A Possible WTO Agreement on Investment-Identifying Emerging Issues and Their Implications for India

Abstract

The potential of foreign investment to inject a positive and multiplier effect on the receiving economy’s national output is now universally recognised. Most developing countries are unilaterally liberalizing their capital account and actively pursuing foreign capital to finance, primarily, their infrastructure and development projects. In 2015, global FDI flows stood at US$ 1.76 trillion, increasing by more than 5.5 times in the last two decades (US $315 billion in 1995). In rhythm with the forces of globalisation, as capital began to disavow its territorial linkages and started moving freely across borders, concerns regarding the inability of States to establish the legal institutions necessary to offer protection for foreign investments and demands for an international investment protection regime heightened. The scepticism regarding host State’s behaviour was founded on the assumption that, although there is initially a convergence in the interests of the foreign investor and the host State in bringing in investment, post-establishment, the aspirations of the investor and the objectives of the State are fundamentally conflictive. Whereas the investor is forever aiming to maximise its profits and exit the market without suffering a financial loss, the host State, guided by the purpose of keeping the investment steadfast, has an incentive to amend the governing laws or put in place capital controls, if not expropriate the investment without compensation. It was against this background of scepticism regarding hostile host State behaviour that international legal instruments for protection of foreign investment first developed. They were concluded at the bilateral level as a set of rules that would offer a minimum standard of protection to foreign investments. Bilateral Investment Treaties (BITs) containing disciplines on non-discrimination, expropriation, fair and equitable treatment of investors and investments, prohibition of performance requirements and provisions on investor-state dispute settlement system (ISDS) were the first concrete building blocks for an international investment protection regime. It was expected that these scattered fragments of bilateral treaties would eventually pave the way to a multilateral investment agreement. Concerted efforts to initiate negotiations for such an agreement under the WTO framework were made at the Singapore Ministerial Conference of the WTO in 1996. However, the path towards multilateralism in international investment law has been fraught with complexities and has eluded the consensus that was visible in other areas of international economic laws (GATT and then WTO for international trade law and the IMF for international monetary law). This paper attempts to identify and evaluate the issues that need to be addressed before moving towards a multilateral agreement, specifically from the perspective of India. This issue has gained emphasis today as the efforts to locate a multilateral investment agreement within the WTO matrix have once again gained traction. In the run up to the 10th WTO Ministerial Conference at Nairobi, certain members proposed “new issues” as an item for consideration at Nairobi. Amongst other issues, the facilitator’s report that was circulated before the Nairobi Ministerial Conference mentioned ‘investment’ as an issue that could be pursued after Nairobi or as a recurring issue. The renewal of attention towards the “Singapore new issues” forms part of a larger narrative to develop multilateral rules on competition, investment, e-commerce, government procurement so as to enhance the participation of micro, small and medium enterprises in regional and global value chains. Even as debates continue regarding the appropriateness of the WTO as a forum for negotiating multilateral investment disciplines on investment and whether multilateral disciplines would actually contribute to enhanced MSME participation in GVCs, it seems pertinent to look at some of the substantive issues surrounding the extant international investment regime so as to assess whether any of these issues can be resolved by progressing from bilateralism to multilateralism. Part II of the paper identifies the issues underlying the multilateralization of the investment regime. The issues are broadly divided into three parts. Issues that pertain to the extant bilateral treaty framework are assimilated under Part IIa. The more fundamental question of whether FDI itself has the natural quality of positively impacting the economy of the host State has been dealt with under Part IIb. Issues that are India-centric, but could very well confront policy makers in other developing countries as they enter the transitory phase and liberalise FDI, are analysed in Part IIc. Part III concludes.