Context: The article is discussing the proposed Investment Facilitation Agreement (IFA) which is being actively pursued by more than 100 countries, excluding India in WTO. It also highlights the difference between the IFA and investment protection agreements like Bilateral Investment Treaties (BITs) and the problems associated with the Investor-State Dispute Settlement (ISDS) clause of the BITs.
Some Advice to India on the IFA Negotiations Background
About the World Trade Organization (WTO)
- WTO is an international organization established to supervise and liberalize world trade.
- The WTO is the successor to the General Agreement on Tariffs and Trade (GATT), which was created in 1947.
- Members: The WTO has 164 member countries, and its headquarters is located in Geneva, Switzerland.
- India and WTO: India has been a WTO member since 1 January 1995 and a member of GATT since 8 July 1948.
- Objectives of WTO:
- To promote free and fair trade
- To provide a forum for trade negotiations
- To administer and enforce WTO agreements
- To cooperate with other international organisations
- To Monitor National trade policies
- To Provide technical assistance and training
Agreements of WTO related to Trade and Investments:
General Agreement on Trade in Services (GATS):
- This agreement covers trade in services, including modes of supply such as cross-border trade, consumption abroad, commercial presence, and presence of natural persons.
- It includes provisions for the movement of natural persons, such as business visitors, intra-corporate transferees, and independent professionals.
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS):
- This agreement covers the protection of intellectual property rights, including patents, trademarks, and copyrights.
- It establishes minimum standards for the protection and enforcement of intellectual property rights, and aims to promote the transfer and dissemination of technology.
Agreement on Subsidies and Countervailing Measures (SCM):
- This agreement regulates subsidies and other forms of government support that may affect international trade.
- It prohibits subsidies that are contingent on export performance, and provides for the investigation and countervailing of subsidies that cause injury to domestic industries.
Agreement on Technical Barriers to Trade (TBT):
- This agreement aims to ensure that technical regulations, standards, and conformity assessment procedures do not create unnecessary barriers to trade.
- It encourages the use of international standards, and provides for the notification and consultation of new or revised technical regulations.
Agreement on Sanitary and Phytosanitary Measures (SPS):
- This agreement regulates measures that countries may take to protect human, animal, or plant life or health.
- It aims to ensure that such measures are based on scientific principles, and are not applied in a discriminatory manner.
- It provides for the recognition of equivalent measures taken by other countries, and encourages the use of international standards.
What are BITs and IFA? Are they an Integral part of the WTO Trade Agreements?
- BITs and IFAs are not a part of the WTO.
- While BITs are agreements between two countries aimed at promoting and protecting investments made by investors of one country in the other, IFAs are similar agreements but they focus on facilitating investment flows and reducing barriers to investment.
|Bilateral Investment Treaties (BITs)||Investment Facilitation Agreement (IFA)|
|BITs are agreements between two countries that establish the terms and conditions for private investment by nationals and companies of one country in the other country.
They typically cover issues such as the protection of foreign investment, the promotion of technology transfer and other forms of business cooperation, and the resolution of disputes between investors and states.
These treaties are a key instrument of economic diplomacy and play an important role in promoting foreign investment and economic development.
|IFA is a proposed agreement currently being discussed among WTO members.
The IFA is intended to facilitate and promote investment by creating a more transparent, predictable, and streamlined environment for investors.
The IFA negotiations began in 2017, and is seen as a way to promote investment in developing countries, particularly in sectors such as infrastructure, energy, and technology.
However, there are still some issues such as the role of investor-state dispute settlement (ISDS) and the scope of the agreement.
Some countries are concerned that the IFA could be used to undermine existing investment protection measures, while others argue that the agreement should be more ambitious in its scope.
Decoding the Editorial
The article majorly focuses on IFA that aims to create legally binding provisions to facilitate investment flows and improve regulatory transparency and predictability of investment measures.
Controversial aspects of BITs: The article highlights India’s concern that foreign investors may use the Investment Facilitation Agreement (IFA), even if India is not a party to it, as a basis for making claims under existing Bilateral Investment Treaties (BITs) between India and other countries.
- Most Favoured Nation (MFN) Clause: Under the Most-Favoured Nation (MFN) provision in BITs, foreign investors may be able to import or borrow certain provisions from the IFA, which they may perceive to be more favourable than those provided in the underlying BIT.
- For example, if a provision in the IFA requires greater transparency in investment measures than a provision in the existing BIT, a foreign investor could potentially use the MFN clause to argue that the more favourable IFA provision should apply to their investment.
- India’s concern is that foreign investors could use the IFA to their advantage by invoking the MFN clause to bring claims under the existing BITs, which would be disadvantageous to India.
- This is one reason why India has not joined the IFA negotiations.
- Fair and Equitable Treatment (FET) Clause:
- The FET provision in BITs is a standard clause that requires host states to treat foreign investors fairly and equitably.
- Tribunals have interpreted the FET provision to include the protection of investors’ legitimate expectations.
- Therefore, foreign investors could argue that the commitments made by a state under the IFA create legitimate expectations, and non-compliance with these commitments would violate the FET provision.
