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

Rising Trade Walls and Shrinking Standards

Country after country, especially free trade evangelists, are erecting walls to stop the flow of professionals and human capital

Indian professionals are finding doors across the world shutting, shrinking opportunities to ply their trade. Weaned on a diet of free markets and globalization, they are finding that promise now ringing hollow. Country after country, especially free trade evangelists, are erecting walls to stop the flow of professionals and human capital.

US President Donald Trump carried out his campaign promise on 18 April by signing an executive order overhauling the H-1B visa regime, a programme allowing foreign professionals to work in the US for six years. Indian infotech companies such as Infosys, Wipro and Tata Consultancy Services (TCS) are among the biggest beneficiaries of this programme.

In less than 24 hours, Australia followed suit by revamping the immigration law which allows entry of professionals, titled “Subclass 457 visa”. Australian Prime Minister Malcolm Turnbull’s abrupt about-turn was unexpected. He was in India less than a week earlier, waxing eloquent about India-Australia ties and dispensing homilies about trade between the nations. He even signed off on a joint declaration with Prime Minister Narendra Modi which, among other things, welcomed “…progress in the flourishing knowledge partnership…building on the strong links in higher education, skills development and science, technology and innovation”. The icing was a memorandum of understanding signed with TCS for opening a new innovation lab in Australia, the fate of which could now be uncertain.

What could have happened in less than a week to force such a transformation? Could it be a follow-up to the now-infamous Trump-Turnbull telephone call? Turnbull’s measure, ostensibly designed to undermine rising nationalist right-wing forces at home, has now jeopardized progress on the Comprehensive Economic Cooperation Agreement (Ceca) being negotiated between India and Australia. A Ceca is wider in scope than a free-trade agreement—apart from trade in goods and services, a comprehensive treaty also includes issues like investment, government procurement and competition policy.

Three other prosperous nations have erected barriers of varying degrees—New Zealand, Singapore and the UK. New Zealand’s new work visa rules came a day after neighbour Australia’s. The UK has been tightening its visa rules for some time now. UK Prime Minister Theresa May recently further tightened visa rules for professionals by mandating minimum salary thresholds and language requirements.

India has a Ceca with Singapore which provides for trade in services between the two nations; to avoid breaching the agreement, Singapore has not denied work permits outright but has kept them in extended limbo.

This pandemic of border and behind-the-border barriers to services trade has compelled even World Trade Organization (WTO) director general Roberto Azevêdo to undergird his 2017 cheery trade prognosis with a caveat: “At the domestic level, policies are needed to help support the workers of today and train the workers of tomorrow. Closing the borders to trade would only worsen the situation—it would not bring the jobs back, it would make more jobs disappear.” WTO estimates world trade in 2017 will grow between 1.8-3.6%, but might settle at around 2.4% if world gross domestic product (GDP) growth sticks to projections. WTO also recognizes existence of multiple downside risks, including the sort of knee-jerk protectionist measures implemented by the US and Australia.

There could be a charitable explanation for why these countries are banding together against professional Indian talent. Australia, New Zealand and Singapore may have responded reflexively to the US and UK’s restrictive immigration laws; apprehensive of a spillover from these countries, the three countries might have responded impulsively and hastily.

The more plausible justification is that these moves—particularly by Australia and the US—are perhaps designed to blunt India’s attempts to introduce trade facilitation in services (TFS) agreement, somewhat identical to the trade facilitation agreement (TFA) in goods which came into force in February. According to India’s concept note—introduced in the WTO on 27 September 2016—like the TFA is intended to “…expedite the movement, release and clearance of goods as well as cooperation on customs compliance issues…”, the TFS can result in “…reduction of transaction costs associated with unnecessary regulatory and administrative burden on trade in services”.

India followed up the concept note with an “element paper” in November 2016 and a draft legal text in February 2017. The TFS is also now pitted directly against TiSA, or Trade in Services Agreement, currently being negotiated outside the WTO by 23 members comprising mostly developed countries. It is aiming for an ambitious overhaul of the General Agreement on Trade in Services (GATS), which it hopes will attract more members and eventually be ratified in the WTO. Both India and China (as well as many other emerging nations) are not members. It is, therefore, safe to expect that trade politics and diplomacy will probably focus a lot on services trade in the immediate future, especially at the WTO’s December ministerial in Buenos Aires.

Coincidentally, TiSA was initiated by the US and Australia. Which brings the discussion full circle: Is Australia’s long-term destiny to remain cat’s paw of the US? Its desire to also be identified as an Asia-Pacific community member will call for some tough balancing act then.

The above article was 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 

Anatomy of the unspoken word

Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development

Ratan Tata (left) with Cyrus Mistry. File photo courtesy PTI.

