A call for equitable negotiations
In recent trade negotiations, demands from developed countries for India to incorporate “investment protection” elements within free trade agreements (FTAs) have sparked considerable debate. While the proposal may appear benign on the surface, its implications could be far-reaching and detrimental, particularly for developing nations like India. The insistence on embedding such provisions within FTAs undermines sovereign decision-making, exposes countries to disproportionate risks, and demands closer scrutiny. The concept of investment protection, in essence, grants expansive rights and safeguards to foreign investors. These provisions include commitments that may restrict a host nation’s policy space in areas such as public health, environmental regulation, and labour rights. As noted by informed sources, the integration of these elements within FTAs is inappropriate and unnecessary. Instead, they argue, investment protection agreements should be negotiated separately, preserving the integrity of trade-focused agreements. A precedent for separate negotiations exists. For example, India and the European Union (EU) have been working on a distinct investment protection agreement, independent of the India-EU FTA. This distinction is crucial. FTAs often feature specialized dispute settlement mechanisms that allow countries to implement retaliatory measures across unrelated sectors, should disputes arise. Incorporating investment protection clauses within an FTA could exacerbate such conflicts, distorting the trade agreement’s primary intent.
India’s caution stems from its past experiences. Investment chapters in earlier FTAs with countries like Japan, Korea, and Singapore have revealed risks of disputes spilling over into the trade domain. This cross-sectoral escalation of conflicts is particularly problematic when disputes reach country-to-country levels of resolution, disrupting broader economic relationships. By advocating separate agreements, India seeks to decouple trade and investment disputes. This separation ensures greater clarity, minimizes risks, and maintains distinct regimes for trade and investment. Such an approach is not unique. Many nations, including developed ones, have increasingly moved away from binding investor-state arbitration mechanisms in trade agreements. Recent treaties, such as the UK-New Zealand and UK-Australia FTAs, and the United States-Mexico-Canada Agreement (USMCA), omit investor-state arbitration altogether. Similarly, countries like the UK have withdrawn from mechanisms such as the Energy Charter Treaty’s arbitration framework, signalling a broader shift. One of the most contentious aspects of investment protection agreements is investor-state arbitration. While touted as a fair dispute resolution mechanism, arbitration is fraught with issues. It is an exorbitantly costly process, with studies estimating expenses between $5 million and $7.5 million per case. These costs, often borne by taxpayers, escalate further during enforcement and appeals, which may span multiple jurisdictions over several years.
Moreover, arbitration tends to disproportionately favour developed countries, as decision-makers predominantly hail from narrow, Western-centric demographics. This systemic bias leaves developing nations like India at a disadvantage. UNCTAD data shows that countries such as Argentina, Colombia, and Ecuador have faced the majority of arbitration cases, predominantly initiated by developed nations. The trend underscores the unequal burden of arbitration on developing economies. India’s approach to addressing these concerns is pragmatic. By mandating the exhaustion of local remedies (ELR) before resorting to international arbitration, India ensures that disputes undergo a fair chance of resolution within domestic legal frameworks. ELR serves as a filter, allowing disputes to be resolved amicably without immediately incurring the high costs and prolonged timelines associated with arbitration. Critics argue that ELR delays justice for investors. However, the provision aligns with global practices, observed in treaties involving nations like China, Bangladesh, Malta, and Turkey. ELR not only protects taxpayer money but also encourages early settlements, fostering trust between investors and host states. The insistence on embedding expansive investment protection clauses within FTAs reflects a larger issue of power dynamics in global trade negotiations. For developing nations, these clauses pose significant challenges. They restrict policy flexibility, expose countries to potential litigation risks, and shift the balance of power toward foreign investors.
India’s stance highlights the broader concerns shared by many developing nations. Arbitration mechanisms often become tools for developed countries to exert influence, with high costs and interpretative biases exacerbating the disparity. By pushing back against these demands, India is not only safeguarding its economic interests but also setting an example for other nations facing similar pressures. Furthermore, India’s commitment to protecting its domestic policy space is evident in its updated Model Bilateral Investment Treaty (BIT) of 2016. The model BIT reflects a shift toward balanced agreements, focusing on preserving sovereign rights while providing reasonable protections to investors. It is a significant departure from earlier practices, where investment protection chapters in FTAs often resulted in one-sided obligations. The global rise in arbitration cases—over 1,300 so far, as per UNCTAD—highlights the urgency of reforming the investment protection regime. For India, the path forward involves striking a delicate balance between encouraging foreign investment and safeguarding national interests. The emphasis on separate agreements for trade and investment protection ensures that both domains receive due attention without undue interference. India’s position resonates beyond its borders. As developing nations grapple with similar challenges, a collective push for reforming the investor-state arbitration system gains momentum. The system’s inherent flaws, from high costs to decision-making biases, necessitate a rethinking of how investment disputes are resolved globally.
