Everyone wants a piece of India in recent times. No surprises there! The Indian economy has gone from strength to strength. Indian Prime Minister Narendra Modi is pursuing an ambitious agenda for promoting manufacturing in India as the cornerstone for his long-term economic strategy. This plan is dubbed ‘Make in India’ and it aims to attract investment into the Indian manufacturing sector. This is essentially a replication of the export-led growth model that was pursued by various East Asian economies in the 1960s and 1970s. China is a current example of economic growth pursued through export-led strategy. The complication, however, stems from India’s membership of the World Trade Organisation (WTO), and the following question: how will India expand its manufacturing base while remaining within the WTO framework?

While there are several sides to the debate as to whether an export-led growth model is the ideal path to economic advancement, the question for Australian policymakers and trade representatives is how best to safeguard Australia’s economic interests while negotiating the Australia-India Comprehensive Economic Cooperation Agreement (CECA). Presently, there is a wide divergence between the trading interests of both countries, especially when Indian plans of export-oriented manufacturing contrast with WTO commitments to trade liberalisation. The importance of proceeding with caution cannot be understated, considering the global slowdown of commodity prices and Australia’s economic reliance on natural resources.

Understanding the Indian Problem

When dealing with India, we must bear two realities in mind. First, India is highly populated and has an abundant supply of labour resources. Population is India’s greatest asset and clearly India wants to capitalise on this. For Australia, India’s large population is a rich vein of consumers waiting to be mined. The reality is, however, that India will likely not be interested in any trade deal which does not allow its human resources to be capitalised. The ‘Make in India’ policy is clearly an effort in this direction. Manufacturing requires labour, which India has a surplus of. Politically speaking, Modi’s chances of re-election will be enhanced if he can attract the type of investment that boosts manufacturing jobs in India.

Secondly, what is Australia offering India in terms of market access? ‘Most-Favoured Nation’ tariffs on most goods that enter from India are already low (hovering around 5%). India is interested in accessing the automobile spare parts, textiles and clothing, agriculture and services sectors. Within the agriculture sector, India wants particular access for its mangoes, which poses an obvious threat to the revenue of Australian cultivators, as well as posing quarantine problems in relation to potential parasitical threats.

Australia has to fit in somehow, keeping in mind that the Indian government must balance domestic compulsions with international commitments. One time-tested way of doing so is the adoption of the Outward Production Processing approach, whereby Australian brands engage India’s abundantly available labour resources for the manufacturing process, while retaining the branding, value addition and quality control processes. What is abundantly clear is that India is not going to let go of its manufacturing ambitions anytime soon, despite warnings to the contrary by Dr Raghuram Rajan, the Governor of the Reserve Bank of India. Dr Rajan makes an interesting observation when he claims that policies that were effective during the 1970s might not be effective in today’s financial climate and hence, the export-led strategy may not be an effective plan. For their part, Australian negotiators understand that India has always been an economy notorious for its high tariffs and invisible non-tariff barriers. While Australia is asking for liberalisation in the Indian dairy, livestock and agricultural sectors, it must consider that an overwhelming part of the population in India engages in agrarian activity. This makes trade liberalisation in the agri-sectors a politically sensitive issue in India. Indian dairy producers and farmers would understandably be anxious if this deal goes ahead.

Impact on Australian manufacturing

It is now common knowledge that Australia’s manufacturing base has consistently shrunk over the last few years. The majority of consumer goods are imported into Australia to meet domestic demand. At the same time, Australia seems to be morphing into something of a hybrid, concentrating on the natural resources, infrastructure and services sector to drive its economy. India has seen this and is trying to penetrate the services economy in Australia by demanding greater market access to the services sector, including a relaxed visa regime for Indian workers/professionals. If this part of the deal goes through, we may further see a shift in dynamics in the Australian services sector. Indubitably, establishing a presence in the Australian services sector, such as banking and finance, insurance, hospitality and IT services, will be a major coup for the Indian corporations. This foothold in the Australian economy would further enhance India’s move into the other far-eastern economies such as Indonesia.

