Chapter 2. International integration, investment and services in Uruguay 1
Uruguay has consistently pursued an investor-friendly regime, making remarkable progress in attracting FDI and achieving sustained productivity growth. The uncertainty in regional markets, however, and the changing nature of global demand pose new challenges for its international integration strategy. This chapter outlines steps that Uruguay could take to harness new opportunities in global value chains (GVCs) and to diversify to markets with fast-growing economies, particularly Asia. Uruguay should continue to pursue efforts to position itself as an exporter of business services, for reduced sensitivity to distance to final markets and economic downturns. Its regulatory profile in domestic backbone services, however, remains relatively restrictive, hampering competitiveness and the ability to capture segments of GVCs. In addition, Uruguay could make better use of international trade and investment agreements by forging modern, behind-the-border disciplines. In this regard, the chapter provides some guidance on how to develop GVC-friendly Regional Trade Agreements. Given the widening remit of this “deep integration” agenda, institutional co-ordination could be improved to maximise the effectiveness of its policy efforts.
Introduction
Uruguay has shown remarkable progress in attaining greater trade and financial integration and increasing its participation in new sectors. Its strong economic performance over the past decade (5.2% growth between 2006 and 2014) attests to a sound macroeconomic framework and a favourable external environment, helping to make the Uruguayan economy one of the most dynamic in the region. However, within a changing external environment, and confronted with several structural constraints to integration, Uruguay will be challenged to sustain its recent performance.
This chapter argues that as a small economy, Uruguay needs to increase its global integration in order to sustain growth and poverty alleviation. Uruguay is already an open, liberalised economy, but while its participation in global value chains has been increasing and has coincided with a period of strong national growth, the overall benefits of this participation are still relatively limited compared with other countries and regions. This suggests that there is considerable scope for stronger integration, to diversify its trade partners and maximise the competitiveness of its service sectors. This chapter takes stock of Uruguay’s services trade performance and proposes an action plan for enhancing regional and international integration. It begins with an overview of Uruguay’s trends in and strategies for integration, before taking a closer look at Uruguay’s services trade. The third section explores the regulatory and administrative barriers to trade in services, with a particular focus on those barriers to investment which may be hindering market access. The fourth section examines the role of Regional Trade Agreements and Bilateral Investment Treaties as mechanisms for fostering deeper integration across partners, and in the service sectors. The final section discusses strategies for fostering deeper integration and enhancing services exports.
Uruguay’s pool of trade and investment partners is growing, with a higher participation of Asian and some Latin American economies in particular (Figure 2.1). Mercosur remains the main trade destination for Uruguayan goods, accounting for an average share of around 30%.2 However, Asia is gaining ground (12.4% for the period 2010-12). While Uruguay’s trade in services is opening new avenues for diversification, trends in the composition of merchandise exports suggest that a certain amount of commodity-dependence still persists in the Uruguayan economy. The share in exports of primary and natural resource-based products has increased (from 60% in 1997-99 to 75% in 2010-12), with the share in low-technology exports decreasing from 25% to 12% over the same period. This signals the importance of continued diversification efforts (OECD/ECLAC, 2014).
The potential for further integration is demonstrated by the share of value added generated by Uruguay relative to the size of its economy. Domestic value added as a share of gross domestic product (GDP) increased slightly between 1995 and 2011 (from 13% to 16%), indicating a simultaneous increase in both participation and domestic value added. While this share is equal to the regional average, it falls short of the global average (22%) as well as that of transition economies (30%) (UNCTAD, 2013). This suggests that Uruguay benefitted from increased engagement in certain value chains during this period, but that its benefit compared with other countries and regions remains at the lower end of the spectrum, with significant room for deeper integration.
To maintain the inertia in its export-based growth, Uruguay needs to capitalise on this moment by overcoming structural barriers to economic integration. Overall, external conditions are likely to be more restrictive in the medium term, with Latin America slowing down as a whole, and external financial conditions tightening. In addition, the scenario of a potential “growth normalisation” in some emerging economies, including the People’s Republic of China, could also hinder Uruguay’s growth performance in the years to come. With an average 7.3% growth in 2014, China continues to drive global growth (2.6% in 2014). Uruguay’s current integration with China is notable, particularly when compared with its Mercosur partners. Its exports to China increased by 7% in 2014, showing higher resilience than Argentina and Brazil, both of which experienced significant contractions (19% and 12%, respectively) in their exports to China.
Trade in services is the key to resilient growth
International integration has had a decisive impact on the way goods and services are produced, resulting in increasing levels of fragmentation and geographical dispersion. The emergence of global value chains means that production of most goods now involves distinct stages of production, each in a different country. This phenomenon is driven by firms which use advances in communication and regulation to optimise their sourcing strategies through geographic re-organisation and the separation of production stages. This new separation provides countries with the opportunity to integrate into global value chains at a specific stage, enabling participation in new sectors through specialisation in concrete tasks.
This productive fragmentation has also effectively blurred the lines between goods and services trade. Services are increasingly important, acting as the “glue” which binds stages of production together and embeds value along these chains. Recent OECD work on the Trade in Value Added (TiVA ) database has demonstrated that service activities such as transport, logistics and warehousing, banking, business and professional services, as well as communications services, contribute more than 30% of total value added in manufacturing industries (OECD, 2014b; Figure 2.2). This suggests that not only are service value chains important avenues for integration, they are also crucial for enhancing competitiveness in goods trade by ensuring that components are transported efficiently and by providing various inputs required throughout the value chain.
The service sector offers considerable potential for Uruguay to diversify its trade patterns, improve labour productivity and increase economic resilience. Services are playing an increasingly important role in Uruguay, particularly within the dynamic segments known as global services (Figure 2.3). Services accounted for 32% of Uruguay’s GDP in 2012 (MEF, 2013) and global trade in services has been increasing considerably. According to the most recent available data for 2013 (though see Box 2.1), Uruguay exported over USD 3.1 billion in services, accounting for 26% of its total exports. Over three-quarters of its services exports were in the travel and transport sectors, with non-traditional sectors accounting for nearly one-quarter (Figure 2.4). Non-traditional services sectors such as financial services, wholesale and trade services, telecommunications, as well as the range of business services included in global services which are offshored from company headquarters, experienced some of the fastest rates of export growth. Computer and information services grew by over 25% every year between 2000 and 2013. Other business services followed suit, at over 22% growth every year over this period, compared to the 8% annual growth rate of services exports overall.
Measuring services trade is critical for understanding its role in the economy and for designing strategic instruments for export promotion, maximising market access and fostering competitiveness. Nevertheless, accurately capturing services trade through the four possible GATS modes of supply continues to be a statistical challenge for many countries. Despite international efforts to standardise reporting – such as the 2010 Manual on Statistics of International Trade in Services (MSITS) – services trade presents difficulties in bringing together comprehensive information on cross-border trade, tourists’ consumption abroad, commercial presence of foreign affiliates, and the temporary movement of service providers. The lack of a centralised authority for data collection, and the differences in firm transaction reporting and the information needed by statistical agencies create particular challenges, especially for small providers.
In the case of Uruguay, the Central Bank of Uruguay reports electronic balance of payments information to the International Monetary Fund in the BPM6 format, but these statistics do not capture the significant services trade activities taking place in the Special Economic Zones, or the Foreign Affiliates Trade statistics providing information about services rendered through commercial presence. Putting in place the appropriate systems for enhancing services trade reporting requires maintaining an accurate register of businesses within the economy, an appropriate legal mandate for confidential data collection, as well as service industry surveys which will capture transactions in line with the norms presented in the 2010 MSITS.
Furthermore, different areas of trade-related statistics can be divided across different ministries of government institutions complicating the compilation and validation processes. For instance, in many countries diverse institutions, such as the National Statistics Office, Central Bank and Customs Agency can be involved in collecting inward foreign affiliate trade statistics (FATS), outward FATS, foreign direct investment, trade in goods, trade in services, and business registries. However, in the case of Ireland, for instance, the government has unified reporting responsibilities to the National Statistics Office to ensure timely and coherent information, particularly in recording the activities of multi-national enterprises within the country’s borders. In Uruguay, most statistics on trade in goods and services as well as investment are compiled by the Central Bank (albeit with a significant time lag), and complemented with the Census of the Free Trade Zones. FATS data are not currently available.
Source: Connolly, M. (2012), UN Manual on Statistics of International Trade in Services 2010.
Export destination markets for these fast-growing services segments are diversified across core markets in the United States, European Union (EU) and within Latin America. Within this category of non-traditional services, 35% were exported to the US, 23% to Latin America (outside of Mercosur), 15% to Mercosur, followed by 12% to the EU (Uruguay XXI, 2013). Global services represent around 75% of export in non-traditional sectors, with an important share being supplied from Uruguay’s Free Trade Zones. Services exports from Free Trade Zones totalled USD 602 million in 2010, or around 19% of Uruguay’s total services exports that year. By encouraging investment in new sectors, these zones have also been crucial for the diversification of Uruguay’s services exports (Lalanne and Vaillant, 2013; Ferreira and Vaillant, 2014). Exports from these zones tend to be more concentrated in financial, professional, business and IT services (accounting for roughly two-thirds of exports in 2010). The export destination of services firms based in Free Trade Zones follow broadly similar trends to the country as a whole. The US and EU are important destinations for financial and professional services, accounting for over 50% of exports from Uruguay in these sectors. Mexico and the US are key destinations for business services exports (Lalanne and Vaillant, 2013; Blyde, 2014). Argentina and other regional partners dominate as key exports partners for other service sectors, including trading and commercial intermediation and logistics services.
The productivity of the service sector has also been improving. Between 1997 and 2012, the average productivity growth rate in the service-related sectors of transport, storage and communications (7.2%) was considerably higher than the economy average (0.9%). This demonstrates the important role that expanding services exports can play in diversifying dependence on external markets, as well as contributing to structural change and development. Furthermore, following the 2008 crisis, the fall in service trade was considerably less than for goods, indicating the relative resilience of such trade. Given Uruguay’s small and open economy, bolstering its economic resilience remains a priority.
Uruguay’s competitiveness in services trade is influenced by many factors. These include its market size, geography, infrastructure, business climate and labour force, as well as regulatory and institutional factors (Box 2.2). Despite its limited domestic market size, Uruguay is working towards becoming a regional gateway to the Mercosur area. The country benefits from relatively high-quality technological infrastructure in the areas of mobile and fixed telephony penetration, Internet bandwidth and power supply. Furthermore, Uruguay has invested in industrial parks to enhance access to quality infrastructure, and has also put in place important logistics infrastructure, such as cold supply chains. Uruguay’s geographic location allows its services to reach markets in the United States, as well as in Europe (due to small differences in time zones). The country’s macroeconomic stability and attractive business climate are further strengths for fostering competitiveness and attracting new services outsourcing opportunities.
