The Risk of Trade Wars Becomes A Reality

Trump’s trade actions and its contagion effects could theoretically lead to a slow erosion of the global rules-based trading system

Names can reveal a lot. The recurring cold waves buffeting Europe are called “beast from the east” because of their origin in Siberia. It is unlikely that the trade chill arising in the US and threatening to freeze global commerce will be given a similar sobriquet. US’ controversial decision to levy import duties—25% on steel and 10% on aluminium imports—has given rise to martial terms like trade war, with many countries threatening to retaliate. But truth be told, this is one winter that is unlikely to thaw any time soon.

But all credit to US President Donald Trump for not deviating from script. Multiple risk forecasts for 2018 had predicted a ratcheting up of trade protectionism. The tariff order—purportedly for national security purposes and to save jobs in the US steel industry—fulfils these prophesies. It now becomes necessary to see how the ripples left behind have an impact on India. Below the currents lies another trade development which is taking shape slowly but with potential to affect India.

As numerous reports show, US’ steel and aluminium import levies do not harm India grievously. India’s exports of steel (raw and finished) and aluminium into the US do not exceed $2 billion: it’s less than 5% of the $42 billion exported to the US in 2016-17. The effects will be felt elsewhere: Intermediate goods that originate in the US and form part of the global supply chain will become more expensive and could slow down wheels of trade. A study by Christine McDaniel, former senior economist with the White House council of economic advisers, has shown this is the US’ trade war with itself, given that industries consuming steel to manufacture other products (such as automobiles or washing machines) employ more workers than steel mills.

There will be some indirect consequences for India as well, with many countries threatening to erect their own protectionist walls. According to a Standard and Poor’s publication Global Trade At Crossroads, the strong undertow will be felt globally: “The retaliatory spiral could lead to a breakdown in the global rules-based trading system and raise the risk of an all-out trade war, eventually hurting exporters both in the US and globally.” At risk is India’s incipient export growth momentum: exports during April-February 2017-18 were $273.73 billion, 11% higher than the corresponding period of previous year.

Many commentators were critical of India’s higher import duty rates, presented during budget 2018-19, especially since they were introduced soon after Prime Minister Narendra Modi’s speech at Davos cautioned against growing protectionism. While the new tariffs do seem to contradict India’s stand on free trade, they are broadly consistent with its World Trade Organization (WTO) commitments and are within the bound rates fixed for India.

Trump’s trade actions and its contagion effects also do not violate WTO norms but, by bringing in a national security angle, could theoretically lead to a slow erosion of the global rules-based trading system. The WTO mini ministerial scheduled in Delhi from 19 March might provide a window into the future of the multilateral trading system.

As things stand, US has often been accused of subverting the WTO system when the going gets tough. It has been holding up the appointment of judges to WTO’s appellate body, actively preventing a satisfactory closure to the food security discussions and openly supporting bilateral deals over a multilateral solution. Its unilateral approach to trade—naming and shaming countries through Special 301 or its WTO-plus intellectual property laws—are regarded as openly contemptuous of multilateral systems.

On the sidelines, another global trade development is quietly challenging its predominance. On 8 March, 11 Asia-Pacific countries signed the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP), an improved version of the earlier Trans Pacific Partnership (TPP) from which the US walked out. What makes the new agreement interesting, apart from 11 nations opting to go ahead without the US, is the relaxation of certain clauses specifically introduced by the US.

The new agreement puts on hold 20 provisions from the old draft, 11 of which relate to intellectual property rights (IPR) included at the US’ insistence. Among the changes introduced are a truncated patent protection phase for innovative medicines, or narrower data protection rules for new pharmaceutical products or biologics. Gone also are some of the onerous investor-state dispute settlement clauses.

India should be concerned about what remains on the books because some clauses could indirectly put pressure for an overhaul of its domestic policies: the chapter on state-owned enterprises is one example. By adopting these rules for trading within themselves, the 11 CPTPP members—Canada, Australia, New Zealand, Mexico, Japan, Singapore, Brunei, Malaysia, Peru, Chile and Vietnam—might demand other trade partners to follow some of these rules. They are unlikely to have one set of rules for TPP members and another set for other trade partners.

It is also quite likely, though not definite, that CPTPP will have a benign influence on other trade pacts involving India, such as the Regional Comprehensive Economic Partnership, which has many common members with CPTPP and is currently being negotiated. India will have to be prepared for this eventuality.

