based on a thorough review of
the available literature, including the results of analysis carried out on this subject by other intergovernmental
organisations." (G/C/W/266).
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the form of export obligations, utilisation and processing of domestic
raw materials and natural resources, increasing the local content of
the manufacturing programme, local sourcing of supplies,
employment generation, training of national personnel and the
location of projects in designated areas. Furthermore, in the case of
host countries that regard the acquisition of advanced technology as a
key policy objective, the full transfer of technical know-how,
including improvements, is an important obligation to be undertaken
by the foreign technology supplier. Likewise, the setting up of
domestic R and D facilities and utilisation of domestic engineering
and consulting services are also stipulated as important performance
requirements of enterprises."2
5.
Guisinger (1986) subsumes "performance requirements" and "trade-related performance
requirements" in a general category of "investment incentives and disincentives":
"Investment incentives and disincentives are all the measures that
directly affect the profitability of an investment. For simplicity, the
term 'incentives' will be used to include both positive and negative
(that is, disincentive) measures affecting profitability. Incentives can
be further sub-divided into commodity-based ones -- those which
affect the revenues and intermediate input costs of an investment -and factor-based ones -- those which affect the costs of factors of
production. Performance requirements are a special category of
disincentives that direct an investor to buy from or sell to certain
markets.
They comprise, in turn, trade-related performance
requirements -- stipulated shares of production that must be exported
and stipulated shares of inputs to be procured domestically -- as well
as such measures as restrictions on foreign ownership of equity and
employment of local nationals."3
6.
The OECD Secretariat (1987) reported the definition of "trade-related investment measures"
that had been adopted in the context of the OECD's Trade Committee:
"The term [trade-related investment measures] is generally taken to
mean investment measures which are likely to have a direct impact
on trade and/or are motivated by trade policy considerations.
Examples include investment preconditions such as local content
regulations, export performance rules and product mandate
requirements (i.e. restrictions on the choice of product and the
geographic market to be served). Other measures such as exchange
restrictions, controls on technology transfer, licensing, R&D or local
equity participation may also have trade effects and could be
included in the broad category of TRIMs. Both host and home
country measures are generally included in this category. Examples
of home country measures are extra-territorial measures affecting the
imports and exports of foreign-located affiliates of national firms. As
TRIMs tend to have disincentive effects on inward direct investment,
they are frequently packaged with offsetting conventional investment
2
UNCTC 1983, p. 63.
Guisinger (1986), p. 81. Based on this definition, Guisinger classifies more than forty specific policy
instruments as incentives or disincentives. Guisinger (1986), pp. 82-83.
3
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incentives (often fiscal and financial) or other favourable trade
measures ( e.g. high tariff barriers)."4
7.
The same OECD document described a definition that had been used by the OECD's
Committee on International Investment and Multinational Enterprises in its work on international
investment incentives and disincentives:
"Trade–related investment measures with disincentive effects may be
defined as measures seeking to impact initially or directly on
investment (rather than on other impact variables such as trade or
employment) and which also have a direct reference to trade. Such
measures generally fall into the following four categories:
(1)
import, local content or local sourcing requirements whereby
limitations may be placed on imports, directly, or indirectly
via requirements to use certain levels or types of local inputs;
(2)
export requirements, related to the nature or volume of
exports;
(3)
international product mandate requirements, relating to
commitments to both produce certain products, often
components, and to worldwide sales;
(4)
technology transfer requirements, committing the use of
certain methods, processes or requirements, often proprietary.
The types of measures listed above may be linked to the award of
incentives (for example the availability or level of a particular award
may be conditional upon or in some way proportional to the
fulfilment of such requirements or may enter more generally into the
assessment of application for incentives)."5
8.
Moran and Pearson (1988) define "trade-related investment performance requirements" as
"…all host-government measures that are designed to increase the
local procurement of inputs by foreign-owned firms or joint ventures
and/or to increase the exports of those investments. The most
obvious TRIP requirements are domestic content and minimumexport requirements -- stipulating shares of inputs to be purchased
domestically and shares of production to be exported, respectively -but such requirements blend into a wide variety of other policies and
regulations used by governments to alter the location of production,
the selection of inputs, the scale of operations and the marketing of
the output from what foreign investors might otherwise undertake."6
4
OECD (1987), p. 3.
OECD (1987), p. 5.
6
Moran and Pearson (1988), p. 119.