This year’s Nobel for economics—on contract theory—continues the Sveriges Riksbank’s quest to reward investigations into information asymmetry, especially its role in contracts, markets and incentives. Theory suggests that asymmetry of information leads to imperfect markets, including adverse selection and moral hazard. While perfect markets are chimeras, restricted to theoretical constructs, communication and information flows play a definite role in reducing imperfections.

Two recent events highlight how lack of communication, or not saying the right word at the right time, can lead to sub-optimal consequences, especially for minority shareholders.

The first is the corporate putsch playing out on prime time. The sudden, unseemly ouster of Cyrus Mistry as Tata Sons chairman, and the subsequent two-way flow of accusations and assertions between him and his predecessor Ratan Tata, highlight how things can go terribly wrong when leaders do not communicate. In fact, the hazy chain of events suggests that breakdown in communications lines led to this abrupt, indecorous turn of events. As a result, the share prices of most listed Tata companies have suffered.

The first thing that strikes any observer is the perception gap between what Ratan Tata wanted from his successor and what Mistry, in turn, understood and delivered. While conversations between the two during the passing of the baton remain private, it is abundantly clear that either Mistry misunderstood his covenant or Ratan Tata was not explicit in describing the role. Ironically, and rather late in the day, both are indulging in excess communication, mostly through the media.

Consequently, there is soiled laundry on display. Leaving the allegations aside, there is sufficient evidence to suggest that Ratan Tata’s and Mistry’s paths to corporate excellence diverged sharply and there were no attempts to make them meet. Mistry also expresses incredulity at the board “replacing” him for non-performance, especially after directors had lauded his performance. He also claims that while he was promised a “free hand”, some directors would leave in the middle of board meetings to seek Ratan Tata’s guidance.

The other side brushes these contentions aside; but it does maintain that Mistry has been on the Tata Sons board for a decade and was, therefore, party to some of the business decisions that he is now questioning.

All these point to a much larger, and grievous, communication gap. Neither Ratan Tata nor Mistry thought it fit to publicly discuss the controversial issues before they blew out of proportion. As a holding company of numerous listed companies, the Tata Sons board should have ensured adequate discussion and disclosure. For example, instead of lavishing Ratan Tata with public commendations, Mistry should have warned shareholders of the impending write-offs that he so direly predicts now.

The second incident of crossed wires is a direct outcome of the government’s multilateral trade strategy. A recent news story, citing unidentified people, said that the Indian negotiating team at the World Trade Organization’s (WTO) recent Oslo mini-ministerial had decided to oppose attempts by rich countries to introduce the promotion of global value chains (GVCs).

Indian negotiators fear that developed nations will sneak in issues like intellectual property rights, investment safeguards, competition laws under the garb of discussing GVCs. India, and a host of other developing countries, want WTO to first settle the pending Doha agenda before taking up new issues. Unfortunately, the Indian government’s ensuing communiqué about the meeting does not reveal whether GVCs came up for discussion at all. And even if they did, how the Indian side reacted.

Conversely, the whole episode might end up muddying the government’s policy stand on GVCs. India has been a proponent of GVCs, especially increasing the share of small- and medium-sized enterprises in GVCs. The government views GVCs as a device to increase domestic and foreign investment in manufacturing. The commerce ministry’s annual report for 2013-14 spells it out: “The business and trade segments of e-commerce and global value chains provide an opportunity to compete at par with other world economies and expanding our technology base.” But in the absence of proper communication, there is a lingering doubt over the government’s stand: Does it want GVCs or is it opposing their entry? Lack of clarity in economic policy hurts everybody because it affects investment decisions and stifles employment generation.

A similar lack of communication besmirched India’s reputation when WTO members met in July 2014 to vote on the trade facilitation agreement. India was the only country to oppose the deal and was subjected to global condemnation, despite having valid reasons for blocking the agreement. What made it doubly intriguing was the fact that India was principally on board with the idea and had already implemented many of the measures listed under the agreement. The problem: India did not communicate adequately with WTO fellow travellers or explain its stand lucidly. Western media, taking the cue from political leaders, labelled India a game-spoiler. Outcome: Global decision makers still look at India askance.

Both examples lead to one indisputable conclusion: Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development.

This article originally appeared in Mint on November 2, 2016. It can also be read here.

A new trajectory for India-Africa ties

India now sees Africa as a promising market for Indian goods, services, and investments. This is evident in the government’s recent concerted focus on the India-Africa relationship—high profile visits by top leaders to African countries, a recasting of India’s development diplomacy, and an attempt to match action to past promises

India’s relationship with Africa has been through an unprecedented intensification in June 2016. In the first week of the month, Vice President Hamid Ansari visited Tunisia and Morocco. In the second week, President Pranab Mukherjee embarked on a tour of western and southern Africa, covering Ghana, Cote d’Ivoire, and Namibia. And in July, Prime Minister Narendra Modi is scheduled to visit Kenya, Mozambique, Tanzania, and South Africa.