Another interesting observation is the impact of a free trade agreement on the Australian manufacturing sector (especially steel and tomato processing industries). These two sectors have been the subject of a case study in a recent report by the Productivity Commission (PC). The PC has recommended several changes to the system, such as increasing the dumping margin threshold to 5% and above. The report also suggests a change to the way Australia’s Anti-Dumping Commission calculates the total costs to the economy when imposing penalties on imports. Australia has been a leading user of anti-dumping measures in the past, primarily to protect the steel industry. If the recommendations of the PC are adopted, Indian industries automatically gain an advantageous, almost tariff-free entry into the Australian economy. There is a high likelihood that free trade agreements such as the CECA will prove the proverbial nail in the coffin for Australian industries.

The Game of TRIMS

We can see indications of India already proceeding down the path of “encouraging” domestic manufacture of high value-added items. Such a strategy has, however, brought India into conflict with other WTO members. A case in point is the India – Solar Cells case, where India mandated domestic content requirements as part of its National Solar Mission imposed on Solar Power Developers (SPDs). The US lodged a complaint at the WTO and won the case by arguing that such rules violate several WTO norms, such as various provisions of the Agreement on Subsidies and Countervailing Measures.

As part of an ambitious solar power development project, India required SPDs in the country to use locally-manufactured components in order to avail benefits such as feed-in tariffs or in order to obtain licenses to establish renewable energy projects.

It was exactly this strategy that the WTO Dispute Settlement Panel ruled against. India’s strategy of allowing SPDs benefits of feed-in tariffs by incentivising use of local inputs violated the WTO Agreement on Trade Related Investment Measures (TRIMS). India, however, has not been deterred, despite the rap on its knuckles by the WTO, as it announced the decision to go on to appeal to the WTO Appellate Body. The decision of the WTO dispute settlement panel was released to the public in late February 2016. Although the decision came when negotiations between India and Australia are in already at an advanced stage, the decision does present an opportunity for Australian investors and manufacturers to streamline their India strategy. The major outcome of the India – Solar Cells decision is that India cannot insist on the use of local inputs as a precondition to doing business with foreign investors or manufacturers because doing so would be a violation of the TRIMS agreement. This gives Australian negotiators an added advantage when finalising the trade deal with India.

Investment Standards

In negotiating the CECA, the negative experience of investor-state dispute settlement (ISDS) and its potential to hinder public welfare regulation must be considered. In the past, Australia has demonstrated an inconsistent approach to the question of ISDS. For example, ISDS provisions are included in free trade agreements with Chile, Singapore, Thailand and South Korea, but not in those with the US and New Zealand. Australia also agreed to ISDS in the Trans-Pacific Partnership after an initial period of opposition. Whether we like it or not, ISDS is a ‘necessary evil’ and represents the current standard in international investment dispute settlement until an alternative solution emerges. The approach to consider here should be based on ‘carve outs’, which are intended to create regulatory space for the host countries. The carve outs encompass governmental policies such as environmental protection and public health orders. Typically, such measures constitute grounds for ISDS claims based on what is commonly referred to as ‘indirect’ expropriation. Australia need only look towards its neighbourhood to find a suitable template. For example, the ASEAN Comprehensive Investment Agreement, annex 2, paragraph 3, clearly explains indirect expropriation by listing factors that can be used on a case-by-case basis. Paragraph 3 specifies that adverse economic effects due to governmental measures are not illustrative of expropriation. Paragraph 3 is then further supplemented by paragraph 4, which unequivocally states that ‘legitimate public welfare objectives, such as public health, safety and the environment’ do not constitute indirect expropriation. If indirect expropriation is not clearly defined, ISDS panels get more discretion to determine whether expropriation has occurred. This is where the ability of sovereign states to regulate in the public interest is compromised. For Australia, adopting such an approach becomes all the more essential since the Australian economy is greatly dependent on resources and mining and it must be ensured that the discretion of the governmental regulators is not constrained in any way. Adopting a clearly defined standard will go a long way in minimising investment disputes under the CECA.

Where to from here?

It seems that Australia’s policymakers have decided that bilateralism and regionalism is the way to go. Several media reports seem to suggest that India and Australia have completed most of the work but there is deadlock on a few sticking points. It obviously remains to be seen whether a trade deal with India will be beneficial for the Australian economy in the long run. However, what is certain is that Australian manufacturing and food processing industries will likely face tough competition in the domestic market.

Dr Umair Ghori is an Assistant Professor in the Faculty of Law at Bond University.