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Obama’s Trip to India: Don’t Rush into a Bilateral Investment Treaty

October 26, 2010

Source: Institute for Policy Studies

By Sarah Anderson

The U.S. and India should not sign a treaty that will only serve the short-term interests of large corporations, and undermine the authority of governments to protect their people from financial crisis.

After what’s expected to be a grim election for his party, President Barack Obama will fly to the other side of the planet next week.  In the lead-up to his first visit to India, there have been calls from many quarters for the two countries to sign a bilateral investment treaty.

Corporate lobbyists seeking increased market access have been pushing for such a deal for years.  Recently, top foreign policy officials from the Bush administration also weighed in.

In a report published by the Center for a New American Security, former Deputy Secretary of State Richard L. Armitage and former Under Secretary of State for Political Affairs R. Nicholas Burns wrote that “The United States and India should prioritize the need to advance the multilateral trading system. They can accomplish this by adopting bilateral trade and investment measures that they would like to see other countries emulate.  This should begin with the launch of serious negotiations toward the long-delayed Bilateral Investment Treaty that would, in light of the tremendous domestic Indian market and increasing bilateral investment flows, create a more stable environment for growth.”

Armitage and Burns provided no details of what’s actually in bilateral investment treaties (BITs).  Many analysts who’ve taken a closer look argue that the current U.S. model for such treaties would be likely to lead to less economic stability – not more.

Treaty provisions that should be of serious concern to India are those that prohibit the use of capital controls, a policy tool that India has applied effectively to escape the worst impacts of global financial crises.

In a New York Times article, former IMF chief economist Kenneth Rogoff reported that Indian policymakers were the most cheerful attendees at the 2009 World Economic Forum in Davos, largely because that government’s stringent capital controls were helping to insulate the country from the economic crisis.

A February 2010 IMF report of a larger group of nations found that those which deployed controls on inflows before the current crisis were among the least hard hit. The IMF study concluded that capital controls are a legitimate policy tool for preventing and mitigating crises.

What happens if a government violates the capital controls provisions in a U.S. trade or investment treaty?  Private foreign investors affected by the policy have the right to sue the government for compensation in supra-national tribunals that have no public accountability, no standard judicial ethics rules, and no appeals process.

In response to criticism, a handful of recent U.S. trade agreements have included a special dispute settlement procedure for investor-state claims related to capital transfers. The U.S.-Peru free trade agreement, for example, limits damages arising from certain restrictive measures on capital inflows to the reduction in value of the transfers. Investors may not demand compensation for the loss of profits or business. In addition, there is an extended “cooling off” period before investors may file claims.

While a step in the right direction, these provisions still place undue restrictions on the authority to use capital controls. If they were included in any possible U.S.-India treaty, the government of India would still face the prospect of expensive investor-state damages claims.  They could be tied up in legal proceedings for years, defending a legitimate policy that has proved effective in reducing financial instability.

The negotiations over a U.S.-India treaty were begun by the Bush administration.  Obama officials have said they won’t complete the deal until they finish up a review of the U.S. model BIT.

Let’s hope U.S. and Indian leaders won’t get carried away by the pressures of the upcoming Obama visit to produce a treaty that may serve the short-term interests of large corporations and investors but would undermine the authority of governments to protect their people from financial crisis.

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and serves on the Investment Subcommittee of the U.S. State Department’s Advisory Committee on International Economic Policy.

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