The present renewed outreach is also unabashedly about business, and a good example of geo-politics combining with geo-economics. India views Africa as a promising market for Indian goods, services, and investments. So far though, any follow-up on promises had remained anaemic. Now, Indian leaders are seeking out fresh investment opportunities for Indian public and private sector companies in different African countries.

The vice president’s visits to Morocco and Tunisia are crucial because India imports phosphate—a critical raw material for fertiliser production—from these countries. Ansari also inaugurated an India-Morocco Chamber of Commerce during his trip to Rabat.

The president’s three-country tour provided an opportunity to further India’s business interests. At the India-Ghana Business Forum, Mukherjee said: “…the Indian Government would be ready to work with you in key sectors and areas of common interest and encourage Indian private as well as public entrepreneurs to bring more investments into Ghana.”[1] India’s cumulative investments in Ghana are over $1 billion and two-way trade during 2015-16 amounted to $3 billion.[2]

In Cote d’Ivoire, Mukherjee said: “…your country is blessed with fertile soil and abundant agricultural and mineral resources. Our public and private sectors are keen to join you in exploring these resources efficiently and in setting up agro-based industries.”[3]

At the same time, India’s development diplomacy for the continent has been through a strategic shift. Exim Bank, for example, is now likely to focus more on service exports, rather than compete with China for infrastructure projects in Africa.

The bank is looking to disburse close to Rs. 10,000 crores in Africa over the next three years as both commercial and concessional credit.[4] Service exports aim to build on India’s traditional strengths in Africa and will include healthcare, education, and information technology services. Exim inaugurated an office in Cote d’Ivoire during Mukherjee’s visit. The office is expected to widen the bank’s footprint in West Africa.

Exim Bank is also looking to sharpen its focus on another area of India’s traditional exports to Africa: project exports. It has requested the Reserve Bank of India to ease regulatory and compliance guidelines regarding minimum equity capital, leverage (the multiples—3X, 4X or 8X—of share capital that a company can borrow) and the maximum that the bank can lend to a single borrower.[5] These will be necessary if the bank is to make project exports one of its thrust areas.

These actions are in line with promises made during the Third India-Africa Forum Summit (IAFS) in October 2015. The first two editions of the summit—in 2008 and 2011—made numerous pledges but fell short on follow-up and delivery. Both sides were responsible for the indifferent implementation.

The last IAFS, held in October 2015, saw a strategic shift in focus—apart from the usual rhetoric, there was a better alignment of India’s global ambitions (both political and geo-economic) and traditional strengths.[6] [7] Importantly, the third IAFS created a formal monitoring mechanism to regularly review the progress of various projects at different stages of completion.

The summit aimed high—it also sought to create a global alliance of solar-rich countries.[8] Such an alliance will help create goodwill for India among Africa countries, and generate solidarity through collective bargaining when accessing IPR-protected technology from rich countries.

It’s starting with this summit that Modi has been building bridges with different African countries and soliciting support for a host of multilateral initiatives. These include backing for India’s membership of the UN Security Council along with a united front of emerging and poor economies at the World Trade Organisation.

The high-octane official Africa engagements will also help assuage concerns regarding India after recent allegedly racist incidents involving African nationals living in the country. But it is now up to India to ensure that its belated recognition of the critical role Africa can play in our strategic calculus, as well as in India’s trade and investment expansion plans, is not just a temporary spurt.

This feature was exclusively written for Gateway House: Indian Council on Global Relations. You can also read it here.

References
[1] Mukherjee, Pranab, ‘Address at the India-Ghana Business Forum Event’; Speech delivered at Accra, 13 June 2016, <http://presidentofindia.nic.in/speeches-detail.htm?531>

[2] Press Release, Ministry of External Affairs, Government of India, Visit of President to Ghana (June 12-14, 2016), 6 June 2016, <http://www.mea.gov.in/press-releases.htm?dtl/26872/Visit_of_President_to_Ghana_June_1214_2016>

[3] Mukherjee, Pranab, ‘President of India; Speech in response to welcome speech by President of Cote d’Ivoire’ Speech delivered in Abidjan, Ivory Coast, 14 June 2016, <http://presidentofindia.nic.in/speeches-detail.htm?534>

[4] S, Arun, ‘Exim Bank’s African credit to boost service exports’, The Hindu, 12 June, 2016, <http://www.thehindu.com/business/Economy/exim-banks-african-credit-to-boost-services-exports/article8721312.ece>