Global value chains in services present certain advantages for countries at the periphery of manufacturing hubs to reach distant markets and expand their exports due to the diminished role of distance to manufacturing hubs and the advances in technology and the relative portability of services via ITC (Information, Technologic and Communications) technology. Thus, the growing tradability of new services areas, as demonstrated by the global explosion in the trade of business services, provides growing opportunities for suppliers who are capable of providing certain fundamental base conditions. Five fundamental factors have been identified as key determinants:
Uruguay’s performance in these five factors is higher than its regional peers. With high quality communications infrastructure, a strategic geographic location for US and EU markets, growing capacities in R&D in many areas as well as stringent data privacy standards, Uruguay is strongly poised to benefit from offshore opportunities. The recent reforms for setting up a proper National Innovation System (ANII) have shown promise for strengthening the country’s capacity in this area. While Uruguay’s labour pool is relatively shallow, recent initiatives to adapt qualifications through finishing schools (see below) and create registries of skill levels and certifications among qualified professionals could be a useful step towards developing its talent pool. Furthermore, putting in place mutual recognition agreements with key partners could increase labour flexibility and help address skill shortages in high-demand sectors. The medium-term success in ensuring that skills meet the labour market demands will rely on a more broad-based incorporation of service-specific skill needs into the education and skills national agenda.
Source: Bamber et al. (2014), “Connecting local producers in developing countries to regional and global value chains: Update”, OECD Trade Policy Papers, No. 160, https://doi.org/10.1787/5jzb95f1885l-en.
Uruguay is integrating globally through its services
Uruguayan exports have experienced significant growth from a value-added perspective in recent decades, with export values tripling between 1995 and 2011. Services accounted for 21% of total value added exports in 2011. Uruguay’s regional and international insertion can be seen in the increasing share of foreign value added in its exports. In 2011, foreign value added accounted for 28% of total value added, up from 11% in 1995, signalling the growing importance of Uruguay’s backward linkages (foreign value added in a country’s gross exports). Uruguay’s international insertion was 44% in 2011,3 just above the Latin American average for both goods and services in 2011. Uruguay’s global value chain participation takes place predominantly through stronger backward linkages (Figure 2.5). Since 1995, Uruguay’s global value chain participation has increased at an average rate of 13% every year, slightly above the regional average, with backward linkages growing faster than forward linkages. This growth in backward linkages tends to be associated with stronger GDP per capita growth and diversification, unlike forward linkages which tend to be associated with the supply of natural resources and commodities at the beginning of a value chain (AfDB/OECD/UNDP, 2014; Klinger and Lederman, 2006).
Imported inputs into Uruguayan exports come primarily from Latin America, Europe and North America, although the share coming from China has been increasing in recent years. This pattern underscores the importance of regional integration as a source of inputs, as well as the strategic importance of the trade relationship with Europe. Europe plays an even stronger role in re-exports containing Uruguayan value added than Latin America, with over 40% of re-exports occurring from the European region (Figure 2.6).
Uruguay’s trade and investment policy framework is taking shape
Uruguay’s international economic integration policy rests on two main pillars: the creation of an inter-ministerial body to improve co-ordination (the Inter-Ministerial Commission for Foreign Trade Affairs (CIACEX) and the strengthening of Uruguay’s main investment promotion agency, Uruguay XXI. Together these two pillars aim to promote an open regionalism and an active role for public policy in diversifying trade and investment partners, maintaining Uruguay’s investment grade in international financial markets and close co-ordination with multilateral organisations. Meanwhile, the reform of the Customs Code has aimed to facilitate and improve the overall system performance by introducing changes to the internal structure, incorporating risk models and professionalising staff.
Created in 2005, CIACEX defines the main strategies in international trade integration, international negotiations, trade and investment promotion.4 It comprises the ministers of foreign affairs; economy and finance; livestock, agriculture and fisheries; energy and mining; and tourism and transport. Although CIACEX was initially created to improve co-ordination among ministries and government agencies, for some government actors this role has been undermined by its size and structure. Although it works well at the technical level and provides valuable dialogue with the private sector, the general perception is that it lacks the capacity for co-ordination at the political level.
Uruguay’s Executive Branch is formed by the Presidency, vice-Presidency and the Council of Ministers, and co-ordinates strategy-setting and the implementation of national policies. The CIACEX services this type of Committee structure, with the participation of several civil servants in simultaneous positions. Formalising the capacity of centre of government (CoG) bodies like CIACEX is essential for this purpose (OECD, 2013c). The OECD highlights some of the functions that these bodies require, including a) a leadership function, which enables the Commission to speak for the Head of Government and work with ministries who are contributing to foreign trade activities, b) a co-ordination function, which allows the CoG body to harness resources across government to ensure that Cabinet decisions are made coherently and ex-post performance assessment is carried out, c) an advisory function, which enables the Commission to advise the Cabinet on the validity and utility of different initiatives, and d) a communication function, which allows the government to report internally and externally and improve accountability. These functions need to be formalised in order to be effective. To attain its objectives, the Commission needs to clearly define the responsibilities of each Commission participant.
The bill for creating a National Competitiveness System (SNC), that will be part of the new institutional configuration, aims to strengthen Uruguay’s systemic competitiveness and productivity and highlights the increasing need for improving the government’s co-ordination capacities. The SNC will be in charge of co-ordinating several institutional bodies and integrating their activities into a long-term, over-arching strategy, with the aim of designing, implementing and evaluating programmes for productive transformation. Together with the Competitiveness Cabinet, the system includes several agencies (ANII, ANDE, Uruguay XXI, INEFOP, INACOOP, CND, INIA, National System to address Climate Change). The absence of an institutional framework for the services sector could be addressed in this new configuration. The bill must also advise on appropriate public policies in conjunction with improvements in the innovative sector including resource utilisation and international economic integration. The SNC will be regulated at the national level, with input from local counterparts. The productivity, innovation and foreign trade cabinets will be combined and streamlined through the establishment of a secretariat.
A commission is being formed to analyse the proposed changes to the bill to best meet the objectives of improved competitiveness and inclusive growth. There are several areas for improvement, the primary focusing on the bodies involved with the development of human capital and capacity building. In this direction, the Ministry of Education and Culture (MEC) and the LATU could be considered to participate in the framework, to involve all stakeholders in the process. Also, as in the case of some OECD countries, more emphasis on innovation and a stronger connection between the science, technology and innovation sectors is needed (OECD/ECLAC, 2014). The goals, policies and strategies proposed by this bill could enhance Uruguay’s capacity to maintain productivity, improve product quality and secure competitiveness in the long run.
The second pillar of Uruguay’s trade and investment strategy is the consolidation of its investment and trade promotion agency, Uruguay XXI. As the focal investment agency, Uruguay XXI’s main objective is to support the internationalisation process of the economy through investment and export promotion, within the framework established by the national government. As a non-governmental organisation subject to private law, the agency has a small, professional structure, including public and private actors. Its board includes representatives of the Ministry of Foreign Affairs and Economy and Finance, as well as various chambers (industry, commerce, etc.).
One of Uruguay XXI’s main initiatives to develop the services sectors is the Global Services for Exports Programme (2590/OC-UR), set up in March 2012 with the support of the Inter-American Development Bank. This programme aims to increase exports in global services, facilitate foreign direct investment (FDI) attraction, and stimulate further employment for dynamic services segments. The programme has a strong emphasis on the development of human resources in global services, with the implementation of a new talent portal to match the supply and demand of skilled labour. It is also establishing finishing schools which organise tailored programmes for industry-specific training. Furthermore, the programme will also target the regulatory framework and explore strategies for supporting strategic sectors in services with promising growth potential. The programme has prioritised four main sectors of activity: 1) consulting processing services (call centres, back office, human resource management, financial services, consulting); 2) information technology services (software development, data management); 3) pharmaceutical-industry services; and 4) logistics services.
What are the barriers to greater international integration through trade in services?
Unlike the trade in goods, services trade is significantly influenced by investment restrictions and behind-the-border measures. Accordingly, trade in services is greatly facilitated by regulatory coherence between trading partners. Diverse types of regulations will have differing but often cumulative impacts on foreign provider market access. Such regulations include restrictions on foreign ownership or market entry, limitations on the movement of people, barriers to competition and public ownership, regulatory transparency and administrative requirements as well as adherence to international standards and other discriminatory measures. OECD work on services trade restrictiveness based on sector expert consultations is finding that restrictions on foreign ownership and market entry – such as foreign equity limits and quotas for licenses – are generally regarded as the most restrictive, followed by barriers to competition. However, it is important to bear in mind that sector specificities play an important role in the relative restrictiveness and that other types of restrictions can also be significant. Given the trade-restricting influences of certain regulations, steps should be taken to evaluate their impacts and to ensure that they achieve their objectives while minimising trade restrictive effects and ensuring appropriate competition and safety standards, among other objectives.
According to the World Bank Services Trade Restrictiveness database, Uruguay’s overall services restrictiveness profile is higher (i.e. more restrictive) than Latin American and EU averages (Table 2.1). Nevertheless, this relatively high score masks significant heterogeneity across sectors. Although Uruguay ranks quite high in regulatory restrictiveness in telecommunications and financial services, in sectors such as professional services and retail trade, its regulatory profile is one of the most open in the world. In the following sections, we examine Uruguay’s regulatory profile by sector, with a particular focus on investment-related measures as they often have the most significant market entry impacts.
Foreign direct investment is restricted in certain key sectors
Trade in services and investments are inextricably linked because commercial presence plays an important role in the provision of services in many sectors. In 2013, 53% of global FDI was in the service sector, with a notable 20% increase in services greenfield investments over 2012 (UNCTAD, 2014). FDI into Mercosur amounted to 6% of global FDI flows (UNCTAD, 2014). In the case of Uruguay, inward FDI flows have increased significantly in recent years, reaching USD 2 796 million in 2013: a 4% increase over the previous year. Uruguay ranks second after Chile in terms of its FDI flows as a share of GDP (5%). Uruguay’s FDI stock as a share of GDP was 37% in 2013, exceeding the shares in Argentina, Brazil, Colombia and Peru (Uruguay XXI, 2014; Figure 2.7).
In 2012, over 65% of Uruguay’s FDI came from South America and Europe (Figure 2.8). Argentina, Brazil and Spain were the top three countries of origin and cumulatively accounted for over 50% of Uruguay’s inward FDI (Uruguay XXI, 2014; Figure 2.9). The largest share of FDI, nearly 40%, was directed towards the construction sector. Nevertheless, financial, hotel and restaurants, and transport and communication services attracted at least 18% of total FDI. Furthermore, 37% of the inquiries registered by the Investment Agency in 2013 were for service sector investments.