5
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9.
Ariff (1989) defines "trade-related investment measures" as "various regulations and
requirements imposed on foreign investors in host countries that directly or indirectly impinge on
international trade flows."7
10.
According to UNCTC (1991a):
"…performance requirements … include government mandates
which affect the content and composition of the value-added
activities within a country." By far the most common are minimum
export and local-content requirements…..the former is sometimes
expressed in terms of a foreign exchange balancing requirement,
while the latter is sometimes expressed in policies which limit the use
of foreign personnel and other imported inputs. In addition, the host
government may interfere, if infrequently, in the question of the
nature of the technology the investor proposes to use, and the
manufacturing capacity."8
11.
UNCTC (1991b) noted that "[t]here is no commonly accepted definition of what constitutes a
TRIM". Based on definitions suggested during the Uruguay Round negotiations on TRIMs, it
provided a list of specific measures including: investment incentives; local equity requirements;
licensing requirements; manufacturing limitations; transfer of technology requirements; domestic
sales requirements; manufacturing requirements; product-mandating requirements; trade-balancing
requirements; local content requirements; export requirements; and import substitution requirements.
The study also refers to certain corporate practices9 and home country measures10 that had been
mentioned by participants in these negotiations.11
12.
Greenaway (1992) develops an inventory of "trade-related investment measures" based on a
distinction between "input TRIMs" and "output TRIMs." Included in the former category are: local
content requirements; trade-balancing requirements; laws of similars; limitation on imports; foreign
exchange restrictions; local equity participation; local hiring targets; expatriate quotas; national
participation in management; research and development requirements; and technology transfer. In the
latter category are: minimum export requirements; trade-balancing requirements; export controls;
market reserve policy; product-mandating requirements; licensing requirements; and technology
transfer.12
13.
Dunning (1993) classifies "operating requirements demanded or expected of foreign-owned
affiliates" or "performance-related requirements" as one of four categories of FDI policy measures:
"They include behavioural guidelines or requirements in respect of
the local purchases of capital goods, raw materials, intermediate
goods and services; recruitment, employment and training practices,
particularly at a managerial and professional level; the proportion of
output exported; the type of value added (e.g. R&D) undertaken by
the affiliates; information provided on intra-firm pricing practices;
conditions attached by MNEs on the use of technology transferred;
and even (in the case of developing countries, in particular) types of
7
Ariff (1989), p. 347.
UNCTC (1991), p. 10.
9
Market allocation; collusive tendering; refusal to deal; exclusive dealing; tied sales; resale-price
maintenance; price fixing; differential pricing; and transfer pricing.
10
Export limitations on foreign affiliates and preferential taxes for income on investments.
11
UNCTC (1991b), pp. 11-12.
12
Greenaway (1992), pp. 141-142.
8
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production methods utilized. In some cases, these requirements may
be traded for more favoured treatment of MNEs by governments,
such as the granting of additional import licences and protection from
foreign competition."13
14.
UNCTAD (1996) contains a taxonomy of "investment measures that affect the entry and
operation of foreign investors", and classifies such measures as follows: (i) measures relating to
admission and establishment; (ii) measures relating to ownership and control; (iii) measures relating
to operations; (iv) incentives; and (v) investment-related trade measures. The category of "measures
relating to operations" covers a wide range of measures, including "[p]erformance requirements, such
as sourcing/local content requirements; manufacturing requirements; technology transfer
requirements, employment requirements, regional and/or global product mandates, training
requirements, export requirements, trade-balancing requirements, import restrictions, local sales
requirements, linking export quotas to domestic sales, export/foreign exchange earning
requirements."14 The category "investment-related trade measures" comprises trade policy measures
that affect the volume, sectoral composition and geographical distribution of foreign direct investment
(FDI). Examples mentioned are: "tariffs and quantitative import restrictions; sectorally managed
trade, including voluntary export restraints; regional free trade arrangements; rules-of-origin policies;
export-processing zones; export controls; export financing; non-monetary trade arrangements…;
safety, health, environment, privacy and other national standards."15
15.
