India has always been running about with bells on, when it comes to free trade agreements (FTAs), ever since the literal collapse of the WTO Doha Round. However, of the FTAs that it has signed till date, most have won more 'friendship' and less 'precious forex'. Several trade experts and economists share similar opinions. Has India's FTA experience been in most parts a case of 'trial and error' gone wrong? And despite having seen the little gains from these agreements, is India still backing the wrong horses when it comes to choosing FTA partners? Or has the world's largest democracy simply chosen to put to risk its trade deficit for the sake of foreign policy? The Dollar Business analyses...
By The Dollar Business Intelligence Unit | June 2016 Issue | The Dollar Business
If the World Trade Orgainsation's (WTO) forecast is something to go by, the global economy will witness its fifth consecutive year of subpar growth in international trade in 2016 – WTO expects world trade to grow by just 2.8% this year, once again below 3%. This isn't going to augur well for the global economy which is still struggling to achieve the pre-GFC growth levels. According to UN data, "six years after the global financial crisis, gross domestic product (GDP) growth for a majority of the world economies has shifted to a noticeably lower path compared to pre-crisis levels. Excluding the three years from 2008 to 2010, which featured, respectively, the eruption of the financial crisis, the Great Recession (GFC) and the policy-driven rebound, four-fifths of the world economies have seen lower average growth in 2011-2014 than in 2004-2007." Least motivating.
In this backdrop, on October 4, 2015, 12 Pacific Rim countries concluded negotiations on the Trans-Pacific Partnership (TPP; a trade accord among 12 Pacific Rim countries). If ratified by all, this free trade agreement (FTA) could raise GDP in member countries by an average of 1.1% by 2030. It could also increase member countries’ trade by 11% by 2030, and boost regional trade growth, which had slowed to about 5%, on average, during 2010-2014, from about 10% during 1990-2007.
So, is TPP one outcome of drug discovery to return to normal the rather anaemic global health post the GFC (that has certiainly made policymakers desperate to explore all options)? Or is it just one element on the larger geopolitical periodic table?
TPP is only one of several mega-regional trade agreements (MRTAs) that are currently being negotiated across the globe. Apart from TPP, there is the Regional Comprehensive Partnership Agreement (RCEP) in Asia between ASEAN members and six other nations with which ASEAN has agreements in force (India, of course, is a part of RCEP); the Pacific Alliance in Latin America (Chile, Colombia, Mexico and Peru); the Tripartite Agreement between parties to COMESA (Common Market for Eastern and Southern Africa), EAC (East African Community) and SADC (Southern African Development Community) in Africa; and many other such bilateral and plurilateral foreign trade pacts. "These agreements, once in force, have the potential to reduce the spaghetti bowl of FTAs, especially if they supersede existing bilateral agreements and develop common rules (such as for rules of origin) to be applied by all the parties to the agreement," states WTO. But then, aren't FTAs against free market principles and WTO's very ideology? They favour one country over another, even though, ironically, one of WTO’s basic principles is to "give Most Favoured Nation (MFN) status to all member countries". Ironical!
There is a school of thought that these agreements undermine the multilateral process for trade liberalisation represented by the WTO. Ideally, a global trading system along the lines of WTO would maximise the benefits from exploiting the competitive and comparative advantages of all countries and reduce transactional costs. These benefits and savings could then be passed on to the consumer. Therefore, FTAs should not exist in such a multilateral trading system, as they potentially create preferential bilateral or regional markets that disrupt a level-playing field. This could cause trade, which would normally flow to other countries, to divert and flow between countries benefiting from the preferential treatment, thus distorting global trade flow. "This is the reason why most economists are sceptical about RTAs and FTAs, because they essentially divert trade from one market to another. However, there are several broad studies that show that RTAs are likely to create a lot more trade between partner countries, because as trade barriers fall, trade volume rises,"
( International trade has witnessed a proliferation of so-called mega regional tradeagreements (MRTAs) over the last decade, and India is no exception. )
Dr. Swati Dhingra, Assistant Professor, Department of Economics and CEP, London School of Economics tells The Dollar Business.
