INTRODUCTION
Recently, India amended its FDI policy, requiring all foreign investments from countries sharing a land border, to enter through the approval route (‘New Policy’).[1] Since China’s cumulative investment in India far exceeds the total investments of India’s other border-sharing countries,[2] this measure is clearly targeted at reducing Chinese investment. It is therefore unsurprising that this measure has been openly criticised in a statement released by the Chinese Embassy.[3]
It is startling that this measure comes at a time of liquidity crunch, where the need for cash influx through investment is at an all-time high. Although this investment is not banned per se, the regulation process is likely to make investment more onerous, through severe delays and red-tapism.[4] It also creates uncertainty for Chinese investors and for domestic sectors which intensely rely on investments from China.[5] Therefore, this policy clearly discriminates against Chinese investors. The author believes that this policy contradicts India’s commitments under the World Trade Organization (‘WTO’), and is therefore illegal.
To this end, the author argues that first, the General Agreement on Trade in Services (‘GATS’) extends to foreign investments, and the Agreement on Trade-Related Investment Measures (‘TRIMS’) should be read expansively; second, that the policy contradicts the Most-Favoured Nation (‘MFN’) principle enshrined in GATS; and third, that India cannot invoke the security exceptions to escape its obligations. In conclusion, the author suggests the policy that can be adopted by the Indian government in order to protect its sovereign interests without violating its MFN obligation.
Is WTO law applicable?
It is commonly argued that while WTO governs trade, separate bilateral investment treaties (‘BIT’s) govern investment.[6] Therefore, since the BIT between India and China was unilaterally terminated in 2018,[7] it is often understood that these investments exist in legal limbo – hence justifying the ‘legality’ of India’s policy.[8] However, this argument ignores both the text and purpose of WTO laws.
First of all, the GATS extends the scope of ‘trade in services’, to “commercial presence in the territory of any other member”[9]. This explicitly brings FDI in the services sector, within the ambit of GATS’ governance.[10] Beyond the service industry, the expansion of WTO’s jurisdiction to investment in other areas is evident, although more controversially, through TRIMS.
It is widely argued that TRIMS, which is based on the General Agreement on Tariffs and Trade (‘GATT’), relates only to those investment measures that violate trade obligations under the GATT.[11] Under this construction, India’s New Policy would not fall within the ambit of TRIMS, since it is purely concerned with regulation of foreign investment, and is not directly aimed at distorting trade. Although this reflects the general consensus on the matter, it may be useful to explore an alternate approach. While admittedly, TRIMS is restricted to ‘trade-related investment’, the Agreement does not provide any definition for the same. In the absence of a text to this effect, the scope of the Agreement should be interpreted in light of its Preamble, which aims to promote the “liberalisation of world trade and to facilitate investment across international frontiers”[12] – permitting a wide definition.[13] In the modern era, where trade and investment are now seen as complementary, and the distinction between them continues to blur,[14] there is an argument for TRIMS to cover investment matters as well. In such a situation, if TRIMS does not cover entry-level investment, it runs the risk of undermining the post-entry prohibition on trade-restrictive practices – since these provisions can be evaded by making the entry process itself more restrictive, like India has done via the New Policy.
Having said that, given the WTO’s penchant towards a formalistic legal approach,[15] it is unlikely to expand jurisdiction beyond strictly ‘trade-related’ matters. The panel’s apprehension to comment on Canada’s right to regulate foreign investment in a 1980s dispute with USA, epitomises this wary approach.[16] The extension of TRIMS to direct investment also gives rise to problems including overlaps with conflicting BITs, and impingement on state autonomy.[17] Nevertheless, the author believes that for the reasons mentioned above, TRIMS should at least serve as a pre-cursor for future negotiations on global investment liberalization, and uniformity in investment governance. For the immediate purpose of this article, given the absence of an MFN obligation under TRIMS, the following section will evaluate whether the New Policy violates India’s obligation of non-discrimination under GATS.
How does the policy violate WTO law?
Violation of the principle of non-discrimination
A centerpiece in GATS is the concept of non-discrimination between Member States, crystalised in the principle of Most-Favoured Nation (MFN).[18] This broadly requires that every Member country shall treat service suppliers of all other Member countries equally, with respect to the measures covered under GATS. While countries are allowed to exempt certain sectors from the MFN requirement of GATS, this applies to a very limited extent in the present case, since India has only exempted telecommunications, shipping, banking, and audiovisual services.[19]
In Argentina-Financial Services, the Appellate Body liberally interpreted the MFN obligation, holding that Art. II:1 of GATS will be violated with respect to one country, if it modifies the ‘conditions of competition’ in favour of service suppliers of another country. [20] It is clear therefore, given the wide scope accorded to the MFN obligation, that by placing Chinese investments under government radar, while allowing other countries to proceed under the automatic route, India is violating its MFN obligation. It cannot be argued that this is a mere change in procedure,[21] since the inconvenience that associates with enhanced regulatory approval, undeniably results in increased transaction costs, and in turn, severe competitive disadvantage. In fact, the idea of procedural changes affecting conditions of competition, is not alien to WTO jurisprudence. In EC Bananas III (US), the Appellate Body found that a change in procedural rules for allocation of import licenses, led to less favorable conditions of competition and consequently violated the MFN obligation under Art. II:1.[22] At the same time, a ‘change in conditions of competition’, being a question of fact, will depend on each individual allegation of MFN violation.