Based on this survey of the literature, there is no commonly accepted definition of either
TRIMs or performance requirements. Authors have tended first to set the control variable they are
interested in analysing (e.g., trade flows, investment flows, technology transfer, profitability), from a
host or home country point of view, and then group together examples of measures which they
consider to be relevant. Where trade has been the focus of attention, core measures have typically
included local content, trade balancing, export performance, and domestic sales requirements, but
some studies have cast the net wider than this to examine the trade effects (if any) of measures such as
technology transfer, licensing, and local equity requirements. Where investment has been the focus of
attention, a much broader range of measures has typically been covered.16
B.
PROVISIONS ON PERFORMANCE REQUIREMENTS IN INTERNATIONAL AGREEMENTS
16.
International trade and investment agreements carry a wide range of provisions on
performance requirements.
17.
In this section, selected international agreements have been classified into four categories,
according to their stance on performance requirements. The first category contains examples of
agreements that discourage performance requirements; the second contains examples of agreements
that prohibit certain mandatory and voluntary performance requirements; the third contains examples
of agreements that prohibit only certain mandatory performance requirements; and the fourth contain
implicit prohibitions on performance requirements. While some model agreements 17 do contain
permissive provisions on performance requirements, actual international agreements typically do not.
13
Dunning (1993), pp. 559-560.
UNCTAD (1996), pp. 176-181.
15
UNCTAD (1996), p. 181.
16
UNCTAD (1996) has probably set the outer limits for the time being.
17
For example, Article 3(ii) of Model B of the Asian-African Legal Consultative Committee Revised
Draft of Model Agreements for Promotion and Protection of Investments (1985) reads: "The investment shall
be received subject to the terms and conditions specified in the letter of authorization. Such terms and
conditions may include the obligation or requirement concerning employment of local personnel and labour in
the investment projects, organisation of training programmes, transfer of technology and marketing
14
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Illustrative list of Host-Country Operational Measures
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Restrictions on employment of key foreign professional or technical personnel, including restrictions associated with
the granting of visas and permits.
Requirements to establish a joint venture with domestic participation.
Requirements for a minimum level of domestic equity participation.
Requirements on location of headquarters for a specific region or the world market.
Public procurement restrictions (e.g., foreign affiliates are excluded as Government suppliers).
Restrictions on imports of capital goods, spare parts, manufacturing inputs.
Restrictions/conditions on access to local raw materials, spare parts and inputs.
Restrictions on long-term leases of land and real property.
Restrictions to relocate operations within a country.
Restrictions to diversify operations.
Restrictions on access to telecommunications networks.
Restrictions on the free flow of data.
Restrictions relating to monopolies or participation in public companies (e.g., an obligation to provide a public service
at a certain price).
Restrictions on access to local credit facilities.
Restrictions on access to foreign exchange (e.g., to pay for foreign finance, imports of goods and services).
Restrictions on repatriation of capital and profits (e.g., case-by-case approval, additional taxation or remittances, phase
out of transfers over a number of years).
"Cultural" restrictions, mainly in relation to educational or media services.
Disclosure of information requirements (e.g., on the foreign operations of transnational corporations).
Special requirements on foreign firms in certain sectors/activities (e.g., on branches of foreign banks).
Operational permits and licences (e.g., to transfer funds).
Special requirements on professional qualifications, technical standards.
Advertising restrictions for foreign firms.
Ceilings on royalties and technical assistance fees or special taxes.
Limits on the use of certain technologies, brand names, etc., or case-by-case approval and conditions.
Rules of origin, tracing requirements.
Linking local production to access or establishment of distribution facilities.
Restrictions related to national security, public order, public morals, etc.
Sourcing/local content performance requirements.
Manufacturing performance requirements.
Technology transfer requirements.
Regional and/or global product mandates.
Research-and-development requirements.
Employment performance requirements.
Training requirements.
Export requirements.
Trade-balancing requirements.
Import restrictions, local sales requirements.
Linking export quotas to domestic sales.
Export/foreign exchange earning requirements.
Source: UNCTAD (2001), pp. 8-9.
18.
The table above offers a picture of the wide range of performance requirements that
international agreements might address. As an illustrative list of what UNCTAD has referred to as
arrangements for the products." The CARICOM Guidelines for Use in the Negotiation of Bilateral Treaties
(1984) specify that: "(i) CARICOM countries should not accept any restrictions on their freedom to impose
performance obligations; (ii) performance obligations, which should include but not be limited to, export
performance, employment, conformity with national laws and with trade union practices, and transfer of
technology, should be linked to the benefits to be derived and in this context provision should be made for such
obligations to be reviewed periodically." However, it should be stressed that these are model provisions, and
that actual agreements containing these provisions appear to be scarce; the five-volume UNCTAD publication,
International Investment Instruments: A Compendium, contains no agreements with these provisions.
