TRADE RELATED INVESTMENT MEASURES IN INDIA

(TRIMs)

ABSTRACT

World Trade Organization has given Trade Related Investment Measures (TRIMS) to
harmonize flow of Foreign Direct Investment (FDI) among the member countries.
India became member of the WTO in 1995 so TRIMs agreements have considered as
an important part of broader national policy rule. Since 1991, India's government has
pursued a liberalisation, privatisation, and globalisation (LPG) agenda. As a WTO
member, India is required to adopt TRIMS in order to operate and execute FDI in
order to enhance trade gains. It designed to achieve some important goals of nation’s
industrialization through export expansion, skill acquisition and entrepreneurship,
import substitution, local employment, balance of payment improvement and promote
transfer of technology.1 Among the TRIMs agreement’s important objective is to
advocate members to eliminated those measures that cause distortions of the trade.
The Agreements ensured that after removal of the barriers free competition among the
members helps to expand the liberalization of world trade, which may facilitate
investment across international boundaries. As a result, economic growth of
participated trading partners and member countries has been increased with increasing
trade and investments.

The researcher sought to demonstrate that FDI under the TRIMs have promotional
and developmental role to encourage new investment in needy areas. Moreover, the
researcher has described TRIMs, its Agreements and discusses its, pros and cons. And
sheds light on the empirical effects of some of these TRIMs in India.

Keywords: World Trade Organisation (WTO), Trade Related Investment Measures

(TRIMS), Trade Related Investment Measures (TRIMs) Agreement, Foreign Direct
Investment (FDI)

1
Zang J, 2003
RESEARCH QUESTIONS

1. How FDI under the TRIMs have promotional and developmental role to
encourage new investment in needy areas?
2. What are TRIMs, its types and objectives?
3. What are the pros and cons of TRIMs?
4. What are the empirical effects of some of these TRIMs in India?
 CHAPTER 1: INTRODUCTION

A mature conversion in the world economy by size & structure of Foreign Direct
investment is in mid-1990s. Inflow of FDI and benefits of Inflows are not run
automatically. Inflow of FDI increased because of favourable country’s policy, which
boost the development benefit of such investment. FDI ‘quality’ has so many
variations which are associated with favourable and unfavourable impact on host
countries performance. For example, some host country’s irrespective strategy or
operational behaviour can less conductive to positive impact from FDI. In some
situation crowding out may also lead to increased concentration in market. Sometimes
anticompetitive behaviour and restrictive practice in business may result in welfare
losses to county by TNC. There are so many ranges of policy options available to
Government to optimise.

From the 1990s, FDI has been increased in the practices of private capital resulting
from “globalization”. India has followed liberalization, privatization and globalization
policy to boost their global trade. Traditional trade policies more focused on trade in
goods which are not effective in rapid changing scenario of Industry. The Indian
government has replaced the system of control by liberalization by becoming a
member of WTO in 1995. New economic policy helped to improve economic
condition with moments of the International development in India after WTO
membership. WTO has followed so many agreements like Agreement on Agriculture
(AoA), a Trade-related aspect of intellectual property rights (TRIPs), TRIMs, etc.
WTO works with the aims of world’s trade liberalization. Many countries introduced
TRIMs to manoeuvre FDI activities in a way to benefit the trade. India is capital-
deficit and Technology lacking country; it is accessory to know provisions made by
WTO under TRIMs. The measures of TRIMS known as Performance requirements
are provisions, imposed on the investors to require them to meet certain specified
goals with respect to their operations in the host country.
 CHAPTER 2: GENERAL OVERVIEW

1. Meaning of TRIMs

“The narrow definition of TRIMs is “The measures designed by WTO to

influence trade volume or trade pattern, (Zang J, 2003) for example in TRIMs
agreements; export performance requirement means a minimum level of output
can be exported, and local content regulation denote that a minimum amount of
input be sourced domestically. Theoretically, “the broad definition of TRIMs has
been included in government different policies like the macroeconomic policy,
industrial policy, regional policy, FDI policy, etc (Zang J, 2003). One can also
define that “Trade Related Investment Measures deal with preparations duties and
functions of host countries similarly code of conduct for the home country for the
development of Trade Related Investment’. (WTO, 2012) “The Governments
impose trade related measures to either support or oblige investment to achieve
certain national priorities.” These provisions affected to trade are known as
TRIMs (Kennedy, 2003). Another definition of TRIMs is “The agreements
considered as tools of anti-market command and commercial abuse by
multinational enterprises that bargain strongly over the terms and code of conduct
(UNCTAD, 2003)”.

