- Posted by Prof. Bryan Mercurio
- On September 7, 2016
- APEC, BIT, India, investment treaties, TPP, TTIP, USA
Recent reports indicate that the United States (US) is attempting to kick start the ‘on-again off-again’ bilateral investment treaty (BIT) negotiations with India. Commencing in 2008, negotiations have proven difficult and for long periods have simply stalled. The recent push comes on the back of US President Barack Obama and Indian Prime Minister Narendra Modi announcing in 2015 that the nations would prioritise the negotiations with a view to reaching agreement as quickly as possible. The result, however, is that one year later little progress has materialised. The US is disappointed with the lack of progress and several high level government officials have begun publicly speaking this summer about India’s lack of ambition. In the face of this reality, the question at this stage is not when the agreement will be reached but rather why the US would want to continue the negotiations with India. A bigger question which I will not seek to address is since stalemate should have been expected, why the US and India even entered into the negotiations.
It is not that closer economic relations between the US and India would not be beneficial to both parties – trade and investment is growing but there is still scope for much more. More specifically, international trade in the last ten years has grown by three times to reach a record $107 billion dollars in 2015. While not insignificant, that figure is not that impressive given the size of economies involved. In terms of foreign direct investment (FDI) flows between the two countries again the figures are not impressively large, and more worryingly are relatively unstable. For instance, FDI from the US to India saw a massive increase from approximately $800 million in the 2014 to nearly $4 billion in 2015. Likewise, Indian FDI in the US totaled $718 million in 2014 (the last year available), up from $139 million in 2013 and $374 million in 2012.
These numbers could well have been effected by a number of international trade disputes which have arisen between the US and India in recent years. The US has filed cases against India involving poultry and other agricultural products as well as on industrial policy on renewable energy disguised as environmental policy while India has requested WTO consultations with the US over non-immigrant work visas. While there are reports to the contrary, these disputes have played little if any role in the stalled BIT negotiations. The real problem is simply one of level of ambition. BITs are a valuable tool for the protection of investors and a tool for host nations to promote stable investment conditions, but only if they are drafted with binding commitments and a certain level of ambition. The US is ambitious and demands a high level agreement with real and meaningful liberalisation commitments while India is unaccustomed to negotiating trade and investment agreements with many binding commitments and actual liberalisation.
The US uses its Model BIT (2012) as a negotiating template and history shows that it rarely deviates from its established template. Included among the obligations expected, if not required by the US, are pre-establishment rights for potential investors, core non-discrimination provisions such as most favoured nation and national treatment, fair and equitable treatment and carefully crafted safeguards for public welfare and other measures. In other words, the US template includes issues of nondiscrimination, investor protections and specifically demarcated exceptions. Moreover, the US will insist on what is called a negative list approach to the scheduling of commitments whereby all sectors are liberalised unless specific reservations are made. US negotiating partners usually must make substantial market access commitments in almost every sector, and likewise US commitments to provide access to foreign investors are also often extremely broad.
For its part, perhaps as a reaction to being on the receiving end of several claims, India released a new model BIT in 2015 which radically departs from the US Model BIT in a number of respects. For example, the Indian Model BIT narrows the scope of what is deemed to be a covered investment (excluding portfolio investments, government debt securities, commercial contracts, goodwill and other intangible assets), lacks the usual nondiscrimination (including the most-favored nation) protections, exposes foreign investors to potentially discriminatory treatment and may even be unenforceable in international arbitration proceedings due to the strong local exhaustion of remedies provisions. India has formally requested that the BIT be based on the Indian Model BIT and does not appear to have moved from this position over the course of the negotiations. Put bluntly, there is simply no way that the US would agree to a BIT using the Indian Model BIT as a template.
Yet another problem is that the Indian Model BIT significantly pulls back from what India has granted to countries such as Japan and Korea. Again, it is abundantly clear that the US will not accept treatment less favourable than provided to investors of other nations. India’s response to date is unsettling – it plans to revise its current investment agreements downward! Not only is such a move highly unlikely (why would Japan, Korea and others agree to such changes?), it must provide cold comfort to the US that what it agrees with India will be respected.
In short, the US will insist on a high level agreement, as it is not only in line with its existing practice but also it is highly doubtful that the US would see value in a watered down agreement with India. India may think it is a major emerging economy which deserves special treatment, but it is not that special and it has always been a high investment risk. Moreover, the US will not want to deviate from its template for fear of setting a precedent for future negotiations, especially with the fractured Transatlantic Trade and Investment Partnership (TTIP) negotiations with the European Union (EU) ongoing.
In 2015, and in the wake of Prime Ministers Modi’s prioritisation of the BIT negotiations, an Indian official stated that there were many outstanding issues and that the negotiations will be “difficult but not impossible.” The reality, however, may be starkly different. The US demands a high level agreement and will not deviate from its established model. India is a notoriously difficult negotiating partner and always reticent to agree to any meaningful liberalisation. India too now insists that its negotiating template be used as a model. The fact that there is stalemate is no surprise. This is the US. This is India. Both countries were foolish to expect any other result.
Not wanting to end this post on such a negative note, I will offer one small crack which may allow the parties to reach an agreement. India seems desperate to ensure that the US revisions to its visa program do not adversely affect its citizens and homegrown IT industry. India has also requested US assistance and support for its bid to secure membership in the Asia-Pacific Economic Cooperation (APEC). Perhaps in exchange for the US cooperation on these matters India may see fit to give ground in the BIT negotiations. Given the Indian government’s strong rhetoric on traditional BIT protections and the promulgation of its own Model BIT only one year ago, I have my doubts. Then there is the added uncertainty on whether the US could actually ratify and implement a freshly signed BIT. I should apologise, with these two negotiating partners at the table I could not help ending on a negative note.
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