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Evan A Feigenbaum: Time for a US-India investment treaty

The US has been left out of a raft of agreements with India, partly because Washington has yet to sort out its own trade priorities with New Delhi

Evan A Feigenbaum 

India has concluded a raft of trade agreements – with Japan, South Korea, the Association of Southeast Asian Nations (Asean), and many others – and it looks set to initiate more negotiations. But the US is the forgotten player, in part because Washington has yet to sort out its own trade priorities with India.

First, the good news: The US-India trade has grown rapidly — more than doubled from 2004 to around $66 billion in goods and services trade in 2008. Growth areas include aircraft, machinery, commercial services and defence-related equipment. And Washington and New Delhi are reaching out in other ways as well. During President Barack Obama’s visit to India in November, 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 US investors.

But what happened to the idea of a bilateral investment treaty (BIT)? Not long ago, the US 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 US-India relations in the face of disagreements on multilateral arrangements.

But the BIT is stalled, principally because the US 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-US free trade agreement (FTA), has 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 policy makers announced that they would seek new trade agreements this year affecting services, investment and tariffs on goods. They will aim to conclude comprehensive accords with Thailand, the European Union and the European Free Trade Association by year 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. 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 between 2013 and 2016.

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

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

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

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

Third, 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 US 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 US competitiveness abroad, and strong US leadership on international trade agreements and regimes. All three pillars are now under attack in the US. And with Doha stalled, but with India and other Asian powers forging regional agreements, the US risks being left behind.

A BIT won’t offer a magic bullet. No such trade or investment agreement could. And ideally, the US will push to conclude the Doha round, so that multilateral liberalisation erases intra-regional preferences.

But in the absence of progress on Doha, it makes sense for the US 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 Asia-Pacific Economic Cooperation members to move beyond consensus by taking concrete steps toward World Trade Organisation-compatible free trade expansion.

The US 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.

The author is head, Asia Practice Group, at Eurasia Group, and is also adjunct senior fellow for Asia at the Council on Foreign Relations Washington, DC

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First Published: Mon, May 02 2011. 00:31 IST