A new negotiating agenda: How India could address issues of sustainable development in trade negotiations

Economic Times, February 19, 2022

By Pradeep S. Mehta and Sneha Singh

Creativity and pragmatism must guide India’s endeavour in negotiating a full array of tools to shape sustainable trade outcomes. An appropriately tailored Trade and Sustainable Development chapter in India’s Free Trade Agreements could be a force for good and should not be opposed without due consideration.

There is a growing trend among developed countries to incorporate provisions linking Trade and Sustainable Development (TSD) in Free Trade Agreements (FTAs). Nearly all the recently concluded FTAs by the US and EU include provisions on TSD.

Most TSD provisions in FTAs cover issues of environment and labour protection. These in turn are primarily based on Multilateral Environmental Agreements (MEAs) and International Labour Organisation (ILO) conventions respectively.

There is no doubt that trade can be a crucial facilitator for sustainable development. However, when it comes to developing enforceable norms at the bilateral or multilateral fora, most developing countries equate this linkage of TSD (part of the more contentious “trade and…” issues at the World Trade Organisation) to the opening of a pandora’s box of trade protectionism.

Developing countries fear that TSD obligations could result in developed countries imposing trade restrictions based on a stringent formulation of sustainability. Such strict labour and environmental regulations are divorced from the dire socio-economic realities of developing nations and unfairly penalise them. How could India, a country with more than 134 million people surviving on less than $2 a day, guarantee labour standards that are often not met by the world’s largest economy?

These concerns were voiced by CUTS International in its Third World Intellectuals and NGOs’ Statement Against Linkages (TWIN-SAL) in 1999, demanding that instead of trying to kill two birds with one stone, the international community should get another. Thus, even though environment and labour protection are worthy goals for countries to adopt domestically, there exist specialised multilateral and regional institutions where developing countries can (and are) contributing as active participants. Resultantly, these “trade and…” discussions are at best, unnecessary, and at worst, an attempt to legitimise trade protectionism.

Further, the best strategy to attain higher environment/labour standards is through export-based growth and economic development. Redirecting the gains from trade liberalisation would meet the same objectives sought by these ‘social clauses’, but in a just manner.

Regardless of the legitimacy of these arguments, new economic and political realities cannot be denied.

First, India is engaged in a multitude of FTA negotiations with important and developed trade partners that place significant importance on TSD chapters. As a country focused on export-led growth, it should brace itself for some challenging quid pro quos.

Second, India herself has very ambitious domestic and international commitments on these issues. In so far as trade is a common thread that can connect different spheres of international governance and facilitate greater synergy, India should try to formulate rules that complement her efforts to attain sustainability.

Third, without changing India’s position on keeping environment and labour outside the WTO’s negotiating agenda, India can attempt to utilise bilateral and regional fora to test its comfort with TSD linkages in a limited setting.

This article will first discuss why India may have to address TSD in FTA negotiations and how such engagement could prove to be a winning (though challenging) proposition. Consequently, this article will broach how India could negotiate TSD clauses that serve multiple purposes – enabling India to reach its ambitious sustainability objectives while safeguarding market access from protectionism and buffering the inevitable short-term losses that will be incurred during the period of adjustment.

1. The Inevitable Tide: rise and rise of TSD clauses in FTAs
The incremental and consistent acceptance of TSD clauses in trade agreements, especially mega-regionals like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the resolve in the Indo-Pacific Strategy of the US to “develop new approaches to trade that meet high labour and environmental standards” implies that sooner or later, most developing countries in the Asia-Pacific will undertake or be impacted by commitments on labour rights and environmental protection.

Accordingly, if India desires to integrate itself into global value chains and the new trading order that is being driven by a critical mass of countries, a discussion on TSD clauses in FTAs will become non-negotiable. Case in point, the ratification of the EU-MERCOSUR trade deal has been put on hold (after twenty years of negotiations) due to pressure from businesses, civil society, and some EU member states over the agreement’s failure to include guarantees on sustainability.

Second, growing public consciousness and changes in consumer preference are increasingly creating an incentive to enter a ‘race to the top’ and distinguish products from competitors based on adherence to social values rather than cost differential alone. Thus, domestic exporters will inevitably need to upgrade their products and processes per increasingly higher environmental/labour product standards and labelling measures in developed countries.

Acceding to incremental TSD obligations for greater market access could help incentivise exporters to comply with its provisions to avail the FTA’s benefits. This would differentiate Indian exporters from competitors, as has been tried by prominent players in the sectors of textile and leather. Nationally, India too has adopted various public and private labels like the Ecomark (for consumer products meeting fixed environmental criteria) and RUGMARK (addressing child labour in the rug making industry) and there should be a push for greater uptake of the same.

