On 5 June 2019, the US terminated India’s designation as a beneficiary developing country under the Generalized System of Preference (GSP) trade program. This means that nearly 2000 products including auto products and textiles and up to $5.6 billion of Indian exports can no longer enter the US duty-free. Much has been written about whether and what impact this policy reversal would have on the Indian exporters, US consumers, and others. And there has been much discussionabout the factors driving the US decision – trade imbalance, lack of reciprocity, weak intellectual property regime, lack of market access for US dairy and medical devices, and new restrictions on e-commerce companies. Of particular interest is the last motivation. Over the past year, the Indian government has adopted new data localization and e-commerce rules that work against the long-term commercial interests of foreign online retailers. Foreign investors were traditionally not allowed to control and market their own inventory on their e-commerce platforms; they could only operate marketplace platforms where others sell goods to retail consumers. Amazon and Walmart-controlled Flipkart – two of India’s largest e-commerce sites – have relied on intermediate companies in which they have direct or indirect stakes to overcome this hurdle. The recently adopted e-commerce rules aim to close this loophole by classifying sellers purchasing large inventory shares from other group companies as controlled by the e-commerce company. Further, any data generated by these companies would have to be stored in data centers and servers within the country. The new laws have prompted a significant overview of Amazon and Walmart-controlled Flipkart’s operations (see here). But it is easy to see why they might oppose the new rules. The Indian market is crucial for American e-commerce firms. Having been shut out of China, they view the untapped potential of India’s e-commerce market as an important source of growth in the coming years. This has spurred about $5 billion in investment from Amazon, and a $16 billion investment by Walmart into the local player Flipkart. So, any rules that restrict their potential operations in India might be seen a significant challenge. Indeed, it was reportedthat Nasdaq listed Amazon and NYSE listed Walmart lost a combined $50 billion in market cap when the policy came into effect, and had to stop or discontinue selling multiple products on their portals. With so much at stake, it is not inconceivable that they would lobby their home government to intervene diplomatically. And, when combined with the other sticky trade issues on the US-India agenda, the US government has responded by revoking India’s trade benefits. Yet, this was not an inevitable outcome. In recent research, my co-authors and I examined US diplomatic actions in 219 investment disputes involving US companies in 73 developing countries, mostly during the mid-1990s to the mid-2000s. In each case, the US firm contended that their property rights were violated by actions of the foreign government. And in each case, we examined if and how the US government intervened diplomatically on behalf of the firm. Our analysis indicates that US diplomatic intervention in disputes between developing county governments and American investors occurred in about a third of the cases. In these cases, high-level US officials, legislators, ambassadors, and other representatives regularly pushed the very highest officials – often the President or Prime Minister of the developing country – to resolve the issue, thus linking the dispute of a US investor to the bilateral diplomatic agenda. Yet, explicit threats of coercive sanctions – such as revoking trade or aid benefits or linking other priorities of the developing country to the resolution of the commercial dispute involving US firms – were rare; occurring in only about 3% of the sample. Our research suggests that American investment diplomacy was much more ‘benign’ during our study period of the mid-1990s to the mid-2000s. The more aggressive policies adopted by the current US administration suggests a return to the approaches more common under the Cold-War era. India, for its part, has pushed through with its e-commerce reforms and the new Commerce and Industry Minister has announcedthat the country would try to build up its export competitiveness without relying on GSP benefits. While negotiations on a potential trade deal with the US continue, Amazon and Walmart are likely to have to adapt their business models in India to comply with the new regulations. Comments are closed.
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AuthorSrividya Jandhyala Archives
June 2019
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