Unfortunately, we do not live in a world where nations altruistically place global welfare and common interest over their own immediate self-interests. Ideally, States should balance their short-term self-interests against long-term self-interests as part of a community of nations. That would make for significant aggregate gains from trade liberalisation. However, the global trading system operates in a political reality that is increasingly cautious about trade liberalisation, and many countries continue to impose significant barriers to trade in goods and services. And then again, as we have seen with the WTO, dialogues and negotiations have faced many hurdles precisely due to the multilateralism built into the system. Whether or not the WTO regime allows FTAs and RTAs, over time, these pacts have become integral to world trade framework.
WTO allows FTAs, despite them being against its basic frEe Market Principles
Since WTO's Doha Development Round of talks broke down in 2008, there have been multiple attempts to revive the negotiations. And while there has been progress, it is difficult to estimate the time span fortalks to get fruitful. In August 2014, when negotiators failed to agree over objections raised by India, WTO estimated that the deal would have stimulated the world economy by more than $1 trillion by cutting regulatory hurdles and red tapism at international borders. But with the global economy showing signs of a slowdown, and FTAs having shown the merit of being easier to negotiate, the trading economies started putting more emphasis on FTAs or RTAs. In fact, between 2008 and 2012, FTAs grew at an average year-on-year rate of 24%. Interstingly, as it stands today, 'all' WTO members except one (Mongolia) have concluded at least one FTA (PTA), while some, such as European Union (EU), Chile and Mexico, have concluded more than 20!
Having witnessed a virtual explosion in the number of RTAs and FTAs among nations over the past two decades and a half, one might expect them to have catalysed trade flow among member countries. Have they? And in general, do FTAs do so? Well, there is no single answer to this question. A recent study titled, 'The Impact of Free Trade Agreements between Developed and Developing Countries on Economic Development in Developing Countries', by Department of International Development of the Government of UK, states that "in most cases FTAs are neither ‘a golden bullet’ that will automatically destroy impediments to trade nor – at an aggregate level – a potent source of harm. Much will depend on the context in which the agreement is implemented. Usually, an FTA will result in an increase in trade between partners compared to the counterfactual of what would have happened in its absence." So, while there are those who feel that all FTAs do is run against WTO principles of 'equality in trade' by diverting trade from one country to another, there is an almost equal number which believes that FTAs should be looked at beyond just direct gain-loss equation.
( India’s tariff barriers are one of the highest in the world, even when compared to ASEAN members with whom it already has an FTA. )
But again, numbers don't lie. If China claims it is the largest exporter in the world, it does so with numbers. If India claims it has one of the largest middle class consumer society, it does so with numbers. If elections in USA or UK is decided, it is with numbers. If Barcelona FC has won the La Liga, it is with numbers. If WTO accused a nation of protectionism by building a wall of high tarrifs arounds itself, it is with numbers.
Numbers, they don't lie. By the same argument, if one needs to judge the outcome of FTAs for any country, it has to be based on numbers; numbers of trade deficit and surplus that the FTAs would have resulted in for that market. Call us less altrustic if you will, but our concern here unquestionably is India.
Though a relative new comer to trade agreements (except the few that were signed in the 1970s and 1980s with certain African and Asia Pacific countries), India started pursuing FTAs after liberalisation and even more so as the country’s economic might have started growing in the new millennium. However, India has mainly focused on partnering with other Asian countries, and more so in merchandise than in services. Within Asia, India has signed bilateral FTAs with Sri Lanka (1998), Afghanistan (2003), Thailand (2004), Singapore (2005), Bhutan (2006), Nepal (2009), Korea (2009), Malaysia (2011) and Japan (2011). There have also been two regional trade agreements, the South Asian Free Trade Agreement (SAFTA, 2004) and the India-Association of Southeast Asian Nations Agreement (ASEAN, 2010). Outside Asia, FTAs have been agreed with Chile (2006) and MERCOSUR (2004). Meanwhile, the country has also initiated similar deals with Canada, Australia, European Union, New Zealand, and Israel, among others. Apparently, India is also a part of the much ambitious mega regional trade agreement RCEP, and hopes to gain significantly from this trade bloc.
