This is a guest post by Rohan, a PhD student at the Graduate Institute
India and the EFTA countries (Iceland, Liechtenstein, Norway, and Switzerland) signed a comprehensive Trade and Economic Partnership Agreement (TEPA) on 10th March, 2024 after a long process of negotiations that started in 2008. Notably, two disciplines in the agreement, relating to Trade and Sustainable Development (TSD) and Investment Promotion, contain novel provisions that stand out as a break from the past and merit attention. TEPA provides an excellent example of a ‘package treaty’ that legally binds commitments on issues such as labour standards and employment with trade obligations. Such an arrangement can create leverage for governments to support their policy response to domestic challenges and may establish a new framework for future north-south collaboration.
Labour Provisions under the TSD chapter
The commitments linked to labour standards in the TSD chapter are a first for India. None of India’s past trade agreements contained any obligation linked to labour standards. India has historically opposed the linking of non-trade issues such as labour and environment with trade agreements, both at multilateral and bilateral levels. Past trade agreements with neighbouring Asian countries were largely limited to mutual access to markets through tariff rationalisation, and discussions around labour standards were off the table. In this sense, the inclusion of labour provisions marks a departure from the past and sets a new normal, in so far as commitments linked to labour standards in future trade agreements (currently under negotiation) with other advanced economies such as the EU, UK, and Australia are concerned.
From a plain reading of labour-related provisions, it appears that the current design of the TSD chapter does little in terms of India’s obligations to make a meaningful impact vis-a-vis labour standards on the ground. The parties are free to decide their own levels of protection under Article 11.2, which is likely to raise several eyebrows in light of India’s alleged weak record of labour enforcement. Article 11.1(3) clarifies that the agreement does not in any way intend to impose labour standards of one party over another. Finally, the provisions under the TSD chapter are non-enforceable as the parties do not have recourse to binding dispute settlement, under Article 11.11. In addition to these provisions, a safety valve in the form of security exceptions (first of its kind) under Article 11.10 may possibly justify deviation from obligations linked to labour standards.
The EU, Australia, and the UK are currently also negotiating trade agreements with India.The substance of the EFTA-India TEPA TSD chapter is likely to serve as a useful threshold in negotiations on labour commitments. It will be particularly interesting to see how the EU negotiates the TSD chapter with India, given that the EU and India, on the question of subjecting labour and environment-related obligations to binding dispute settlement, currently stand at opposite ends.
Despite the built-in flexibilities, which provide India a decent space to wriggle out of its commitments under the chapter, the EFTA-India TEPA provisions may be viewed with a more pragmatic lens. This is a forward-looking step from India, against its past stated position to de-link non-trade issues, such as labour and environment, with trade agreements. It is important to emphasise here that India has a decent record at the ILO in terms of ratification of core labour standards. However, India’s reluctance concerning binding commitments stems from implementation and enforcement challenges on the ground, primarily on account of an overwhelmingly large informal labour market (almost 90 percent of the workforce) that hinders the government’s ability to effectively regulate labour standards. To address some of these challenges, India has made rapid strides toward reforming its domestic labour laws. The greater hurdle, however, is posed by resistance to the actual implementation of new laws by different states (sub-federal entities) under the constitutional scheme on account of various reasons, including political considerations.
Investment Promotion and Job Creation
The much talked about chapter on Investment Promotion contains a foreign direct investment (FDI) commitment (Article 7.1.3(a)) worth $100 billion in India by EFTA countries spread over a period of 15 years ($50 billion in the first 10 years followed by remaining $50 billion in next 5 years). The commitment also entails the creation of 1 million jobs in the said period (Article 7.1.3 (b)). A plain reading of the text indicates that these commitments (termed as ‘shared objectives’ in the treaty text) are not binding but a best endeavour clause. Two significant features, however, lend uniqueness to the investment commitments under TEPA.
First, the obligations in terms of the magnitude of FDI and the creation of new jobs have been laid down in specific terms and in a time-bound manner, with the caveat that the job creation should be directly linked to the FDI (Article 7.1.3 (b)). Second, and more importantly, the recipient country i.e. India can rebalance the concessions extended to the defaulting partner by withdrawing tariff concessions (after duly following a consultation process) in case of non-fulfilment of shared objectives (Article 7.8). Even if the shared objectives have been worded as a best endeavour clause, when read together with the rebalancing provision, they appear to create an enforceable obligation by conditioning market access by EFTA countries on investment commitments and job creation in India.