The above article was originally published in Mint newspaper and can also be read here

Caught Between The Dragon And The Elephant

India’s trade diplomats will need some deft footwork to manage two trade partners—China and the US

Two large beasts cramp our geostrategic mindspace. One, China’s dragon refuses to vacate our imagination. The second one stirring about in the same space is expected to further cramp room for manoeuvrability. The current US administration, much like the Republican Party’s elephant symbol, is steamrollering global multilateral negotiations. Both these heavyweights present India with a difficult balancing act.

The first inkling of India’s expected high-wire act came from Chile last week when 11 members of the floundering Trans-Pacific Partnership (TPP), all founding nations barring the US, met to revive the plurilateral agreement. An added twist was China’s presence at the meeting.

It is expected that China will step into the US’ large shoes. America’s withdrawal from the TPP was seen as a parting kiss of death since its stewardship had kept negotiations alive. Having invested time, resources and political capital—especially on beyond-the-border issues like labour standards, environment rules and intellectual property laws—many developing countries are loath to let all that work go to waste.

These developments point to the likelihood of an alternative Asia-Pacific trade agreement, perhaps without the trademark TPP markers. Importantly, China was not part of the TPP, which was seen as an instrument and extension of the US’ strategic power. While it is still early to predict how it will all shape up, hopes are the new pact will be built on the back of Latin America’s four-country Pacific Alliance and South-East Asia’s Regional Comprehensive Economic Partnership (RCEP).

India is part of the RCEP trade and investment initiative being negotiated between 16 countries—10 countries from the Association of South-East Asian Nations (Singapore, Malaysia, Thailand, Indonesia, Cambodia, Vietnam, Laos, Myanmar, Brunei and the Philippines) and six others with which the regional grouping has a free trade agreement (India, China, Japan, South Korea, Australia and New Zealand). Many of these nations are also TPP members. The RCEP provides India an opportunity to stamp its strategic and economic presence across the Asia-Pacific. It also provides India an opportunity to bring multilateralism back to centre stage.

But here’s the thing. With China assuming leadership of the RCEP and the putative Asia-Pacific alliance, the world will be keenly watching the shape of the new trade and investment agreement, especially who gets to set standards and the nature of standards finalized. The TPP’s insistence on standardized labour, environment and intellectual property right (IPR) regulations (apart from a host of other issues) conflicted with notions of sovereignty.

The question now is: Will China impose similar standards?

While China has publicly endorsed World Trade Organization (WTO)-compatible trade agreements, will it cherrypick rules? India and China share an uneasy geostrategic relationship, especially in trade. India’s three-tiered tariff proposal for the RCEP has already met with disapproval and India’s push for inclusion of trade in services faces multiple headwinds.

In the other corner, the US’ browbeating at the recently concluded G20 meeting in Germany provides a glimpse of forthcoming challenges to the existing world trade order and globalization. During the drafting of the final communiqué, the US bullied all members to drop pro forma references to free trade and protectionism. Not surprisingly, all members complied, though they did grumble in private.

US President Donald Trump’s administration has repeatedly emphasized that it prefers bilateral agreements over multilateral compacts. The 2017 Trade Policy Agenda makes it official: “The overarching purpose of our trade policy…will be to expand trade in a way that is freer and fairer for all Americans…these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations—and by renegotiating and revising trade agreements when our goals are not being met.”

India does not have a free trade agreement with the US and negotiations over a bilateral investment treaty between the two countries is stuck over, among other things, the investor-state dispute system. IPR laws are the other thorn in the relationship: India claims its IPR regime is compliant with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights while the US insists on a WTO-plus framework. This has prompted the US to unilaterally include India in its “Priority Watch List” under Special 301.

The trade agenda outlines the future course of the bilateral: “Although existing Indian trade and regulatory policies have inhibited an even more robust trade and investment relationship, India’s economic growth and development could support significantly more US exports…In 2017, the United States will press India to make meaningful progress…on intellectual property rights, promoting investment in manufacturing, agriculture, and trade in goods and services.”

This, in short, is the dilemma. India’s geostrategic ambitions include RCEP membership but it will have to contend with China’s growing heft and increasing pressures to further reduce tariffs. India’s trade deficit with China is growing every year and shows no signs of reversing. On the other hand, India’s support for multilateralism will have to contend with the US’ insistence on bilateral treaties and a re-examination of all existing trade relations. Ironically, India enjoys a trade surplus with the US—in 2015, it touched $30 billion. India’s trade diplomats will need some deft footwork to manage these two trade partners and contradictions.

