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Time for a U.S.-India Investment Treaty

by Evan A. Feigenbaum
May 1, 2011

Passengers travel in an overcrowded train in the eastern Indian city of Patna, February 23, 2010. (Stringer/Courtesy Reuters).

It’s been a while since I last blogged on India. So my latest “DC Diary” column in India’s leading financial daily, the Business Standard, offers a good opportunity to do so. The column revisits—and then makes—the case for a bilateral investment treaty (BIT) between the United States and India.

Why? Here’s my argument:

India has concluded a raft of trade agreements—with Japan, South Korea, ASEAN, and many others—and it looks set to launch negotiations for many more. But the United States is the forgotten player, in part because Washington has yet to sort out its own trade priorities with India.

First, the good news: U.S.-India trade has grown rapidly, more than doubling from 2004 to around $66 billion in goods and services trade in 2008. Growth areas include aircraft, machinery, commercial services, and defense-related equipment. And Washington and New Delhi are stepping out in other ways as well. During President Obama’s November visit to India, the two sides announced plans to create a $10 billion infrastructure debt fund as a public-private partnership. India seeks large-scale foreign funding for its infrastructure build out. And its decision to raise the limit for foreign institutional investment in corporate bonds in the infrastructure sector will almost certainly open up new opportunities for U.S. investors.

But whatever happened to the idea of a bilateral investment treaty? Not long ago, the U.S. and India were locked in rancorous disagreements in the Doha Round of multilateral trade talks. And bilateral initiatives, like the BIT, were viewed, in part, as a way to provide ballast to U.S.-India relations in the face of disagreements on multilateral arrangements.

But the BIT is stalled, principally because the U.S. remains locked in an interminable internal review of its model treaty. And neither President Obama’s November visit to India, nor his administration’s December decision to move forward with other pacts, such as the Korea-U.S. free trade agreement (FTA), have done much to shake it loose.

That’s a shame, for at least three reasons:

First, India isn’t standing still. In early April, Indian policymakers announced that they will seek new trade agreements this year affecting services, investments, and tariffs on goods. They will aim to conclude comprehensive accords with Thailand, the European Union, and the European Free Trade Association by year’s end. And they look set to begin talks with Indonesia, the Common Market for Eastern and Southern Africa, and others, perhaps including Australia.

These agreements will result in lower tariffs on imported goods. Indeed, import tariff concessions from India’s recently signed deals with Japan and Malaysia will come into effect this year. And concessions from New Delhi’s ASEAN deal will be phased in between 2013 and 2016.

In coming years, such a proliferation of preferential trade agreements could help keep merchandise costs down in India and gradually liberalize the country’s commercial ties with important trading partners. But the U.S. isn’t part of the equation. And while a U.S.-India FTA isn’t in the cards, the idea of a BIT offered one pathway through which to build confidence on both sides.

Second, a BIT could have a salutary effect on US-India commercial relations. US-India trade has grown rapidly, but so too has bilateral investment.

Why a BIT? U.S. firms would welcome relevant legal changes, as well as the symbolic implications of such a treaty for further, subsequent liberalization in India. A treaty would establish safeguards, and an independent arbitration process, from which both countries could benefit.

A BIT would also enable further U.S. investment in Indian infrastructure by American investors. And it would provide protections to Indian investors too, as Indian firms’ U.S.-bound investments multiply. In fact, investment has grown in both directions, with Indian investment into the U.S. growing by some 60 percent to more than $4 billion from 2007 to 2008.

Third, the business of Asia is business. And many in Asia are now questioning America’s commitment to the economic pillars of its postwar role in Asia. A BIT with India could be one element of a broader US effort to reinvigorate its trade engagement in this region.

Trade and investment have both economic and political implications. They have become controversial in the United States as protectionist sentiment broadens and the country wrestles with a mostly jobless recovery. But in the 20th century, from the Open Door to the Cold War, commercial engagement was a central pillar of American leadership in Asia.

Put simply, America’s postwar economic role in Asia was underpinned by three pillars: sustained commitment to openness at home, deep faith in U.S. competitiveness abroad, and strong U.S. leadership on international trade agreements and regimes. Yet all three pillars are now under attack in the United States. And with Doha stalled, but with India and other Asian powers forging regional agreements, the U.S. risks being left behind.

A BIT won’t offer a magic bullet. No such trade or investment agreement could. And ideally, the U.S. will push to conclude the Doha round, so that multilateral liberalization will erase intraregional preferences.

But in the absence of progress on Doha, it makes sense for the U.S. to lean on a mix of other trade-related tools, from BITs with India and others to an expansion of the Trans-Pacific Partnership (TPP)—the potentially important, if still modest, effort among some APEC members to move beyond consensus by taking concrete steps toward WTO-compatible free trade expansion.

The U.S. and India do not always agree. And they most certainly have had strong differences on trade and investment rules. But there is no reason why the two countries cannot turn common interests into complementary policies. In their commercial relations, a BIT would be one important, if modest, way to forge ahead.

Post a Comment 1 Comment

  • Posted by IndiaUS BIT

    Mr. Feigenbaum, thanks for a very detailed article on the importance of India US BIT. Your article (just like USIBC) focuses on big issues like investment protection etc. We understand importance of these issues. However, we are missing out on one of the practical aspect -specifically movement of people, i.e. visas for investors.

    India has generated so many millionaires who can invest $300k to $500k in USA and generate jobs in USA. If these investors are allowed to invest in USA (along with visas) they can definitely improve US economy. Model treaty somehow dropped the visa provisions.

    Kindly elaborate your thoughts on this aspect.

    We (a group of like minded professionals/ entrepreneurs) have initiated a blog specifically to achieve India-US BIT-with visa provisions. Please visit our blog at http://www.indiausbit.wordpress.com.

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