One of the reasons why India embarked upon this journey was the decreasing relevance of the Doha Round of global trade talks under the WTO, where the developing countries were not able to clinch favourable deals with the developed ones. So regional or such bilateral arrangements probably seemed a more comfortable route. With its growing significance as a large economy, with a high-potential manufacturing and vibrant services sector, India looked to emulate its Asian peers – Japan, South Korea and China – whose economic successes were largely export-driven. As India looked at achieving double-digit growth figures, it was but natural for the country to access new markets. And starting the late 1990s, unlike during the era of a ‘Hindu Growth Rate’, India apparently had more skin in the world trade game. But opting for RTAs and FTAs as means to smoothly channel products and services have not paid positive dividends to the country. Rise in forex revenues have been greater from non-partner markets. Surprised? Read on...
Despite scholars having questioned the loopholes of Article XXIV the General Agreement on Tariffs and Trade (GATT), as incorporated into the WTO in 1994 (which allows WTO-member nations to form customs unions or FTAs, with conditions on barriers to trade within and without the union) and Article V of GATS (which outlines conditions for WTO members to set up a PTA), India remains a believer in bilateralism. However, a decade-and-a-half since we got up in a hurry to sign FTAs (RTAs, PTAs, etc.), we are still to find reasonable numeric justification for the very birth of these relationships a.k.a. harmonies.
During the past eleven years (post which most of these RTAs were signed by India), our annual exports to RTA partners have risen at a CAGR of just 12% – almost equal to the rate at which our exports to non-RTA nations have grown. If our past RTAs were signed as acts of generosity, they would have perhaps been better justified. Since FY2005, these RTAs have worked more to destroy our chart of fiscal deficit than beautify it. In the eleven years leading to FY2016, imports from our bilateral trade partners (including the blocs) have actually increased by 14.9%! Compare this to the lower 12.7% rise of import bill from non-FTA partners and you are taken by a bigger surprise. To quickly explain how India’s experience with bilateral trade is not a happy one, let us consider the much ambitious trade pact with ASEAN bloc and with two Asian powers Japan and South Korea. In the past eleven years, our trade deficit with these three geographies have increased about 596% (deficit during FY2016 alone was to the tune of $30 billion). Even if you solely consider the ASEAN bloc, during the past eleven years, we have accumulated a trade deficit of over $84 billion – thanks to heightened imports and a sluggish outward trade with this bloc.
Whether India should sign another FTA in a hurry should be determined by how the story has unfolded for India so far. That our annual trade deficit with 24 FTA partner nations has risen by a staggering 1260% since FY2005, should be enough indication for the wise!
The only significant FTAs that India has gained from are the so called ‘early-harvest' FTA programmes which were signed with LDCs (Least Developed Countries), mostly because LDCs by nature have limited capacity to export and embrace Indian products. A case in point could be SAFTA (South Asian Free Trade Area) – India's trade surplus with SAFTA members has risen sharply from $3.60 billion in FY2005 to $14.79 in FY2016, witnessing a staggering jump of about 310%. So, why is it that despite trade deficits with ASEAN, Japan and South Korea rising past the roof since FY2005, our surplus with SAFTA has only grown in magnitude during the period? Secret: SAFTA has seven nations – Nepal, Afghanistan, Bhutan, Bangladesh, Pakistan, Sri Lanka, and Maldives (the first four enjoy 'LDC' status) – the major chunks of whose populace consist of consumer groups that relish volume and low price more than high quality or premium priced brand power!
