China Perturbed by India’s Recent FDI Amendment: Decoding Possible Arguments in a WTO Dispute

Shatakshi Tripathi & Ashwin Vardarajan*

Introduction

On 17th April, 2020, India amended its Foreign Direct Investment Policy (“FDI Policy”) formulated under the Foreign Exchange Management Act, 1999 (“FEMA”), through which India has mandated countries which share land borders with it to adopt the government route, as opposed to the automatic route, for advancing Foreign Direct Investments (“FDI”) in India. Prior to the amendment, only Pakistan and Bangladesh were mandated to undergo this route. The amendment, being a pre-investment measure, further subjects future investments by pre-existing beneficial owners from land-border sharing countries in India to the governmental route of advancing FDIs. The amendment aims to curb “opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic”. Various countries, including European Union and Australia have also adopted similar measures for countering possible takeovers by foreign entities during the pandemic.

The Chinese Embassy claimed that the amendment brought about by India violates the World Trade Organisation (“WTO”) law’s principles of non-discrimination, and liberalization and facilitation of trade and investment. In case of a WTO lawsuit, Trade Related Investment Measures Agreement (“TRIMS”) – dealing with investment in terms of trade in goods – and the General Agreement of Trade in Services (“GATS”) – dealing with investment in terms of trade in services– will be attracted. Prima facie, it appears that China’s claim may pertain to India’s Most Favoured Nation (“MFN”), the National Treatment (“NTO”), Market Access (“MA”), and Quantitative restriction obligations.

This article delves into possible arguments in respect of these obligations and decode their outcomes from both nations’ perspectives.

 

Possible Arguments under WTO Law

  1. TRIMS

Article 2 of TRIMS states that no investment measures, inconsistent to Article III and XI of the General Agreement on Tariffs and Trade (“GATT”), can be adopted by a WTO member.

Article III of GATT (NTO) concerns laws, regulations or requirements which afford protection to domestic products over imported/foreign products in a given market (Appellate Body Report, Japan-Alcoholic Beverages II, p.16). Mandating a governmental route for foreign investments does not distinguish between goods produced in India and those being imported so as to afford protection to the former, and thus the amendment cannot attract Article III of GATT. In order for an investment relating measure to attract violation of NTO, it should have been accompanied by certain measures affording protection to, or favouring, domestic products; such as the imposition of a minimum local content requirement – as was the case in Canada-FIRA (GATT Panel Report, para. 5.8).

Article XI of GATT, on the other hand, concerns imposition of Quantitative restrictions on imported goods in the form of tariff quotas or limiting effects (Panel Report, India – Autos, para. 7.270). Paragraph 2(b) of TRIMS’s Annex illustrates and recognises measures, which restrict foreign investments into a country, as limiting effect restrictions inconsistent with a country’s obligation to eliminate Quantitative restrictions. Subjecting FDIs to governmental scrutiny is inevitably a restriction and thus has a limiting effect. Thus, Article 2 of TRIMS may be attracted in this case.

Since TRIMS does not cover the MFN obligation, it is irrelevant here.

  1. GATS

GATS’ covers four modes of supplying services, one of which is supply through commercial presence (Mode 3) (see, Article I, GATS). FDIs fall within the purview of Mode 3 as it includes commercial presence established through the acquisition or establishment of juridical persons in an economy (Article XXVIII(d)(i), GATS). Therefore, an assessment of the amendment to attract obligations under GATS will proceed with respect to India’s commitments under Mode 3 in its GATS service schedules (available here). At the outset, one must also note that FDIs do not preliminarily involve flow of services and service suppliers in a domestic economy. They are merely “an extension of corporate control over international boundaries” through mediums like purchase by someone of another entity’s shares.

Article XVII of GATS (the NTO) concerns measures in a given service sector which modify the conditions of competition to favour domestic services and service suppliers, or constitute less favourable treatment on foreign services and service suppliers in a service sector. NTO under GATS will again face the same rhythm as that under Article III of GATT, as the amendment does not favour Indian services and service suppliers in any way. On the contrary, several Chinese investors such as Great Wall Motors and SAIC have put investments on hold because of the amendment. In the past, they have contributed around $12 billion to the Indian economy and its domestic businesses as investments. Therefore, Indian businesses are rather prone to financial damage likely to result from the amendment.