Inapplicability of the security exceptions
Admittedly, even if India has violated its obligation of non-discrimination, the GATS[23] provides for exceptions. It is likely that India may invoke the national security exception which allows a Member State to take any action “which it considers necessary for the protection of its essential security interests”, during a time of “war or other emergency”.[24] Proponents of India’s policy erroneously highlight that the language of this provision allows the country to determine for itself whether a measure is necessary, and precludes the WTO from interfering with such invocation (a so-called ‘self-judging’ obligation).[25] This would, however, shift the adjudicatory function from the WTO to the parties themselves – an absurd outcome. This position also conveniently ignores contemporary developments in the law.
It was held in the 2019 Russia—Measures Transit case, that firstly, not only is the existence of an emergency justiciable by the WTO,[26] but secondly, the Member also has the burden of proving that the measure taken was necessary in good faith, to protect its essential security interests.[27] This case curtails the unfettered discretion to Member states, which was earlier provided through the ‘self-judging’ construction of the exception. India’s policy is illegal on both fronts outlined above. In the Russia-Transit case, the panel accepted an emergency situation, concerning “armed conflict…rather than protectionism”, thus separating security-related conflicts from economic and political differences.[28] This differentiation is essential since otherwise, the provisions could be misused to cover every conceivable circumstance,[29] heavily undermining the Members’ legal obligations. Therefore, the risk of “opportunistic takeovers”, falling under the ambit of economic security, is not an emergency under this provision.
Admittedly, however, since the novel coronavirus has arguably caused ‘general instability’,[30] the existence of an emergency may be accepted. However, this does not exonerate India per se. This is because, even if an emergency situation exists, the oft-ignored good faith obligation would still require a rational nexus between the measure undertaken, and the aim to address the emergency situation.[31] Otherwise, during an emergency, countries would enjoy a clean chit to ignore all of their obligations. In the present situation, India fears that foreign investors may take advantage of the economic slump by acquiring domestic businesses. However, it is unclear why the approval route is prescribed only for Chinese investors, or how this discriminatory and targeted approach has a rational nexus with ameliorating the emergency situation. If India is concerned about takeover of strategic industries such as those dealing with sensitive personal data,[32] the policy should have been industry-specific (encompassing sectors like media, telecommunications, defence, energy etc.), not country-specific.
It seems, therefore, that the measure is purely politically motivated, subtly blaming China for the novel coronavirus, and thus preventing China from ‘reaping the benefits’ of a crashed economy. As outlined above, measures purely intended to gain an economic or political advantage, are not by themselves sufficient to qualify for the security exceptions. As a result, the move is not in furtherance of essential security interests, and violates India’s MFN obligation under GATS. Nevertheless, the current impasse of the WTO dispute settlement mechanism, whereby the United States continues to block the appointment of judges to the Appellate Body, is a saving grace for India.
What could India do differently?
The author believes that a security exception, even if applicable, does not blindly trump the Member’s legal obligations, including non-discrimination. Instead, where possible, the two must be interpreted harmoniously. Therefore, where different possible measures exist, the countries should, in good faith, undertake the measure which would least impinge on its legal obligations, including its MFN obligation.
In this situation, to protect strategic firms from opportunistic takeovers, the appropriate measure would have been to shift all countries’ foreign investments to the approval route for particular strategic industries, rather than to shift only Chinese investments for all industries. This is similar to the move adopted by Australia, which has temporarily subjected all foreign investment to an approval review[33] – thereby harmoniously balancing the emergency situation with its MFN obligation.
The article has been authored by Anshul Butani, a Fourth-year student at the National Law School of India University(NLSIU), Bangalore.
[1] Dipanjan Chaudhury, A new approval route, no WTO rules breach, Economic Times (New Delhi) April 21, 2020, available at https://economictimes.indiatimes.com/news/economy/indicators/a-new-approval-route-no-wto-rules-breach-officials/articleshow/75262838.cms?from=mdr.
[2] China says India’s FDI restrictions against WTO rules, G-20 consensus, Business Line (New Delhi) April 20, 2020, available at https://www.thehindubusinessline.com/news/china-says-indias-fdi-restrictions-against-wto-rules-g-20-consensus/article31386992.ece.
[3] Subhayan Chakraborty, China slams India’s move to scrutinise FDI, calls it discriminatory, Business Standard (New Delhi) April 20, 2020, available at https://www.business-standard.com/article/economy-policy/china-slams-india-s-move-to-scrutinise-fdi-calls-it-discriminatory-120042000694_1.html.