‘TRIMs agreements are a key part of broader national economic policy system
which designed to achieve such goals as industrialization through export
expansion, import exchange, skill acquisition and entrepreneurship, local
employment, promote technology transfer and balance of payment improvement’
(Zang J, 2003). Many countries have imposed these agreements in order to get the
benefits from their domestic firms. TRIMS referred to certain conditions or
restrictions executed with reference to foreign direct investment in the country.
2. Objectives of the TRIMs

Among the TRIMs agreement’s important objective is to advocate members to

eliminated those measures that cause distortions of the trade. The Agreements
ensured that after removal of the barriers free competition among the members
helps to expand the liberalization of world trade, which may facilitate investment
across international boundaries. As a result, economic growth of participated
trading partners and member countries has been increased with increasing trade
and investments. Another objective of the agreement to protects in its preamble
that the expansion as well as liberalization of world trade including developing
countries.

1. To encourage local content requirement refers to use of certain amount of local

input in production

2. To maintain Trade-balancing requirement with reference to balance of payment.

For this, certain portions of exports equivalent to obliging imports.

3. To manage foreign exchange-balancing

4. To boost domestic sales

5. To invite technology, transfer in leading business areas

6. Foreign investment must promote local holding of equity by local people.

With reference to above mentioned objectives confined to boost global trade in

developed and developing countries. FDI under the TRIMs have promotional and
developmental role to encourage new investment in needy areas.
 CHAPTER 3: TYPES OF TRIMs

“Restrictive TRIMs and Incentive TRIMs” are the two types of TRIMs available.
Restrictive TRIMs are FDI policies that not only limit or discourage FDI but also
affect trade. Incentive TRIMs are a variety of tax breaks, incentives, and subsidies
targeted towards foreign investors that have a positive influence on trade. For
example, In United Nations it recognizes in four categories: 1. Performance
requirements 2. Investment incentives 3. corporate measures 4. Home-country
measures.

In case of India two types of classification are discussed below.

I. Classification of the TRIMs by Governing body

 TRIMS related certain performance called – Performance requirements:
Performance requirements means some standard measures of TRIMs followed
by both investors as well as host government industrial policy. To impose
these measures, these requirements are mandatory like investor to take action
on certain purchasing, sales or manufacturing decisions.
 Use of Domestic input imposed by TRIMs called – Local Content
Requirements: A necessary condition followed by foreign investors when
imposed TRIMs. To established their enterprise committed quantity or
percentage of the local produced input must be used for production during the
course of operation. Accordingly, the investor may be received cheaper and
better input that may available for import, as well as they must be satisfied
with available local inputs in terms of price and quality (CANADA-FIRA.
(1984), 1984).
  TRIMS execution operation on Export called - Export performance
requirements: In this requirement host county set their condition on FDI
requirement like certain amount/percentage of product must be exported in
direct investment. Main objective behind this performance requirement for the
host country to earn foreign exchange. In case study of WTO dispute
settlement about India automotive sector: the car manufacturer imported parts
according to requirement, proportionally final manufactured car exported
(India - Automotive sectors. (1998), 1998).
 TRIMs requirement for manufacturer to manufacture specific product
called – Product mandate Requirements: These measures are necessary to
imposed when country wish to specifically developed a particular Industrial or
economic zone. So, it is mandatory for foreign investor allowed only to invest
in selected segment or identified industries. As a result, local demand met
sufficiently and it would promote export by surplus production in anticipated
areas. There are so many Special Economic Zones (SEA)has been developed
in India to promote investor by offering special concessions on investment.
 TRIMs requirement for local Investor by holding certain percentage of
ownership right in Foreign investment called Local Equity Requirements:
The host country allowed the foreign investor under this requirement to invest
particular amount of ownership rights to be held on local or citizen of the host
country. The motives behind this requirement to control management decision,
to build local entrepreneurship, for the screening of management decisions.
There might be other TRIMs which have a dominant requirement.

II. Classification of TRIMS by Investors effects

 TRIMS provide incentives to investors called Pro-motive TRIMs: This
requirement intended to influence investment locational decision by
offering investment incentives which contributed finance from host
country. Motive behind this requirement to attract multinational enterprise
for favourable trade development. measures included to attract investors
like, tax holidays, cash grants, exemption in other possible taxes,
government offer other financial contribution. This requirement itself
incentives for the host country because cost associated with FDI and
 TRIMS act as incentives.
 TRIMS regulated the Investment call regulative TRIMs: In this
requirement negative incentives offered to foreign investor to regulate the
investment by FDI. These requirements also called local requirement,
licensing requirements, foreign exchange requirements, technology
transfer requirement, Trade balancing requirements (annexure –II) etc.
These requirements are necessary to regulate foreign investor in favour of
host country development. So, TRIMs imposed based on father agreement
needed to prohibit or resections required.

