Assessing the WTO Consistency of India’s Recent FDI Policy Reform for Preventing Acquisition of Distressed Assets During a Pandemic – Part II

Abhishek Rana and Rishabha Meena

In the first part of the blog series, the authors discussed the specifics of India’s recent FDI policy change and its criticism by China. The discussion further delved into China’s inability to bring a successful claim against India at the WTO under GATT and TRIMS. The second part of the blog series thereby attempts to address the possible violations of provisions under the General Agreement on Trade in Services (GATS), and the likely way forward for India.

Violation under GATS

GATS provides for a framework of rules governing trade in services, mechanisms for liberalisation of such trade in services, and provisions for services trade-related disputes between the WTO Members. Under Article I:2 GATS, services are supplied through four different modes, viz.cross-border supply (mode 1), consumption abroad (mode 2), commercial presence (mode 3), and movement of natural person (mode 4). It is the commercial presence mode which is concerned with the FDI Amendment, wherein the ‘measure by Member’ is taken as per Article I:3(a) GATS, and this Amendment affects the trade in services as per the Article XXVIII (c) GATS.

The MFN requirement under Article II of GATS is violated when a Member’s measure does not accord the same treatment “immediately and unconditionally” to all “like services and service suppliers” from all WTO Members. Any ‘advantage’ given by one Member to another Member, if not accorded to all the other WTO Members would be a violation of the MFN requirement. In EC-Bananas III (US), it was held that the obligation contained in Article II:1 of GATS to extend "treatment no less favourable" should be interpreted to require providing no less favourable conditions of competition. This ratio was in relation to the procedural rules for allocation of import licenses of bananas, which discriminated against the distributors of Latin American and non-traditional ACP bananas in favour of distributors of EC and traditional ACP bananas.The change in the FDI policy creates an additional procedural requirement by mandating an approval route only for the Members that are sharing their borders with India, thereby making a fit case for a violation of the GATS MFN requirement.

Furthermore, GATS also provides general obligations relating to principles of transparency, fairness, and due process wherein Article VI:1 mandates that a measure must be administered in a reasonable, objective and impartial mannerin sectors where specific commitments (in relation Articles XI, XVII, and XVIII of GATS) are undertaken by a Member. There exists a corresponding provision in Article X:3(a) GATT, which requires administration in a ‘uniform, impartial and reasonable manner’. A measure herein might be considered to be administered in a partial manner when the same favourable treatment is not accorded to the commercial interests of service suppliers, regardless of their origin. Moreover, while the scope of application under Article VI:1 is wider than the equivalent provision under GATT, there has been no direct interpretation of a measure under the former. Therefore, the jurisprudence of Article X:3 GATT can potentially play a vital role in the interpretation of Article VI:1 GATS.

A claim can be brought under Article VI GATS when the measure generally affecting trade in services is not administered in an objective, impartial, and reasonable manner. An initial cursory reading might suggest that such standards only refer to administration, not to the substance of these measures. However, after the Appellate Body Report in EC – Bananas III and Panel Report in Argentina – Hides, it was in EC - Certain Customs Measures that the Appellate Body held that Article X does not exclude the assessment of the substantive content of the measure which regulates the administration of legal instrument of another kind, or provides guidance on the meaning of specific requirement of a measure. In other words, it can be concluded that the substantive content of a measure providing guidance on the administration or meaning of a requirement in another measure can be assessed under Article X(3) GATT, and with transposition under Article VI:1 GATS.

China, without getting into the bad faith contention, can thereby argue that the substantive content of the governmental screening requirement under the concerned Amendment also affects the administration of other measures that are present in the Circular on Consolidated FDI Policy. For instance, the consolidated FDI policy, under its Chapter 3, already provides for general conditions on FDI in India. By the introduction of any new requirements, through a de jure impartial Amendment, it would only result into a multiplicity of contentious actions - stemming from the origin-based discrimination faced under different provisions, having a significant impact on the overall administration of law.

Additionally, with the application of Article XXVIII(a) GATS, the procedural requirement under the concerned Amendment can be covered as a measure by a Member violating the obligations under Article VI:1 of GATS to an extent where India has taken specific bound commitments. China would thereby have to determine the bound commitments undertaken by India in the commercial presence mode, and establish how this impartiality has nullified or impaired the rights of a service supplier in a concerned service sector.

