The term "TRIMs"
represents "trade-related investment measures". Governments impose
these measures to either encourage or compel investment to achieve certain national
priorities. Conditions that can affect trade are known as TRIMs.
Used TRIMs and their Advantages
Governments establish TRIMs
for foreign investors because governments want to ensure the positive impacts
of foreign direct investment (FDI) on the FDI-receiving countries' employment
and export performance. The domestic sectors can also be protected under TRIMs
from the increasing competition after the injection of foreign investment.
TRIMs are more frequently
used by developing countries than developed countries. It is because most infant
industries in developing countries are not well prepared to compete in the world
market, it is necessary for developing countries to use TRIMs to protect their
local industries during the transitional period. TRIMs, such as the joint venture
requirements, allow local enterprises to take advantage during the transitional
period to learn from foreign subsidiaries and to enhance their competitiveness
by cooperating with foreign subsidiaries. The followings are examples of TRIMs
that are commonly used.
Local content requirements
One of the commonly used measures is the local content requirements (LCRs).
They are popular government policies in developing countries to regulate FDI.
Foreign investors are required to utilize a certain proportion of local parts
and components in their production. By regulating the multinational enterprises
to use local resources and factor inputs, employment in the local industries
of the host countries will be bound to increase.
Besides, governments also
require the multinational enterprises to transfer the technology to the local
industries so as to maintain the quality of the finished products. Imposing
LCRs consolidates the positive impacts of FDI on employment opportunities and
technological levels in the host countries.
Meanwhile, foreign subsidiaries
also gain under the local content requirements. Under these requirements, foreign
subsidiaries are required to buy a proportion of resources from local suppliers.
In order to become the providers of resources to the foreign subsidiaries, the
local suppliers will compete against each other by lowering the sales prices.
As a result, foreign subsidiaries can exercise their monopsonistic powers to
drive down the buying prices as well as the production costs.
Trade balancing requirements
Another type of performance requirements is the trade balancing requirements.
These requirements limit the amounts of imported products purchased or used
by foreign enterprises which are located in host countries and require the foreign
enterprises to export a certain amount of their finished products. Trade balancing
requirements can ensure that imports coming in would not be more than exports
going out to avoid potentially serious balance of payments deficits in host
countries. The precaution of balance of payments crisis is an incentive for
governments to use this type of TRIMs.
Foreign exchange balancing
The foreign exchange balancing requirements is another type of TRIMs that protects
the interests of the host countries. These requirements aim at linking the imported
level of a foreign firm to the value of its exports in order to maintain a net
foreign exchange earning. This TRIM is similar to exchange control under which
the amount of foreign currencies available to multinational enterprises is limited
by the performance of their exports.
By imposing these requirements,
foreign subsidiaries cannot import goods as much as they want. Governments can
also directly limit the domestic sales of home currency to foreign currencies,
thus preventing the adverse effects on foreign exchange reserves and reducing
the possibility of speculative attacks. That is the reason for countries commonly
using these measures to maintain a stable balance of payments.
Export performance requirements
These requirements are the restrictions on the sales of products in domestic
market, that is, a certain proportion of production should be stipulated for
export. Countries with aims of export-led growth have the tendency to impose
EPRs on foreign investors because these regulations help the penetration of
domestic products to overseas markets, fitting well with the development objectives
of the host countries.
Technology transfer requirements
These requirements restrict specified technologies to be transferred and/or
specific levels and types of research and development (R & D) to be conducted
locally. Foreign investors are required to share new technologies and researches
with local researchers, government agencies, businesses or local communities.
The aim is obvious that the governments want to improve the technological level
of the host countries.
Joint venture requirements
The host countries try to limit foreign ownerships of the firms located in home
countries and influence the activities of foreign investors by requiring them
to take on local partners in joint venture rather than to own the whole firm.
The objective of these requirements is to help local partners achieve more technology
transfer through the cooperation with foreign investors. On the other hand,
these requirements also benefit the foreign investors. With the help of their
local partners, foreign investors can acquire the location-specific knowledge
regarding the host-country market without any costs. The local partners can
also help them establish backward linkages to the domestic industrial base.
Therefore, foreign investors can access the local market and input suppliers
Other than the above commonly used TRIMs, there are several more requirements
or restrictions, such as manufacturing requirements, manufacturing limitations
and remittance restrictions, which may be imposed by the host countries. Under
the manufacturing requirements, foreign investors have to manufacture certain
products locally. In contrast, manufacturing limitations prevent companies from
manufacturing certain products or establishing certain product lines in the
host countries. These limitations aim at protecting domestic industries by reducing
the competition between foreign subsidiaries and domestic enterprises. While
remittance restrictions limit the rights of foreign investors to repatriate
returns from their investments; the host countries always hope that the return
can be re-invested in different projects and generate more income in domestic
In the previous section,
we mentioned the benefits of TRIMs. However, some evidences showed that the
regulations imposed on FDI do not benefit the host economies.
Firstly, TRIMs discourage
free trade and free competition, thus adversely affecting the host economies.
