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Chakra Chaisse Final TI

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Information about Chakra Chaisse Final TI
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Published on May 7, 2008

Author: Viola

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Linking Trade and Investment at the Multilateral Level: Indian Perspective:  Linking Trade and Investment at the Multilateral Level: Indian Perspective Julien Chaisse and Debashis Chakraborty January 18, 2008 Bangkok The Presentation:  The Presentation Background TRIMS provisions and WTO Negotiations on Trade and Investment Foreign Investment and Financial Mobility regime in India India’s Negotiating Stance at WTO on Trade and Investment Issues An empirical testing of the interrelation between current and capital account balance: Indian case Conclusion Background:  Background Singapore Ministerial: Trade and Investment Issues Success of East Asian countries in early nineties led IMF in early 1997 to consider whether to amend it’s Articles to make liberalisation of the capital account as one of the core objective. Changed perspective after the massive capital outflow from the South East Asian economies during the currency crisis (1997). Global Economic Prospects (World Bank, 1999): cautious approach for developing countries towards capital accounts liberalization. World Economic Outlook (IMF, 2001): capital controls in the short run paves a strong platform for more fundamental reforms in the future. Key Question: Is the current situation strong enough for a developing country to commit at the Multilateral Forum??? Investment Legal Aspects:  Investment Legal Aspects Since 1991, the investment regime in India has been considerably simplified and liberalized (domestic legal reforms) India has been very active and negotiated several Bilateral Agreements on Investment (Argentina, Indonesia etc.). Since 2002, it has signed 16 bilateral investment agreements, of which 8 are yet to be ratified. That shows the willingness of the Indian Government to attract FDI in the country. BITs + Domestic reforms:  BITs + Domestic reforms These gradual reforms have resulted in continued growth in annual FDI inflow US$3.13 billion in 2002-03 US$5.6 billion in 2005-06 However FDI had not entered India to the degree expected. Why? complexity of procedural requirements of several laws and regulations, as well as transparency in the approval procedures. Comparison of FDI scenario for China and India:  Comparison of FDI scenario for China and India Source: WIR (2006) data India - Measures Affecting the Automotive Sector:  India - Measures Affecting the Automotive Sector Beyond BITs and domestic law, there is a 3rd layer of regulation (WTO law) In 2001, the India - Measures Affecting the Automotive Sector case involved TRIMs requiring ”trade balancing“. In May 1999 the US government lodged a complaint against the Indian government for the auto industry measures it introduced in November 1997. Under the 1997 law, the Indian government required all new foreign auto manufacturing investments to sign a standard MOU with the government establishing: a minimum US$50 million investment in joint ventures with majority foreign ownership; a waiver of import licenses if local content exceeds 50 per cent; and the obligation to export within 3 years, if export requirements are not met (trade balancing India - Measures Affecting the Automotive Sector:  India - Measures Affecting the Automotive Sector Article XI of the GATT 1994 prohibits any measure other than duties, taxes or other charges “or other measures having equivalent effect” (elimination of QRs). WTO jurisprudence says, it is not the legal form of the measure but its effect on trade which is important. In that case, the Panel found logically that the trade balancing condition contained in Indian legislation by limiting the amount of imports through linking them to an export commitment, acts as a restriction on importation, contrary to the terms of Article XI:1 India had to amend its policies to bring them into line with the WTO investment regime Negotiations at WTO:  Negotiations at WTO In order to strengthen the provisions of the GATS (mode 3) and TRIMs agreements, the Singapore Ministerial introduced the relationship between Trade and Investment for future discussion at WTO forums. Technically, TRIMs could be expanded by adding more examples to the Illustrative List (local content requirements, trade balancing measure). Is it politically feasible? Conflicting viewpoint of WTO members on including Trade and Investment in the negotiating agenda For instance, India’s viewpoint witnesses a U turn over time Foreign Investment and Financial Mobility regime in India:  Foreign Investment and Financial Mobility regime in India Up to the early nineties: Controlled exchange rate regime and restrictions on various components of capital accounts transactions July 1991: BOP crisis, structural adjustment, reforms January 1994: Multilateral Investment Guarantee Agency (MIGA) membership August 1994: the Indian rupee was made fully convertible on current account (as per IMF Article VIII) May 1997: Tarapore Committee recommendation for introduction of Capital Account Convertibility by 1999-2000 in a phased manner. Foreign Investment and Financial Mobility regime in India ..:  Foreign Investment and Financial Mobility regime in India .. Gradual reform in the subsequent period. June 2000: Foreign Exchange Regulation Act (FERA) replaced by Foreign Exchange Management Act (FEMA). 