So, is there something wrong in India’s strategy with regards to FTAs? Are we not choosing the right partner? Is the basket of goods and services in our trade agreements not in our favour? Or are we choosing to go too deep, too fast in our quest to expand our global footprint? Why is it that most of India’s FTAs have not borne fruit? "FTAs require both a minimum of political understanding between neighbouring countries and insight into the gains of unilateral opening up of domestic markets. Such an opening up can be cautiously done and gradually so. But it must be visible, consistent and credible. India’s FTAs are still far from such a perspective," Prof. Rolf Langhammer of the Kiel Institute, tells The Dollar Business.
India should look at signing FTAs with countries that have high trade barriers
Several other experts and economists are unhappy with India’s policy vis-à-vis FTAs. They think India's efforts to sign trade agreements with East Asian countries is illogical. For India has higher trade barriers than most East Asian countries. Therefore agreements based on just reducing tariff barriers – which has been India’s policy for long now – will only mean giving up more and getting less.
Similarly, since India’s strength is in the services sector, the fact that it has not been able to negotiate enough trade pacts in services, puts serious question marks over objectives of the country’s FTA policy.
But then there is another school of thought that says – FTAs should not be looked at only from a trade balance point of view. They believe that even when imports increase, there is a positive spillover effect on the industry. "I strongly believe that imports lead to investment which in turn leads to industrial growth and export growth. Let us take the case of Japan and South Korea. When companies from these countries first set up shops in India, they were largely import oriented. Once they understood the country and the culture, they started investing in manufacturing facilities, which in turn helped the domestic industry in setting up ancillary units. Now these companies are making in India and exporting from India," Atul Kumar Saxena, President, Indian Importers Chamber of Commerce & Industry, tells The Dollar Business.
Dr. Ferdinand Rauch, Associate Professor, University of Oxford, too holds similar views. “Even if trade deficit or surplus remains constant, and merely volumes increase, there would be huge medium to long run benefits, although there might be short term disruptions," he tells The Dollar Business. Explaining the long-term benefits of FTAs further, Rauch adds, “FTAs lead to lower prices and greater variety for consumers. They lead to higher productivity of domestic producers since they are forced to learn best practices. FTAs also provide firms bigger markets and more competition that can break domestic inefficiencies.”
Whatever the viewpoint, the question remains: What is the relevance of these FTAs? And if FTAs are being pursued, what do we need to do to leverage their maximum potential? Statistics reveal that utilisation rate (defined as "share of trade value under FTA schemes in total trade values for FTA eligible products", by Institute of Developing Economies Paper no. 438, JETRO) of India's FTAs is one of the lowest in Asia – between 5% and 15%, as against average FTA utilisation rates of 20.8% and 29% of South Korea and Japan respectively.
The Dollar Business spoke to a spectrum of experts – from export-import community to policymakers and heads of EPCs, from academicians and researchers to representatives of foreign governments in India – on the issue of FTA outcomes, and most agreed that FTAs have not lived up to their potential. They counted a number of reasons for the same. One that came up a number of times was that most of India's FTAs have not been negotiated well. Taking the case of the FTA with Singapore that was signed in the middle of 2005, Dr. Biswajit Nag of the Indian Institute of Foreign Trade (IIFT) says, "Our negotiators at that time were probably not very conversant and experienced. Singapore already had low tariffs, whereas India is known for its high tariffs. This naturally meant that exporters from Singapore gained more than exporters from India. Also the services trade treaty had a number of clauses that in hindsight has not helped our service exports to Singapore”.
This theory also conforms to the reasoning that our FTA gains have been more from LDCs and SAFTA members, which too had higher tariffs and these free trade accords gave India an automatic, comparative advantage.
