India plans to abolish ISD clause in FTAs

The Hankyoreh, Seoul

India plans to abolish ISD clause in FTAs

Indian Express reports New Delhi’s decision after facing the threat of international arbitration from foreign companies.

By Jung Eun-joo, staff writer

6 April 2012

India plans to abolish the investor-state dispute system and renegotiate FTAs with South Korea, Singapore, and other countries, an Indian newspaper reported.

Indian Express, a leading English-language daily, reported on Wednesday that the Indian government decided to abolish the ISD system after facing the threat of international arbitration from foreign companies.

The article also said New Delhi was negotiating investment agreement changes with other countries to ensure that any lawsuits filed against it by foreign companies could only be heard in Indian courts.

The ISD system allows foreign investors who suffer losses due to a country’s failure to fulfill its investment agreement obligations to seek damages from that country through international arbitration.

The newspaper named India’s Comprehensive Economic Partnership Agreement (CEPA) with South Korea as a representative example of a trade agreement permitting foreign companies to challenge New Delhi’s policies. A CEPA is a trade agreement with a broader scope than an FTA. It encompasses all areas of economic relations, including trading of goods and services, investment, and economic cooperation. The CEPA signed between South Korea and India went into effect in January 2010.

India has investment agreements with around fifty countries and is currently in negotiations with Australia and the European Union.

The reason for New Delhi’s decision to abandon the ISD system is its first-hand experience with the potential threat foreign companies pose to public policy on the grounds of investment agreement violations. Since January, multinational corporations have been waging an assault on Indian government policy. The UK telecommunications company Vodafone announced plans to take various international and domestic measures, arguing that the Indian government violated its investment pledge by changing its tax policy. Norway’s Telenor and Russia’s Sistema also launched legal battles, and India’s state-run Coal India Limited recently lost an international arbitration case to an Australian company.

In an interview with the Indian Express, Indian trade expert Biswajit Dhar noted that the concerns about ISD abuse has been frequently commented on and argued that the Indian government was right to refuse international arbitration in connection with investment, even if this hurt its reputation.

With the number of international arbitration cases rising sharply in recent years, more and more countries are expressing similar opposition to the ISD system. Australia, which excluded the ISD system from its 2004 FTA with the US, said in its new trade policy statement of April 2011 that it would not be adopting the system in the future. Canberra also made it clear that it would not introduce the system in its ongoing FTA negotiations with South Korea.

The South African government is reexamining the ISD system after a policy of affirmative action for blacks, aimed at reducing economic disparities between white and black people, was targeted in 2007 by a multinational corporation. While attending the United Nations Conference on Trade and Development’s World Investment Forum in 2010, South Korean official said that unfair and exploitative investment agreements with ISD provisions limited developing countries’ ability to formulate policies for sustainable development.

The Brazilian parliament has also refused to ratify a number of investment agreements on the grounds that they infringe on legislative sovereignty. Ecuador and Bolivia pulled out of the International Center for Settlement of Investment Disputes convention after suffering a baptism by fire from US investors.

Stephen Clarkson, a political science professor at University of Toronto in Canada, criticized the ISD system as a threat to democracy that allows undue power to foreign businesses.

Gus Van Harten, a professor at the Osgoode Hall Law School of Canada’s York University, said that the best choice was to abandon the system, and recommended that if this is not feasible, countries should seek out alternatives to guarantee arbitrator independence and pursue renegotiations.