[5] Lele, Abhijit, ‘Commerce ministry, RBI to review regulatory norms for Exim Bank’Business Standard, 24 May 2016, <http://www.business-standard.com/article/economy-policy/commerce-ministry-rbi-to-review-regulatory-norms-for-exim-bank-116052400042_1.html>

[6] Documents, Third India-Africa Forum Summit, India Africa Framework for Strategic Cooperation, 29 October 2015, <http://www.iafs.in/documents-detail.php?archive_id=323>

[7] Documents, Third India-Africa Forum Summit, Delhi Declaration 2015, 29 October 2015, <http://www.iafs.in/documents-detail.php?archive_id=322>

[8] Speeches, Third India-Africa Forum Summit, Speech by Prime Minister Shri Narendra Modi at the Inaugural Ceremony, 29 October 2015, <http://www.iafs.in/speeches-detail.php?speeches_id=276>

COP21 Battle: from Paris to Nairobi

December 13 will bring curtains down on climate change talks at Paris, but the sharp ideological divides between rich countries and developing nations will continue to play out at World Trade Organisation’s 10th Ministerial Conference in Nairobi, beginning on December 15

Even as the Paris climate talks, or COP21, is likely to yield an agreement, albeit a weak one, governments are readying themselves to continue the battle in Nairobi, where they will converge again from 15-18 December for the World Trade Organisation’s (WTO) 10th Ministerial Conference (MC10). And, though the faces around the table will change, the positions adopted by various countries at Paris will only harden.

Take the stand that Western countries — led by the U.S. and Europe — are trying to force fit into all talks: that India and China deserve to be in a separate category since both have outgrown the “developing country” tag. This is being duly repeated by Western media and their think tanks. This implicitly requires India and China to make larger sacrifices than the rest of the developing countries.

In climate change negotiations, a “High Ambition Coalition” (comprising 100 countries, including the U.S.) has pitched for an “ambitious” deal that would require the world to limit global warming to below 1.5 degrees, against the earlier target of 2 degrees. This strategy achieves four things simultaneously.

One, it takes attention away from the pollution that industrialised countries continue to inflict upon the world. Two, it detracts from the package industrialised countries had promised to deliver but reneged — $100 billion of funding for developing and poor countries to help improve energy technologies. Three, it wins over island nations (which can be used in other negotiating forums), who have been complaining about rising water levels due to global warming. Four, it turns the needle of blame towards India and China, both of whom will obviously oppose the increased commitment expectations.

It is quite likely that the developed world lobby will try to replicate some of these strategies at MC10 talks as well.

For example, well ahead of the meeting, the U.S. has begun making noises (with some support from the U.S.-based think tanks and media) that India and China should not be included in the group of “developing countries”, especially when designing support for poor farmers. This, effectively, takes out the strongest proponents of the Doha Round of the WTO. Without these two, most other developing countries will find it difficult to resist pressure from the developed world lobby.

The conclusions are fairly predictable if the West is able to have its way. The U.S. will manage to achieve its goal of burying the Doha Development Agenda (DDA). In this endeavour, it has some help from WTO Director-General Roberto Azavedo, who has suggested on a deadline to finalise DDA and sees MC10 as the last opportunity to do so. This proposition was rejected by developing countries, including India. One reason for seeking to bury DDA is that the U.S. and other developed countries have already managed to swing Trade Facilitation Agreement (TFA). Uniquely, TFA was not part of original DDA but was shoe-horned into the Bali agreement of the WTO by the rich countries as a trade-off. Today, with TFA out of their way, the developed countries would want to bury the DDA.

It will also help torpedo WTO members’ plans to finalise a permanent solution for public food grains stockholding programme or a special safeguard mechanism (which allows developing countries to protect farmers from cheap imports or sharp price drops).

In fact, the U.S. has concurrently started pushing WTO for a deal on “new issues” — environment, labour, e-commerce, global value chains, investment, competition policy and transparency in government procurement — which will replace the development agenda.

As trade ministers congregate in the Kenyan capital next week, expect to see a reprisal of the Paris viewpoints.

Courtesy: Gateway House

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

India Resets Africa Strategy

Changes in how India plans to approach its relationship with Africa were evident at the recent India-Africa Forum Summit, including the wider representation of African countries, and Modi’s push to forge a united front with Africa at multilateral institutions on trade and other issues. But beyond these, gaps in the India-Africa alliance remain to be addressed.

Four changes or incipient trends were noteworthy at the third India-Africa Forum Summit last month. These spell out the contours of the engagement that India will pursue with the African continent, its constituent countries, and regional organisations, as well as the government’s desire for a course correction in the traditional trajectory of the India-Africa relationship.