The above article was published in Mint newspaper and can also be read here 

TPP & ISDS: New Tests For India

The U.S.-driven Trans Pacific Partnership agreement between 12 countries, which is aiming to become the new standard of world trade, impacts domestic systems globally. For India, it will skew investment and intellectual property rights, and especially the debate over the Investor State Dispute System which allows companies to challenge sovereign rights and public policy.

The closely-guarded Trans Pacific Partnership (TPP) agreement, which will up-end existing global trade standards, is now public[1]. The 30 chapters comprising 6,000 pages, will undoubtedly influence all future world trade talks — bilateral, plurilateral and multilateral. TPP aspires to become the “gold standard” for global trade – ‘WTO-plus’ standards. The clock has started ticking for the agreement, as legislators of the 12 signatory countries will be under pressure to ratify the agreement before President Barak Obama demits office a year from now.

This has multiple implications for India. In addition to potentially limiting India’s concessions to public sector units, is the issue of intellectual and property rights (IPR) contained with a controversial chapter on bilateral investment treaties (BITS) and the treatment of “investor-state dispute system” (ISDS) mechanism. Under this, foreign investors can sue sovereign countries in a third country through international arbitration.

ISDS was already a contentious issue, with many governments reviewing their ISDS mechanisms over the years in reaction to a growing trend of MNCs filing arbitration cases against host countries, seeking compensation for loss of potential revenue from changes inpublic policy. One of the most quoted cases is that of cigarette manufacturer Philip Morris Asia Ltd. finding the Australian government’s directive on health warnings prejudicial to its future revenues and seeking redressal in overseas arbitration. The arbitration of 2011 is still pending. India has faced its fair share[2] of arbitration cases on similar grounds, involving foreign companies such as — Cairn India, Vodafone, Bechtel and GE Structured Finance BNP Paribas, Deutsche Telekom.

Governments view such arbitration with skepticism. Many claim the system is being gamed, given the opacity of arbitration processes, its non-appellant provisions, its appointment of mostly private sector lawyers as arbitrators (thereby inducing an inherent bias in the judicial process) and its predilection for granting awards to private companies over governments[3].

Many experts also feel that ISDS mechanism creates economic distortions by reducing policy space for government and for the protection offered to investors. Prominent economists like Nobel laureate Joseph Stiglitz, oppose[4] the concept of ISDS as being unfair[5].

The public backlash probably has had a sobering effect. The preamble[6] to the TPP agreement acknowledges government’s rights: “Recognise their inherent right to regulate and resolve to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals.”

But this self-correcting move seems only partial when viewed against the Investment chapter[7], which lists conditions to be followed by TPP signatory countries when soliciting foreign investment. Breach of these can result in ISDS being invoked. These are: offering foreign investors treatment equivalent to national companies (including state-owned enterprises), treatment equivalent to what’s accorded to companies from most favoured nations, minimum standard of treatment (which includes “fair and equitable treatment” and “full protection and security”), prohibiting expropriation or nationalisation (and, if in an extreme case it becomes necessary, then ‘fair value of compensation’ has to be paid which has been left undefined), free transfer of capital, no performance standards (such as minimum export commitment or minimum local content requirement), no restriction on nationality of senior staff or directors.

Other pernicious additions include a stretched definition of investment to include even IPR. This has opened up a rabbit hole of hidden clauses and tripwires. Contradictions abound between the chapters on Investment and Intellectual Property. For example, Article 9.7.5 exempts issuance of compulsory licenses (under the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, host countries can permit a non-patent holder to produce a patented drug) from eexpropriation provisions. But it comes with an escape hatch: issuance of such license must be consistent with TRIPS or with the TPP’s chapter on Intellectual Property. Another insidious addition is that ISDS can also be initiated in cases of “indirect expropriation”, or if the corporation deems that a specific government action “interferes with distinct, reasonable investment-backed expectations…”[8] But here’s the catch: determining what indirect expropriation is will be decided on a case-by-case basis.

This open-ended definition gives arbitration tribunals a free hand to interpret TPP provisions. For example, any regulatory action that could, hypothetically, diminish the value of property/investment, without the government taking ownership of the property[9], could also be deemed to be “indirect”expropriation and invite action under ISDS.