2003: overseas investment norms for corporate houses eased by allowing the prepayment of foreign loans over US$100 million. April 2005: limit to overseas investment under the automatic route was increased from 100 percent of the net worth of the Indian entity to 200 percent in and remittance limits have also been substantially relaxed. Other reforms: increased coverage of FDI inflow under the automatic route and the relaxation of procedures relating to external commercial borrowings (ECBs) Foreign Investment and Financial Mobility regime in India ..:  Foreign Investment and Financial Mobility regime in India .. February 2006: Opening sectors to foreign investment with the exception of certain specific areas (e.g. railways, print media and agriculture) Equity restrictions were lifted in several activities, including brewing and distillation of alcohol; manufacturing activities in products subject to industrial licensing within 25 km of large cities; and in sensitive sectors such as the manufacture of explosives and hazardous chemicals, and greenfield airports, where investment has been permitted under the automatic route subject to sectoral regulations and, where applicable, an industrial licence under the Industries (Development and Regulation) Act. Mid-2006: Discussions on introducing Capital Account Convertibility surfaced once again Trade policy Review, India, 2007 Future Concern Areas??:  Future Concern Areas?? “.. Foreign purchaser attempts to acquire 100 percent ownership of a locally traded company, permissible in principle, faces regulatory hurdles that render 100 percent ownership unobtainable under current practice… Press Note 18, promulgated in 1998 by the Ministry of Industry, poses major impediments to investment in India by requiring prior approval of the Indian party to a joint venture before the foreign partner can pursue other investment opportunities in India. This provision was widely abused, holding foreign partners hostage, even for failed joint ventures”. USTR (2007), p. 283 India’s Negotiating Stance on Trade and Investment Issues:  India’s Negotiating Stance on Trade and Investment Issues June 1998: Need to look into the interrelation between mobility of capital and mobility of labour April 1999: Submission on the need to strengthen the link June 2000: Focus on foreign investors’ obligations, issues pertaining to investment incentives, the costs of adjustment and impact on social gains in developing countries and the comparative flexibility with bilateral investment agreements etc. – defensive turn. June 2001: India expressed dissatisfaction over the progress of technology transfer into developing countries: “developing countries should preserve their right and ability to influence foreign direct investment flows into their territories with a view to ensuring that it is accompanied by appropriate technology..” Doha (2001): Opposed inclusion of Singapore Issues India’s Negotiating Stance on Trade and Investment Issues ..:  India’s Negotiating Stance on Trade and Investment Issues .. October 2002: Stressed the developmental role of BITs October (2002): Potential BOP worsening effect of FDI Since 2002: Entry into several BITs November 2002: Focus on constitutional powers available to the authorities to make rules and regulations related to foreign investment, to the disclosure and accounting procedures, effects of technology transfer, restrictive business practices etc. July 2003: Stopped linking movement of labour and capital January 2004: India’s Conditional Initial Offer to WTO March 2004: need to de-link the issue of mobility of labour (Mode 4) with other categories of services Stress on including Investment in the recent RTA negotiations: ASEAN, China, Japan, Korea, Malaysia, Singapore etc. New wave of negotiations recently – Canada, EU, Israel August 2005: India’s Revised Offer to WTO India’s Negotiating Stance on Trade and Investment Issues ..:  India’s Negotiating Stance on Trade and Investment Issues .. India’s Revised Offer: (a) foreign investment upper limit increased for a number of sectors, (b) investment upper limit has been removed for several categories (e.g. – Computer and related services, technical testing and analysis services etc.), (c) requires establishment through incorporation and subject to Foreign Investment Promotion Board (FIPB) / Reserve Bank of India (RBI) approval, (d) upward revision in foreign equity participation limit for several categories (e.g. – telecommunication services). US Concern: conditionality on prior presence in