Why We Need a U.S.-India Bilateral Investment Treaty Now
Faced with a slackening domestic recovery and struggling European allies, the United States urgently needs an ambitious trade strategy for the world's fastest growing region: Asia. An obvious place to begin would be India, one of the largest emerging markets and a fellow democracy with which the U.S. shares key strategic interests including combating fundamentalist violence.
Newly launched talks on an investment agreement with India couldn't be more propitious given that the State Department recently finalized a long-awaited document called the "model" Bilateral Investment Treaty (BIT), which provides a basis for negotiations. However, treaty efforts will wither on the vine unless the Obama administration commits serious political capital post haste to overcome protectionist opposition and build on the considerable bipartisan consensus in favor of deeper U.S.-India economic ties.
The United States, once at the head of the pack, is today losing valuable ground in India's burgeoning market. While two-way trade in goods and services from software to solar wafers is expected to cross the $100 billion mark this year, India is not among America's top 10 trading partners. Moreover, American firms are steadily losing Indian market share to competitors from China and Europe. At the same time, the U.S. share of foreign direct investment in India has contracted by two-thirds since 2005. India itself is partly responsible for this decline, given that New Delhi myopically attempted to plug its budget deficit by proposing retroactive taxes on foreign companies and also dropped the ball on a highly anticipated second round of liberalization. However, the loss is not India's alone - American businesses have missed lucrative investment opportunities as well.
The Obama administration can reverse this trajectory by rapidly negotiating a U.S.-India BIT and teeing it up for Senate approval. The upside is tremendous. An investment treaty would help eliminate unfair bidding practices including collusion with state-owned entities and preferential treatment of domestic firms that prevent American companies from competing in some of India's most compelling markets like infrastructure - slated to draw a headline-grabbing $1 trillion in new capital over the next five years. It would also accelerate investment in the U.S. by Indian firms, which are already active in over 40 states and generate more than 80 percent of their employment locally.
Corporate heavyweights like Boeing, Dow Chemical, and General Electric have been calling for a BIT with India for years. In 2008, coming on the heels of a landmark civil nuclear deal, U.S. and Indian officials promised to negotiate an agreement that would offer foreign investors in both countries substantial legal protections against arbitrary or discriminatory government policies. However, progress stalled when the incoming Obama administration, under heavy pressure from labor and environmental groups, initiated a lengthy review of the bilateral investment treaty framework. Indian leaders, too, backed away from their initial commitment amidst rising protectionist sentiment. But with the State Department recently unveiling a revamped "model" BIT and New Delhi announcing its renewed willingness to proceed, momentum is finally picking up.
Still, the treaty's passage faces major hurdles. On the Indian side, chief among them is Prime Minister Manmohan Singh's political vulnerability. The aging technocrat faces stiff opposition from populists who lack his storied credentials and grasp of economics; they will push back hard against the BIT for fear that it will expose domestic Indian players to foreign competition. New Delhi, ever mindful of its sovereign prerogatives, may also protest the agreement's labor, environmental, and intellectual property protections, some of which Indians regard, not without merit, as a Western imposition. Overcoming these obstacles will require Obama administration officials to be patient and pragmatic in negotiations.
To help seal the deal, they could offer concessions on onerous visa requirements and annual caps that make it difficult for Indians to work in the U.S. And they could commit to establishing a Social Security agreement, like those the U.S. has in place with nearly 25 countries, which would significantly reduce the dual tax burden on 300,000 Indian nationals employed here.
On the American side, the treaty will face opposition from labor groups such as the AFL-CIO and watchdogs like Public Citizen, who have long claimed that the U.S. investment model encourages companies to shift production overseas to countries with weak labor and environmental standards. However, the new "model" BIT was designed precisely to address these concerns - and the Obama administration must get this message across to the American public.
While upcoming elections will make bold moves difficult, the U.S.-India BIT has won support from prominent Republican senators including John McCain (R-AZ). And earlier this year, ten members of the Senate India Caucus from both sides of the aisle urged President Obama to move forward with negotiations. The president could work with them to secure the treaty's passage, offering proof of his consensus-building skills, even in a deeply divided election year. And doing so would allow Senate Republicans to counter allegations that they are "naysayers," demonstrating their ability to advance bipartisan initiatives that enhance American firms' competitiveness and create domestic jobs, as a U.S.-India investment treaty would do.
The U.S. already has over 40 such investment agreements in place with other nations, while India has implemented more than 80. Tokyo moved quickly to ink a broader free trade agreement with New Delhi last year and Brussels is working hard to conclude a similar pact in the fall; this should be Washington's final goal as well. And the BIT offers an excellent stepping-stone. Failure to conclude the investment treaty, however, will continue to handicap American firms in one of the world's largest and fastest growing markets, and even have repercussions for defense trade and security cooperation - costs we can ill afford. Any way you look at it, the U.S.-India BIT is a no-brainer.