Beyond immediately tangible commercial prospects, the ongoing geopolitical, geo-economic and geo-technological churn will see global challenges that necessitate the existence of reliable and sustainable supply chains. India must build itself to be “ an engine for regional growth and development.”

Third, with or without TSD obligations in FTAs, there is a rise in the number of trade measures being taken to address SD goals. Various international legislations focus on sustainability and impact supply chains. For instance, Section 307 of the US Tariff Act prohibits import of products manufactured wholly or in part by forced labour, including forced child labour. The Australian Modern Slavery Act of 2018 requires companies to report steps taken to keep their supply chains free of modern slavery.

Fears of protectionism through new non-tariff measures in developed countries can be addressed through WTO-plus rules negotiated bilaterally/within lighter blocs if India assents to engage in meaningful talks on these issues.

Fourth, considering the growing momentum of negotiations at the WTO (multilateral rules on fisheries as well as a plurilateral push for Trade and Environmental Sustainability Structured Discussions, rules on plastics trade and phasing out of fossil fuel subsidies), FTAs can allow India to dip her toes in the waters of TSD. Utilising this experience at the regional and bilateral levels, in particular with some of rich demandeur countries, will allow India to address these issues at the WTO with greater ease.

Finally, and perhaps most importantly, India needs a new negotiating agenda that targets simultaneous transformation on two fronts. First, in pursuit of economic growth, India needs to necessarily attain competitiveness in manufacturing and pursue the elimination of trade barriers in key export markets. Second, while bucking all trends, India must strive hard for a low-carbon pathway to such economic growth. The right mix of policies with an adequate focus on green goods, services and technologies can accelerate India’s movement along its economic and environment Kuznets curves to attain reduction in inequality and environmental degradation.

Shifting the Indian workforce from low in productivity, highly polluting and informal ventures to resource-efficient manufacturing that is sustainable and formal in nature will necessarily require the negotiation of conducive trade deals in synergy with its domestic reforms.

2. Dip Toes, Don’t Tiptoe: key items to check in the new negotiating agenda
With sights on an ambitious developmental model that bucks previous trends of ‘growing up and cleaning up’, the new agenda should be built on three prongs.

A. An ambitious yet practical TSD chapter
First, the FTA must take on a suitable level of legal obligations that India can deliver.

Negotiators must ensure that India does not repeat its past mistake of overpromising and underdelivering as it did with its International Investment Agreements. The fallout resulted in back-to-back losses in Investor State Dispute Settlement (ISDS) cases.

Accordingly, India should model its TSD chapters around those in the US FTA with CAFTA or the EU FTA with Vietnam which base their demands on agreements concluded under the auspices of the MEA/ILO in promotional language, rather than binding or conditional terms. Notably, when it comes to the enforceability of environmental/labour standards, India should assent to clauses that pay adequate deference to ‘domestic circumstances’ when enforcing core labour or environmental standards (Art 13.4(3)(b), EU-Vietnam FTA).

India should also opt for clauses where the appropriateness of domestic laws to achieve a higher level of standards is left to discretion. (Article 285, EU Central America Association Agreement). For instance, India’s agreement to “phasing down” rather than “phasing out” the use of coal balances her resolve to be carbon-neutral by 2070 while reserving the right to provide cheap energy for its industrialisation and urbanisation needs. In other words, even if one party believes that India’s domestic framework offers only a low level of protection, as long the same is implemented effectively, there should not be a breach of the TSD obligations.

Further, India should insist upon making the TSD chapter incentive rather than sanction focused (more carrots, less sticks). In the US-Cambodia Textile Agreement the regulatory alignment was done through positive incentives. Compliance with labour standards unlocked increased export quotas thereby linking increased labour standards with better export prospects and job creation. Similarly, an FTA between Indonesia and the European Free Trade Association offers Indonesian palm-oil exporters lower tariffs if they meet certain environmental standards.

This brings us to the second prong.

B. Build forward better
In exchange for acquiescing to stronger rules and standards, India should negotiate enforceable and meaningful obligations for assistance and capacity building. This would also reinforce commitments made by developed countries in other fora such as the United Nations Framework Convention on Climate Change (UNFCCC) to facilitate the transfer of technologies and finance. Further, India too could insist upon its FTA partners playing a larger role in the galvanisation of India led international initiatives like the Green Grid Initiative – One Sun, One World, One Grid (GGI-OSOWOG) under the International Solar Alliance, for globally inter-connected solar grids.

