The visit of US President Barack Obama to India this week is heightening expectations about a host of new bilateral initiatives, such as a Bilateral Investment Treaty (BIT) between India and the US. Even if it is not formally signed during this visit, negotiations for such a treaty are already on. But the benefits of such a treaty are highly questionable and the dangers are many.
BITs are extensions of the attempt in the late 1990s by rich nations to impose a Multilateral Agreement on Investment (MAI) that would have significantly reduced regulation of the activities of multinational companies by governments in host countries. That effort failed, but the US and the European Union (EU) pushed to include it in trade talks at the World Trade Organization (WTO) forum in 2003. India played a key role in blocking that particular effort, along with other developing countries.
The US continues to persevere and now seeks to sign “mini-MAIs" on a bilateral level. BITs have proliferated since then—there are now over 2000 that have been signed. The main provisions of such treaties tend to be broadly similar to those in the abandoned MAI, and sometimes they are even more stringent. They usually cover aspects such as the scope and definition of foreign investment; national and most-favoured nation status; fair and equitable treatment clauses; compensation guarantees for expropriation, war and civil unrest; guarantees of fund transfers and the recuperation of capital gains; subrogation of insurance claims; and dispute settlement provisions.
Many development economists view BITs with serious reservation. These have far-reaching and typically negative implications for host country governments and citizens, because of the sweeping protections afforded to investors at the cost of domestic socio-economic rights and environmental standards. BITs allow private investors to directly take a local government to a private tribunal in the World Bank and sue for damages. So they subject countries to the risk of litigation by corporations from or based in another country that is a signatory to the same agreement. This might be based on a company’s objections to the host government’s environmental, health, social or economic policies, if these are seen to interfere with the company’s “right" to profit.
The resolution of such conflicts is not subject to the standard juridical systems of member countries—rather, it is governed by tribunals or similar bodies specified in the treaty. This amounts to the privatization of commercial justice, with no democratic accountability. In most bilateral agreements, the provisions state that where a dispute cannot be settled amicably and procedures for settlement have not been agreed to within a specified period, the dispute can be referred to another body. The two most important such bodies are the World Bank’s private arbitration body for investment disputes, the International Centre for Settlement of Investment Disputes (ICSID) or the UN Commission on International Trade Law (UNCITRAL).
Domestic courts and national legal systems are completely marginalized by investors’ recourse to these international arbitration panels. ICSID and UNCITRAL only allow for the investor and government parties to the dispute to have legal standing. The arbitration process is marked by complete lack of transparency even in cases involving legitimate public interest having significant public impact.
The public has no right to listen to proceedings or to view evidence and submissions. Both bodies require only minimal disclosure of the names of the parties and a brief indication of the subject matter, which prevents public scrutiny or popular opposition. The record of these bodies thus far has been very investor-friendly, in awarding substantial damages and compensation to multinational corporations for “transgressions" of developing country governments.
These adverse effects have been evident in the litigation faced by developing country governments who seek to safeguard citizens’ rights. For example, in November 2000, the multinational water infrastructure company AdT filed for arbitration at ICSID under a 1992 Netherlands-Bolivia BIT. The Bolivian government was forced to reverse a disastrous water privatization attempt in Cochabamba, because of a popular uprising in the area after the company demanded a fourfold increase in water rates and deprived many citizens of water supply for non-payment. So AdT sought $25 million from Bolivia as compensation for its lost investment, including expected profits. The company was originally registered in the Cayman Islands, but it exploited the fact that its majority shareholder International Waters Ltd was registered in the Netherlands. The case was finally settled only in 2006.
A number of other countries, ranging from Pakistan to the Czech Republic, currently face disputes brought by multinational companies. In some cases, tribunals have even viewed new public health or environmental regulations as being tantamount to expropriation, and have sued local and national governments for efforts to protect the public.
This is not just a problem for India. Citizens of the US are increasingly concerned about the power of large corporations based in the country, and such treaties further increase the bargaining power of corporations. A US-India BIT is not in the interests of citizens in either country, and we should prevent our governments from signing one.
Kevin P Gallagher & Jayati Ghosh are associate professor of international relations at Boston University, and professor of economics at New Delhi’s Jawaharlal Nehru University, respectively.