CHAPTER 4: PROVISIONS OF TRIMS

Provisions of TRIMs Articles are pertaining to goods only:

1. The first article shows agreement applies to “Investment Measures” for trade in
goods. Under this article investment measures are described to remove subsidies.
There are indirect effects of investment decision of host countries. There are problems
of internal taxes barriers to investment decision as well as production and marketing
of the product. Therefore, “Investment Measures” indicate that TRIMs agreement is
not limited to Foreign Investment, which is not limited to first investment but to
suggest rationality of the ownership of enterprise. With regard to “investment related
to trade” several issues came before WTO secretariat. One of the issues related with
trade is people always favour the use of domestic product over imported product,
which enhance its affect trade. WTO has also provided guideline as a separate
analysis on a measure, which are related Trade and its investment measures.

2. Article II describes National Treatment and Quantitative restriction under the

TRIMs. This has taken from GATT 1994.

3. Article III shows all exceptions under GATT 1994 to be applied to appropriate to
the provision of TRIMs given by WTO.

4. Article IV shows provision for the developing countries it is free to deviate

temporarily from the provision of Article-ii to the extent in such a manner as given in
GATT agreement about investment. These are related with Balance of payment
provision and the declaration on trade measurement taken for balance of payment
purpose.

5. Article V of the TRIMs deals with notice and transitional arrangements;

communication of TRIMs in general and specific applications, as well as their main
elements, is required. Each WTO member must delete any TRIMs that are reported
within 2 years of the WTO agreement's entrance into force for developed nations, 5
years for emerging nations, and seven years for least developed countries. During the
transition time, a member cannot change any of the TRIM that has been informed for
the article's application. The Council for Trade and Goods has established a
standardized format for notices that are required under this item.

6. Article VI explored transaction transparency in relation to TRIM member nations'

adherence to transparency obligations. This item also expresses member behaviour for
information and provides ample chance for engagement on any TRIMs-related
subject.

7. The functions allocated to the committees by the council for trade in products are
outlined in the article VII committee on “Trade Related Investment Measures”. It also
demonstrates how the increments are used and implemented.

8. Article VIII shows provision for consultation and dispute settlement machinery.
WTO has provided a detail guideline. For settlement of disputes among member
countries, the provisions are as per article XII and XIII of GATT1994.

9. Article IX is showing that after five years of the entry of WTO agreement for the
member. TRIMs are reviewed by the council of trade and goods. The council reviews
implementation of the provision on treatment policies and competition policy in a
right perspective.

With reference to above articles the objective of the TRIMs agreements is not
contained in GATT provisions. It means TRIMs are not contradictory of GATT but
these are complimentary to GATT provisions of Investment. As discussed in Article I
it helps to recognize certain investment measures for member country. Such measures
that are earlier prohibited by the provision of GATT now “National Treatment” and
“quantitative restriction” related issues are discussed in article II of TRIMs
provisions. Moreover, article XI related with restriction of volume and value of
imports that an enterprise can purchase equivalent to its exports. (Known as Trade
Balancing requirement) have given relaxation to developing country for better Trade
Balancing effect. There is a same provision given by GATT for dispute settlement and
persuasive consultation given in article viii of TRIMs. A member country has to
follow code of conduct in right outlook for treatment policy and competition policy
among each other of trade partners for harmonies global trade.

CHAPTER 5: BENEFITS AND LIMITATIONS OF TRIMS

 Benefits

1. It increases transparency by announcing the nature of TRIMs and WTO

obligations. The WTO is a quasi-judicial system that eliminates notified TRIMs and
ends the agreed-upon transition time.

2. Within the multilateral trading system, TRIMs have recognised a policy

internalisation relationship between investment and competition. The agreement is
particularly beneficial to developing country members in the sense that it allows them
to fully use funding in their growing process.

3. TRIMs assist tiny businesses to grow to full competitive scale, and they may be
used to channel FDI to raise new industries to maturity, allowing them to
boost employment in domestic jurisdictions and value addition.