In the first change, a departure from the approach of previous Indian governments, the October event dispensed with the practice of following the Banjul formula, under which only a few African countries participated in the summit [1]. This time, the government invited all 54 African countries to New Delhi, and among those who came were 40 heads of state. While the shift in policy could be ascribed to this government’s predilection for spectacular optics, it is also true that the multilateral summit gave India an opportunity to engage with each country—Prime Minister Narendra Modi and External Affairs Minister Sushma Swaraj held numerous bilateral discussions with individual leaders and representatives.

This extensive bilateral exercise is tied to a second new policy stance—Modi’s push to forge a united front with African nations for a common, but differentiated, negotiating framework in multilateral institutions. India’s previous desires to build such a platform had remained nebulous; the most long-standing of these relates to reforms in the United Nations Security Council. In his inaugural speech at the summit [2], Modi said: “…our global institutions reflect the circumstances of the century that we left behind, not the one we are in today…That is why India and Africa must speak in one voice for reforms of the United Nations, including its Security Council.”

Beyond this, PM Modi has sought African support on two other critical multilateral fronts — climate change negotiations and trade talks. For the first, Modi wants to create a club: “I also invite you to join an alliance of solar-rich countries that I have proposed to launch in Paris on November 30 at the time of the COP-21 meeting.” A combined front such as this will be necessary when negotiating with rich countries for resources to shift to clean energy technologies because, “the excess of [a] few cannot become the burden of many.”

Modi also wants to align African countries to India’s concerns with the global trading regime. This becomes important given the forthcoming World Trade Organisation (WTO) ministerial in Nairobi in December, where developing countries are likely to make a last-ditch effort to save the Doha Development Round. The threat comes from developed nations, specifically the U.S., which in October has signed the Trans Pacific Partnership with 11 other nations and is lobbying to bury the development round.

Modi said as much in his inaugural speech: “India and Africa seek also a global trading regime that serves our development goals and improves our trade prospects. We must ensure that the Doha Development Agenda of 2001 is not closed without achieving these fundamental objectives. We should also achieve a permanent solution on public stockholding for food security and special safeguard mechanism in agriculture for the developing countries.”

India’s desire to construct a common bargaining platform is probably driven by the embarrassment of July 2014, when it was isolated while blocking the Trade Facilitation Agreement at WTO’s General Council meeting. India’s other attempts to get developing countries on board—to provide Duty Free Tariff Preference (DTFP) to least developed countries on 98% of its tariff lines, including in services— have also produced mixed results, prompting the government to now fast-track the entire scheme.

These points of common and joint multilateral action have been re-emphasised in the India-Africa Framework for Strategic Cooperation, which was released at the end of the October summit [3].

The third outcome is a public acknowledgement of the partial success in implementing India’s marquee development cooperation programmes—concessional lines of credit (LOCs), grants, and capacity building through the Indian Technical and Economic Cooperation Programme as well as the Pan Africa E-Network—and the need to improve the current processes.

Modi announced enhanced allocations for the programme—$10 billion under concessional LOCs (double the $5 billion announced at the 2011 summit), $600 million of grants, and 50,000 scholarships in India—but also admitted, in a departure from convention, that, “There are times when we have not done as well as you have wanted us to. There have been occasions when we have not been as attentive as we should be. There are commitments we have not fulfilled as quickly as we should have.”

The problem with LOCs is well documented [4] including a widening gap between sanctions and disbursements. In a pre-summit media briefing [5] in New Delhi on October 17, Secretary (West) in the Ministry of External Affairs, Navtej Singh Sarna, gave an update on LOCs: of the $7.4 billion on offer so far, $6.8 billion has been approved and $3.5 billion disbursed. In effect, disbursals are only 51.47% of sanctions.

Both India and recipient African countries are responsible for the low disbursal rate. In India, a multi-tiered and multi-agency framework for sanctioning and disbursing these loans creates delays. Additionally, a non-transparent process engenders attendant distortions. Exim Bank, which finally disburses the loans, has complained to the Prime Minister’s Office about malpractices [6]. On the African side, capacity gaps in drawing up detailed project reports, essential for the Indian side to conduct a proper appraisal and assessment, cause enormous delays.

The Framework for Strategic Cooperation has promised to introduce a “regular formal monitoring mechanism” to review the implementation of, and progress in, areas of cooperation and identified projects.

The fourth change was the absence of an announcement of trade targets, a departure from the accepted practice at such forums. This was probably necessitated because India-Africa two-way trade has fallen short of the $90 billion 2015 target [7]. But such ambitious targets tend to overshadow otherwise admirable progress in trade relations. In fact, trade between India and Africa has been remarkable. According to government data [8], two-way trade touched $72 billion during 2014-15, which is a vast improvement over the $4.5 billion of 1996-97.

But beyond these four directional indicators, interlocutors still need to address some persistent gaps in the India-Africa alliance.

