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Additional trade barriers violate WTO’s principle of non-discrimination: China

Topics Covered: India and neighbours.

Additional trade barriers violate WTO’s principle of non-discrimination: China

What to study?

For Prelims: Latest FDI measures announced.

For Mains: Need for and significance of these measures, China’s concerns.

Context: China has said that the additional barriers set by India for investors from specific countries violate World Trade Organisation’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.

What is the issue?

In an April 17 decision, the Ministry of Commerce and Industry imposed restrictions saying companies from countries that share borders with India can invest ‘only under the government route’.

The revised FDI policy was aimed at curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic. But, it is expected to mainly hurt China. China’s footprint in the Indian business space has been expanding rapidly, especially since 2014. The latest measures will prevent Chinese expansion in India.

What are China’s concerns?

The amended policy makes every type of investment by Chinese investors subject to government approval.

It neither distinguishes between greenfield and brownfield investments nor listed and unlisted companies.

It also does not distinguish between the different types of investors, such as industry players, financial institutions, or venture capital funds.

Besides, making government approval necessary for acquisitions in private companies by Chinese investors will only reduce the number of potential investors available for a prospective seller, and drive down the valuation.

Such a blanket application could create unintended problems.

What has the China said?

The latest FDI measures by government of India do not conform to the consensus of G20 leaders and trade ministers to realise a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.

Companies make choices based on market principles and hence India should revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment.

The Principle of Non-Discrimination in International Trade Law (GATT perspective):

Non-discrimination is a key concept in WTO law, not to say is both central and essential to assuring the success of the multilateral trading system.

The principle of non-discrimination rests on two pillars: the most-favored nation (MFN) treatment obligation and the national treatment obligation.

The principle of non-discrimination is so fundamental for the balance of rights and obligations within the WTO that it continues to induce legal effects even when subject to certain exceptions.

How India defends its latest move?

India’s tweaking FDI rules are not in violation of WTO norms that allow countries to make such changes when issues of national security are at stake.

India is not the only country to make such modifications in policy. Several countries in Europe had changed their laws or made new ones to cope with similar situations.

What provoked the government?

The Indian government appears to have been spooked by the People’s Bank of China raising its stake in India’s largest non-banking mortgage provider HDFC and amid warning calls by MSMEs to prevent a ‘shopping spree’ by Chinese investors of heavily discounted Indian companies.

What next?

While the government would term the move as an act of self-defence and one that follows global pattern, this pre-emptive economic strike would impact foreign investment inflows in India and could follow a Chinese retribution against Indian companies with investments in China.

However, in times of a global pandemic, one can hardly cast a shadow on the government’s motive. As the country braces for the fallout of this decision, it is imperative for the government’s bold move to be immediately followed by a comprehensive FEMA notification and SEBI clarification that addresses the above concerns.

 Insta Links:

Prelims Link:

  1. Latest FDI amendments?
  2. What is the difference between automatic and government approved route?
  3. Sectors in which FDI is not allowed?
  4. Who decides on matters related to FDI in India?
  5. Sectors in which 100% FDI is allowed.

Mains Link:

Discuss the rationale behind the recent FDI amendments. What are its impacts?

Sources: the Hindu.