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"host-country operational measures," it is phrased in terms of mandatory performance requirements; it
should be noted, however, that the list could also be cast in voluntary terms.18
1.
Provisions discouraging performance requirements
19.
Some bilateral investment treaties (BITs) between developing countries discourage
performance requirements. For example, the BIT between Malaysia and the United Arab Emirates
calls for the parties to: "…seek as far as practicable to avoid performance requirements as a condition
of establishment, expansion or maintenance of investments, which require or enforce commitments to
export goods produced or which specify that goods or services must be purchased locally or which
impose and other similar requirements."19
20.
Similarly, the BIT between the United States and Zaire (Democratic Republic of Congo) of
1984 calls for the parties to "endeavour to avoid imposing" on the investments of nationals or
companies of the other party local content or export requirements.20 And the BIT between the United
States and Turkey (1985) provides in Article II (7) that: "Each party shall seek to avoid performance
requirements as a condition of establishment, expansion or maintenance of investments, which require
or enforce commitments to export goods produced, or which specify that goods or services must be
purchased locally, or which impose any other similar requirements."
21.
Some plurilateral and multilateral initiatives aimed at setting norms also express a preference
for avoiding such measures, although they do not carry legally binding prohibitions. Of relevance in
this respect is the OECD's non-legally binding Declaration on International Investment and
Multinational Enterprises (1976).21 The Declaration urges Member countries to give due weight to
the interests of other Member countries affected by investment incentives and disincentives, and to
endeavour to make such measures as transparent as possible.
22.
Norms contained in the World Bank Guidelines on the Treatment of Foreign Direct
Investment (1992) also take a negative approach towards performance requirements.22 While
18
UNCTAD (2001) which offers a classification of how "any policy measure adopted by a hostcountry Government to influence the operations of foreign investors" has been treated in international
agreements. Its first category comprises measures that have been explicitly prohibited at the multilateral level in
the WTO Agreement on TRIMs. A second category consists of measures "that are explicitly prohibited,
conditioned or discouraged by interregional, regional or bilateral (but not multilateral) agreements (or drafts
thereof)." This category includes: requirements to establish a joint venture with domestic participation;
requirements for minimum level of domestic equity participation; requirements to locate headquarters for a
specific region or the world market; employment performance requirements; export performance requirements;
restrictions on sales of goods or services in the territory where they are produced or provided; requirements to
supply goods produced or services provided to a specific region or the world market exclusively from a given
territory; requirements to act as the exclusive supplier of goods produced or services provided; requirements to
transfer technology, production processes or other proprietary knowledge; research and development
requirements; and measures contrary to the principle of fair and equitable treatment. A third category includes
measures that "are not contested" and have not been the subject of specific international disciplines.
19
BIT between Malaysia and the United Arab Emirates (1991), Article 2. The BIT between El
Salvador and Peru (1996) contains a similar provision.
20
BIT between the United States and Zaire (1984), Article II.
21
The Declaration was most recently revised in 1991. See OECD, The OECD Declaration and Decisions
on International Investment and Multinational Enterprises - 1991 Review (Paris, 1992).
22 These Guidelines were developed in the World Bank Group following a request in April 1991 by the
IMF-World Bank Development Committee for the preparation of a report on "an overall legal framework which
would embody the essential legal principles so as to promote foreign direct investment" and were "called to the
attention" of the members of the World Bank Group by the Development Committee in September 1992. A
detailed explanation of the Guidelines is contained in the accompanying Report to the Development Committee on
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recognizing the right of each state to make regulations governing the admission of investments, one of
the Guidelines23 encourages states to facilitate the admission of investments by nationals of other
states and to adopt an approach of open admission, possibly subject to a restricted list of investments,
which are either prohibited or require screening and licensing, as being more effective than an
approach involving the imposition of performance requirements as a condition for the admission of
foreign investment.24
23.
In the context of Asia-Pacific Economic Cooperation (APEC), norms of a non-binding nature
relating to the admission, treatment and protection of foreign investment have been adopted in the
APEC Non-Binding Investment Principles (1994).25 The Principles provide, inter alia, that Member
economies minimize the use of performance requirements that distort or limit the expansion of trade
and investment.
