India’s approach to Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) has become a topic of significant discussion, especially in the context of recent demands from developed nations.
There have been calls for including investment protection elements as part of FTAs, but India remains firm in its position that these two agreements should be kept separate.
The reasoning behind this is rooted in concerns that merging the two could have far-reaching and negative consequences on both the trade structure and investor relations.
One of the primary issues with combining investment protection clauses within FTAs is the complexity it adds to dispute resolution mechanisms.
FTAs typically include specialised mechanisms to settle trade-related disputes, and these could potentially be extended to investment-related matters if the two agreements were combined.
This could result in retaliatory measures being taken in unrelated sectors, something India sees as detrimental to the structure and functioning of trade agreements.
Instead, India advocates for the negotiation of investment protection agreements independently, allowing for clearer and more manageable legal frameworks.
Historically, India has negotiated investment protection clauses as part of FTAs with countries like Japan, Korea, and Singapore. However, India’s Model BIT, introduced in 2016, focuses on keeping investment and trade separate to avoid complications.
The concern, as highlighted by sources, is that including investment protections in FTAs could lead to disputes spilling over into trade agreements, causing unnecessary tension between countries.
By keeping the two agreements distinct, India believes it can minimise the risks and offer greater clarity in both trade and investment regimes.
A further complication arises from the pressure to include arbitration as a dispute resolution mechanism in BITs. Many developed countries, while demanding arbitration provisions in treaties, have themselves begun moving away from arbitration in their national policies.
Examples include treaties like the UK-New Zealand, UK-Australia, and USA-Canada under the United States-Mexico-Canada Agreement (USMCA), which do not include investor-state arbitration.
This growing trend among developed nations raises questions about the fairness and practicality of the system, especially when it involves significant costs, which are ultimately borne by taxpayers.
Arbitration is a lengthy and expensive process, with costs estimated to range between USD 5 million and USD 7.5 million, excluding additional expenses for enforcement and appeals. These costs can escalate further when disputes are heard in multiple jurisdictions.
For instance, if the arbitration seat is in the Netherlands, the process could involve a court system with three levels, each adding to the overall cost. This expensive and time-consuming process is one of the reasons why India has been advocating for the exhaustion of local remedies before resorting to international arbitration.
The concept of "exhaustion of local remedies" (ELR) is a crucial aspect of India’s investment treaty practices. ELR mandates that investors must first attempt to resolve disputes through local legal systems before seeking international arbitration.
This provides an opportunity for both parties to reach an amicable resolution, avoiding costly arbitration proceedings. India’s position aligns with the view that this approach safeguards taxpayer money and reduces the financial burden of prolonged legal battles.
While some developed countries argue that ELR causes delays in dispute resolution, India counters this by pointing to its role in encouraging early settlements.
Moreover, the practice of requiring ELR is not unique to India; it is a common feature in the investment treaties of countries such as China, Argentina, Colombia, and Turkey.
According to data from the UNCTAD Dispute Navigator, developing countries like Argentina, Colombia, and Ecuador face the majority of arbitration cases, often initiated by developed nations.
This highlights the disproportionate impact that the investor-state arbitration system has on developing countries, reinforcing India’s position on the need for reform.
India’s stance on arbitration and investment protection in BITs is shaped by broader concerns that are shared by other developing nations.
The arbitration system is often seen as biased, with decision-makers predominantly from Western countries, which creates an uneven playing field. India is advocating for changes to the system, calling for greater fairness and representation for developing nations in investor-state dispute resolution.
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