One, there is little data in the public domain about the development and progress of projects, especially those under the LOC umbrella or under other initiatives announced from time to time. For instance, there is no report card on the promise to help build 100 institutions that India made during the second India-Africa Forum Summit in Addis Ababa in 2011.

Two, with similar and competing summits being hosted by China, Japan, Turkey, and the U.S., India should work on upgrading the status of its India-Africa Summit by including sub-fora on labour representatives, think tanks, civil society, academia, and women’s rights groups, in addition to the existing India-Africa Business Forum.

References

[1] Chand, Manish, ‘India and Africa: Sharing interlinked dreams’, Ministry of External Affairs, Government of India, 28 January 2015, http://mea.gov.in/in-focus-article.htm?24742/India+and+Africa+Sharing+interlinked+dreams

[2] Modi, Narendra, ‘Inaugural Ceremony Speech’, speech delivered at the Third India-Africa Forum Summit, New Delhi, 29 October 2015, http://iafs.in/speeches-detail.php?speeches_id=276

[3] Third India-Africa Forum Summit, India-Africa Framework For Strategic Cooperation, 29 October 2015, http://pmindia.gov.in/wp-content/uploads/2015/10/p2015102903.pdf

[4] Qadri, Asgar & Rajrishi Singhal, ‘Development and Diplomacy Through Lines of Credit: Achievements and Lessons Learnt’, ORF Occasional Paper 53, August 2014, Observer Research Foundation,http://orfonline.org/cms/export/orfonline/modules/occasionalpaper/attachments/op_53_1411638542827.pdf

[5] Ministry of External Affairs, Government of India, Media Briefings, 17 October 2015,http://www.mea.gov.in/media-briefings.htm?dtl/25945

[6] Iyer, P V, ‘Exim Bank’s red flag: Why most Africa deals go to so few firms?‘, The Indian Express, 20 October 2015, http://indianexpress.com/article/india/india-news-india/exim-banks-red-flag-why-most-africa-deals-go-to-so-few-firms/

[7] Ministry of Commerce and Industry, Government of India, Joint Statement of 2nd India-Africa Trade Ministers Meet (2012),http://commerce.nic.in/trade/Joint_Statement_2nd_India_Africa_Trade_17_03_2012.pdf

[8] Ministry of Commerce and Industry, Government of India, Export Import Data Bank,http://commerce.nic.in/eidb/default.asp

Courtesy: Gateway House

Public Procurement: Policy Must Precede Law

Pressure for a unified public procurement framework is mounting on India from both within the country and internationally. While an integrated procurement structure is necessary, a broad policy architecture must precede the framing of any legislation

As India prepares to convert some of its free trade agreements into larger comprehensive agreements, it will have to re-examine some existing domestic rules and convert other rules into legislations. And in some cases, such as procurement by the government, it will have to first frame guiding principles that are aligned with global norms.

Comprehensive agreements usually include, apart from export and import rules, treaties on investment, intellectual property rights, and public procurement. All comprehensive agreements, and some bilateral investment treaties, demand that public procurement treat all vendors—foreign or domestic—equally. In keeping with these norms, India too will have to design a globally-aligned public procurement framework that is fair and equitable.

The Indian government’s annual procurement bill is enormous. If purchases by the Centre, states, local bodies, public sector organisations, and the armed forces are consolidated, various estimates put the total bill anywhere between 25% and 30% of the country’s GDP, amounting to over $600 billion. [1]

Despite this colossal bill, India does not have an over-arching policy to guide public procurement.

In theory, all public procurement is guided by General Financial Rules (1963) and Delegation of Financial Powers Rules of 1978, both framed (and occasionally updated) by the Ministry of Finance. [2, 3] The ministry has also published a manual called “Policies and Procedures for Purchase of Goods”. [4] On top of that, the centralised purchase department of the central government—the Directorate General of Supplies and Disposals—issues its own guidelines. Many ministries often tweak these rules, with government agencies developing their own rules, and framing model tender documents.

Defence procurement, on the other hand, is covered by a unique set of policies and procedures formulated by the National Security System, and the decisions are made by the Defence Acquisition Council. In addition, many states have legislated their own procurement Bills—for example, the Tamil Nadu Public Procurement Act, the Karnataka Public Procurement Act, and the Rajasthan Transparency in Public Procurement Act.

Given this wide variation in procurement rules within the government, regulation and supervision are casualties. While the Central Vigilance Commission provides supplementary regulations and oversight, with additional supervision by the Comptroller and Auditor General, there is no central authority that monitors public procurement to ensure compliance with existing rules.

