India is pushing back against demands from certain developed nations to include dedicated “investment protection” chapters within free trade agreements (FTAs), arguing that such embedded provisions could have significant negative repercussions for its economy and trade relations. Sources indicate that negotiating investment protection as a separate treaty, rather than a chapter within an FTA, offers a more balanced and less risky approach.
Concerns centre on the broad obligations and commitments imposed on foreign investors under typical investment protection frameworks. Integrating these within FTAs, which often have specialised dispute settlement mechanisms, raises the possibility of retaliatory trade measures in unrelated sectors triggered by investment disputes. This risk is mitigated when investment protection is handled through independent treaties.
The European Union, for example, is pursuing a separate investment protection agreement with India, distinct from their ongoing FTA negotiations. This approach avoids the potential for investment disputes to disrupt the broader trade relationship.
India’s stance is informed by past experiences. While earlier FTAs with countries like Japan, Korea, and Singapore included investment chapters, these provisions carry the inherent risk of disputes escalating beyond investment matters and impacting trade. India now advocates for separating trade and investment agreements to ensure clarity and minimise such cross-domain risks.
A key point of contention is the push from developed nations for investor-state dispute settlement (ISDS) through arbitration. Ironically, these same nations are increasingly abandoning ISDS in their own recent treaties, such as the UK-New Zealand, UK-Australia, and the USMCA. Several European nations and the UK have also withdrawn from the Energy Charter Treaty, which included ISDS provisions.
India highlights the exorbitant costs associated with arbitration, estimated between $5 million and $7.5 million, excluding enforcement and appeals. These costs are ultimately borne by taxpayers when the state is the respondent. Furthermore, arbitration is a lengthy process, often taking four to five years, with additional time spent on enforcement.
India champions the principle of “exhaustion of local remedies” (ELR), requiring investors to pursue legal avenues within India for a five-year period before resorting to international arbitration. This encourages amicable resolutions and reduces the need for costly arbitration. While developed nations argue that ELR causes delays, India maintains that it promotes early settlements and is a common practice in investment treaties of other countries like China, Colombia, and Turkey.
Data from UNCTAD reveals that developing nations like Argentina, Colombia, and Ecuador are disproportionately targeted by arbitration cases, often initiated by developed nations. With over 1,332 arbitration cases globally, India’s stance reflects a broader concern among developing countries about the high costs, potential biases, and unequal impact of arbitration mechanisms. The current system, they argue, is heavily skewed in favour of developed countries.
India remains committed to negotiating agreements that protect its economic interests, balance investor confidence, and preserve its domestic policy space. The nation’s focus on separating investment protection from trade agreements and advocating for ELR underscores its commitment to a more balanced and equitable approach to international investment.