24.
The Association of South-East Asian Nations (ASEAN) regional Framework Agreement on
the ASEAN Investment Area (1998) also opts for a best-efforts approach, with Article 3 calling for the
progressive reduction or elimination of "investment regulations and conditions which may impede
investment flows and the operation of investment projects in ASEAN."
2.
Provisions prohibiting both mandatory and voluntary performance requirements
25.
The TRIMs Agreement prohibits measures that favour the use of domestic over imported
goods or establish quantitative restrictions on imports of goods, whether the measures are mandatory
or are only required to be applied by those investors and producers that obtain an advantage in
exchange. The Agreement on Subsidies and Countervailing Measures prohibits subsidies contingent
upon export performance, and upon the use of domestic over imported goods.
26.
Some investment provisions in international agreements explicitly incorporate the TRIMs
Agreement. One example is the Free Trade Agreement between Central America and the Dominican
Republic (1998). Another example is the 2000 Agreement between the United States and Vietnam on
Trade Relations, though some TRIMs are allowed during a transition period.
3.
Provisions prohibiting mandatory performance requirements
27.
Some international agreements go beyond the scope of the TRIMs Agreement to prohibit
other mandatory measures, such as export performance requirements. Agreements which follow this
pattern include BITs concluded in recent years by the United States and Canada. The performance
requirements prohibited by these treaties include mandatory requirements with respect to local
content, trade balancing, export performance, transfer of technology and in some cases, research and
development. The prohibition of such requirements applies to both goods and services.
28.
For example, Article VI of the U.S. Prototype Treaty (1994) contains the following language:
"Neither Party shall mandate or enforce, as a condition for the
establishment, acquisition, expansion, management, conduct or
operation of a covered investment, any requirement (including any
commitment or undertaking in connection with the receipt of a
governmental permission or authorization):
the Legal Framework for the Treatment of Foreign Investment. See International Legal Materials, Vol. 31 (1992),
p.1368.
23
That is, the second of five Guidelines.
24
By way of exception to this preferred approach, a state may refuse admission of foreign investment on
grounds of national security or in respect of sectors reserved by the law of a state to its nationals on account of the
state's economic development objectives or the strict exigencies of its national interest.
25
http://www.apecsec.org.sg.
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(a)
to achieve a particular level or percentage of local content, or
to purchase, use or otherwise give a preference to products or
services of domestic origin or from any domestic source;
(b)
to limit imports by the investment of products or services in
relation to a particular volume or value of production, exports
or foreign exchange earnings;
(c)
to export a particular type, level or percentage of products or
services, either generally or to a specific market region;
(d)
to limit sales by the investment of products or services in the
Party's territory in relation to a particular volume or value or
production, exports or foreign exchange earnings;
(e)
to transfer technology, a production process or other
proprietary knowledge to a national or company in the Party's
territory, except pursuant to an order, commitment or
undertaking that is enforced by a court, administrative
tribunal or competition authority to remedy an alleged or
adjudicated violation of competition laws; or
(f)
to carry out a particular type, level or percentage of research
and development in the Party's territory.
Such requirements do not include conditions for the receipt or
continued receipt of an advantage."
29.
This Prototype Treaty is used in BITs between the United States and Trinidad and Tobago
(1994), Bolivia (1998), Mozambique (1998) and Bahrain (1999).
30.
BITs between Canada and Barbados (1996), the Philippines (1995), Trinidad and Tobago
(1995) and Venezuela (1996) prohibit performance requirements as a condition of establishing,
expanding or maintaining an investment project, but allow performance requirements taken on
voluntarily by investors in exchange for an advantage. For example, Article V of the BIT between
Canada and the Philippines specifies:
"(2) Neither Contracting Party may impose any of the following
requirements in connection with permitting the establishment or
acquisition of an investment or enforce any of the following
requirements in connection with the subsequent regulation of that
investment:
(a)
to export a given level or percentage of goods;
(b)
to achieve a given level or percentage of domestic content;
(c)
to purchase, use or accord a preference to goods produced or
services provided in its territory, or to purchase goods or
services from persons in that territory;
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(d)
to relate in any way the volume or value of imports to the
volume or value of exports or to the amount of foreign
exchange inflows associated with such investment; or
(e)
to transfer technology, a production process or other
proprietary knowledge to a person in its territory unaffiliated
with the transferor, except when the requirement is imposed or
the commitment or undertaking is enforced by a court,
administrative tribunal or competition authority, either to
remedy an alleged violation of competition laws, or acting in a
manner not inconsistent with the provisions of this Agreement."