In light of the significant impact of investment restrictions on market entry, we begin by examining Uruguay’s investment regime. Uruguay’s investment policy is embodied in the Protection and Promotion of Investment Law, 7 January 1998.5 The law declares that the promotion and protection of national and foreign investment is in the nation’s interest. It also enshrines the principle of non-discrimination, under which a government must treat enterprises controlled by nationals or residents of another country as favourably as domestic enterprises in similar situations (OECD, 2006). No prior authorisation is required for foreign investment. Foreign companies may act through a branch, a subsidiary or an agency without the need to formally incorporate an independent company within the country. To establish a Uruguayan company, a foreign investor may set up a Uruguayan public limited company or corporation (sociedad anónima) and may own up to 100% of the share capital. The sociedad anónima is the most commonly established type of company. The investment law also guarantees free movement of capital, meaning there are no restrictions on the repatriation of capital or profits and government authorisation is not required.
Although the investment law prescribes that the investment regime should not discriminate between foreign and domestic investors, there are exceptions in the sectoral legislation. Certain sectors related to national security, for example, are reserved for Uruguayan nationals, while for legal government monopolies, investment by a foreign or domestic investor may be approved subject to conditions to protect the public interest.
According to the OECD FDI Regulatory Restrictiveness Index, Uruguay’s FDI regime is generally open, and comparable with the OECD country average (Annex 2.A1). The majority of restrictions in the country are found in the services sectors – transport, media and financial services – as we have seen above. This trend is reflected across most countries in the index, both OECD and non-OECD, where service sectors such as transport, media, real estate, communications and electricity, tend to be the most restrictive. One reason is that these sectors are often deemed strategic or have been subject to state ownership in the past. In contrast, FDI in the manufacturing sector is the most liberalised (Figure 2.10), containing the least number of restrictions, except when a horizontal measure applying across the board is in place, such as screening requirements or restrictions on the acquisition of land for business purposes by foreign investors (see below).
As international production is becoming more organised around global value chains, an examination of the relationship between FDI restrictiveness and global value chain participation reveals that the level of restrictiveness is negatively associated with backward linkages (Figure 2.11). Even when accounting for market size and GDP per capita – factors that influence the degree to which a country will need to seek FDI –statutory restrictions still have a significant impact.
In terms of the type of restriction, across both OECD and non-OECD countries in the Index, FDI restrictions are concentrated in foreign equity limits and screening measures (e.g. national interest tests or economic benefits) (Figure 2.12). Foreign equity restrictions are usually a sector-based measure limiting the extent of foreign ownership allowed in companies or in the aggregate of companies in a particular sector. Screening mechanisms are considered discriminatory when they do not apply to both foreign and national investments. This practice is particularly prevalent in emerging economies as well as in resource-rich countries, including those in the OECD. The rationale for screening FDI is for governments to exclude those that are not in line with the country’s overall economic priorities and development objectives. In many cases, screening is becoming more focused, covering only potential threats to national security or investments in strategic sectors such as natural resources.
In Uruguay, restrictions are focused primarily on equity limits and hiring of foreign key personnel, with some screening mechanisms also in place. The rest of the section examines investment and related regulatory restrictions at the sectoral level, with a focus on sectors where investment barriers are most prevalent (Figure 2.13).
Restrictions are high in the transport sector
Overall, Uruguay’s transport sector is more restrictive than most countries in the Index (Figure 2.13). The domestic road freight transport sector is subject to several foreign equity restrictions, commercial presence obligations and limitations on concessions, as well as government mandated price ceilings. For international road transport services, an equity restriction of 49% applies, requiring that the controlling stake be held by Uruguayan nationals. The state holds the right to provide regular public national and international passenger transport services (both regularly scheduled and irregularly scheduled), but also grants concessions and permits to private enterprises6 (but only Uruguayan nationals or enterprises).7 Uruguayan enterprises are those that are managed, controlled, and in which more than 50% of the capital is owned by Uruguayan nationals domiciled in Uruguay. In addition to equity restrictions and control of licenses and permits, the Ministry of Transport also regulates maximum prices in road freight transport.8
Uruguay’s rail transport is managed and operated by the State Railway Administration or AFE (Administración de Ferrocarriles del Estado), an autonomous state-owned enterprise open to private-sector participation. In order to provide railway passenger and cargo transportation services, a railway operator must obtain a license (Licencia de Operación Ferroviaria) from the Dirección Nacional de Transporte. Among the requirements for obtaining the license are: a) at least 51% of the paid-in capital of the railway operator must be owned by Uruguayan nationals domiciled in Uruguay or by Uruguayan enterprises that meet the same requirements for paid-in capital; and b) at least 51% of the railway operator’s board of directors or managing board must be composed of Uruguayan nationals domiciled in Uruguay. However, current reforms to this sector and the changing institutional landscape make it difficult to assess the degree of regulatory restrictiveness.
Uruguay’s regulatory profile in maritime transport resembles that of several OECD member countries, and includes cabotage9 restrictions, nationality requirements, as well as differential tax benefits reserved for Uruguayan nationals (STRI Transport and Courrier Services). Cabotage trade is reserved for Uruguayan-flagged vessels, whose crews (including the captain) are composed of at least 50% Uruguayan nationals. However, waivers permitting foreign-flagged vessels to perform cabotage services may be granted by the Executive Branch when Uruguayan-flagged vessels are not available. Vessels providing cabotage transportation services within Uruguay are subject to the following requirements:
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if owned by natural persons, vessels must be owned by Uruguayan nationals domiciled in Uruguay
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if owned by an enterprise:
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51% of the enterprise owners must be Uruguayan nationals
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51% of the voting shares must be owned by Uruguayan nationals
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the enterprise must be controlled and managed by Uruguayan nationals.
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Half of all the Uruguayan foreign trade cargo (imports and exports) is reserved for Uruguayan-flagged vessels; however, waivers are granted to foreign-flagged vessels to carry the unreserved portion. Uruguay may impose restrictions on access to foreign trade cargo transportation on the basis of reciprocity. Port services are provided by private operators under concessions given by the state, which owns the ports, within the capped price limits for various services set by the government. Uruguayan-registered vessels are exempt from a number of taxes, including on spare parts, fuel and lubricants. Furthermore, shipping companies operating Uruguayan merchant ships are excluded from income and value-added tax, and the vessel is not included in wealth tax.10
The air transport sector faces a larger share of restrictions due to the security-related aspects of the sector. As in most OECD countries, Uruguay restricts foreign equity participation in the sector to less than 50%, as well as nationality requirements for employees (STRI Transport and Courier). Only a national air transportation enterprise (empresa nacional de transporte aéreo) may offer a domestic air transportation service (cabotage) and may provide international scheduled and non-scheduled air transport services. Only a national air works enterprise (empresa nacional de servicios de trabajo aéreo) may operate aircraft in domestic non-transportation air services. In order to be a national air transportation enterprise or a national air works enterprise, the firm must be 51% owned by Uruguayan nationals domiciled in Uruguay. All crew and other personnel, including management, must be Uruguayan nationals, unless otherwise authorised by the National Civil Aviation and Aviation Infrastructure Directorate (Dirección Nacional de Aviación Civil e Infraestructura Aeronáutica).
Media is the second most restrictive sector
In line with observed trends, particularly in non-OECD countries, Uruguay’s media sector limits participation by foreign providers (Figure 2.13). Uruguayan law stipulates that free-to-air television and AM/FM radio broadcasting services are closed to foreign ownership and may only be supplied by Uruguayan nationals. All stockholders or partners in broadcasting enterprises in Uruguay, or established in Uruguay, must be Uruguayan nationals domiciled in Uruguay. Senior management, members of the boards of directors, and the responsible director or manager of broadcasting enterprises, must be Uruguayan nationals. The responsible director of a subscription (cable, satellite, MMDS) television enterprise must also be a Uruguayan national.
Financial services are relatively unrestricted
Uruguay is relatively restrictive of foreign entry into the financial services sector through its limitations on licensing. Only a limited number of licenses are granted by the Executive Power and require special authorisation from the Central Bank. In the OECD area, only a few countries, such as Denmark and New Zealand have limitations on branch establishment by foreign companies (World Bank STR database, OECD STRI Regulatory database). Within the country’s insurance market, there are no limits on foreign participation in new or existing companies; however, entry through a branch is not allowed. For foreign investors, this implies that insurance companies can be fully owned by foreign shareholders as long as the companies are duly incorporated and registered in the country.
Restrictions are increasing on foreign state purchase of farmland
International investors have long been interested in agricultural investments in South America, attracted by the affordable price of land, policies that encourage foreign investment, and the lack of tariffs on farm exports. Uruguay has a total cultivated area of 16 million hectares. Land transactions have been carried out for 6 million hectares in the last decade. According to the National Institute of Colonization (Instituto Nacional de Colonización), 83% of the fields sold in 2010 (approximately 336 000 hectares) were bought by foreign investors from Brazil, Argentina, New Zealand, Korea, the US and Europe. The growth in demand and interest in Uruguayan agriculture by international investors has driven land prices up by an average of 20% every year since 2002.
While discussions on foreign ownership of land typically involve private actions by profit-driven investors (speculators), a 2011 report from the United Nations Food and Agricultural Organization (FAO) highlighted the problematic nature of land purchases by foreign governments (“land grabbing”) to support food production and improve food security in their respective countries. This practice is targeting agriculturally rich countries across all regions. In Latin America, the practice has grown in Argentina, Brazil and Uruguay in particular.
In 2014 Uruguay introduced restrictions on the purchase of agricultural land, to preserve the country’s sovereignty over its natural resources. Law No. 19.283 forbids foreign states from owning rural real estate and agricultural exploitations (i.e. a land surface intended for agricultural production). It also prohibits the ownership of rural real estate and agricultural exploitations by corporations (sociedades anónimas) or companies limited by shares (sociedades en comandita por acciones) which have foreign states or their sovereign funds as shareholders. In taking this action Uruguay has followed the examples of Argentina and Brazil, both of which have enacted laws restricting the amount of farmland that can be owned by foreigners in general, regardless of whether they are individual investors, corporations or foreign governments. However, Uruguay’s agricultural land restriction applies only to foreign governments.
Screening mechanisms offer an alternative to equity restrictions in managing land ownership issues (Box 2.4).
From March 2015, the Australian Government’s Foreign Investment Review Board (FIRB) has adopted a new screening threshold for agricultural land investment. The aim is to increase scrutiny of foreign investment in the agricultural sector. All foreign purchases of agricultural land will be subject to FIRB screening when the cumulative value of agricultural investments by the foreign investor reaches the threshold of USD 15 million. This is a significant reduction from the previous screening threshold, which was USD 252 million.
The New Zealand Government, through its Overseas Investment Office, reviews all foreign investment proposals for “sensitive land” (farm land), which requires consent. Foreign investors – individuals, corporations and governments – must meet certain criteria based on national interest and economic benefit. The transaction must be proven to be beneficial for New Zealand and the relevant overseas person must show intent to reside in the country indefinitely.
Source: OECD (2015).