Further, MA obligations, under Article XVI of GATS, concern barriers restricting access of services and service suppliers in a domestic economy. This is proven by identifying a specific service sector and determining whether a country has undertaken a commitment to grant full, partial or no MA (here). If a country has committed to grant MA in a service sector, Article XVI is prima facie violated. However, to show that MA of Chinese services and service suppliers in India has been hindered by the amendment, the same must fall within one of the six subcategories of MA barriers provided under Article XVI:2 of GATS – which includes barriers like limitation on the number of service suppliers, limitations on the total value of service transactions or assets etc. (Appellate Body Report, US-Gambling, para. 214). Facially, the amendment does not fall within the garb of any such barriers and thus India’s MA obligations are not violated.

As far as the MFN Obligation (Article II of GATS) is concerned, China will have to show that services and service suppliers from other nations are favoured more by the amendment, as opposed to its services and service suppliers in India. It would be valid to concede that non-land border sharing countries’ entities are not mandated to undergo governmental scrutiny before advancing investments in India, thereby exhibiting discriminatory treatment against cross-border sharing countries’ entities. Various Indian service sectors, such as the automobile, tourism and entertainment sectors, have seen the more FDIs from China in than from any other country.

However, the MFN under GATS simply concerns less favourable treatment by a country of services and service suppliers from one country when juxtaposed with another’s. Since FDIs, preliminarily, do not involve flow of services and merely concern transfer of acquisition and ownership, the amendment cannot contribute to such treatment. Therefore, alleging that Chinese services and service suppliers are accorded less favourable treatment when compared to those from other nations is a far-fetched argument, at least for the time being.

 

Exceptions Under WTO Law

In any scenario, India can resort to exceptions under Article XIV(c) of GATS and Article XX(d) of GATT – as exceptions under GATT apply to TRIMS via Article 3 of TRIMS. Under the said articles, a trade measure may be justified under the exceptions if it secures necessary compliance with a law or regulation, including those curbing ‘deceptive practices’.

The World Bank has noted that India’s GDP is expected to grow at a minimum of 1.5% per annum by the end of fiscal year 2020-21 and Indian businesses will require financial support. In this economic scenario, luring Indian business with fruitful FDIs as a means of boosting trade and aiding the economy, but with the ulterior motive of ill-intentional and opportunistic takeovers, may qualify as a deceptive practice. To substantiate, in Indonesia–Chicken, the Panel accepted the act of misleading consumers to buy one product under the garb of another as a deceptive practice under Article XX(d) (Panel Report, para. 7.249). Therefore, when the intent of the GATT’s Preparatory Committee (here, p.583) and the WTO Panel on deceptive practises are applied in the current scenario, India can perhaps contend that the amendment secures compliance to the FDI Policy, or FEMA, and counters deceptive practices.

However, for a measure to be justified under the general exceptions, it must fulfil the chapeau. The chapeau of Article XX of GATT and Article XIV(c) of GATS states that measures being justified cannot be applied by a country in a manner constituting a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade. India has not specifically subjected Chinese entities to the governmental route and has in-turn subjected all land-border sharing countries to be subjected to the governmental route whilst ignoring possible takeovers by non-land border sharing countries’ entities. Thus, there arises a possibility of the amendment constituting a means of arbitrary or unjustifiable discrimination, thereby violating the chapeau of the general exceptions under GATS and GATT.

 

Conclusion

A dispute alleging violation of WTO law may be a hefty task for China and an efficacious idea. However, one cannot ignore that the amendment may have a negative impact on the Indian market – specifically on start-ups in the tech industry, as they receive a fair share of investment support from Chinese entities. Although the amendment is a bulwark against ill-intentioned takeovers by Chinese entities, adequate clarification to the same will be needed in the near future.


* Authors are law students at the Symbiosis Law School, Pune.

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