4. TRIMs are employed by multinational corporations to protect themselves against

anticompetitive and trade-restrictive practises. The removal of restrictions would aid
in attracting FDI.
 Limitations

1. One of the key concepts of the WTO agreement is "national treatment." It

establishes the need that an imported product be considered as a domestic product.
That is, no distinction should be made between domestic and imported goods. Local
content requirements and trade balance requirements, on the other hand, are TRIMs
that contradict this premise.

2. TRIMs have a detrimental influence on a foreign operation's economic efficiency in

a country. Because to LCRs, international investors are obliged to use local resources
as inputs, which do not have any comparative advantages.

3. There are no provisions in the TRIMs agreements that address the difficulties.
There are no provisions for capital repatriation or labour mobility. The agreement
does not address compensation concerns for trading partners in the case of loss or
damage during trade handling.

4. The TRIMs agreement is inadequate in that it demonstrates the consequences of

investment measures while ignoring the reasons of TRIMs imposition. In addition, it
does not address benefit distorting activities of multinational corporations.
 CHAPTER 6: TRIMs IN THE PERSPECTIVE OF INDIA

TRIMS for India must consider certain national priorities, direct investment in India
must encourage and the government must be ready to impose condition for this. The
agreement of TRIMs has prohibited five types of measures as they are considered to
be consistent with GATT rules of” national treatment”. These are rules against value
of “quantitative restriction”, looking to requirement of “domestic content” and
“export performance” for which five years transition is given.

Domestic content is useful for countries like India largely due to:

1. Encourage domestic activities in raw material and intermediate input sector, up

gradation of input sectors,

2. Prevention of wastage of foreign exchange in input of few raw material and

intermediate input,

3. Encourage linkage of FDI with domestic economic activities,

4. Encouraging internalization of FDI,

5. Acting in several of the ways as important instrument in development process.

Such requirement needs to be useful from balance economic growth, export
performance and national development.

Therefore, the government of India requested WTO to review again these provisions
in the TRIMs regarding growth of the developing nation as well as to manage the
BOP stability. For this, the government of India proposed to the WTO to extent
transition period for Implementation of TRIMs and channelized investment in such a
way that investment may fulfil higher growth rate goal of India.

Reaction of TRIMs relaxation by WTO member, they felt inconsistencies of the

TRIMs. The following changes were found subsequently necessary in the case of
India:

 WTO allowed deviating from BOP ground for the developing countries including
India

 With regard to Article V of TRIMS changed as local content requirement (mixing

requirement) in production of new print, local content requirement in the
production of some medicines

 Dividend Balancing requirement in the case of investment in 22 categories of

consumer goods.

Now it is declared by India that none of the measures were in force initially but India
has not having outstanding obligation under the TRIMs agreement.
 CHAPTER 7: CONCLUSION

The foregoing points of TRIMs agreement reveal that WTO has powerful role to
manage FDI in general and specific investment in particular. TRIMs agreements
appear as trade-distorting but it will encourage both trade and investment in
developing country like India. India needs technological collaboration and
technological growth at home rather than to import. Liberalization policy of the
government of India has provided a vital boost to various sectors of Indian economy.
However, TRIMs agreements have limitation within its frame work because members
are informed to abolish and remove some measures. These may enable developing
country like India to open up more opportunities for foreign investment and the
agreement has introduce rules of International law in world trade system. The impact
of TRIM’s has been small but its effectiveness have been influenced to a range of
factors such as government policy, local government policy, local engrossing capacity
of work force and demonstrating efficiency of enterprise. Finally, it concluded that
Government of India have encouraged FDI flow in various sectors as per requirement
of the sector as well as their growth potential of the sector. To make Foreign Direct
Investment inflows conventional to host country, objective of the development in
various policy fulfilled by the government to employed some performance
requirement. India has always followed an open, equitable, conventional, fair-minded
and rules based multilateral trade regime. Finally, it should be overwrought that in a
large economy like that of India, investors seeking access to the domestic market may
still be attracted facing the performance requirements’ (UNCTAD, 2003). Infect
TRIMS Impact of FDI in India as ‘butterfly effect - It is the idea that small differences
in one area, can lead to widely diverging outcomes elsewhere’, As per the TRIMs
Agreement, India as members has notified the WTO council with their existing
TRIMs for trade in goods, are inconsistent with the agreement. Moreover, TRIMs
imposed with subjective to the policy of the host countries, which may vary from
country to country. The performance requirements that are addressed in various
agreements at the bilateral and regional levels policy, even after completion of
transition period by the WTO Agreement on TRIMs shows a positive impact for the
growth of FDI in India.

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