These examples show that whether it is in the form of equity restrictions or screening mechanisms, recent restrictions introduced in countries with rich agricultural land are becoming more focused and targeted, with the intent to cover potential threats to national security or protect investments in natural resources which are considered strategic. The introduction of new restrictions must be guided by evidence-based processes such as cost-benefit analyses, as well as sound rationale that uphold national development goals.
Administrative barriers are important disincentives
In addition to explicit regulatory obstacles, the administrative procedures related to business establishment and trade facilitation can also influence the competitiveness of services supplied in a country. Uruguay’s performance is varied when assessed against indicators related to establishing and running a business. For instance, according to the World Bank Doing Business Indicators, registering a business in Uruguay involves 5 procedures and can be completed in roughly 6.5 days, both of which are below the world average. Nevertheless, the relative cost is considerable, amounting to nearly 23% of Uruguay’s per capita income, compared to a world average of 8%. In terms of customs and trade facilitation, Uruguay performs well in the OECD Trade Facilitation Index on ensuring appeal possibilities in administrative decisions taken by border agencies, as well as co-operation with other country authorities. On the other hand, its performance is below the regional and upper middle-income country averages for the publication of trade information, advance rulings, the simplification and harmonisation of documents related to customs and international trade processing, as well as within-Uruguay border agency co-operation (OECD, 2013a). These outcomes suggest that Uruguay can do more to improve the transparency and efficiency of its administrative processes so as to maximise connectivity and competitiveness for both domestic and international suppliers within its borders.
From an overall business perception perspective (financial attractiveness, business environment and the availability and quality of skilled labour), Uruguay ranked 42nd out of the top 50 services outsourcing destinations in 2014 (A.T. Kearney, 2014: Table 2.2). This puts Uruguay below several other Latin American countries, with the limited availability of skilled labour noted as the largest constraint in relative terms. Uruguay’s small labour force and higher labour costs than some of its regional competitors, such as Colombia and Costa Rica, are challenges for capitalising on certain outsourcing opportunities (Uruguay XXI, 2013). Furthermore, the obligations for salary increases over time and the strengthening of the currency may also drive up labour costs. Nevertheless, in terms of city attractiveness, Montevideo scored higher than many of its Latin American cities as a destination for services outsourcing (Tholons, 2015: Table 2.1).
Trade and investment agreements offer unexploited opportunities for deepening and diversifying integration
International trade and investment agreements can be useful vehicles for strengthening integration. Uruguay could make better use of international agreements – particularly with more advanced economies – in order to accelerate its alignment with international regulatory standards. While most of the reforms negotiated in international agreements can be taken unilaterally, these may prove difficult to achieve within the domestic political processes. For this reason, many countries have used international negotiations as an external “anchor” for driving domestic policies, making reforms with a complicated internal political economy more feasible as the result of a commitment to a larger partner or group of partners in an external process. Similarly, international agreements can provide a “lock-in mechanism” that dissuades policy reversals in the future which may come with changes in government. Finally, international negotiations can be a means to acquire technical knowledge on prevailing international standards (related to transparency, technical barriers, etc.) and offer platforms for exchanges of information with regulatory authorities in other countries.
Uruguay has forged limited trade ties with commercially relevant partners outside of Mercosur
Uruguay has not fully reaped the benefits from international agreements, and has yet to exploit new ties with commercially relevant trading partners. In total, Uruguay has forged preferential trade partnerships with 21 countries. Over half of these trade partners are Latin American countries, in particular members of Mercosur and ALADI (Latin American Integration Association). The majority of its remaining trade partners are in Africa and the Middle East (Figure 2.14). In particular, it has established regional trade agreements (RTAs) with the five countries that are members of the Southern African Customs Union (SACU) and selected countries in North Africa and the Middle East, including Egypt and Morocco. Beyond these two regions, it has concluded one RTA with India, but does not have trade partnerships with other Asian countries, despite this being a growing destination for its exports. Neither does it have any accords with North America, after its efforts to negotiate a bilateral free trade agreement (FTA) with the United States were abandoned. There have been long-standing negotiations between Mercosur and the European Union, and the conclusion of this accord could bring important opportunities for Uruguay.
Uruguay’s pattern of insertion into the global economy has been embedded in its integration within the Mercosur bloc. With the exception of the Uruguay-Mexico FTA, Uruguay’s bilateral trade negotiations have been conducted as part of the Mercosur bloc, rather than being part of an autonomous strategy. In any case, the selection and nature of Uruguay’s trade ties appears to be more politically than commercially motivated. The majority of existing agreements are with countries with which Uruguay does not have strong commercial interests, and often constitute distant markets with high tariff barriers. As a result, the number and composition of existing trading partners provides limited opportunities for increased trade, both in terms of export markets and import (input) sources. Hence, although there are clear advantages to negotiations as part of a larger bloc – in terms of increased negotiating leverage, coherence of agreements, economies of scale –, the resulting configuration of RTAs with non-Mercosur patterns is not commercially meaningful. The exception to this is, of course, the agreement with the EU; failure to conclude this agreement may lead to lost opportunities, particularly as other countries obtain preferential access with the EU.
Beyond the agreement with the EU, Uruguay could benefit from greater market diversification, particularly with high-income and high-growth economies where the opportunities for dynamic learning and technological spillovers may be higher. Only two of its RTA partners are high-income OECD countries, Chile and Israel, although these are relatively small markets with a low level of technological sophistication in their productive structure. Similarly, the level of demand and degree of consumer sophistication in other large middle-income markets with which Uruguay has RTAs is not very strong. Given that Uruguay has a small internal market, the profile of demand in its external markets can critically influence the sophistication of its export basket. Forging agreements with larger markets, as well as markets with higher purchasing power and more diversified consumer preferences, could allow Uruguayan firms to discover more sophisticated activities. In this sense, market diversification can support a productive diversification strategy. To this end, Uruguay should consider strategies for plugging into intra-regional initiatives such as the TPP (Trans-Pacific Partnership), which could offer opportunities for greater market diversification.
Uruguay has a large scope for expanding and diversifying its trade partnerships
Overall, Uruguay’s composition of trade partners may not be aligned with its best commercial interests. At present, only 40% of Uruguay’s trade is covered by the network of its RTAs, and the bulk of this relates to intra-Mercosur trade. Trade with non-Mercosur trading partners represents only 9% of exports, and 6% of imports (Figure 2.15). This suggests that Uruguay could still benefit from endowing its main export markets with better legal and regulatory frameworks, so as to facilitate market access of more exporters and investors, particular SMEs, and provide more diversified and efficient sources of inputs for domestic producers and cheaper goods for consumers.
Part of Uruguay’s challenges in its negotiating strategy lie with the Mercosur policy to negotiate as part of the bloc, giving Uruguay limited leeway to negotiate agreements independently. While Uruguay should continue to deepen its integration in Mercosur, which remains its main trading partner, it could also consider agreeing with Mercosur members on certain flexibilities to pursue commercial opportunities that are of particular interest to Uruguay and that do not conflict with the commitments undertaken under Mercosur. It should consider what level of flexibility is appropriate for conducting other negotiations, particularly in the areas of services and investment that are not at odds with the Common External Tariff. This may call for a more flexible interpretation of Mercosur’s Article 32, concerning the scope of unilateral negotiations with third parties. In effect, Uruguay’s negotiations with Mexico serve as a precedent for pursuing a more variable geometry. Uruguay’s exports to Mercosur have not been very dynamic, whereas it has seen significant export growth to other areas with which it does not enjoy the benefit of an agreement, notably in Asia.
Uruguay has made limited strides in “deep integration” agreements
Apart from the relatively small network of trade partnerships under RTAs, the contents of Uruguay’s agreements are of limited scope and coverage. Only one-quarter of Uruguay’s RTAs represent fully-fledged trade agreements. Figure 2.16 displays all the trade agreements signed by Uruguay, ranging from those of more limited scope (framework agreements) to those of most comprehensive coverage (economic integration agreements). Only seven of the agreements signed by Uruguay (27% of its total agreements) are considered to be comprehensive regional trade agreements: free trade agreements, customs unions, and economic integration agreements. On the other hand, 34% are partial scope agreements, notably within the ALADI framework and its Mercosur accords, which generally cover a few sectors, such as the automobile industry, agro-industry, or selected services. Similarly, over one-quarter of these accords are Framework Agreements signed by Mercosur which establish the basis for negotiations leading to the establishment of future FTAs. The remaining three agreements pertain to preferences Uruguay has conferred on a non-reciprocal basis.
Uruguay’s RTAs are also characterised by the limited coverage of so-called 21st century disciplines. Compared to other countries of similar size and development, Uruguay has signed a high share of “shallow RTAs”.11 Only two of its RTAs – with Mercosur and Mexico – are considered to contain “deep” integration disciplines, governing non-tariff measures of a domestic regulatory nature (see Table 2.5 below). Of these, only the FTA with Mexico covers disciplines related to investment, intellectual property rights, services and competition issues. Other small countries in the region – such as Costa Rica or Panama – have signed the same number of agreements as Uruguay, but have pursued a strategy of deep integration in the majority of their accords (Figure 2.17). Even economies that have signed fewer RTAs, such as Malaysia or Hong Kong, China, have nevertheless focused on deep integration disciplines. Hence, although Uruguay has signed a reasonable number of RTAs, these are largely confined to traditional trade barriers, with limited coverage of domestic regulatory reforms.
Quality is more important than quantity of RTAs
Not all RTAs are equal, and not all of them have the same effects on the pattern and benefits derived from integration. A recent stream of empirical work is showing that RTA heterogeneity – namely, variations in the design and contents of the agreement – plays an important role in explaining different effects and outcomes from existing agreements (Ahcar and Siroen, 2014; Di Comite, Nocco and Orecife, 2014; Christian, 2013). As the scope of issues negotiated in trade agendas has been widening, and new partners have become active players in the new regionalism wave, the diversity of RTAs has also increased over time. There is significant variation in the nature of these arrangements, including the scope and depth of the agreements, the design and nature of specific commitments and obligations, and the overall modalities of negotiation and implementation, as well as the institutional architecture. Many of these dimensions are being shown to influence the economic outcomes. Moreover, the number of signatories, their economic size and distance between them, as well as the level of economic development and economic growth, can also play a role.
Despite the opportunities for RTAs to facilitate insertion into global value chains, they also have risks when they are poorly designed. Poorly designed trade agreements can hinder the development of global value chains, increasing fragmentation and diverting trade and investment. In particular, it is important to consider the potential negative effects of uncoordinated RTAs on production sharing, and the risks of inconsistent regulations on global value chains (Feridhanusetyawan, 2005) leading to a “spaghetti-bowl” effect created by the overlapping of different rules of origin (Zhang and Shen, 2011; Baldwin, 2008). In other cases, however, regional agreements have had no effect on the development of global value chains, particularly when the formation of partners has been politically rather than commercially driven. The policy question for Uruguay and other economies considering to expand their integration strategy is not so much whether to pursue new RTAs, or how many of them, but which type of RTAs to pursue.