It may be important to highlight here that the onus to fulfil investment and job-related commitments lies with private entities in EFTA countries. It is not clear how private players can be burdened with an obligation to achieve investment and employment targets, as it may depend on a number of variables including the extent of facilitation, investment climate, etc. in India during the relevant period.
Why EFTA-India TEPA has broader implications for future FTAs?
Conventionally, trade agreements are expected to generate aggregate welfare gains through liberalisation, whereas domestic fallouts and spill-overs are expected to be addressed by governments through flanking policies that operate domestically independent of trade agreements. However, due to lack of political will, resource constraints, policy inefficiencies, etc., too often, domestic policies fail to address such spill-overs, and the expected gains from trade fail to materialise even after trade liberalisation.
A ‘package treaty’ can be understood as a type of trade agreement that enables countries to mutually agree on flanking policies that address domestic spill-overs such as those relating to labour rights, environment, labour adjustment, etc. through legally binding commitments within the treaty itself.[1] In this sense, a package treaty differs from other arrangements where trading partners either establish non-binding cooperation or institutional mechanisms (eg. best endeavour clauses within trade agreements) to address certain domestic challenges (eg. capacity-building provisions in EFTA-Indonesia CEPA ) or extend unilateral financial assistance to support domestic efforts (eg. USMCA funds to assist Mexico).
TEPA, as an example of a package treaty, introduces mutually agreed and legally binding commitments on member countries. By linking domestic investment with tariff concessions and creating binding obligations on EFTA countries, TEPA establishes time-bound investment targets in India without waiting for gains from trade, in terms of investments, to ‘trickle-down’. Further, job-creation targets (linked to investment) as part of treaty obligations are a first of its kind (by creating positive obligations) that would flank India’s domestic efforts to address the problem of unemployment, given its large and young labour force. By packaging such commitments as part of a trade agreement, it thus becomes easier for the Indian government to overcome domestic opposition to trade liberalisation by highlighting the employment and investment potential of the agreement in real and quantifiable terms.
TEPA also commits India to adhere to ILO’s fundamental conventions under the TSD chapter. Commitment under an international treaty to enforce labour standards can create leverage for the central (federal) government in India to overcome domestic resistance by the stakeholders, build consensus internally amongst non-conforming states (sub-federal entities) and expedite the pace of much-needed reform of labour laws. In addition, legal obligation through a treaty to strengthen labour rights strengthens India’s domestic efforts to address the concerns of a large informal labour force.
EFTA-India TEPA paving the way for North-South collaboration?
The TEPA template underscores the significance of package treaties as a means to create binding obligations through the agreement itself to address a range of domestic challenges that may impede the capacity of countries, especially developing economies, to realise their trade potential. Developing economies can identify specific sectors with high growth or employment potential and extend market access after creating binding obligations for trading partners to invest in technology, skill development, training, etc. in those sectors.
For instance, developing economies may allow tariff reductions in the agricultural sector by committing their trading partner in the treaty to invest in productivity-enhancing technologies, sustainable farming, logistics, storage, etc. Such a ‘tech-for-tariff’ arrangement is already being explored (although in the early stages) in the India-Australia FTA. Developing countries often hesitate to liberalise trade in certain sectors and may even abstain from joining a trade agreement, anticipating job losses in the short run (due to import competition) leading to a domestic backlash. The TEPA template could allow these countries to liberalise trade in such ‘sensitive’ sectors by committing their trading partner to provide adjustment-related assistance.
While the above discussion highlights the extent and potential of north-south collaboration through package treaties, it could be argued that the possibility of successfully negotiating such an agreement tilts heavily in favour of developing countries with large markets, as a bargaining chip to extract concessions from their trading partners, when compared to smaller countries and LDCs which do not enjoy similar clout or advantage. This argument may have some merit and the outcomes will be known only in due course, but the TEPA template does underscore the importance of exploring complementarities to identify respective areas (or specific sectors) of interest and subsequently, find innovative ways to collaborate and commit in mutually beneficial ways. In this sense, issues relating to the development of green technology, climate finance, investment in environment-friendly goods, regulation of labour standards, etc. concern developing and developed countries alike, and certainly call for greater ingenuity in the design of future trade agreements to address the same.
[1] For more on this see Pauwelyn, Joost & Sieber-Gasser, Charlotte, Addressing Negative Effects of Trade Liberalization: Unilateral and Mutually Agreed Flanking Policies, World Trade Review, forthcoming Summer 2024.