These clauses will undoubtedly affect India’s quest for increased foreign direct investment as part of Make in India. India’s home-grown BITs version — called Bilateral Investment Promotion and Protection Agreement (BIPPA) — has been revised to allow foreign investors to opt for international arbitration only after exhausting all domestic legal options. The draft model agreement is awaiting finalisation. India’s draft BIT and its ISDS treatment is now being pulled in different directions by varied influences — TPP, the work-in-progress Trans-Atlantic Trade and Investment Partnership (TTIP) agreement being discussed between USA and European Union (EU) and the India-EU bilateral investment trade and investment agreement under negotiation. Contradictions are aplenty: While the EU has rejected[10] inclusion of ISDS in TTIP with the U.S., in its negotiations with India in the past, it has insisted on including ISDS[11]. In addition, India’s draft model text drops any reference to most-favoured nation treatment, while TPP includes it.

Clearly, internal and external pressure will be brought on the Indian government to amend its draft model agreement. Some U.S.-based think tanks[12] and administration-friendly publications[13] have already started the drumroll. As India’s Ministry of Finance prepares to finalise its draft agreement, two issues — moral and transactional — must be kept in mind.

The moral issue first. Allowing foreign investors to bypass local legal processes through ISDS creates a discriminatory structure. A transactional solution exists, one borrowed from the securities markets. Many companies offer different kinds of shares and each category is endowed with differentiated rights. For instance, preference shares are entitled to a fixed dividend every year, irrespective of the company’s performance, but forego the right to vote. Therefore, foreign companies wishing to appropriate special privileges over other investors should be willing to forego some rights.

As a test case, this should form the basis of the next round of BIT talks between India and the U.S.

References

[1] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership, 5 November 2015, <http://tpp.mfat.govt.nz/text#>

[2] United Nations Conference for Trade and Development, Database of Investor-State Dispute Settlement (ISDS) (reduced version); <http://unctad.org/en/Pages/DIAE/ISDS.aspx>

[3] Singhal, Rajrishi, ‘India-U.S. BIT: not a done deal yet’, Gateway House, 23 January, 2015; <http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/>

[4] Stiglitz, Joseph, ‘South Africa Breaks Out’, Project Syndicate, 5 November, 2015 <http://www.project-syndicate.org/commentary/joseph-e–stiglitz-on-the-dangers-of-bilateral-investment-agreements>

[5] Lise Johnson, Lisa Sachs and Jeffrey Sachs, Investor State Dispute Settlement, Public Interest & U.S. Domestic Law, CCSI Policy Paper, May 2015, <http://ccsi.columbia.edu/files/2015/05/Investor-State-Dispute-Settlement-Public-Interest-and-U.S.-Domestic-Law-FINAL-May-19-8.pdf

[6] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Preamble, 5 November 2015,http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/TPP-text/0.%20Preamble.pdf

[7] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Investment, 5 November 2015, <http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/TPP-text/9.%20Investment%20Chapter.pdf>

[8] Trans Pacific Partnership, Annex 9-B, Expropriation

[9] Intellectual Property Watch, ‘How The Leaked TPP ISDS Chapter Threatens Intellectual Property Limitations and Exceptions’, 26 March, 2015 <http://www.ip-watch.org/2015/03/26/how-the-leaked-tpp-isds-chapter-threatens-intellectual-property-limitations-and-exceptions/>

[10] Robert, Aline; translated from French by Samuel White; ‘European Parliament Backs TTIP, Rejects ISDS’, Euractiv, 9 July, 2015, <http://www.euractiv.com/sections/global-europe/european-parliament-backs-ttip-rejects-isds-316142>

[11] Mishra, Asit Ranjan, India Rejects Clause on Litigation, Live Mint, 4 July, 2011, <http://www.livemint.com/Home-Page/T8uMUbH7Psx9sJawlwtzvN/India-rejects-clause-on-litigation.html>

[12] Rossow, Richard M, ‘Going To Bat For The BIT’ U.S.-India Insight, Volume 5, Issue 9, September 2015, <http://csis.org/files/publication/150910_USIndiaInsight_September_Clean.pdf>

[13] Worstall, Tim, ‘Cairn Energy’s Indian Tax Dispute Shows The Value Of ISDS Provisions In Trade Treaties, Forbes, June 28, 2015, <http://www.forbes.com/sites/timworstall/2015/06/28/cairn-energys-indian-tax-dispute-shows-the-value-of-isds-provisions-in-trade-treaties/>