Deep integration is essential for the development of global value chains
Recent research on global value chains suggests that there is often a strong regional basis underpinning the development of global value chains. Some authors argue that supply chain trade is not global, but mostly regional (Baldwin and López-Gonzalez, 2013). In effect, a high share of foreign value added comes from countries that are geographically close, suggesting that distance and congruity/geographical proximity can play a determinant role. The regional dimension, however, appears to be stronger for manufacturing-based global value chains than for natural resources and services. Indeed, natural resources and services have seen the emergence of international (extra-regional) supply chain trade. As noted above, not only are Uruguay’s RTAs largely concentrated in the region, but they are also largely confined to goods trade. Establishing a favourable regulatory regime for cross-border services activities is a promising area of reform. As technology increasingly enables a growing range of services to be traded, there will continue to be opportunities to capture high-value added services activities along international supply chains.
This suggests that “deep” and comprehensive RTAs, particularly those containing disciplines that cover the “trade-investment-services-know-how” nexus, are associated with a higher degree of insertion into global value chains. For global value chains to emerge, RTAs need to address a new set of issues that are associated with the cross-border fragmentation of production processes, such as intermediates trade, the free flow of capital, the global demand for services across the chains, the international movement of management and other skills, and the protection of knowledge and technology that accompanies production. Given that a whole production process is established abroad, the degree of behind-the-border regulatory integration becomes paramount. After all, although the benefits for firms from unbundling the production process are evident, the risks are also much higher. In order to attenuate these risks, countries need to provide higher behind-the-border predictability and lower the costs of divergences in regulatory regimes.
Towards 21st century RTAs
The so-called “21st century” RTAs could represent relevant areas of international co-operation for Uruguay. The WTO-plus or WTO-beyond elements are key features of these RTAs, involving a degree of liberalisation and/or rule-making that goes beyond the commitments made by countries in the WTO. These RTAs provide for a range of behind-the-border domestic policies, such as services, investment, intellectual property rights, competition policy, and regulatory transparency (Table 2.3). Modern RTAs also contain provisions that have helped reforms at a sectoral level, notably in telecommunications and financial services. Unlike the agreements under the World Trade Organization, free trade agreements have fashioned a more holistic approach, integrating the movement of goods, services, capital, people and knowledge. This is particularly important for trade associated with global value chains, which requires that production processes – including capital, technology, management – cross borders and are protected in foreign markets.
Countries that pursue regulatory integration in their RTAs are more likely to become part of these production-sharing schemes. Multinational enterprises that are at the core of global value chains are already operating by these new global standards, and will more readily locate in countries that have adopted them in order to minimise transaction costs.
Capturing the more sophisticated and more services-oriented tasks along the international supply chain is likely to lead to knowledge spillovers from global firms to local suppliers, as well as higher income-generating activities. Countries seeking to attract more sophisticated segments of the value chain need to be prepared to embrace and implement a complex package of rules typically embedded in 21st century RTAs, from the protection of intellectual property rights, to data protection and e-commerce. The more sophisticated the economic activities, the more intensively they rely on the regulatory and institutional environment. Similarly, the inherently regulatory nature of most services barriers has placed demands on new components of regional negotiations, such as regulatory co-operation and coherence.
The pursuit of deep integration is no longer circumscribed to a small number of trade partnerships, but has become considerably more widespread. Almost two-thirds (57%) of RTAs signed since the beginning of 2001 display “deep” coverage, as opposed to only 10% of RTAs prior to the WTO (Figure 2.18). By way of contrast, Table 2.4 displays the WTO-plus and WTO-beyond disciplines contained in RTAs signed by Uruguay (via Mercosur).
RTA coverage of services will increase global value chain participation
An implication of offshoring and the fragmentation of production is that goods and services sectors are increasingly intertwined. Indeed, services have become the “glue” of global value chains. The “servicification” of industry refers to the phenomenon whereby services are embedded, and embodied, in manufacturing and agro-industry products. An increasing share of the value of manufacturing goods is made up of services: domestic and imported services inputs used along the production process account for one-third of the total value of exports in transport equipment, textile, chemicals or food products (OECD, 2013a). As a result of this “servicification” of manufacturing, the competitive nature of services play a crucial enabling role in the development of global value chains. Since services are inputs into the production of goods, the cost of services trade barriers also affects the competitiveness of manufacturing and agricultural supply chain.
In light of the importance of ensuring the competitiveness of services, increasing the coverage and depth of services chapters in RTAs can be a useful strategy for lowering trade costs. In general, trade costs for services tend to be higher than those of goods and more often of a regulatory nature, but RTAs can play a role in bringing down these costs through greater regulatory coherence (Miroudot, Souvage and Sheperd, 2013). Effectively, bringing down services trade costs is also relevant for increasing productivity, as services sectors with lower trade costs tend to have higher rates of productivity growth (ibid.). By lowering these trade costs for services and increasing productivity in these sectors, suppliers in Uruguay could increase their opportunities for fostering competitiveness in manufacturing and agricultural value chains.
Several of Uruguay’s trade arrangements provide a framework for trade in services, although the actual progress in market opening and rules development has been limited, except for financial services, where Uruguay assumed GATS-plus commitments under Mercosur, and to a lesser extent, in telecoms services. The Mercosur Montevideo Protocol on Trade in Services signed in 1997 provided a framework for liberalising services, which was to be undertaken over a period of ten years, by 2007. The Protocol mirrors a GATS template, defining modes of supply, market access rules and national treatment similar to those of GATS. Except for a few sectors, the commitments under Mercosur lock in the schedules under GATS, and in this sense, provide limited liberalisation beyond the multilateral level. Similarly, none of the Mercosur bilateral treaties that cover services (such as Mercosur-Egypt or Mercosur-Peru) go beyond an affirmation of GATS.
Bilateral investment treaties offer good protection to foreign investors
With the global trend towards fragmented production, firms do not just look for increased market access, but more importantly, for favourable conditions for market presence. Firms that unbundle their production across borders face important risks related to the treatment they will receive in the host country. In this context, bilateral investment treaties (BITs) have emerged to promote certain standards of treatment for foreign investors. BITs usually provide for non-discrimination through national treatment, most-favoured nation and fair and equitable treatment provisions, as well as security for investors and protection against expropriation. BITs also usually contain provisions on the transfer of funds. Since the mid-1990s, the inclusion of investor-state dispute settlement provisions in BITs has offered investors recourse to international arbitration to settle disputes with the host country. Where BITs succeed in making the investment framework and environment of signatory countries more predictable, stable and safe for investors, it is expected that they will help countries to attract vertical and horizontal FDI.
Uruguay has been able to pursue BITs independently, concluding agreements with over 30 countries (see Table 2.5). These BITs contain provisions that are commonly encountered in the so-called “first-generation” treaties, given that most of the country’s treaties were adopted in the 1990s and 2000s. On average, Uruguay’s treaties are 19 years old, which is close to the global average. Older treaties were concluded essentially with European countries – its traditional commercial partners –, while more recent ones have been concluded with countries from a broader geographical scope (Americas, Asia, Australia). Uruguay is also a party to 17 non-BITs agreements that cover investment matters (see Annex 2.A2). In particular, through its membership of Mercosur, Uruguay has concluded, with major partner countries, several international agreements that encompass investment Economic Complementation Agreements; Framework Agreements, and Trade and Investment Framework Agreements.
Between BITs and FTAs with investment coverage, 100% of Uruguay’s inward FDI stock is covered by international investment agreements, and around 40% of Uruguay’s outward FDI stock is covered.12 This is a high degree of treaty coverage compared to the global average: less than 20% of global FDI is currently under cover of an international investment agreement.13 This markedly high level of correspondence between Uruguay’s inward FDI counterparts and its BITs might suggest that BITs are an important element of its investment policy, more so than in most other countries where other factors (size of market, geography) could be driving investors to the market. Alternatively, it could reflect the fact that Uruguay has only concluded BITs with its traditional or existing partners, and that there may be unexploited investment opportunities from concluding agreements with non-traditional partners.
These agreements have allowed Uruguay to offer adequate protection to foreign investors. However, the BITs could have a greater impact on both inward and outward direct investment by including market access and other practices to enhance transparency, responsible conduct, and other sustainable development considerations.
The core treaty protection provisions are applicable at the post-establishment phase, while the admission of investment remains subject to national laws. Uruguay’s BITs do not provide foreign investors with a right of free establishment in its territory. That is, the standards of treatment that are granted to covered foreign investors, such as guarantees of fair and non-discriminatory treatment, apply to investments that have already been admitted under national regulations, at the post-establishment phase. Uruguay could consider extending these legal protection provisions to the pre-establishment phase, which would provide covered foreign investors with market access, while granting its nationals investing abroad the same market access guarantee in partner countries. For example, BITs agreed between Japan and Korea (2003) and Viet Nam (2005) cover both the pre- and post-establishment phases. Likewise, the Canadian and US model, similar to NAFTA (the North American Free Trade Agreement), applies to the “establishment, acquisition, expansion, management, conduct, operation, management, maintenance, use, enjoyment [. . .]”. Since econometric studies suggest that comprehensive free trade agreements and pre-establishment NT provisions in international investment agreements are positively correlated with greater FDI inflows, Uruguay might consider inserting pre-establishment protection provisions in its future treaties.
Uruguay’s international investment agreements promote responsible business
Despite the fact that most treaties are grounded in first-generation practices, Uruguay has been a forerunner in adopting some new practices, particularly the insertion of Responsible Business Conduct (RBC) elements. It is worth noting, in the light of the current global debate on the links between sustainable development goals and investment treaties, that Uruguay is one of the most advanced countries in the use of its international investment agreements to advance its sustainable development policies. An OECD survey of 2 107 investment treaties shows that only 12% of the entire stock of international investment agreements contains language on such matters, while 17% of Uruguay’s treaties refer to RBC issues.14 The issues mentioned in its treaties are environment (in 17% of its treaties) and labour standards (8% of Uruguay’s treaties). In addition, references to sustainable development and RBC concerns are made in the preambles to Uruguay’s international investment agreements. Although preamble language does not create binding treaty commitments, it is nevertheless important for clarifying the purpose of the treaty as well as the broader context for interpreting the treaty. As such, preamble language can provide essential inputs to the treaty interpretation process. However, Uruguay does not include RBC issues systematically: only 20% of the later treaties contain references to RBC standards. This suggests that it is Uruguay’s treaty partners who have called for inclusion of such language, rather than a firm policy stance by Uruguay.
Dealing with tax incoherencies can pay dividends
Closely related to services and investment, Uruguay has also made progress in double taxation treaties and investment (Box 2.5). Agreements do not liberalise investment, but encourage countries to explore bilateral treaties and that joint activities are taken for the promotion. Moreover, in some agreements (i.e. with Mexico and Peru), the parties undertake to explore new agreements for avoiding double taxation. Finally, other agreements (e.g. Mercosur-CAN) involve co-operation over export processing zones and other special regimes.