If a country wants to be a World Trade Organization (WTO) Member and benefits
from free trade, the country is obligated to obey the articles mentioned in
WTO agreement. One of the important principles in WTO agreement is "national
treatment". It prescribes the obligation that an imported product should
be treated as a national product. That means there should be no discrimination
between domestic and imported products. However, TRIMs like local content requirements
and trade balancing requirements violate this principle. They restrict the use
of imported resources and limit the quantity of imported goods entering the
host countries. As a result, countries using TRIMs cannot enjoy the benefits
from free trade.
Secondly, TRIMs have a negative impact on the economic efficiency of a foreign
operation in a country. It is because under LCRs, foreign investors are forced
to use the local resources, which do not have comparative advantages, as their
inputs. These restrictions indeed raise foreign companies' production costs
and ultimately discourage foreign investors from investing in the host countries.
Meanwhile, consumers will suffer if multinational enterprises transfer the extra
costs to them. Besides missing the opportunity of enjoying comparative advantages,
foreign investors are unlikely to enjoy lower average costs and capture the
benefits of full economies of scale. Under the LCRs, foreign investors in host
countries cannot import resources in bulk amount. Therefore, the foreign investors
have to pay higher prices of resources. In sum, there are high inefficiency
in the host countries where LCRs have been imposed. This inefficiency is also
shown in a survey conducted under the United Nations of Transnational Corporations.
Other than undermining economic
efficiency, TRIMs also slow down the pace of technological upgrading of local
operations in host countries. There is an evidence that technological lags between
the introduction and the adoption of new technology to projects in the highly
protected countries is great. Without economies of scale and updated technology
of local operations, the incentives for foreign subsidiaries to invest in the
host countries will be reduced. Gradually, foreign investors will locate their
subsidiaries to somewhere else.
In addition, an evidence
showed that the gains of wholly owned subsidiaries are higher than that of joint
ventures which are set up in request under joint ventures requirements. The
speed of parent firms transferred technology to wholly owned subsidiaries in
developing countries is one-third faster, on average, than that of joint ventures.
The evidence also indicated that the requirement of a local partner weakens
export performance. In contrast, the wholly owned foreign subsidiaries can act
as catalysts that stimulate the export performance of domestic firms because
domestic firms can improve the quality of products under competition. Accordingly,
the wholly owned foreign subsidiaries seem to be a better business structure
to improve economic growth of the host countries.
From the above arguments,
TRIMs cannot guarantee a higher economic growth and possibly generate negative
impacts on the host economies. Therefore, the WTO members negotiated a multilateral
agreement on TRIMs during the Uruguay round.
is TRIMs Agreement?
The WTO recognized that some of TRIMs might cause trade distortion and violate
the principles of General Agreement on Tariff and Trade (GATT). Therefore, WTO
Members negotiated a multilateral agreement on TRIMs in the Uruguay Round. The
agreement requires countries to phase out TRIMs that have been identified as
being inconsistent with GATT rules.
The TRIMs Agreement is a
multilateral agreement that only applies to the measures that affect trade of
goods. The Agreement focuses on discriminatory treatment of imported and exported
products but not on the issue of entry and treatment of foreign investments.
The agreement prohibits those TRIMs which violate "national treatment"
principles in GATT or lead to restrictions in quantity.
The main objective of the TRIMs Agreement is to advocate Members to eliminate
those TRIMs which cause trade distortions. Through the removal of barriers,
the Agreement ensures free competition among Members, helps expand the liberalization
of world trade and facilitates investments across international frontiers. Therefore,
economic growth of all trading partners, particularly developing country members,
increase with the increasing trades and investments.
Content of TRIMs Agreement
Although TRIMs Agreement is about trade related investment measures (TRIMs),
it does not give a clear definition on the Agreement. The Agreement contains
only an illustrative list of measures in Annex. These measures in the list are
inconsistent with Article III (National Treatment on Internal Taxation and Regulation)
or Article XI (General Elimination of Quantitative Restrictions) of GATT 1994
and should be eliminated under the Agreement, including local content requirements,
trade balancing measures, foreign exchange balancing requirements and export
The TRIMs Agreement came
into effect on 1 January 1995 and a Working Party was established in 1996 to
conduct analytical work on relationship between trade and investment. When the
enforcement of WTO agreement started to implement, there was a transitional
period for Members to eliminate the TRIMs. However, those TRIMs originally used
by countries must be notified to the WTO within 90 days of 1 January 1995 (i.e.
the date of enforcing the TRIMs Agreement). Developed countries would have a
period of 2 years to abolish such measures, developing countries would have
5 years while least-developed countries would have 7 years to do so. Therefore,
all developing countries should have implemented the TRIMs Agreement and eliminated
their regulations forbidden by TRIMs Agreement by 1 January 2000. For those
developing and least-developed countries which cannot finish the abolition by
2000, they can apply for an extension of the transition period. However, the
benefits of transition periods only apply to the TRIMs that were in existence
at least 180 days before the enforcement of the WTO Agreement. Otherwise, the
TRIMs would have to be eliminated immediately.
In the Agreement, there
are some exceptional provisions for the developing countries. For example, the
developing countries are allowed to retain TRIMs
which constitute a violation of GATT Article III (National Treatment on Internal
Taxation and Regulation) or Article XI (General Elimination of Quantitative
Restrictions), provided that the measures meet the conditions of GATT Article
XVIII (Government Assistant to Economic Development).