The Evolving and Multilayered EU–India Investment Relations—Regulatory Issues and Policy Conjectures

• DOI: http://doi.org/10.1111/eulj.12037
• Author: Julien Chaisse,Debashis Chakraborty
• Date: 01 May 2014
• Published date: 01 May 2014

The Evolving and Multilayered EU–

India Investment Relations—Regulatory

Issues and Policy Conjectures

Julien Chaisse and Debashis Chakraborty*

Abstract: India and several EU member countries share a rich history of investment

collaborations. The collaboration has been cemented with several formal agreements

with individual EU members, and the recent negotiations with the trade bloc since June

2007 on a broad-based Bilateral Trade and Investment Agreement (BTIA) can be

considered as a culmination of this process while ongoing WTO negotiations on Mode 3

commitments remain essential in terms of market opening. The present article analyzes

the multi-layered regulation of foreign investment against the backdrop of the evolving

EU-India economic relations. The 2009 Treaty of Lisbon gave a new competence to the

EU which will impact ongoing negotiations with India whose global standing has

been signif‌icantly changing in recent years. The economic vibrancy, coupled with large

market size, has earned India greater relevance in several international forums, thereby

making the future EU—India investment treaty one of the most promising investment

agreements.

* Julien Chaisse, PhD in Law, Associate Professor, Faculty of Law, Centre for Financial Regulation and

Economic Development (CeFRED), The Chinese University of Hong Kong, ShaTin, Hong Kong;

Debashis Chakraborty, PhD in Economics, Assistant Professor of Economics, Indian Institute of

Foreign Trade, New Delhi, India. The authors would like to sincerely thank Mitsuo Matsushita, Bryan

Mercurio, Margaret Liang, Amb. Manickarn Supperamaniam, Wang Guiguo and other participants at

the Asian WTO Network conference on ‘Trade, Investment, Environment and the East Asian Com-

munity’ on 27–28 November 2010 for their helpful comments. We are also grateful to an anonymous

referee for his constructive suggestions. We, however, are fully responsible for all the remaining errors.

This article is part of the research entitled ‘The Evolving International Investment Regime’ led by Dr.

Julien Chaisse at the Faculty of Law in the Chinese University of Hong Kong, which aims to investigate

the evolution of investment law across relevant agreements, and to discern patterns of congruence and

divergence across key issue areas, substantive disciplines, and countries and regions (see http://

www.law.cuhk.edu.hk).

bs_bs_banner

European Law Journal, Vol. 20, No. 3, May 2014, pp. 385–422.

© 2013 John Wiley & Sons Ltd., 9600 Garsington Road, Oxford, OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA

I Introduction

The recent trade and investment dynamics indicates that increasing cohesion between

developed and developing countries is the order of the decade.1While capital and

technology transfer, banking, and f‌inancial services are among the areas that the

North can offer to the South, in return it enjoys the benef‌its of labour cost advantage

(both in case of manufacturing labour and professional service personnel), and land

and mineral resources from the latter. The recent growing economic relationship

between the EU and India needs to be analysed in this broader canvas. Although the

European countries enjoy a long history of trade relationship with India, the recent

economic liberalisation and diversif‌ication undertaken by the latter, especially in

terms of service sector growth,2infrastructure development (especially telecom

sector)3and tariff reform,4improves its economic importance to the former consid-

erably. The current discussion to enter into the EU–India preferential trade agreement

(PTA),5encompassing trade in merchandise, as well as services and investment issues,

is an acknowledgement of this phenomenon. It illustrates the mutual interest that

1The globalisation process has deepened considerably over the last two decades, as ref‌lected from the

cross-border trade and investment f‌lows. The recent globalisation drive has been markedly different

from the earlier period in two respects. First, the importance of the developing countries, especially in

Asia, has been growing steadily in world trade and investment patterns. For instance, the total share of

merchandise exports coming from Africa, Asia (excluding Japan), Community of Independent States

(CIS) (excluding Russia), Middle East, and South and Central America has increased from 28.47% of

global export in 1999 to 39.93% in 2009 (Authors’ calculations based on International Trade Statistics

2010 (Geneva, WTO) data). Similarly, the share of developing countries in world FDI inward f‌lows have

increased from 18.59% in 1989–1991 to 42.93% in 2009 (Authors’ calculations based on various issues

of World Investment Report (Geneva and New York, UNCTAD) data). This increasing importance of

the developing countries both on trade and investment fronts are not mutually exclusive; rather, the

FDI inf‌lows often play a major role in boosting exports from the host country. China is a major case

in point of this phenomenon. Second, the number of PTAs notif‌ied to the WTO, which stood around

100 in the early 1990s, but reached 511 as of 24 January 2012. Interestingly, instead of the North-North

and South-South Regional Trade Agreements (RTAs) witnessed during the 1980s and the earlier period,

the recent regionalisation drive has been marked with emergence of several North-South RTAs. See

UNIDO, Industrialization, Environment and the Millennium Development Goals in Sub-Saharan Africa

(UNIDO, 2004).

2See B. Eichengreen and P. Gupta, ‘The Service Sector as India’s Road to Economic Growth?’, (2010),

ICRIER Working Paper No. 249, New Delhi.