The G20 has identified base erosion and profit shifting (BEPS) as a serious risk to tax revenues, sovereignty and fair tax systems worldwide. BEPS enable multinational companies to take advantage of tax rates that are lower than in the country where the profit is made by shifting profits across borders. This activity – which arises from deficiencies in current international tax rules and standards – harms developed and developing countries alike. But for low-income countries, which rely very heavily on tax revenue from multinational companies, profit shifting has a particularly significant effect on vital tax revenues. If the largest and most high-profile taxpayers are seen to be avoiding their tax liabilities, confidence in, and effectiveness of, the tax system is undermined.
The OECD and G20 economies are working together to address BEPS issues, providing consistency for both business and tax sovereignties. In 2013, the OECD launched a 15-point Action Plan to provide governments with the domestic and international tools they need to combat profit shifting (OECD, 2013b). Engagement of developing countries in the OECD/G20 BEPS Project is therefore important, in particular to ensure they receive appropriate support to address the specific challenges they face.
The lack of transfer pricing, comparable data and the granting of wasteful tax incentives have also been identified as areas of particular concern for developing countries (OECD, 2014a). While these issues are not part of the BEPS Project itself, they will undergo further analysis through the G20 and work of the OECD Task Force on Tax and Development.
The engagement of developing countries in designing solutions to counter BEPS has now been scaled up to enable them to participate in the project directly. Since 2015, 13 developing countries have been involved in the Committee on Fiscal Affairs (CFA) and in the relevant Working Parties on BEPS, with Peru and the Inter-American Center of Tax Administrations (CIAT) representing Latin America. In order to engage with a broader group of developing countries, particularly low-income countries which may lack the capacity to participate directly in the BEPS Project, network meetings are organised in five regions, including Latin America and the Caribbean (LAC), in partnership with CIAT. Uruguay participated in the LAC Regional Network Meeting which was held on 26-27 February 2015 in Lima, Peru.
Discussions with the Uruguay Tax Commissioner in 2014 suggested that Uruguay might be interested in Participant status on the CFA. The OECD will encourage Uruguay to consider applying for this status in 2015 to provide the new government with a solid platform for engaging in the BEPS Project and directly in the OECD work on Uruguay’s other tax priorities.
Sources: OECD (2013b), Action Plan on Base Erosion and Profit Shifting, https://doi.org/10.1787/9789264202719-en; OECD (2014a), “Part 1 of a report to G20 Development Working Group on the impact of BEPS in low income countries”, www.oecd.org/tax/tax-global/part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-low-income-countries.pdf.
Intellectual property rights protection will attract high-tech sectors
High-quality intellectual property rights (IPRs) are an increasingly important framework condition for the development of global value chains. Indeed, when firms establish segments of their production in foreign countries, they are also transferring knowledge (and technology) abroad, particularly in more sophisticated segments of the value chain. The implication is that countries that wish to attract production processes that are more sophisticated (e.g. beyond assembly services, etc.) need to ensure adequate IPR protection. The quality of the supply chain segments can be more important than the quantity of value-added segments that locate in the country. The higher the degree of technological sophistication, the more productivity spill-overs it will generate and the higher income-generating activities it will create. The allocation of value depends on the ability of participants to supply sophisticated, hard-to-imitate products or services. Increasingly, the supply of such products or services stems from forms of knowledge-based capital, such as brands, basic R&D and design, and the complex integration of software within organisational structures (OECD, 2013a). IPRs play an important role in allowing the development of such knowledge-based capital. In this context, integrating TRIPs provisions could become a useful component of Uruguay’s trade agreement strategy.
State-owned enterprises need clear governance
Given the large relative weight of state-owned enterprises in domestic demand (see Box 2.6), Uruguay would benefit from inserting competition disciplines into its RTAs. At present, Uruguay is not a member of the Government Procurement Agreement of the WTO. In addition, the only international agreement that includes coverage of government procurement is with Mexico, although its standards and provisions are the most progressive among OECD countries.
State-owned enterprises (SOEs) in Uruguay are prevalent in the finance sector and in a large part of the utilities and infrastructure sectors, such as energy and oil, telecommunications, transport, water and sanitation. They contribute to a substantial share of the country’s GDP and employment. According to World Bank estimations (2014), SOEs in Uruguay account for around 2.3% of total employment and 16.8% of employment in the public sector; their aggregate current expenditure amounts to 12% of GDP and total capital expenditures represent 1.7% of GDP. Given that SOEs play a fundamental role in the Uruguayan economy, ensuring transparency and accountability in SOE corporate governance is vital for improving economic efficiency.
Corporate governance in state-owned enterprises has gained prevalence within the OECD in recent years. The OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOEs), created in 2005, are the first international benchmark aiming at helping governments to improve and assess the functioning of publicly owned enterprises. These guidelines are oriented toward major issues related to SOE corporate governance and provide recommendations in six main areas: (i) legal and regulatory framework; (ii) ownership policy; (iii) relations with stakeholders; (iv) equitable treatment of shareholders; (v) transparency and disclosure; and (vi) responsibility of the board. Given that SOEs often represent a significant share of economies and are present in a wide range of sectors, the guidelines are intended to contribute to economic efficiency, and to improve accountability and transparency.
Despite recent developments in SOE corporate governance in Uruguay, including the adoption of compulsory external and private audits,1 and international accounting standards,2 Uruguay could deepen its efforts, especially in clarifying the state’s function3 and the general application of laws and regulations.4 Concerning the latter, the OECD Guidelines recommend that SOEs should not be excluded from the adoption of general laws and regulations since commercial structures increase transparency and provide the same conditions for private and public enterprises, effectively ensuring competition. In contrast, most SOEs in Uruguay are governed by public law, including the labour relations and bankruptcy law.
Regarding the clear identification of the state’s functions, the Office for Planning and Budget, the Ministry of Economy and Finance and other ministries are in charge of monitoring SOEs. Part of their decision making still depends on these entities and often involves multiple bodies, which hinders the clear identification of functions and roles. In particular, the National Administration of Fuels, Alcohol, and Portland Cement and the State Telecommunications and Energy Enterprise are under the supervision of the Ministry of Industry, Mines and Energy; the State-Owned Banco de la República Oriental de Uruguay (BROU) comes under the Ministry of Economy and Finance; and the State Water Utility is under the Ministry of Housing, Use of Land and Environment. Contrary to recommendations in the OECD Guidelines, there is no single government agency with authority for monitoring SOEs. Centralising these functions in a unique entity would contribute to an efficient separation of the state’s functions and would improve transparency.5
Chile’s System of Public Enterprises (SEP) offers an example of such an agency. Created in 2001, the SEP is responsible for monitoring and evaluating most Chilean SOEs, and for nominating candidates to the country’s SOEs’ boards of directors. In Uruguay, board members are appointed by the Executive Branch, with a three-fifths majority approval by Parliament.6 The BROU Board of Directors is composed of five members designated by the President of the Republic. This is not different from OECD countries, where boards of directors are also designated by the government. However, the guidelines suggest that transparent nomination processes be established for selecting board members who are capable of independent and objective judgement.7 They should have relevant competence and experience; appointing board members from the private sector will help to make boards more business-oriented. In contrast with several OECD countries, tenure of the board members is not fixed in Uruguay and directors are kept in office until a replacement is announced (Robano, 2014).
In relation to the regulatory function of the state, in some cases the regulatory authority governing a SOE is directly linked to the Presidency. This is the case for the Energy and Sanitation Services Regulatory Unit, which is administratively linked to the President’s office. This could imply that the government acts as owner and regulator, with no clear separation of the state’s function and leaving the door open to politically motivated interference.
The OECD Guidelines on Corporate Governance of SOE are being reviewed and revised. The revised guidelines could provide an opportunity for Uruguay to engage further in this area.
← 1. OECD guideline V.C : “This guideline recommends SOEs be subject to an annual independent external audit based on international standards. The existence of specific state control procedures does not substitute an independent external audit”.
← 2. OECD guideline V.A: “The co-ordinating or ownership entity should develop consistent and aggregate reporting on SOEs and publish annually these reports”. OECD guideline on Corporate governance of SOEs.
← 3. OECD guideline I.A: “There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for state-owned enterprises, particularly with regard to market regulation”.
← 4. OECD guideline I.B: “Recommends that governments strive to simplify and streamline the operational practices and legal form under which SOEs operate”.
← 5. OECD Guideline II.D: “The exercise of the ownership rights should be clearly identified within the state administration and may be facilitated by setting up a co-ordinating entity or, more appropriately, by the centralisation of the ownership function”.
← 6. Art. 187 Constitution.
← 7. OECD Guideline VI.C: “The boards of SOEs should be composed so that they can exercise objective and independent judgement.”
Sources: OECD (2005), “OECD guidelines on Corporate Governance of Public Enterprises”, www.oecd.org/corporate/ca/corporategovernanceofstate-ownedenterprises/34803211.pdf; Lehuedé, H. (2013), “Colombian SOEs: A Review Against the OECD Guidelines on Corporate Governance of State-owned Enterprises”, OECD Corporate Governance Working Papers, No. 12, https://doi.org/10.1787/5k3v1ts5s4f6-en; World Bank (2005), “Uruguay - Report on the Observance of Standards and Codes (ROSC): Corporate Governance Country Assessment”, http://documents.worldbank.org/curated/en/2005/09/7380129/uruguay-report-observance-standards-codes-rosc-corporate-governance-country-assessment; World Bank, (2014), “Corporate Governance of State-Owned Enterprises in Latin America: Current Trends and Country Cases”, http://documents.worldbank.org/curated/en/2014/07/20183864/corporate-governance-state-owned-enterprises-latin-america-current-trends-country-cases; Robano, V. (2014), “The role of public financial institutions in fostering SME’s access to finance”, Document CFE/SME (2013)8.
RTAs should be multilaterisable
For all the opportunities that RTAs provide to deepen integration, they remain a second-best for pursuing reform. RTAs should always be designed in ways that are multilateralisable. A number of authors (e.g. Lawrence, 2012) have called for a “multilateralisable impact assessment” of RTAs as a means to monitor their building or stumbling block effects. One proposition in the recent discussions on RTAs is the so-called “multilateralising regionalism” agenda, by which deep measures that are widely incorporated into RTAs could be diffused more widely and consistently across regional negotiations, and ultimately be multilateralised.
Table 2.6 contains a checklist of multilateral-friendly practices that could be adopted in designing Uruguay’s RTAs. The checklist involves five axes. The first element relates to the degree of diffusion of certain practices. If a given deep measure is endorsed by a critical mass of WTO members, including less developed countries, it is more likely to gain traction in the WTO than if it constitutes an isolated practice or one that is only endorsed in the RTAs of particular members. In this sense, knowing how widely dispersed certain standards are could be a factor for considering including it.