[4] Steven Padakandla, India’s China FDI Gamble, The Diplomat, May 1, 2020, available at https://thediplomat.com/2020/05/indias-china-fdi-gamble/.
[5] Asit Ranjan Mishra, FDI Policy change may dry up access to Chinese investments in post-covid world, LiveMint, April 19, 2020, available at https://www.livemint.com/news/india/fdi-policy-change-may-dry-up-access-to-chinese-investments-in-post-covid-world-11587318548263.html.
[6] Nicholas DiMascio, Nondiscrimination in Trade and Investment Treaties: Two Sides of the Same Coin?, AJIL 48 (2008).
[7] Anirudh Laskar, FDI rule tweak: PayTm, BigBasket, others with Chinese investors may not be hit, Livemint, April 24, 2020, available at https://www.livemint.com/news/india/fdi-rule-tweak-paytm-bigbasket-others-with-chinese-investors-may-not-be-hit-11587722635319.html.
[8] Ameya Singh, Logic Behind India’s New Investment Policy, The Diplomat, April 22, 2020, available at https://thediplomat.com/2020/04/the-logic-behind-indias-new-investment-policy/.
[9] General Agreement on Trade in Services, April 15, 1994, 1869 U.N.T.S. 183, 33 I.L.M. 1167 1994 (“GATS”), Art. 1(2)(c).
[10] DiMascio, supra note 6.
[11] Eric M. Burt, Developing Countries and the Framework for Negotiations on Foreign Direct Investment in the World Trade Organization, 12(6) American University International Law Review 1015 (1997).
[12] Agreement on Trade-Related Investment Measures, April 15, 1994, 1868 U.N.T.S. 186 (“TRIMS”), Preamble.
[13] Mohamed Ariff, TRIMs: A North-South Divide or a Non-issue?, 12(3) The World Economy 347 (1989).
[14] Kenneth Vandevelde, A Brief History of International Investment Agreements in Effect of Treaties on FDI 25 (Karl Sauvant ed., 2009).
[15] Appellate Body Report, United States–Import Prohibition of Shrimp Products, WT/DS58/AB/RW (October 22, 2001 adopted on November 21, 2001); Sannoy Das, Sovereignty, Development And International Economic Law, 4 NLUD SLJ 53 (2017).
[16] World Trade Organization, Trade and Investment: Technical Information, Agreement on Trade Related Investment Measures, available at https://www.wto.org/english/tratop_e/invest_e/invest_info_e.htm.
[17] Paul Civello, The TRIMs Agreement: A Failed Attempt at Investment Liberalization, 8(97) Minnesota Journal of International Law 171 (1999).
[18] GATS, Art. II(1).
[19] GATS, India: Final List of Article II (MFN) Exemptions, 3-4, GATS/EL/42, (April 15, 1994), available at https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/SCHD/GATS-EL/EL42.pdf&Open=True; WTO, India: List of Article II (MFN) Exemptions: Supplement 1, 2, GATS/EL/42/Suppl.1, (April 11, 1997), available at https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/SCHD/GATS-EL/EL42S1.pdf&Open=True.
[20] Appellate Body Report, Argentina – Financial Services, ¶6.105-6.106, WT/DS453/AB/R (April 14, 2016 adopted on May 9, 2016).
[21] Akhilesh Sharma, New FDI Rules Not Violation, Say Government Sources on China Criticism NDTV (New Delhi) April 21, 2020, available at https://www.ndtv.com/india-news/new-fdi-rules-not-a-violation-of-wto-principles-its-only-an-approval-process-government-sources-on-c-2215349.
[22] Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, ¶244, 246, WT/DS27/AB/R (September 9, 1997 adopted September 25, 1997).
[23] GATS, Art. XIVbis.
[24] GATS, Art. XIVbis(1)(b)(iii).
[25] Singh, supra note 8.
[26] Report of the Panel, Russia–Measures Concerning Traffic in Transit, ¶7.82, WT/DS512/R (April 5, 2019 adopted on April 26, 2019) (“Russia Transit”).
[27] Russia Transit, ¶7.132-7.138.
[28] Russia Transit, ¶7.81.
[29] Wolfgang Weib, Interpreting Essential Security Exceptions in WTO Law in View of Economic Security Interests in Global Politics and EU Trade Policy (Cornelia Furculita ed., 2019).
[30] Russia Transit, ¶7.76-7.77.
[31] Russia Transit, ¶7.43.
[32] Benjamin Parkin, India moves to curb Chinese corporate takeovers, Financial Times (New Delhi) April 18, 2020, available at https://www.ft.com/content/ad3f84b0-fb75-4588-97e8-4a657ad67883.
[33] Amy Remeikis, Australian authorities to check every proposed foreign investment during coronavirus crisis, The Guardian, March 29, 2020, available at https://www.theguardian.com/world/2020/mar/29/australian-authorities-to-check-every-proposed-foreign-investment-during-coronavirus-crisis.
Picture Source: EconomicTimes
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