India’s defence under the GATS exceptions

To counter the claims that China might raise for violations of WTO law under the services sector, India can look for justification of the Amendment in the FDI policy by relying on the exceptions under GATS. The first exception that India can rely upon is by invoking paragraph (a) of Article XIV, where any measure can be imposed by a Member that is “necessary to protect public morals or to maintain public order”. The public morals exception has been referred by several academics as expanding, ever-evolving and a catch-all for measures, with its broad interpretation encompassing human rights, labour rights, and other transnational norms.

Meanwhile, the second exception lies under Article XIV(c)(i) GATS, where even non-GATS consistent measures can be imposed considering it is necessary to secure compliance with such laws or regulations, for the prevention of deceptive and fraudulent practices. However, any Member invoking these general exceptions would need to satisfy three tests, viz. the challenged measure must:

• relate to “maintenance of public order” under Article XIV(a) and “prevention of deceptive and fraudulent practices” under Article XIV(c)(i), with a “sufficient nexus between the measure(s) and the interest(s) protected”;
• be "necessary", i.e. there shouldn’t be any reasonably-available, WTO-consistent alternative available leading to equal level contribution in achievement of the objective; and
• meet the conditions of the so-called “chapeau”, i.e. the measure must not be “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services.”

The first two tests can be justified under the “maintenance of public order” and “prevention of deceptive practices” exceptions by taking into consideration the background and aim of this amendment. The Amendment addresses the imminent economic crisis faced by the enterprises in India due to an ongoing public health emergency of international concern. It was necessary for the Member to then address the legitimate specific concerns surrounding the forthcoming economic emergency and thereby preserve the fundamental interests of the society by protecting the enterprises from any deceptive practices that the neighbouring countries might indulge in while the conditions of small and medium enterprises in the country are weak. However, there exists a high probability that India would not be able to prove the third test.

A measure is inconsistent with the chapeau when the application of the measure results indiscrimination between countries where the same conditions prevail; this discrimination is arbitrary and/or unjustifiable, and leads to a disguised restriction on trade. For instance, in US-Gambling, the Appellate Body ruled that the United States, “did not demonstrate that the prohibition embodied in the measures at issue did not apply to both foreign and domestic suppliers of remote gambling services”, and held the same to violate conditions in the chapeau. It can be thereby inferred that the application of governmental route of approval and authorisation only for the bordering states, and not for the other Members would eventually create difficulties for India to justify its stand even under the general exceptions. Although, as pointed out by Lorand Bartels, the Appellate Body is not always right with its assessment of the chapeau, as it fails to distinguish between the content and the application of the measure.

Furthermore, it would be even more challenging to take recourse of a security exception under Article XIV bis GATS, which has an identical language to that of Article XXI of GATT, 1994, considering that in Russia – Freedom in Transit dispute, the Panel noted that the security exceptions are concerned with the situations of armed conflict and acute international crisis rather than economic protectionism; therefore, security concerns must be separated from economic and trade concerns. However, adopted panel and Appellate Body reports, while are taken into account wherever they are relevant to a dispute, they are only ‘binding’ on the parties of that particular dispute. Such adopted reports despite their considerable persuasive power, remain to be a non-binding precedent.

Conclusion

China has so far only expressed their discontentment with the Amendment in the FDI policy pertaining to violation of India’s commitments undertaken at the WTO, and not under the India-China BIT. The authors believe that China, if it proceeds with challenging this measure at the WTO under GATS, since a dispute under GATT and TRIMS cannot be brought, have strong contentions that cannot be overlooked. Hence, it would be in the best interests of the Indian government to reform this de jure discriminatory Amendment into an origin-neutral policy for all WTO Members as it would continue to serve the purpose it was meant for and would not qualify as an arbitrary and an unjustifiable measure.

Finally, the central and state governments can also look into alternate WTO law compliant measures for supporting their local SMEs by providing financial and fiscal aids in the form of tax benefits, general recovery for the delayed payments, indirect financing for the supplier’s through their buyers, and funding of development programs.

Abhishek Rana is an International Trade Attorney and a Senior Research Fellow at the Forum for Trade Remedies. He is also a Visiting Lecturer in international trade law at the Indian Society of International Law. He completed his LL.M. from the Queen Mary University of London as an International Economic Law Scholar. He tweets @AbhishekRana

Rishabha Meena is a final semester B.A., LL.B. (Hons.) student at the National Law University, Jodhpur specializing in international trade and investment law. He has done various moot court competitions, internships, publications, etc in the field of international trade law.

All views expressed here are in the strict personal capacity of the authors, and do not reflect those of the organisations to which they are affiliated with.