- “Umbrella Clause” of BITs:
- The “umbrella clause” in BITs allow foreign investors to bring contractual and other commitments owed to them by a state under the protective umbrella of the BIT.
- Therefore, if a state makes commitments under the IFA, foreign investors could potentially argue that these commitments fall under the “umbrella clause” of the BIT and that any violation of these commitments would be a violation of the BIT.
- Investor-State Dispute Settlement (ISDS):
- One of the most controversial aspects of BITs is the ISDS mechanism, which allows foreign investors to bring claims against the host state for alleged treaty breaches.
- Critics argue that this mechanism gives investors undue power over states and can lead to a chilling effect on the ability of states to regulate in the public interest.
Arguments favouring India to be a part of IFA:
- Would MFN clause be a threat to India?
- The chances of deploying the MFN provision in BITs to import the IFA provisions into the BIT seems very bleak.
- This is because many BITs exempt economic integration agreements from the application of MFN.
- Therefore, foreign investors would not be able to rely on MFN to import IFA provisions into the BIT.
- Also, experts have argued that this exemption would make it difficult for foreign investors to successfully bring such claims.
- So, even if a foreign investor brings a claim, it is unlikely that an ISDS tribunal would accept it.
- Arguments against FET:
- If a foreign investor brings a claim under the FET provision of a BIT, arguing that non-compliance with the IFA breached their legitimate expectations, it is unlikely that an ISDS tribunal will accept this argument.
- The only exception to this is if the State had specifically made IFA commitments to the foreign investor to attract their investment, and then went back on these commitments without a valid public policy justification.
- In other words, a binding IFA by itself cannot be the basis of an investor’s legitimate expectations.
- The ISDS tribunal would require evidence of specific promises made by the State to the investor, in order to rule in favour of the investor.
- Therefore, it is unlikely that foreign investors could use IFA provisions as a basis for their legitimate expectations and win an ISDS claim without additional evidence.
- Non-Favourable “Umbrella Clause”:
- Many new investment treaties avoid including “umbrella clauses,” which are clauses that allow contractual or other commitments owed to a foreign investor to be brought under the protective umbrella of the treaty.
- Without such a clause, foreign investors cannot sue states for non-compliance with IFA obligations as a breach of a BIT’s “umbrella clause.”
- This reduces the possibility of investors using IFA provisions as the basis for a claim under a BIT’s umbrella clause, and limits the scope of protection that investors can seek under an investment treaty.
What is the Suggested Solution?
Clear Demarcation of IFA and BITs:
- IFA can be separated from BITs and ISDS by explicitly stating in the IFA text that it cannot be used to interpret or apply any rule for the protection of investment contained in any investment treaty.
- By doing so, the IFA will have its own set of rules and regulations for facilitating investment flows, which will not be interpreted or applied based on any other investment treaty.
- Additionally, the IFA can state that it does not create any rights for non-signatory countries and their investors, further ensuring that the IFA remains independent of any other investment treaty.
- The purpose of this insulation is to prevent any potential conflict or overlapping between the IFA and BITs or ISDS, ensuring that the IFA can function effectively in facilitating investment flows.
- Reform the Existing BITs:
- The countries may need to amend their BITs to explicitly exclude the IFA from its scope.
- This is already happening, as older BITs are being replaced with newer ones that contain more balanced provisions.
- The article further suggests that given the large number of countries pushing for the IFA, there is potential for them to agree to reform their BITs to reflect this will.
The fear of ISDS claims should not be a reason for India to oppose joining the IFA negotiations at the WTO. The possibility of an ISDS tribunal interpreting provisions broadly cannot be ruled out, but that should not be a reason to oppose international lawmaking. For instance, the likelihood of a national court interpreting the law wrongly should not be a reason to cease domestic lawmaking. Therefore, India should not let the fear of ISDS claims prevent it from participating in the IFA negotiations at the WTO.
Beyond the Editorial
India’s Disputes at WTO
- Sugarcane Subsidies: India faced a challenge by Australia, Guatemala, Costa Rica, Thailand, the EU and Brazil at the WTO for its sugar and sugarcane subsidies. India was said to be violating its commitments under the agreement on agriculture.
- WTO asked India to withdraw its subsidies.
- Export Subsidies: India faced a challenge by the US for its export subsidies. Members like the EU, Republic of Korea, China, Canada etc. participated in the dispute as third parties.
- WTO ruled that these export subsidy programmes provided by the Indian government violated provisions of the trade body’s norms.
- National Solar Programme: The US had filed a challenge over elements of India’s national solar program, which it said discriminated against foreign solar products in violation of a core global trade rule.
- The WTO ruled against India.
- Renewable Energy: India had challenged the US on the ground that America’s domestic content requirements and subsidies provided by eight of its states in the renewable energy or the solar sector were violative of global trade norms.
- WTO ruled in favour of India.
- Import Duties: India has a dispute with the US over the additional import duties imposed by Washington on Indian steel and aluminium in 2018.
- The decision is awaited by the WTO’s dispute settlement panel.