A series of scandals—coupled with mounting pressure from international allies, trade partners, and multilateral organisations—forced the UPA-II government to draft a Public Procurement Bill in 2012. But that didn’t go anywhere, and the new government is now trying to resuscitate the Bill. The finance ministry has invited comments on the draft of the existing Bill. [5]

However, there is a problem with drafting legislation before articulating guiding principles, or a strategy architecture, or even a white paper. Such a model document can provide directional guidance to the Bill, and not vice-versa. Also, guiding principles enjoy greater longevity, which when incorporated into legislation, saves it from frequent, time-consuming amendments.

Tactically, such a document will help resolve numerous pending or unresolved policy-related issues in public procurement that a Bill cannot incorporate.

For starters, the proposed Bill applies to only procurement by the central government and its various organisations. Given the growing procurement costs of states and local bodies (such as municipal corporations or panchayats), this Bill then serves only a limited purpose. Any regulatory oversight over purchases by states and local bodies would need to be balanced with the tenets of federalism.

This can be debated in the guiding principles and an alternative solutions framework can be constructed. For instance, it might be instructive to integrate all public procurement—at whatever level—with the proposed technology backbone for the Goods and Services Tax (GST) regime. Aligning procurements with the GST backbone will also allow for fair comparisons between the pricing of similar goods and services procured elsewhere by private or public entities, thereby imparting transparency and accountability. This will then reduce divergence without the need to legislate a central bill.

Second, governments worldwide use public procurement strategically to drive their socio-economic agendas. In India, there is a 20% mandatory carve-out for the micro, small medium enterprises (MSME) segment. [6] This will raise questions about other exemptions, such as a legitimate gender-based quota—should it be part of the 20% or does it deserves separate reservation? With gender budgeting now well established, gender-based public procurement has the opportunity to improve female entrepreneurship, employment, and incomes. [7]

A reservation—known as offsets—has also been included in defence FDI to supplement the ‘Make in India’ programme, under which foreign companies manufacturing in India must source 30% of goods and services from local companies. Even the FDI policy on single brand retail mandates such a requirement. These exceptions might face opposition in comprehensive agreement negotiations. This reinforces the need for a national policy debate, and a broad strategy, which re-examines the extent of exemptions that can be allowed.

Any strategy’s most significant thrust will be in the geoeconomic sphere. For instance, India will probably want to exempt government’s procurement of foodgrains from Indian farmers from any comprehensive negotiations, at least till the Doha Round of discussions under the World Trade Organisation are concluded, or till the outdated WTO formula on agriculture support is overhauled.

Importantly, India also needs a strategy to gain greater market access for services in overseas markets, in exchange for a liberal, domestic public procurement policy in manufactured goods. Public procurement of services in most countries is restricted to citizens of a country, or a particular bloc (like Europe). India should leverage the growing clamour for access to its procurement market by seeking reciprocal access for its services.

This is a plan of action that cannot be included in a Bill, but needs to be outlined in a strategy document.

References

[1] United Nations Office on Drugs and Crime, India: Probity in Public Procurement,

<http://www.unodc.org/documents/southasia/publications/research-studies/India-PPPs.pdf>

[2] Ministry of Finance, Government of India, General Financial Rules, <http://finmin.nic.in/the_ministry/dept_expenditure/GFRS/index.asp>

[3] Ministry of Finance, Government of India, Delegation of Financial Power Rules, <http://finmin.nic.in/the_ministry/dept_expenditure/notification/dfpower/Purchase%20I.pdf>

[4] Department of Expenditure, Ministry of Finance, Government of India, Policies and Procedures for Purchase of Goods, <http://finmin.nic.in/the_ministry/dept_expenditure/acts_codes/MPProc4ProGod.pdf>

[5] Department of Expenditure, Ministry of Finance, Government of India, Notice: Public Procurement Bill, 6 April 2015, <http://finmin.nic.in/the_ministry/dept_expenditure/ppcell/PPDNotice180315.pdf>

[6] Ministry of Micro, Small and Medium Enterprises, Government of India, Public Procurement Policy Notification, <http://dcmsme.gov.in/notification.pdf>

[7] Kirton, Raymond Mark, Gender, Trade and Public Procurement Policy: Kenya, India, Australia, Jamaica. The Commonwealth, 2012, <http://assets.thecommonwealth.org/assetbank-commonwealth/action/viewAsset?id=22979&index=0&total=36&view=viewSearchItem#imageModal>

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>

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/
and
Quartz India: http://qz.com/332427/the-biggest-investment-deal-between-india-and-the-us-is-nowhere-close-to-completion/

Time To Put Substance Before Style

China now views itself as an emerging superpower rather than a ‘developing’ country. India should take this into account

Long after President Xi Jinping has flown back to Beijing, there will remain a host of prickly issues that senior ministers and diplomats on both sides will need to bang heads over. During President Xi’s 48-hour whistle-stop through Ahmedabad and Delhi, the climate-controlled atmospherics, the fastidiously choreographed diplomatic pas de deux on Sabarmati, the thunderous rhetoric and the flurry of MoUs made for good optics. But action is always a poor substitute for achievement.