RTAs need to be coherent with the WTO
The consistency of deep measures in RTAs is assessed at two levels: their coherence with corresponding obligations in the WTO and the homogeneity of WTO-plus measures across RTAs. Deep measures that contravene corresponding commitments and obligations under the WTO could confuse the international trading environment for Uruguayan firms. One critical issue in this regard is the notification of all RTAs to the WTO, which needs to be improved. Only three of Uruguay’s RTAs are notified to the World Trade Organization, and except for Mexico-Uruguay FTA, they were notified under the Enabling Clause (and hence are outside the WTO review process and the requirements under Art. XXIV).
There is also a need to improve coherence with WTO obligations, as Mercosur for instance has had instance of WTO commitments. The clauses in Uruguay’s existing agreements concerning WTO coherence relate to the standard Objectives and Affirmation of Agreements. Beyond these basic elements, there are other best practices that help reinforce coherence and resolve conflicts with the WTO (Table 2.7). The forum exclusion clause should be highlighted, given the conflicts there have been between Mercosur and WTO dispute settlement mechanisms. Finally, given the share of practical scope agreements, attention should be paid to substantially all trade (see below).
The principle of comprehensive coverage is the cornerstone of the multilateral rules on the formation of regional trade agreements. Article XXIV of the GATT requires RTAs to cover “substantially all the trade” in goods between the parties. Similarly, under Article V of the GATS, RTAs that cover services should have “substantial sectorial coverage” of sectors. Admittedly, the meaning of the term substantial – which is intended to define the liberalisation threshold of regional agreements – has never been explicitly defined and is subject to interpretation. This has meant that these requirements are applied in different ways. WTO members’ practice indicates that a regional trade agreement liberalising 80% of goods would be the minimum to meet this requirement. In the same vein, Uruguay has been party to agreements that had very long phase-out periods, sometimes exceeding ten years. Hence, it would be good having reasonable length of time for regional agreements, leaving long phase-out periods to exceptional cases.
Rules of origin need to be harmonised
Avoiding discrimination, particularly in the sourcing of intermediate inputs, can be an important element in creating rather than diverting global value chains. To the extent that they remove tariffs and other barriers on partners’ imported inputs, they encourage the expansion of value chains with the RTAs, which is beneficial. However, if they generate trade diversion in input sourcing, they will divert value chains from outside the RTA to inside the regional scheme. This is harmful at the global level. Hence, it is important to not provide preferences on intermediate goods and to liberalise these barriers on a most-favoured nation basis. Similarly, one element of global value chains is that intermediate goods cross borders multiple times before they reach the final consumer. For this reason, even a low level of tariffs on these goods can have multiplying effects.
The rapid growth in the number and variety of free trade agreements leads to a “spaghetti bowl” phenomenon, in which criss-crossing rules of origin impose higher transaction costs on industries and distort trade and investment flows. The governance of rules of origin is not covered by the WTO in a comprehensive manner, and as a result there is great fragmentation of overlapping RTAs with conflicting rules of origin. Many empirical studies have shown that rules of origin restrict trade. This is particularly important in the context of global value chains, which can involve two or more countries in the production of a single final product. There are two approaches that can help attenuate the spaghetti bowl effect. The first is to provide very open and flexible requirements of origin. A potential example in this regard is the way rules of origin are formulated for services. Table 2.8 ranks the restrictiveness of services rules of origin, from least to more, according to a review of a large sample of RTAs (OECD, 2013).
The second aspect is to provide for “cumulation”, which gives flexibility to the ruling that goods must be produced entirely in the country/region of exportation, or have undergone sufficient working or processing there, in order to qualify as originating goods. Cumulation makes it possible for goods from a free trade partner to be treated the same as those originating in the country of exportation. This therefore provides an incentive for a producer or exporter to use input materials originating from a free trade partner country. On the basis of this rule, input materials of this type must not fulfil the restrictive product specific list rules. Conversely, there is less incentive to use input materials from a third country, which can create distortions.
To reduce potential distortions, it is important to have diagonal rather than bilateral cumulation. Bilateral cumulation only covers the parties to that treaty (e.g. Uruguay-Mexico). On the other hand, diagonal cumulation makes it possible to use input materials originating in different free trade parties, provided that all parties taking part in the process have free trade agreements with one another using the same rules of origin. Although this is less widespread, there are good examples of where it has been integrated, such as in EuroMed and in the recent EPA-SACU agreement.
Uruguay could be more strategic in its RTAs
Uruguay is a signatory to six Mercosur Framework Agreements. Of these, three (Jordan, Morocco and Pakistan) have been ratified by Uruguayan law, while the other three (Syria, Palestine and Turkey) remain to be ratified and are not yet in force. All of these agreements form the basis for negotiations leading to the establishment of future FTAs.
In major OECD countries, there is a remarkable alignment in the network of agreements signed by the United States, Japan and Germany, and the respective global value chains in which they participate. The strong match between the Network Trade Index and the RTA Index reveals that existing international production schemes are almost perfectly covered by regional trade agreements. While it is not possible to infer from this correlation whether RTAs have driven global value chains, or whether global value chains have spurred the formation of RTAs, the strong alignment suggests that RTAs have a role to play in facilitating the operation of global value chains.
Uruguay could improve its insertion in global value chains by negotiating RTAs with key vertical partners. One of the key drawbacks of many of Uruguay’s RTAs is that its trade partnerships are not well-aligned with global production networks. In particular, Uruguay does not have an agreement with those countries or regions that represent a source offshoring demand, notably the United States and Europe. Global value chains largely emanate from the activities of multinational enterprises in selected OECD and other advanced economies. In this regard, the revival of Mercosur-EU negotiations would be a promising step in building bridges with vertical trade partners.
Of course, the selection of trading partners should be broader than existing vertical relationships, given that global value chains are dynamic in nature, and it is not possible (or fruitful) to try to anticipate where a supply chain will emerge. A good practice that characterises recent RTAs, particularly in Asia, is to include clauses for open membership, which are not restricted to the region. In effect, this allowed the PP4 to grow into the Trans-Pacific Partnership and attract partners across three continents, bringing to the table countries like the US who have an interest in locating parts of their production abroad. Despite containing the word “Pacific” (or “Regional” in Regional Comprehensive Economic Partnership), these agreements explicitly contain open accession clauses to any trading partner worldwide with commercial interests with the region. In the case of Mercosur, only members of ALADI are able to become members, which confines the trade ties to countries in South America. The requirement to become a member of ALADI, in turn, is confined to being a Latin American country. Open accession and observer clauses could facilitate trade ties with partners that have strategic interests in South America.
Recommendations
Uruguay has consistently pursued an investor-friendly regime, making remarkable progress in attracting FDI and achieving sustained productivity growth in recent decades. It has demonstrated strong growth in dynamic global services segments in recent years, and has put in place investor-friendly regulations to foster further investment and growth. Nevertheless, Uruguay could take steps to strengthen its integration patterns, notably by harnessing new opportunities in Global Value Chains (GVCs) and diversifying markets with fast-growing economies, particularly in Asia. Uruguay’s regulatory profile in domestic backbone services remains relatively restrictive, effectively acting as a tax to other sectors of the economy and hampering its connectivity to world markets. Accordingly, Uruguay could make better use of international trade and investment agreements by forging modern, behind-the-border disciplines that are essential for sustaining the development of GVCs. The following section highlights concrete actions that Uruguay can take to strengthen and deepen its international integration and competitiveness.
Create the right framework conditions for international investment
Investment is central to growth and sustainable development. International investment can provide additional advantages beyond its contribution to capital accumulation. It can serve as a conduit for the local diffusion of technology and expertise, such as through the creation of local supplier linkages and by providing improved access to international markets and global value chains. The OECD’s Policy Framework for Investment (PFI) is an internationally-supported tool to foster investment for sustainable development (Box 2.7). In the light of the findings of this volume of the Multidimensional Review, three of the PFI policy dimensions appear particularly important for Uruguay and may constitute the basis for enhanced co-operation with the OECD:
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Responsible business conduct: Sustainability and responsible investment are integral parts of a good investment climate and should be factored in from the beginning and not as an after-thought. Principles related to the rule of law, if well implemented, will help to ensure that firms act responsibly, by setting out what is expected of them and by making clear the sanction in the event of a breach in these expectations. Responsibility is not just a consideration for foreign investors keen to preserve their international reputation, but affects all enterprises participating in supply chains, whether foreign or domestically-owned. Numerous non-OECD countries in Latin America, including Argentina, Brazil, Colombia, Costa Rica and Peru, have already adhered to the OECD Guidelines for Multinational Enterprises,15 the most comprehensive set of government-backed recommendations on responsible business conduct in existence today. The governments that adhere to the Guidelines aim to encourage the positive contributions multinational enterprises can make to sustainable development and to minimise the difficulties to which their various operations may give rise.
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Investment in infrastructure: The PFI also looks at how to channel investment into infrastructure sectors, including clean energy. As Uruguay strives to engage private enterprises in financing and developing infrastructure, it will be important to identify best practices that facilitate this effort, also in view of cross-cutting issues such as regional co-operation for promoting transport and clean energy infrastructure.
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Competition policy: competition policy serves to enhance consumer welfare by promoting competition and controlling practices that could restrict it. More competitive markets lead to lower prices for consumers, more entry and new investment, enhanced product variety and quality, and more innovation. Overall, greater competition is expected to deliver higher levels of welfare and economic growth.
The OECD has been the lead global source of best practice and instruments for international investment policy, promoting the principles of openness, transparency and fairness embodied in the OECD Declaration on International Investment and Multinational Enterprises. Its work in this area is increasingly attracting the interest of major emerging markets, such as Brazil and China.
The Policy Framework for Investment (PFI) is an internationally-supported tool to foster investment for sustainable development. The PFI addresses the issue of sustainable and inclusive development through the lens of investment promotion and private sector-led development. This focus is not meant to accord primacy to the concerns of private investors; private and social returns from investment are not always congruous, and governments appropriately have a broader development agenda than corporate profitability. But it does provide a framework for understanding how policies interact and affect outcomes, while also bringing out the critical importance of public governance.
The PFI looks at all forms of investment involving all types of firms. A good investment climate is one which provides opportunities for all investors: public and private, large and small, and foreign and domestic investors. The heterogeneity of investors, the multiplicity of factors which drive investment decisions and the multiple policy objectives pursued by governments all call for a whole-of-government approach so as to increase policy coherence. This policy coherence approach applies to each component of the investment climate, whether encouraging foreign investment, promoting linkages and technology spillovers, raising the quality of the workforce, improving infrastructure or any other area.
The PFI is non-prescriptive; there is no one-size-fits-all approach to investment promotion and private sector development that will work in all countries in all sectors and at all times. It recognises the role of competition in stimulating productivity growth and the related principle of non-discrimination and national treatment, but it also acknowledges that economic efficiency is only one part of the sustainable development equation.