While Article VI then provides:
"(2)
The provisions of Articles II, III, IV and V of this Agreement
do not apply to:
(a)
procurement by a government or state enterprise;
(b)
subsidies or grants provided by a government or state
enterprise, including government-supported loans, guarantees
and insurance;
(c)
any current or future foreign aid program to promote economic
development, whether under a bilateral agreement, or pursuant
to a multilateral arrangement or agreement, such as the OECD
Agreement on Export Credits.
31.
In the North American Free Trade Agreement (NAFTA, 1992), which covers investment in
Chapter 11, Canada, Mexico and the United States impose similar prohibitions on mandatory
performance requirements26. However, Article 1106(3) allows a Party to offer an incentive in
exchange for compliance with a requirement to locate production, provide a service, train or employ
workers, construct or expand particular facilities, or carry out research and development in its
territory.27
26
Specifically, Article 1106(1) proscribes the imposition or enforcement of mandatory requirements and
the enforcement of any undertakings or commitments: (1) to export a given level or percentage of goods or
services; (2) to achieve a given level or percentage of domestic content; (3) to purchase, use or accord a preference
to goods produced or services provided in the territory of a Party or to purchase goods or services from persons in
its territory; (4) to relate the volume or value of imports to the volume or value of exports or to the amount of
foreign exchange inflows associated with investment; (5) to restrict sales of goods or services produced or provided
by an investment in a Party's territory by relating such sales to the volume or value of exports or foreign exchange
earnings of the investment; (6) to transfer technology, a production process or other proprietary knowledge; and (7)
to act as the exclusive supplier of the goods produced or services provided by an investment to a specific region or
world market. [NAFTA Article 1107 prohibits a Party from requiring that an enterprise of that Party that is an
investment of an investor of another Party appoint individuals of any particular nationality to senior management
positions. A Party may require, however, that a majority of the board of directors, or any committee thereof, of an
enterprise of that Party that is an investment of an investor of another Party be of a particular nationality or resident
in the territory of that Party, provided that the requirement does not materially impair the ability of the investor to
exercise control over its investment. Parties have been allowed to make country-specific reservations in
accordance with Article 1108 in respect of this prohibition.]
27
Parties have also been allowed to lodge country-specific reservations under Article 1108 in relation to
the obligations of Article 1106. Additionally, Article 1108(8) provides that certain prohibitions in Article 1106 do
not apply to qualification requirements for goods or services with respect to export promotion and foreign aid
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32.
The Free Trade Agreement between Canada and Chile (1996) and the Free Trade Agreement
between Chile and Mexico (1998) contain investment provisions which are nearly identical to those of
Chapter 11 of the NAFTA. The Free Trade Agreement between Mexico and Costa Rica (1994) and
the Free Trade Agreement between Mexico and Bolivia (1994) have also been designed along this
line, as has the Free Trade Agreement between Mexico and Nicaragua (1997).
33.
Article 3(4) of the Colonia Protocol on Reciprocal Promotion and Protection of Investments
within MERCOSUR (1994) also prohibits mandatory requirements: "None of the Parties will
establish performance requirements as a condition to the establishment, the expansion or maintenance
of investments that require or demand exporting performance, or specify that certain goods or services
are bought locally, or impose any other similar requirement." The Annex notes, however, that
Argentina and Brazil reserve the right to maintain temporary exceptions in the automotive sector. The
Protocol is silent on voluntary performance requirements.
34.
An example of a sector-specific agreement covering mandatory performance requirements is
the Energy Charter Treaty (ECT) (1994),28 which aims at the establishment of a legal framework to
promote long-term cooperation in the energy field. It contains provisions on trade in energy materials
and products, competition, transit, transfer of technology, access to capital, investment promotion and
protection, sovereignty over energy resources, environmental aspects, transparency, taxation, state and
privileged enterprises and dispute settlement. Article 5 in Part II of the ECT ("Commerce") contains
rules on trade-related investment measures which essentially incorporate the provisions of the TRIMs
Agreement. Thus, Article 5(1) of the ECT prohibits the application of any trade-related investment
measure which is inconsistent with the provisions of Articles III or XI of the GATT. The list of
measures covered by this prohibition in Article 5(2) is similar to the list contained in the annex to the
TRIMs Agreement. However, it should be noted that Article 5(3) stipulates that this prohibition is not
to be construed to prevent a Contracting Party from applying the trade-related investment measures
described in Article 5(2) as a condition for eligibility for export promotion, foreign aid, government
procurement or preferential tariff or quota programmes.
programmes, government procurement, and requirements imposed by an importing Party relating to the content of
goods necessary to qualify for preferential tariffs or preferential quotas.