One of the visible thorns in the blossoming relationship is border uncertainty and both President Xi and Prime Minister Narendra Modi did reiterate a need to settle it. But beyond the omnipresent irritation of a virtual border, it is in India’s interest to resolve numerous pending geo-economic issues with China.

Shifts and moves

Start with World Trade Organisation (WTO) first. India invited universal censure after blocking safe passage of Trade Facilitation Agreement (TFA) at WTO’s General Council meeting in Geneva on July 31, 2014. However, China’s unprincipled floor-crossing on that day was truly shocking, after having supported India’s stand in many multilateral fora (such as G-33, G-20) and in bilateral meetings.

China’s mercurial shift could be understandable if India was found to be acting irrationally. But, on closer analysis, it seems India’s actions were justified. Having agreed at the Bali ministerial to approve TFA, on condition that developing countries not be penalised for food security imperatives till a permanent solution is formalised by 2017, India discovered that all discussions thereafter were focused on only TFA. This was contrary to the post-Bali work programme and gave India (and some other developing countries) grounds to believe that once TFA was out of the way, rich countries didn't care much for the Doha Development Agenda, including food security measures.

But, there are some other valid reasons for India’s principled action. For one, India has a sovereign right to provide food security for its citizens, just as US has the right to buy and stockpile crude oil to provide its citizens with energy security. Two, TFA will cause a spike in infrastructure costs for poor countries; the rich nations were to provide budgetary assistance to help them tide over this unplanned expense, but the amount finalised is too low and the modalities are still vague.

Finally, benefits from TFA are ambiguous, with most gains likely to go to the developed world.

China’s sovereign objectives are somewhat aligned with India on this issue, particularly since it too has to provide food at reasonable prices for large sections of its population. Also, China has been a signatory to all the food security negotiations by G-33, a grouping of developing countries with convergent trade issues.

A change of heart?

While it’s not known if Modi-Xi talks included China’s breach of trust, the joint statement issued by both governments was patently anodyne: “As developing countries, India and China have common interests on several issues of global importance like climate change, Doha Development Round of WTO, energy and food security, reform of the international financial institutions and global governance. This is reflected in close cooperation and coordination between the two sides within the BRICS, G-20 and other fora.”

One reason for China’s change of heart could be India’s lackadaisical communications strategy; also, India’s parleys could have conveyed a message that it’s interested in cherry-picking only food stockpiling from a multitude of other development issues. This might have even influenced some of the other large emerging nations, such as Brazil and South Africa, to isolate India.

But there’s another significant development. There's probably a radical shift in how China views itself: as a world superpower and a trade behemoth, competing with the developed countries. Hence, in keeping with this new-found status, TFA makes more sense rather than hankering for food security. While China is indeed a trade colossus, India needs to keep in mind this change in China’s self-perception when negotiating with President Xi’s men in future.

The border incursion, intriguingly timed to coincide with President Xi’s visit, is a reminder of China’s foreign policy dualism: an extended hand of economic friendship to mask the ugly face of geographic expansionism.

The second issue is climate change and India would do well to keep the new Chinese psyche in mind in future multilateral deliberations.

On the surface, both India and China seem to be on the same page. Apart from a common historical stand, both President Xi and PM Modi have also excused themselves from the UN Climate Summit on September 23.

But that’s where the similarities end. China has already signed a separate climate change agreement with US. While these agreements reduce the climate policy distance between the two superpowers, there are still some sticking points. While China and US agree that that rich countries must provide developing nations with wherewithal to upgrade technology, the divergence is whether the old labels of “developing” or “developed” need to be upgraded.

In essence, the rest of the world’s identity — including India’s — is hostage to progress of talks between two superpowers. The initiative seems to be slipping away from India’s grasp; a climate change strategy is required before the big climate summit in Paris next year. While China’s stand may be driven by thickening smog over its cities, India may have to fashion its own position consistent with its economy and stage of development.

Myriad issues

There are many other unresolved issues on the table — using renminbi as a alternative currency, India’s membership in multilateral institutions (such as Asian Investment Infrastructure Bank) and groupings (Shanghai Cooperation Organisation, for example), discussions on how to take the BRICS Bank ahead, enhanced market access for Indian goods and services, are just some of them.

The lessons for Modi are clear: with China what you see is never what you get. Modi will have to take every opportunity to create an independent policy space for india, even if that requires striking trade and investment deals with Japan, USA, EU, Russia or Australia.

The writer is a journalist and senior fellow with Gateway House

Courtesy: The Hindu BusinessLine, edition dated September 22, 2014 (The original can be read here:goo.gl/Cbm3Ex)