Public governance matters as much as policies for the investment climate. The PFI considers not just policies themselves but also how they are developed, designed, co-ordinated, implemented, evaluated and ultimately updated. Investment involves a judgment about the future. What matters for investors are all the principles embodied in the notion of the rule of law: predictability, transparency, credibility, accountability and fairness. The PFI was created in response to this complexity, fostering a flexible, whole-of-government approach which recognises that investment climate improvements require not just policy reform but also changes in the way governments go about their business.
Source: www.oecd.org/investment/pfi.htm.
Be more strategic in trade treaty terms
A strategy for expanding or deepening engagement in trade and investment agreements should not create conflicts in existing partnerships. The various modalities and vehicles for trade and investment agreements cannot be tackled in isolation. The multilateral, regional, and bilateral trade processes are highly interlinked and have significant impact on each other. Accordingly, addressing the prospects for Uruguay to leverage international trade and investment policy needs to be considered alongside its objectives to maintain coherence with its existing commitments in various fora. Thus, Uruguay cannot separate its Mercosur membership from its bilateral or multilateral strategies. At the same time, these regional strategies need to be aligned and co-ordinated with Uruguay’s participation in multilateral negotiations under the World Trade Organization. It is important to avoid creating confusion and contradictions among different regimes, which complicates administrative procedures and creates transaction costs and uncertainty for businesses who no longer know which policy applies.
The best way to ensure coherence among commitments is to develop a strategy or model agreement based on Uruguay’s unique situation and needs. Uruguay’s treaties show a great deal of diversity in their design, and in the language used in investor-state dispute settlement (ISDS) clauses. This suggests that Uruguay lacks a model for its agreements, and simply tends to adopt the model treaty of its partners. This in turn exposes Uruguay, as MFN clauses allow investors to choose from among different treaties to benefit from the treaty that is most favourable to their own interests. Uruguay could benefit from a more strategic approach in developing BITs that advance its own economic and development goals. This will create greater coherence and harmony across BITs, and will enhance Uruguay’s negotiating position in these accords.
Strengthen competitiveness through coherent regulation
Uruguay has put in place considerable investor-friendly legislation, as indicated by its relatively low FDI restrictiveness score, and demonstrating its commitment to protecting the economic interests of both domestic and foreign stakeholders. Nevertheless, Uruguay still effectively limits foreign access in certain service sectors through other behind-the-border measures as discussed above. Bearing in mind the need for effective and transparent regulations for ensuring competitive markets and ensuring consumer safety – among other valid goals – the trade restricting impacts and administrative burdens should be limited as much as possible. To this end, Uruguay could consider seeking feedback from private sector participants in key sectors. This type of regulatory impact analysis can play an important role in accurately gauging the impacts of existing regulations, particularly in sectors where regulations are more restrictive than in other countries. Furthermore, aligning regulatory profiles with those of key partners and adopting international standards whenever possible could help to minimise the regulatory complexity faced by both domestic and international companies.
Increase institutional co-ordination and efficiency
Although Uruguay has made significant efforts to improve its institutional setting for external promotion, it still needs a broad, integral vision for its trade and investment policies. An investment promotion strategy could cover:
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Image building: Uruguay’s investment image has improved considerably thanks to efforts by Uruguay XXI. It could now consolidate this image.
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Lead generation: targeting specific sectors and companies with a view to creating investment leads. Although Uruguay XXI has made important steps in this direction, there is a need for a broader strategy regarding investment attraction.
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FDI targeting: Uruguay XXI could be more strategic and could learn from good practice in other countries (Box 2.8).
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Investor aftercare: several improvements in the aftercare of investors, one of the most important responsibilities of Uruguay XXI, could be made to strengthen Uruguay’s integration agenda. Aftercare involves facilitating the successful start-up and development of a foreign affiliate in a host country or region. It is also critical in encouraging re-investment by established investors and in generating investors’ links with local suppliers. Canada and the United Kingdom are considered two good models of aftercare in investment. Invest in Canada’s aftercare programme follows up with investors for the duration of the project, and undertakes regular back-to-back outcalls to targeted investors. These visits promote dialogue with investing companies after the investment and encourage further reinvestments. UK Trade and Investment (UKTI) builds relationships with different branches of government in order to create a collective understanding of the operations of target companies, to establish long-term strategies vis-à-vis major investors (OECD, 2014c).
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Overseas presence: the presence of investment promotion agencies abroad is an important dimension of their reach and capacity (Gallo et al., 2010). Several Latin American investment promotion agencies have a foreign representation in ten or more countries (i.e. Colombia, Chile, Mexico). Although Uruguay XXI is expecting to open its first representation in the US and has commercial attachés in a few of Uruguay’s embassies (in Argentina, Brazil and Spain), more could be done.
Sectoral clustering is one of the activities that investment promotion agencies have strengthened in several OECD countries. In the Czech Republic, for instance, the local Investment Promotion Agency (Czechinvest) has established a cluster support programme to promote innovation and increase the competitiveness of the Czech economy through sector mapping, feasibility studies for sustainable clusters and capacity building (OECD 2014c). Other countries, such as Chile, have taken a more integrated supply-chain approach to investment promotion. For instance, in addition to seeking further investment in mining, it has also targeted fostering investment into upstream and downstream segments of the chain such as mining machinery and engineering services. This type of holistic approach could ensure greater competitiveness along the entire value chain, rather than in targeted products or sectors.
Source: OECD (2014c), “Strengthening Chile’s Investment Promotion Strategy”.
By various standards, the size of Uruguay XXI seems insufficient to comply with its responsibilities (Gallo, Jordana and Volpe, 2010).
Do more to integrate small and medium-sized enterprises
Uruguay’s current instruments for trade and investment promotion lack a proper strategy for involving small and medium enterprises. Although the focus of Uruguay’s integration policy lies in supporting high-potential sectors, the SME dimension does not seem to be embedded in the design and implementation of policy instruments for economic integration. The Special Economic Zones census, for instance, suggests that small and medium-sized firms implanted in these areas are mostly subsidiaries of larger multi-nationals, and only a small share are domestic SMEs. There are multiple factors explaining the current deficit of SME participation in the instruments described above. First, information asymmetries regarding SME activities have been pointed out, and further exchange with the tax office (DGI) is needed. Second, financing instruments for export companies are mainly targeting large firms, and less traditional instruments need to be designed to include smaller firms. Third, SMEs’ integration in global value chains is still limited to targeted sectors.
Create a more integrated skills-building strategy
The focus of the finishing schools and Talent Portal on training and linking human capital with opportunities in services sectors is crucial, but should be incorporated into a broader skills strategy for services. A stronger link with universities and the Ministry of Education and Labour could facilitate more comprehensive actions to ensure that fast-growing services segments will be able to meet their labour requirements and that graduates are well equipped to carry out the tasks expected of them. Another strategy could involve creating closer connections between universities or other technical training education institutions and services firms, in order to offer students opportunities to participate in internships and get valuable on-the-job training.
The OECD FDI Regulatory Restrictiveness Index seeks to gauge the restrictiveness of a country’s FDI rules. The index measures statutory restrictions on FDI in 60 countries, including all OECD and G20 countries (Figure 2.A1.1). It assesses the restrictiveness of a country’s FDI rules in four categories:
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the level of foreign equity ownership permitted
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the screening and approval procedures applied to inward foreign direct investment
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restrictions on key foreign personnel
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other restrictions such as on land ownership, corporate organisation (e.g. branching).
The FDI Index covers 22 sectors, including agriculture, mining, electricity, manufacturing and the main services (transport, construction, distribution, communications, real estate, financial and professional services). Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness index is a weighted average of individual sector scores.
The discriminatory nature of measures, i.e. when they apply to foreign investors only, is the central criterion for scoring a measure. However, non-discriminatory measures are also covered when they are burdensome for foreign investors. This is the case, in particular, for rules regarding nationality of key personnel/directors which may hinder the foreign investor’s control over the enterprise. The FDI Index scores overt regulatory restrictions on FDI, excluding other aspects of the regulatory framework, such as the nature of corporate governance, the extent of state ownership, and institutional or informal restrictions which may also impinge on the FDI climate. State ownership and state monopolies, to the extent they are not discriminatory towards foreigners, are not scored.
The index does not provide a full measure of a country’s investment climate as it does not score the actual implementation or enforcement of formal restrictions and does not take into account other aspects of the investment regulatory framework, such as the extent of state ownership, and other institutional and informal restrictions. Nonetheless, FDI rules are a critical determinant of a country’s attractiveness to foreign investors and using the FDI Index in combination with other indicators measuring various aspects of the FDI climate helps to assess countries’ international investment policies and to explain variations among countries in attracting FDI. The measures taken into account by the index are limited to statutory regulatory restrictions on FDI, typically listed in countries’ lists of reservations under free trade agreements or, for OECD countries, under the list of exceptions to national treatment.
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Notes
← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
← 2. Mercosur is a sub-regional bloc comprising Argentina, Brazil, Paraguay, Uruguay and Venezuela.
← 3. Captured by its participation in global value chains, taking into account both foreign content of exports and the re-export of Uruguayan content by third countries.
← 4. Decreto No. 101/006, issued 18th March 2006.
← 5. Law No. 16.906, “Interés Nacional, Promoción y Protección”.
← 6. Law No 18.786 (Ley de Participación Público-Privada) establishes the regulatory framework applicable to the Public-Private Partnership Contract regime which covers railways, roads, ports, airports, waste treatment, prisons, health centres, educational establishment, and housing.
← 7. Decree No. 230/997 (Article 5.1) Acuerdo sobre Transporte Internacional Terrestre (Article 22), as adopted in Resolución del Ministerio de Transporte y Obras Públicas del 10 de Mayo de 1991, and published in the Official Gazette of 8 July 1991.)
← 8. Decreto Nº 349/001 - Transporte Terrestre Profesional de Carga. Reglamentación. Art. 17.
← 9. Referring to domestic vessel transportation services between the Uruguay’s ports and coastal areas, including rescue operations, unloading of cargo, towing, and other vessel operations.
← 10. Decree-Law No. 14.650 of 12 May 1977.
← 11. The terms shallow and deep integration were coined in the mid-1980s to distinguish between agreements that addressed tariffs and other quantitative market access barriers from those that tackled behind-the-border barriers of a regulatory nature. While these schemes were confined to North-North agreements and specific regions in the first round of regionalism (mid-1980s to the end of the 1990s), they have now become the norm in 21st century regionalism (2001 onwards).
← 12. Estimates; misrepresentation possible for FDI flows channelled through third countries.
← 13. Based on a sample of between 1660 and 2200 treaties analysed by the OECD Secretariat.
← 14. Ibid.
← 15. See www.oecd.org/corporate/mne/oecdguidelinesformultinationalenterprises.htm.