President Barack Obama has returned to the United States after his whirlwind visit to New Delhi. As the media and analysts pick up the pieces of real information concealed in the officialese in which the joint and separate statements released after the visit are written, the picture that emerges is one of a desire for a new strategic partnership that is still in the making. Even the joint statement described it as a Joint Strategic Vision. This is true in the economic sphere as well. The promise held out by the joint statement is to advance ongoing and often stalled negotiations on trade and investment, besides other important areas such as intellectual property and the digital space. No major “deals” have been struck.
There are two factors that would help this new effort at strengthening a tenuous alliance. One is the Narendra Modi government’s commitment to wooing American and foreign business. The second is the desire of both the U.S. and Indian governments to limit China’s growing influence over the region and elsewhere in the world. The thrust, therefore, is to project India as an alternative force in the region, with India expressing an interest in joining the Asia Pacific Economic Cooperation (APEC) forum and the U.S. welcoming that initiative, as well as to play on tensions between China and other countries in the region. India seems pleased, even though few deny that there are no equal alliances in a world with wide variations in economic, political and military might. India can serve at most as a junior partner.
As of now, assessed in trade terms, India needs the U.S. more than the latter needs India. U.S. exports to India in 2013 were at $35.7 billion, and imports from India stood at $61 billion. The implied $25.4 billion trade deficit reflected a steep rise from $6.3 billion in 2003. Moreover, India’s services exports to the U.S. rose from $2 billion to $19 billion over this period, whereas India’s imports of services from the U.S. had risen from $3.7 billion to $13.5 billion. In the event, the U.S. recorded a deficit in its services trade with India as well, even though it had a surplus in that area vis-à-vis the rest of the world. In 2013, India ranked a low 18th as a market for U.S. goods, and U.S. trade with China was nine times as large as that with India.
Thus, the American plea for more market access in India seems to be strengthened by the figures. This matters because for both leaders, strengthening a relationship, even if with strategic objectives, requires winning sanction from their domestic constituencies. The difficulty is that one set of forces, business in the U.S., is looking for new opportunities, markets and lucrative avenues for investment and growth, just as India’s business interests are. Those interests would be looking to see what they would gain from the quid pro quo that any restructuring of a relationship involves.
In his State of the Union address just before he left for India, Obama made clear what he expects from Asia in general and India in particular. “When ninety-eight per cent of our exporters are small businesses, new trade partnerships with Europe and the Asia-Pacific will help them create more jobs. We need to work together on tools like a bipartisan trade promotion authority to protect our workers, protect our environment, and open new markets to new goods stamped ‘Made in the USA’. China and Europe aren’t standing on the sidelines. Neither should we.” The United States rather than China should write trade rules for Asia, he added.
Yet, there is a problem here because the main plank of Prime Minister Narendra Modi’s effort to accelerate lagging Indian industrial growth by making India a manufacturing hub is to urge foreign (besides domestic) industrialists to “Make In India” for export to international markets. The only way to reconcile this apparent conflict of interests would be to open India’s markets to U.S. business and provide investment opportunities to U.S. capital. Not surprisingly, besides demands for greater trade liberalisation, there is an effort at reviving negotiations on a bilateral investment treaty that began in 2008 but have not proceeded very far.
According to an official press release in New Delhi, the President (of the U.S.) and the Prime Minister (of India) affirmed their shared commitment to facilitating increased bilateral investment flows and fostering an open and predictable climate for investment. To this end, the leaders instructed their officials to assess the prospects for moving forward with high-standard bilateral investment treaty discussions given their respective approaches.