Courtesy: Gateway House

Byte But No BIT

Behind the hullabaloo and grand optics that will accompany PM Narendra Modi’s visit to the U.S. will be laser-focused discussions on enhancing the strategic trade and investment relationship

The agenda for Prime Minister Narendra Modi’s 5-day visit to the U.S. starting September 24, much like his previous trip, is brimming with activity. Apart from attending the United Nations General Assembly, he is travelling to San Francisco to burnish his Digital India credentials, then returning to New York to meet President Barack Obama for a bilateral dialogue and closing by catching up with key U.S. businessmen and CEOs for a closed-door conversation.

But behind Modi’s headline-grabbing California spectacle are other Indian ministers and businessmen who will be rolling up their sleeves and getting down to business in Washington DC.

High on the list is the first meeting of the newly-crafted India-USA Strategic and Commercial Dialogue (S&CD) on September 22, which was upgraded from India-USA Strategic Dialogue this January during Obama’s Republic Day visit[i]. The moniker change reflects the strategic importance of trade, economic and investment to the bilateral ties. The roll-call of the meeting attendees also reveals what will be discussed and what’s off-the-table.

On the Indian end of the table will be External Affairs Minister Sushma Swaraj and Commerce and Industry Minister Nirmala Sitharaman, with Secretary of State John Kerry and Secretary of Commerce Penny Pritzker on the U.S. side. On September 21, a day before the Dialogue, Vice President Joe Biden, Kerry and Swaraj will address the U.S.-India Business Chamber’s anniversary celebrations. Other ministers, including energy minister Piyush Goyal, will be present and when the Dialogue commences the next day, Goyal will meet his U.S. counterpart, Ernest Moniz, for the Sixth India-U.S. Energy Partnership Summit.

U.S. Vice President Joe Biden will be present at the bilateral talks between Modi and Obama. If Biden does indeed make a bid for the presidency, as has been widely rumoured, his involvement becomes significant.

So far, one thing is clear from the agenda: the Bilateral Investment Treaty (BIT) is not in the picture. That inference arises from Finance Minister Arun Jaitley’s absence from the proceedings. The hypothesis becomes even more compelling because the finance ministry has crafted India’s model draft agreement and placed it in the public domain for stakeholder inputs. There are numerous sticking points between India and the U.S. over the draft that will take time to discuss, debate and disentangle. Among them are the investor-state dispute system, intellectual property rights (IPR) and expropriation. Given that the Obama presidency is fast entering the “lame-duck” zone, the BIT might have been kept out because it is still a work-in-progress.

The Dialogue will focus on four areas, according to undersecretary of commerce for international trade, Stefan M Selig’s briefing to reporters September 16 at the American Chamber of Commerce in New Delhi in August 2015[ii]:

Building tomorrow’s smart cities in India and the related infrastructure: The U.S. will participate in “smartening up” three cities — Ajmer, Allahabad and Vizag — and the talks will identify U.S. companies that can deliver on the promise.

Participating in strengthening India’s business climate to the benefit of both Indian and American businesses: This is an euphemism for tackling all the current pain-points in the relationship, especially for the U.S.: IPR, contract laws, the Indian legal system. Strangely, pre-Dialogue chatter seems to centre only on the business climate in India, without any mention of the non-tariff barriers and curbs on movement of skilled people from India to the U.S.

Harmonizing product standards to increase trade and further deepen our industries’ integration into global supply chains: Creating and developing common standards – safety, environmental or labour – in manufacturing that will help integrate India’s trade outreach with both the Asia Pacific Economic Community (APEC) and the Trans Pacific Partnership (TPP). India is not a member of either grouping. Included will also be trade in agricultural goods and the future of the Doha Round at the upcoming WTO ministerial at Nairobi.

Developing best practices around innovation and entrepreneurship: Among the many issues on the table, renewable energy will likely find mention.

What’s different this time is that the talks could depart from the transactional nature of previous rounds and instead identify credible milestones, especially ones that help stretch the annual bilateral trade volume from $100 billion currently to $500 billion. Beyond that, both sides will look to elevate trade into a strategic and diplomatic tool, one that aligns Modi’s “Look East, Act East” policy with Obama’s Asia Rebalance strategy. The nuts and bolts of this tool are likely to be identified on September 22.

