Author: Sarthak Wadhwa is a fifth year law student at the National Law School of India University.
This piece seeks to navigate the conceptual tension between labour law and investment law by – first, examining India’s position on labour interests, as understood from her most recent Model Bilateral Investment Treaty (BIT) (2016); and, second, comparing these provisions with contemporary best practices for labour representation in treaty drafting viz. the US-Model BIT and free trade agreements (FTAs) – to assess India’s receptivity towards a better model of labour-oriented treaty provisions.
India needs to invest at least 5% of her GDP – about ₹13.5 trillion/$158.3 billion – per year to ensure full employment in the country. However, our exposure to global capital has eroded our economic sovereignty to such an extent that the economy has become dependent on foreign investments for the necessary capital infusion. Presently, foreign direct investment in India amounts to an impressive $83 billion obtained through low compliance costs and product linked incentive (PLI) schemes. However, this figure is only about half of the required investment and unlikely to expand in status quo, with a global slowdown in capital growth.
In light of this, capital importing economies need to liberalize and improve their ease-of-doing-business metrics to capture a greater share of global capital flows. In effect, the easier it is for businesses to be conducted and for capital to flow into the country, the more likely it is for investors to invest in India and set-up their business here. Labour law is one such metric which imposes periodic pay-roll costs and other compliances/obligations, making them likely candidates for dilution to attract investments to India. Indian states are already competing to dilute their labour laws in favour of foreign investment [as I have previously discussed in more detail here].
The tension between Labour Interests and Investment Law
A libertarian economic understanding of labour obligations as inefficient compliance costs and potential distortion of labour markets through state intervention, would suggest that labour laws pose a barrier to economic growth. Indeed, states are presently motivated to relax these laws to attract foreign investments to stimulate economic growth. However, such dilutions of the law may be misguided insofar as labour may not be the biggest constraint on economic growth; the World Bank’s Enterprise Survey had found that administrative roadblocks, financial and infrastructural incapacity, and informalization posed more significant problems for incumbent Indian firms. In this context, labour regulations are hardly likely to be a barrier of entry for foreign capital.
Apart from a factor of production, labour is a significant aspect of a dignified human life;[1] labour regulations, in this sense, must be regarded as social goods to provide social security and insulate individuals against market/employment shocks, rather than state interventions into factor costs to create market distortions. The social necessity of these laws is fundamentally at odds with the agglomerative ethos of global capital and investment law that results in the commodification of public goods as factor costs to be optimized. Further, insofar as investment law originates from the need to secure colonial investment and interests in independent former-colonies,[2] the subordination of labour laws to investment instruments can perpetrate the neocolonial subjugation of indigenous workforces.
In light of the persisting tension between the pressing need for foreign investments to generate employment, the exploitative colonial origins of investment law, and the necessity to insulate labour interests against neocolonialist capitalistic expropriation – this piece seeks to: first, examine India’s position on labour interests, as understood from her most recent Model Bilateral Investment Treaty (BIT) (2016); and, second, compare these provisions with contemporary best practices for labour representation in treaty drafting viz. the US-Model BIT and free trade agreements (FTAs).
Indian Treaty Practice and the Position of Labour Provisions
The colonial origins of investment laws to secure investments in the Global South generally focused on broad standards such as fair and equitable treatment (FET), most favoured nation (MFN) treatment of investors, full protection and security (FPS) of investments, ‘national treatment’ at par with local investors and guarantees of untrammeled expropriation of investments. To this extent, early BITs did not make any headway towards incorporating labour obligations. For instance, the limited manner in which corporate employees were included in BIT negotiations was to permit the entry and sojourn of non-citizen technical and managerial personnel for activities associated with the investment (See: Article 9, India’s Model BIT 2016). Generally, older treaty instruments are likely to not contain provisions that elaborate on any labour obligations incumbent upon investors.
However, for a contemporary player in the international investment community, India has a relatively perfunctory representation of labour obligations in her Model BIT. Labour finds reference in the Model BIT insofar as treaty – allows State parties to restrict the transfer of funds in the name of “compliance with labour obligations” [Article 6.3], and allows enterprises/investors to voluntarily incorporate in their internal policies internationally recognized standards of inter alia labour, in the name of corporate social responsibility (CSR) [Article 12]. The former of these provisions also found its way to the India-Brazil BIT signed in 2020, while the latter has appeared in the India-Kyrgistan BIT of 2019. India neither recognizes any mutual obligation to not lower standards to attract investments, nor create any positive (albeit, weak) obligation to enforce labour laws. It is not unfair to say that labour law is virtually, and uncharacteristically absent from the considerations of a Model BIT drafted in 2016. Unlike in the case of old BITs where labour was putatively outside the scope of investment law, a deliberate silence on labour obligations can be observed in the case of India.
Due to the silence of the Model BIT on this point, claims can arise from multiple other directions as well including but not limited to FET violations qua defiance of legitimate expectations, lack of transparency and consultation, delay in justice delivery if the matter has been ventilated before the Courts, or disproportionate impact; FPS violations qua strikes or lock-outs authorized by the State; or even the elevation of other memoranda of understanding or contract provisions that may have been breached. In essence, silence on labour obligations which the State would like to change for the better in exercise of its sovereign power in public interest, could be impeded by investors.
