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.

The Commonly 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 (LCRs)
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 requirements
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 (EPRs)
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 more easily.

Other TRIMs
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 economies.

The Cons of TRIMs

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.

What is TRIMs Agreement?

Background Information
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.

Objectives
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 performance, etc.

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).