28
The ECT has been signed by Albania, Armenia, Australia, Austria, Azerbaijan, Belarus, Belgium,
Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, European Communities,
Finland, France, Georgia, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Kazakhstan, Kyrgyzstan,
Latvia, Liechtenstein, Lithuania, Luxembourg, the FYR of Macedonia, Malta, Moldova, Netherlands, Norway,
Poland, Portugal, Romania, the Russian Federation, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland,
Tajikistan, Turkey, Turkmenistan, Ukraine, United Kingdom and Uzbekistan. As a consequence of the deposit of
the 30th instrument of ratification on 16 January 1998, the ECT entered into force on 16 April 1998.
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Mandatory Performance Requirements Prohibited by Selected Agreements
Prohibited Performance Requirement
Sampling of Agreements Prohibiting

Export performance requirements
NAFTA
Canada-Barbados BIT
Canada-Philippines BIT
Canada-Trinidad and Tobago BIT
Canada-Venezuela BIT
United States-Trinidad and Tobago BIT
United States-Bolivia BIT

Restrictions on sales of goods or services in the
territory where they are produced or provided
NAFTA
United States-Bolivia BIT

Requirements to supply goods produced or services
provided to a specific region or the world market
exclusively from a given territory
United States-Trinidad and Tobago BIT

Requirements to act as the exclusive supplier of goods
produced or services provided
NAFTA

Requirements to transfer technology, production
processes or other proprietary knowledge
NAFTA
Canada-Barbados BIT
Canada-Philippines BIT
Canada-Trinidad and Tobago BIT
Canada-Venezuela BIT
United States-Trinidad and Tobago BIT
United States-Bolivia BIT

Research-and-development requirements
United States-Trinidad and Tobago BIT
United States-Bolivia BIT
Source: UNCTAD (2001), pp. 34-35.
4.
Agreements that Implicitly Prohibit Performance Requirements
Other, more general provisions in some international trade and investment agreements relate
to mandatory performance requirements, and serve as an implicit prohibition against such measures.
General standards of treatment of foreign investment usually require the parties to accord covered
investments fair and equitable treatment and full or constant protection and security, and to refrain from
impairing by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or
disposal of covered investments. In some cases, these standards have been combined with a reference to
treatment as required by international law. In addition, although a number of such agreements only
provide for most-favoured-nation (MFN) treatment, most agreements require that both MFN and
national treatment be accorded.29 Other general provisions carrying implications for performance
requirements include provisions guaranteeing the right of establishment or the free flow of capital.
For example, the Treaty Establishing the European Community (1957) calls for "an internal
market characterized by the abolition, as between Member States, of obstacles to the free movement
of goods, persons, services and capital."30 In addition, Title III of the Treaty, dealing with free
29
If performance requirements are imposed following establishment, they may violate national
treatment provisions. However, if imposed as a condition in the pre-establishment phase, performance
requirements may escape the national treatment obligation, if that obligation applies only to established
investments.
30
Article 3.
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movement of persons, services and capital, provides for freedom of establishment and free movement
of capital. These provisions would implicitly prohibit mandatory performance requirements in the
form of, for example, restraints on foreign ownership among EC Member states as a condition to
entry or as a requirement necessary for the continued operation of an investment.
Another agreement implicitly prohibiting mandatory performance requirements is the
Agreement on the European Economic Area (1992), which carries freedom of establishment and
movement of capital provisions which are essentially identical to those of the EC Treaty. 31 Similarly,
the Europe Agreements concluded in the early and mid-1990s between the EC and its Member States
on the one hand, and Central and Eastern European countries32 on the other, provide for national
treatment with regard to the establishment and operation of companies and nationals.
31
This treaty also incorporates relevant secondary EC legislation in these fields.
Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak
Republic and Slovenia.
32
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