the sector – requirement of adequate justification The Empirical Analysis:  The Empirical Analysis Analysis of the interdependence between Current account balance (CAB) and capital account balance (KAB) series (1979:Q1 – 2005:Q2) The Macroeconomic Theory Literature Survey Stationarity Test Chow Forecast Test Granger Causality Test Impulse Response Analysis The Macroeconomic Theory:  The Macroeconomic Theory Flexible exchange rate: large capital inflow helps the real exchange rate to appreciate, which in turn changes the relative prices of the goods, making exports relatively dearer and imports relatively cheaper. This leads to decline in current account balance. Fixed exchange rate: capital inflow causes domestic interest rate to rise, ultimately leading to increase in domestic prices. As a result exports become relatively dearer and current account balance worsens. Balance of Payments (BOP) crisis may occur from the dynamics of short-term debt, when speculators try to get rid of the domestic currency in exchange for the central bank’s foreign exchange reserves in crisis situations, resulting in the collapse of the exchange rate. Literature Survey:  Literature Survey Under flexible exchange rate, during a sudden BOP crisis speculators let go the domestic currency in exchange of the central bank’s foreign exchange reserve, thereby leading to the collapse of exchange rate. The interrelation between current account balance and capital account balance does not follow a universally predicted path, and is influenced by country-specific characteristics ((Cooper, 1999; Wong and Carranza, 1999; McKibbin and Martin, 1999). Capital account liberalization may influence the economy of developing countries (Ocampo, 1999; Gupta and Sathye, 2004; Dutt, 2006; Sen, 2006). Other viewpoint: CAC is neither necessary nor sufficient for a foreign exchange crisis (Agarwal, 1998) . Provided the preconditions recommended by Tarapore Committee are met, India could gradually move towards full convertibility (Jadhav, 2003; Anderson, 2003; RBI, 2004). India yet to fulfill Tarapore Committee preconditions (Williamson, 2006) – associated volatility (Chakraborty, 2006) - CAC still may not be a good idea. Stationarity Test:  Stationarity Test CAB and the KAB series are stationary and non-stationary respectively. Hence for further analysis we consider the first difference of the series (DKAB), which is stationary. Chow Forecast Test:  Chow Forecast Test The Chow forecast test statistic confirms the third quarter of 1994 to be a structural break of the first difference of the KAB data series. Hence the period before the second quarter of 1994 and the period after could be considered as the pre-liberalization and post-liberalization time period respectively. Granger Causality Test:  Granger Causality Test Results: (a) In pre-liberalization as well as post-liberalisation periods, CAB influences changes in DKAB. However the relationship does not hold the other way round. (b) However, the determined lag length is found to be longer during the pre-liberalization period. (c) The absence of causality by DKAB on CAB could be explained by the influence of excluded factors on the movements in the current account. Impulse Response Analysis:  Impulse Response Analysis The CAB and the KAB series take around 20 and 30 quarters respectively to get back to equilibrium after the shock. The fluctuations are both negative and positive beginning with an initial huge fall in the series causing the crisis. The lower time taken by the CAB series to converge may be explained by the absence of causality between the two series. Conclusion:  Conclusion Concerning inconsistencies with TRIMs agreement, the domestic automobile development policies of India, Indonesia, Brazil, and the Philippines as well have been brought forward or made subject to consultation for dispute settlement. Also, developing countries were not easily able to attain extensions of the period for removing measures that do not comply with the agreement. In response to these incidents, developing countries remain concerned that adoption of a new agreement would impede their freedom to implement policies with national development priorities. Conclusion ..:  Conclusion .. India FDI regime liberalization results from a unilateral and progressive process. Is India’s hesitation in making bolder offers at the Multilateral negotiations justified? Perhaps tendencies to link Multilateral Investment Agreement with CAC is playing a major role here. Although relationship between CAB and KAB not strong, chances of destabilization in case of a potential random shock is there. Result: More and more Indian BITs ? Which strategy? An interesting area of future research. Conclusion ..:  Conclusion .. Impact on the multilateral agenda Redefining multilateral conditions for a WTO agreement on Investment? Proposing a satisfactory MAI supposes to take into account India’s requirements as a basis. GATS could serve as a model : positive list approach

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