Another clue to the future direction of the bilateral and the Dialogue is the equal, if not larger, role that the private sector is expected to play over the public sector in strengthening mutual ties. That’s why the USIBC event has been scheduled a day prior to the Dialogue, so U.S. corporations can voice concerns that can be discussed at the Dialogue the next day.

A disconcerting element: apart from the fanfare around Modi’s public appearances, there hasn’t been much forthcoming from the Indian delegation, the exception being a recent and bare-bones press release from the Ministry of External Affairs[iii]. For the moment then, policy-watchers we will have to remain content with Modi’s grand shows.

ENDNOTES

[i] Department of Commerce, Statement from U.S. Commerce Secretary Penny Pritzker on U.S.-India Strategic and Commercial Dialogue; January 26, 2015; <https://www.commerce.gov/news/press-releases/2015/01/statement-us-commerce-secretary-penny-pritzker-us-india-strategic-and>

[ii] International Trade Administration, Speech (as prepared for delivery) by Under Secretary of Commerce for International Trade, Stefan M Selig; August 11, 2015; New Delhi; <http://www.trade.gov/press/speeches/2015/selig-081115.asp>

[iii] Ministry of External Affairs, Press Releases, September 18, 2015 <http://www.mea.gov.in/press-releases.htm?dtl/25817/First_Ministerial_of_the_IndiaUS_Strategic_and_Commercial_Dialogue>

Originally published in Gateway House (http://goo.gl/13YfW4)

India-U.S. BIT: Not A Done Deal Yet

India is revising the model draft agreement of its existing bilateral investment treaties. Some of the new clauses are unlikely to be accepted by either U.S. negotiators or U.S. corporations without substantial dilution

U.S. President Barack Obama’s second visit to India has resurrected hopes that the two countries will revive talks on the dormant but in-progress Bilateral Investment Treaty (BIT). A BIT is being eagerly sought by both sides—from the U.S., to provide comfort to American companies that they will not be treated unfairly, and from India in the belief that it will help increase foreign investment inflows into India.

But negotiating the many tripwires of the BIT will take time and effort. It may therefore be wise to rein in the optimism that is usually generated by high-profile state visits and the associated optics. More so because every significant India-U.S. bilateral visit in recent times—by Prime Minister Narendra Modi to Washington DC in September 2014, by U.S. Secretary of State John Kerry to India in June 2014 and January 2015, and by U.S. Trade representative Michael Froman in November 2014—has rekindled expectations about the abandoned BIT.

Talks on a BIT between the two countries have been on hold since February 2014. [1] Preparations to restart the conversation resumed in the backrooms soon after Modi’s swearing-in on 26 May 2014. Kerry discussed the pending BIT agreement with Modi on the sidelines of the Vibrant Gujarat Summit earlier in January. Diane Farrell, acting president of the U.S. Indian Business Council, confirmed this in a press statement. [2]

However, many hurdles will have to be cleared before any real progress can be made on the BIT. One of the obstacles is that India’s own BIT regime—the Bilateral Investment Promotion and Protection Agreement (BIPPA)—is in cold storage. India is currently reviewing the draft of the existing model agreement and is yet to produce a blueprint that is acceptable to all stakeholders, including different ministries (such as Finance, Commerce, Law and External Affairs). India has signed 83 BIPPAs since 1994 and enforced 72 of these agreements.

The existing text has been under review since early 2013 because many international companies have initiated overseas arbitration against the Indian government—17 new arbitration proceedings over issues as varied as Supreme Court’s cancellation of 2G licences and retrospective taxation notices were filed in the past two years alone. The companies which have sued the Indian government include Deutsche Telecom, Vodafone, and White Industries, under India’s BIPPAs with Germany, The Netherlands, and Australia, respectively.

Another speed-breaker is conflict within the government. The Department of Industrial Policy and Promotion (DIPP, in the Ministry of Commerce and Industry) is opposed to BIPPAs in general [3, 4]. The DIPP is responsible for framing India’s foreign direct investment (FDI) strategy, as well as promoting, approving, and facilitating FDI. The DIPP believes that a conducive economic and legal environment is sufficient to attract foreign investments. It also believes that the existing BIPPAs are likely to result in increased lawsuits and has suggested that the sunset clause in these agreements be invoked to annul them. On the other hand, India’s finance and external affairs ministries are both in favour of an overhaul of the existing template, which will then have to be applied to all existing 83 agreements.