Bilateral treaties Herein lies an area, besides others like intellectual property, in which the Indian government would be under pressure to offer major concessions. Bilateral investment treaties have been seen as substitutes for the Mulitlateral Agreement on Investment that failed to get off the ground in the late 1990s. A subsequent effort on the part of the U.S. and the European Union to include it in the World Trade Organisation (WTO) agreement was also stalled, with India playing an important role in the process. The strategy since then has been to sign bilateral investment treaties (BITs), with more than 2,000 reportedly in place. These treaties seek to define what is considered foreign investment and include provisions for national and most favoured nation status to the signatories; the assurance of fair and equitable treatment; promises to compensate in case of expropriation; guarantees for repatriation of incomes and capital gains from sale of assets; and dispute settlement measures in case of any conflict between the investor and the host state.
Since these agreements are bilaterally negotiated, there are differences across agreements between different pairs of nations. But the tendency is for parties to define for themselves templates with which they approach each individual negotiation. As is to be expected, developed and predominantly investor nations try to win for themselves significant concessions and important guarantees that implicitly privilege foreign investors over local ones.
One of the reasons why BITs have become controversial is that they are used as weapons to oppose various industrial and tax policies adopted by host governments and to demand large compensation on the grounds of violation of different clauses when such policies are implemented. When this occurs, the difficulty is that BITs often include clauses that allow for arbitration under an investor-state dispute settlement (ISDS) system, where the dispute can be referred to an independent international arbitrator such as the International Centre for Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL) or arbitration bodies run by private industry organisations. The experience from a large number of countries is that the system tends to be unduly biased in favour of the investor rather than the host state.
Cochabamba protests Among the most infamous of them is the case in which the water multinational AdT (formed by Bechtel and a consortium of investors) demanded $50 million as compensation from the Bolivian government in a case filed with ICSID, based on a BIT between Bolivia and Holland, where Bechtel had a paper-only registered office. The demand arose when the Bolivian government was forced to reverse the privatisation of water supply in Cochabamba municipality in the aftermath of protests triggered by hikes in water rates that led to large sections of the population being deprived of access to water. The protests that followed worldwide finally forced Bechtel and its investor allies to settle for a token payment of around 30 cents.
Such incidents have made some governments wary. Thus, a positive feature in the case of a potential U.S.-India BIT is that in 2012 India developed a template for treaties it would negotiate, which sought to address the problems that arose with an earlier template, the use of which led to a series of arbitration notices and demands for compensation from companies such as Vodafone. Not surprisingly, India’s current template differs significantly from the model treaty favoured by the U.S.
In a guest post on Financial Times Beyondbrics blog, Kavaljit Singh has detailed these large differences. They begin at the level of definition of investment, with the U.S. model favouring an asset-based definition (that includes besides enterprises, financial instruments, real assets, and even intellectual property rights). That allows a variety of policies to be challenged in the name of BIT violation. The Indian template, therefore, focusses on investment by an enterprise with substantial and long-term commitment of capital (which is supposed to be the vehicle for stable, foreign direct investment).
Moreover, the U.S. template provides for pre-establishment national treatment, which precludes full scrutiny of foreign investors and their intentions, and for most-favoured nation status, both of which are not included in the Indian template. Finally, the ISDS in the Indian template can be resorted to after all domestic measures of recourse have been exhausted with the foreign investor barred from demanding arbitration if the domestic judicial system has ruled in favour of the host government.
On the surface these seem to protect India against predatory foreign investment. These are all only differences in the template and can be modified in the course of negotiations. It helps that the details of those negotiations are not subject to parliamentary or public scrutiny. Given the Modi government’s desire to accelerate neoliberal reform and clearly align with the U.S. to further its external economic and political goals, those concessions, like ordinances, could be pushed through despite domestic opposition. The government has shown no reticence in revising policies adopted by the United Progressive Alliance (UPA). The changed and ambiguous stand of the National Democratic Alliance (NDA) after coming to power with regard to the civil liability of equipment suppliers in case of a nuclear accident illustrates its willingness to go back on its own positions. And the decision of the government not to challenge the Vodafone judgment by the Bombay High Court on the claim made by the tax department in the transfer of shares case points to its deep desire to woo foreign investors with major concessions. Tampering with an investment treaty template, which can be done by the executive bypassing Parliament, is no major challenge.