Even without an FTA, a slew of upcoming measures to fight climate change like the EU’s Carbon Border Adjustment Mechanism, and other carbon-related border/pricing measures cropping up in the US, UK, and Canada will make it imperative for Indian exporters to adapt to changes.

Further, an exponential increase in sustainability standards will become unavoidable for India and exporters, especially Small & Medium Enterprises (SMEs) desiring integration with Global Value Chains to access larger markets. Notably, many voluntary private standards are turning into de facto or mandatory requirements and will continue to proliferate. These usually mandate higher levels of performance and upgrade rapidly to match industry needs – increasing the costs and difficulty of compliance, especially for micro firms and SMEs.

Adjustment to such change requires financial and technical support, for instance through skilling workers to integrate into value chains driven by clean technologies. Without an unencumbered availability of clean technologies and financial resources to bridge the resource gap between domestic and international frameworks, higher environmental/labour standards in the developed countries will lead to green protectionism.

There should be a special focus on innovation in the FTA to address concerns of equitable access to green goods and technologies through their transfer/licensing at fair and reasonable terms. This is a valid compromise where use of such technologies is made inevitable by environmental standards or regulations that impact exports of developing countries.

C. Flexibilities, safeguards and deeper regulatory coherence
The third and final prong requires that India draws up safeguards or ‘relief clauses’ in the TSD context.

This means that India should be able to negotiate for flexibilities that accommodate its socio-economic realities and individual interests. For example, despite the Indian government’s efforts to eliminate child labour, especially in hazardous occupations, pervasive poverty drives households to prioritise additional income. Accordingly, clauses which take into account good faith and best efforts made towards addressing labour concerns must be added in dispute settlement chapters. ( Article 20.3.5,Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)).

The TSD chapter could be made subject to a transition period to allow the domestic industry enough time to adjust before the implementation of TSD obligations is required. Another option is to render TSD obligations inapplicable through carveouts for certain sectors (like agriculture). This could also be done for certain policy measures that India deems crucial to enable a ‘ just transition’. This would allow India to continue taking measures targeting sustainability without sabotaging prospects of employment, industrialisation and urbanisation (e.g., government procurement and reasonable subsidies on fossil fuel).

Importantly, TSD violations should not lead to nullification of benefits under the FTA. Vietnam has negotiated side agreements with CPTPP Parties to ensure that dispute settlement in relation to labour obligations remains inapplicable for a certain time (transition period) and that even after the operation of dispute settlement, the outcome of the settlement does not result in Parties suspending benefits under the FTA.

In fact, instead of subjecting the TSD chapter to conventional dispute settlement, India could opt for relatively light institutional mechanisms to address conflict. These include creating channels for dialogue with non-state entities, including labour unions. Such provisions are dominant in the TSD chapters of EU FTAs. This soft approach generates far less antagonism and is more effective in comparison to state-state dispute settlement or sanctions upon non-enforcement of TSD obligations.

Additionally, in order to ensure that TSD obligations do not become a shield used by developed nations for protectionism, there must be certain positive obligations towards dismantling non-tariff barriers.

Deeper integration in FTAs through recognition of each other’s measures as equivalent or adhering to one common standard (harmonisation) and reducing unnecessary regulatory diversity (via Good Regulatory Practices) can remove trade barriers, lower administrative costs and in turn enhance market competitiveness.

In this regard, the FTA could provide a systematic manner of addressing divergence in trade policies adopted for similar climate-related objectives. For instance, even though India has not set a carbon price, several governmental initiatives indirectly tax/price carbon. For instance, the Perform, Achieve and Trade scheme rewards/penalises industrial sectors for achieving/failing to reduce energy consumption per government-mandated targets. The PAT scheme is comparable to the EU Emissions Trading System (cap-and-trade). There is a potential for linking the two and creating a larger market for emissions trading through harmonisation of monitoring, reporting and verification (MRV) requirements.

3. Conclusion
Creativity and pragmatism must guide India’s endeavour in negotiating a full array of tools to shape sustainable trade outcomes. The Indian government should also be encouraging better labour and environmental protections in local manufacturing to ensure improved developmental

outcomes for citizens. An appropriately tailored TSD chapter in India’s FTAs could be a force for good and should not be opposed without due consideration.

The authors work for CUTS International, a global public policy research and advocacy group. This article is based on a CUTS Discussion Paper which will be shortly available (here).

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