The conflict also arises from the government’s duality in matters of foreign investment—while the DIPP is responsible for FDI, the Ministry of Finance is responsible for administering the BIPPAs.

Talks could face headwinds due to certain new clauses in the draft model agreement. There is a proposal to dilute the “investor-state dispute settlement” (ISDS) system. Unlike the existing contract, henceforth foreign investors will not be able to take the Indian government to international arbitration unless they have first exhausted all legal and administrative options within India.

Clearly, this is a reaction to the spate of offshore arbitration proceedings. It is likely that this defensive move was inspired by external developments. Brazil has eschewed ISDS and South Africa is likely to follow. Australia is under pressure from its civil society to drop ISDS from all its agreements (especially the one with U.S.) and not from a select few, as is the case currently.[5]

The entire ecosystem of perverse incentives built around the international arbitration system could have also compelled the Indian government to dilute ISDS—armies of highly-paid, ambulance-chasing lawyers who have created an entire business model out of arbitrations and arbitrators who keep dragging cases on because they get paid handsomely by the hour—all operating in a highly secretive system. [6] The reworked BIPPA draft tries to ensure a transparent arbitration system by stipulating certain conditions.

But a BIT bereft of ISDS is bound to be opposed by American negotiators and potential U.S. investors. The popular narrative has portrayed the Indian judicial system as slow and inefficient. Indian authorities, on the other hand, are wary of biases in the overseas arbitration tribunals. Achieving a consensus between India and the U.S. on this count is going to be tricky, but India seems to have global precedent set by Brazil, Australia and South Africa in its favour.

A deal-breaker could be intellectual property rights (IPR), a vexed issue on both sides. The U.S.’s private sector has been persistently lobbying with its government for extracting concessions from India, with the National Association of Manufacturers even pushing the U.S. Trade Representative to label India as a “priority foreign country”, an epithet reserved for the worst IPR offenders.

India’s counter-argument has been that its IPR regime is compliant with the World Trade Organisation’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) multilateral agreement, and it considers the U.S.’s Special 301 report—an annual publication from the United States Trade Representative (USTR) identifying trade barriers to U.S. companies and countries which do not provide “adequate and effective” protection of intellectual property rights—unilateral.

Several other prickly issues could sabotage talks—a proposal to drop the most favoured nation status from the agreement, re-phrased expropriation clauses, and re-worded text that ensures that the BIT/BIPPA does not end up favouring foreign investors while discomfiting domestic ones.

Negotiations are all about give-and-take, ceding some strategic space while appropriating critical concessions. This is, admittedly, a time-consuming process. A lot will, however, depend on American corporations and their attitude to doing business in one of the world’s biggest and fastest growing markets in the world.

REFERENCES

[1] Parashar, Sachin, ‘India, U.S. Agree to Restart Talks on Bilateral Investment Treaty’, Times of India; 12 January 2015, <http://timesofindia.indiatimes.com/india/India-US-agree-to-restart-talks-on-bilateral-investment-treaty/articleshow/45846021.cms>

[2] US India Business Council, USIBC Members Brief John Kerry, Secretary of State, and Catherine Novelli, Under Secretary of State for Economic Growth, Energy, and the Environment at Vibrant Gujarat 2015, 13 January 2015, <http://www.usibc.com/press-release/us-india-business-council%E2%80%99s-delegation-vibrant-gujarat-hosts-us-secretary-state-john>

[3] Sidhartha, ‘Finance ministry to move Cabinet for clearing new BIPA text’, Times of India, 24 June 2014, <http://timesofindia.indiatimes.com/business/india-business/Finance-ministry-to-move-Cabinet-for-clearing-new-BIPA-text/articleshow/37108910.cms>

[4] Press Trust of India, ‘Finance & Commerce Ministry to discuss draft BIPA model tomorrow’, Business Standard, 13 August 2014, <http://www.business-standard.com/article/pti-stories/fin-min-com-ind-min-to-discuss-draft-bipa-model-tomorrow-114081300432_1.html>

[5] Chan, Gabrielle, ‘Bill to ban investor-state dispute settlements garners support’,The Guardian, 14 April 2014, <http://www.theguardian.com/world/2014/apr/14/bill-to-ban-investor-state-dispute-settlements-garners-support>

[6] The Economist, The arbitration game, 11 October 2014, <http://www.economist.com/news/finance-and-economics/21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration>

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