3M.J. Kim and R. Nangia, ‘Infrastructure Development in India and China: A Comparative Analysis’,

available at http://www.pbrc.soka.edu/Resources/Documents/KimNangia.pdf, accessed on 24 January

2012.

4While the peak duty on Indian import was around 40% in 1999–2000, the same has come down to

around 10% in the recent years. Ministry of Finance, ‘Economic Survey 2009–10’, Government of

India, New Delhi. However, neighbouring countries sometimes complain that several non-tariff

barriers on their exports still remain, thereby leaving room for securing greater access through

deeper integration by entering into RTAs. See A. Bhattacharyya and D. Chakraborty, ‘India’s

Cross-Border Infrastructure Initiatives in South and Southeast Asia’, (2011) 46(2) International

Spectator 93–109.

5The current paper uses the term preferential trade agreements rather than regional trade agreement or

free trade agreement (or even bilateral and regional trade agreements). As stated by Lester and Mer-

curio, many of the so-called Free Trade Agreements (FTAs) favour certain countries in trade relations

and are basically discriminatory rather than ‘free trade.’ The term PTAs encompasses many different

kinds of bilateral and regional trade agreements, and underscores their common denominator which is

to establish preferences for the signatories over other in trade relations. See S. Lester and B. Mercurio

(eds), Bilateral and Regional Trade Agreements: Commentary and Analysis (Cambridge University,

2009), at 4–5.

European Law Journal Volume 20

386 © 2013 John Wiley & Sons Ltd.

these two economic and democratic giants would have in formally and substantially

reinforcing their ties by legal instruments.6

Trade and investment dynamics might be boosted further by the recent reforms in

the EU. The Treaty of Lisbon came into force on 1 December 2009, amending the

former EU and European Community (EC) treaties. Among key improvements, the

Treaty of Lisbon abolishes the EC and replaces it with the EU, endowing the latter

with full legal personality.7The new EU has the ambition to be a more prominent

global actor, with the creation of a new European external relations service with EU

delegations around the world, and the EU’s High Representative, which is assigned

greater importance. The Treaty of Lisbon extends the scope of external trade policy

to issues of investment. For the EU itself and its trading partners, the extension of

‘trade’ policy to include investment is an important development and will impact the

international investment regime.8On the other hand, India has recently been very

active on investment front and has so far negotiated several bilateral agreements on

investment.9This illustrates the willingness of the Indian policy makers to attract

foreign direct investment (FDI) into the country. However, that eagerness is essen-

tially unilateral, and demonstrates the quest for a progressive and controlled liberali-

sation, which might be a challenge for EU negotiators.

A brief note on the trade and investment-related reforms undertaken by India over

the last two decades will not be inappropriate here. The Indian economy witnessed a

sluggish growth pattern for a long time since the adoption of import-substituting

economic model after independence in 1947.10 However, major macroeconomic and

external trade imbalance had set the stage for a structural adjustment programme in

1991, which facilitated trade and industrial policy reform.11 The political economic

factors also played a crucial role in determining various aspects of the entire reform

process.12 Following the reforms, the Indian economy increasingly became outward-

oriented since the mid-1990s and has grown at around 8% for a considerable period

6See the preliminary study provided in 2007 by S. Baroowa, ‘The Emerging Strategic

Partnership between India and the EU: A Critical Appraisal’, (2007) 13(6) European Law Journal

732–749.

7Prior to the entry into force of the Treaty of Lisbon on 1 December 2009, the EU did not have the legal

capacity to sign up to international agreements. Arts 216–218 of the Treaty on the Functioning of the

European Union (formerly the EC Treaty) amends this—Treaty of Lisbon OJ 2008 C 115/1. Before

that, ‘European Union’ was the off‌icial name. In order to facilitate the reading, we use the name even

when disputes occurred before 2009.

8The new comprehensive European investment policy may enable the EU to utilise its leverage to

negotiate favourable terms with non-Member States and consistency in protection standards

worldwide, leading to an even (as well as a superior) playing f‌ield for EU investors. This horizon,

however, is darkened by technical but important issues of investment treaties implementation and

the uncertain future of existing investment treaties signed by Member States. See J. Chaisse, ‘Promises

and Pitfalls of the European Union Policy on Foreign Investment—How Will the New EU

Competence on FDI Affect the Emerging Global Regime?’ (2012) 15(1) Journal of International

Economic Law 15–35.

9See, P. Ranjan, ‘International Investment Agreements and Regulatory Discretion: Case Study of India’,

(2008) 9 Journal of World Trade and Investment 209–210.

10 J. Williamson and R. Zagha, ‘From the Hindu Rate of Growth to the Hindu Rate of Reform’, (2002)

Working Paper No. 144, Center for Research on Economic Development and Policy Reform, Stanford

University.

11 V. Joshi and I.M.D. Little, India’s Economic Reforms, 1991–2001 (Oxford University Press, 1996).

12 R. Mukherji (ed), India’s Economic Transition: The Politics of Reforms (Oxford University Press,

2007).

May 2014 The Evolving and Multilayered EU–India Investment Relations

387

© 2013 John Wiley & Sons Ltd.