Can WTO be the ‘Automatic Route’ for Recourse for China?

To regulate the Foreign Direct Investment (“FDI”) coming in from India’s neighboring countries, the Department for Promotion of Industry and Internal Trade (“DPIIT”) released a press note modifying the FDI policy on 17th April 2020. The press-note mandated the approval route for FDI coming in from all countries which “share land border with India”, i.e., Pakistan, China, Bangladesh, Nepal, Bhutan, and Myanmar. 

This has been done to curb “opportunistic takeovers/acquisitions” of companies in India due to the “current COVID-19 pandemic.” It must be noted that FDI from Pakistan and Bangladesh has been subject to Government approval even before the release of this press note. Therefore, it is clear that the press note targets FDI from China, Nepal, Bhutan, Afghanistan, and Myanmar. At this juncture, it is important to analyze the levels of FDI coming in from each of these countries: 

China has invested US$ 2.34 billion in India over the last two decades, which is around 156 times more than the total investment made by Nepal, Myanmar, and Afghanistan collectively. Predictably outraged, China issued a statementcalling the new FDI policy ‘discriminatory’ and ‘in violation of the World Trade Organization’s (“WTO”) laws and principles’.  It is being argued that WTO does not govern FDI and allows countries to liberalize their FDI policy. While this makes for extremely interesting banter, the potential of it materializing into a WTO Dispute seems bleak. 

However, in contrast to the arguments being posed, the FDI policy can be seen from various angles when it comes to WTO law. For the sake of simplicity, the analysis can be divided into: (i) Investment measures related to trade in Goods; and (ii) Investment measures related to the trade in Services. 

Investments related to Trade of Goods 

In the WTO framework, trade in goods is governed by the General Agreement on Tariffs and Trade (“GATT”). GATT is read with other multilateral agreements, including the Agreement on Trade Related Investment Measures (“TRIMS”), which governs investment measures affecting trade in goods. The FDI policy introduced by India squarely falls under the jurisdiction of TRIMS. 

Through Article II, TRIMS directly adopts Article III (National Treatment) and Article XI (Quantitative Restrictions) of the GATT. However, it does not adopt Article I of the GATT, which requires that any form of privilege extended to a country by another country, must be extended to all member countries alike (Principle of Most Favoured Nation). Therefore, it is clear that a remedy only lies under TRIMS if the measure in question either (i) discriminates between foreign and domestic investments; or (ii) imposes a quantitative restriction on the funds available to enterprises which hinders trade. 

What is interesting to note here is that ‘quantitative restrictions’ under Article XI of GATT has been interpreted to not only mean a numerical prohibition on the imports of goods, but also any condition which has a ‘limiting effect’ on importation. In fact, Paragraph 2(b) of the Annex to TRIMS clarifies that any restriction on the access to foreign exchange is inconsistent with a country’s obligation of general elimination of quantitative restrictions.  Therefore, while China would not have a claim under discrimination under TRIMS, India could be found to have violated Article II of TRIMS. 

Investments related to the Trade in Services

Trade in services is governed by the General Agreement on Trade in Services (“GATS”) under which countries make specific commitments under four ‘modes’: (1) Cross-border supply; (2) Consumption abroad; (3) Commercial Presence; and (4) Movement of natural persons. Mode 3, i.e. Commercial Presence is when services are provided through a business establishment, i.e. FDI, to another country.

India has made commitments under Limitations on Market Access under Mode 3 for all service sectors. However, some sub-sectors remain ‘unbound’.  Essentially, in areas where the commitment is ‘unbound’, India has no obligation towards other WTO Member countries. Where specific commitments do exist, India must ensure that these commitments are not being violated through a said measure. The new FDI policy does not, per se, violate any of the commitments made by India to China under Mode 3. 

However, Article II of the GATS does incorporate the requirement of non-discrimination. No measure introduced by a country can extend more favorable treatment to another country. In such a situation, if China is able to establish that the FDI Policy directly affects the trade in services to India, it may have grounds for a WTO dispute. It must be noted that ‘treatment no less favorable’ has been interpreted by the Appellate Body to mean that any measure which “modifies the conditions of competition to the detriment of like services or service suppliers of any other Member” stands in violation of Article II. Therefore, a procedural difficulty being posed to China in providing a service in comparison to other countries may have a strong enough rationale to establish China’s claims. 

Other Possible Claims outside the WTO Framework

India and China had also entered into a Bilateral Investment Treaty (“BIT”) which was terminated in 2018. However, Article 16 of the BIT states that the BIT shall remain in force for 15 years after its termination, making the BIT still enforceable. However, the BIT deals with the protection of already-existing investments, and not investment measures which may govern the process of investment being made into the country. 

Therefore, for now, it seems that the claims made by China may find recourse under Article XI of GATT, TRIMS, and under Article II of GATS. It must be noted that several countries, including the European Union and Australia are reviewing and strengthening their FDI policies in a manner to protect ‘critical assets’. It is yet to be seen if China turns to retaliation or adopts the less-automatic diplomatic route.

Divyashree Suri is an international trade practitioner in a reputed law firm based out of New Delhi. She specializes in WTO and trade remedy laws, and is currently engaged with matters pertaining to anti-dumping, safeguards, and countervailing duty investigations. Divyashree holds a B.A. LL.B (Hons) degree from Jindal Global Law School. 

Image: The Diplomat

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