Labour Interests in Contemporary Western Treaty Practice
In 1998, the United States broke new ground by including internationally recognized labour standards in the non-binding preamble of its Model BIT: “Recognizing that the development of economic and business ties can promote respect for internationally recognized worker rights.” In 2012, the United States explicitly adopted a provision from the North American Free Trade Agreement (NAFTA) into its Model BIT stating that “it is inappropriate to encourage investment by relaxing […] labour legislation” and identifying freedom of association, collective bargaining, elimination of forced labour, child labour and discrimination, and occupational safety and health as “labour laws” for the purposes of the treaty [Article 13]. Comparatively, Austria has even stronger preambular language in addition to the same non-lowering of standards clause. Among other member countries of the Organization for Cooperation and Economic Development (OECD), the Belgium-Luxemburg Economic Union (BLEU) Model BIT treaty provisions materialized to similarly incorporate internationally recognized labour standards, and encouraged the ratification thereof. Generally, substantive claims are not permitted for breach of these obligations – on account of specific exceptions to this effect, as discussed hereinunder.
The US-Model BIT prescribes a negative obligation to avoid lowering labour protections to attract investments, and a positive obligation to conform to internationally recognized standards on labour [Article 13]. Apart from this, however, the provision governing the submission of claims to arbitral dispute resolution [Article 24] limits the claims brought before the tribunal to matters dealt with under Articles 3-10 of the Model BIT [Article 24(1)(a)(i)(A)] alongside some loss of damage incurred by the claimant arising out of the stated breach [Article 24(1)(a)(ii)]. These provisions cover national treatment, MFN, FET and expropriation (and associated compensation) – separating these avenues of ventilating claims from the provision on labour standards. The diplomatic negotiation and consultation session provided for under Article 23 is the only site where grievances with respect to labour standards may be raised, for non-binding settlements/resolutions to be arrived at. Such a model allows labour interests and beneficial legislation to be challenged under the treaty.
Another exceptional way in which labour law can find some purchase in investment instruments is through the negotiation of FTAs which not only occur in a highly generalized context, expanding the scope of provisions beyond the limited provenance of investment protection,[3] but also occur between economic players who may be relatively stronger or weaker, allowing for more sophisticated bargains to inform innovative treaty language.[4] The most innovative development in this field is the emergence of labour-related chapters in FTAs, illustrating a sincere commitment towards labour issues and implicit acknowledgement of the linkage between social and economic progress.[5] Insofar as these FTAs also have parallel investment chapters, trade, investment and labour become facets of the same harmonious progressive and comprehensive enterprise. Such a model makes for a more harmonious and cohesive understanding of the relationship between investments and employment.
The Tension Persists
In the emerging context of sustainable growth and development in which new investment treaties are negotiated, a treaty instrument silent on labour obligations is an aberration – especially when coming from one of the largest labour markets in the world. While such a denouncement of labour obligations could potentially serve the investment objectives of India in the short run (although the possibility is highly disputed), longer-term improvements in these labour standards (if any) are likely to be jeopardized by the weight of the investments. India occupies a tenuous position in the global community of capital-importing nations. As long as international labour markets undercut labour rights to attract investments, India would find herself choosing between lower factor costs or effective social security provisions. In making this choice, perhaps, a better model of treaty provisions is direly needed to allow for these domestic labour interests to advance with an evolving global economy.
This piece has advanced two models that can be adopted by India: first, compliance with international best practices and minimum standards prescribed by the ILO for the treatment of labour; and, second, recognizing a more holistic connection between investment, trade and labour through particularized FTA bargains. Of these, India has already diluted the scope for the incorporation of ILO instruments by making such adoption voluntary at the instance of corporate entities in discharge of their CSR. More significantly, in India’s unilateral en masse denouncement of the previous BIT regime, FTAs were left alone owing to the delicate bargains embodied thereby.[6] However, with the Department of Economic Affairs (Ministry of Finance) taking over FTA negotiations from the Ministry of Commerce,[7] future FTAs are also expected to be negotiated in line with the 2016 Model, taking away yet another bargaining chip from India’s arsenal.
The tension between labour and investments persists, as does the need for a more balanced approach. Sadly, it does not appear that India is making headway in striking this balance at all.
[1] Constitution of India, 1950, art. 39(a), 39(d), 41-43
[2] Kate Miles, “The Origins of International Investment Law”, in The Origins of International Investment Law: Environment and the Safeguarding of Capital (Cambridge University Press, 2013) ch 1, pp. 19 – 70
[3] Bentram Boie, “Labour Related Provisions in International Investment Agreements” (Employment Working Paper No. 126) (Geneva: ILO, 2012) pp. 19
[4] Mark Wu, ‘The Scope and Limits of Trade’s Influence in Shaping the Evolving International Investment Regime’ in Zachary Douglas et. al. (eds.) The Foundations of International Investment Law: Bringing Theory into Practice (OUP, 2014) ch 6, pp 169
[5] Jordi Agustí-Panareda, Franz Christian Ebert, Desirée LeClercq, “Labour Provisions in Free Trade Agreements:
Fostering their Consistency with the ILO Standards System” (ILO Background Paper: Social Dimensions of Free Trade Agreements, March 2014) <labordoc.ilo.org/discovery/delivery/41ILO_INST:41ILO_V1/1277009050002676>
[6] Saurabh Garg et. al. ‘The Indian Model Bilateral Investment Treaty: Continuity and Change’ in Kavaljit Singh, Burghard Ilge (eds.) Rethinking Bilateral Investment Treaties: Critical Issues and Policy Choices (Both Ends, Madhyam, Somo: 2016) 99
[7] H Grant Hanessian, Kabir Duggal ‘The Final 2015 Indian Model BIT: Is This the Change the World Wishes to See?’ (2017) ICSID Review 1-11, 2
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