Then there is the idea of MFN being a better trade course than FTA. Over the years, with globalisation in trade on the rise, countries are trading through multiple routes, including RTAs, FTAs, and MFNs (Most Favoured Nations). A large number of countries enjoy the MFN status and many among these are FTA or RTA partners too. MFNs enjoy lower tariffs and when India trades with them at times it makes more sense for an Indian trader to look at the MFN route instead of the FTA route due to some inherent complications that come with such bilateral & multilateral agreements.
One such complication that FTAs come with is the complex Rules of Origin (RoO). RoO is used to determine the country of origin of a product and is needed to ensure that traders from non-FTA countries don’t take advantage of lower tariffs in one country to re-export to another member of the arrangement that has high tariffs. Even under the best of circumstances, rules of origin are complex, and countries often deliberately design them to divert trade from non-members, which enormously reduces the trade expanding potential of these agreements. Result: Many-a-time traders tend to stay away from an FTA route, particularly when incentives are low, to avoid the complex documentation process involved in realising benefits accruing from the FTA.
The same is the case with the overlap of many FTAs. India has several trade partners that are a part of more than one FTA. For example, while trading with Sri Lanka, an Indian trader can currently opt for any one of the following four FTAs in order to get preferential treatment – India-Sri Lanka Free Trade Agreement (ISFTA), Asia-Pacific Trade Agreement (APTA), SAARC Preferential Trading Arrangement (SAPTA) and South Asian Free Trade Area (SAFTA). Similarly, while dealing with Bangladesh, an Indian trader can opt for either of three FTAs – APTA, SAPTA and SAFTA.
FTAs are also prone to misuse, thanks to issues like re-routing through a third country and mis-declaration of value addition.
Taking decisions at a national scale, and when it comes to something as macro as India’s foreign trade, calls for more sensible and measured thoughts (with historical imperatives) than what even veteran expert money managers would take pride in. If you were to consider this overstatement as a vile act of dramatisation, pray understand – you can’t agree with signing an accord on behalf of a nation and realise a decade later that failure was actually not an option. However, that is what has actually happened with most of India's FTAs so far. But it needs to change now if India really wants to reap benefits from FTAs currently being negotiated and counter the threats from mega trade deals that are slowly emerging across the globe.
One such trade accord which is crucial for India is its FTA with European Union (EU). The deal has been on the table for a while now and is stuck because of several issues at many levels. While India is demanding data secure status for the country, liberalised visa norms for its professionals and market access in services and other sectors, including agriculture, chemicals, pharmaceuticals, textiles, apparels and leather goods, EU wants India to liberalise its professional services sector, particularly accountancy and legal services, apart from seeking massive cuts in India’s tariff on automobiles, auto components, wines and spirits. But neither of the two is ready to accommodate the demands of the other.
While Indian negotiators believe there is a case for accommodating some demands with respect to lowering tariffs on automobiles and liquor, they are totally against EU's demand for a stringent geographical indication regime. Further, India also wants EU to declare the country data-safe, which will help Indian information technology and outsourcing companies. However, EU insists the issue is not a part of the ongoing FTA negotiations and should be dealt with separately.
Some analysts argue that it is in India’s interest to conclude an FTA with EU in order to mitigate some of the export losses that it may suffer on account of trade diversion due to mega FTAs like the Trans-Pacific Partnership, (a trade treaty between countries that together account for more than 30% of global GDP). But then, at what cost? For instance, as soon as the India-EU FTA enters into force, Indian firms will be unable to make use of GSP (Generalised Scheme of Preferences) privileges in many European markets. And Preferential Regime will only be possible with an FTA. Commenting on the negative spillover from the India-EU FTA, Burak Akçapar, Ambassador of Turkey to India, tells The Dollar Business that, "India shall lose over $6 billion a year in exports to EU overnight."
An FTA works well if all partners to the agreement are equal in economic sense or the trade agreements are negotiated based upon reciprocal tariff reductions, leading to the exchange of equal amounts of market access to all partners. However, the India-EU FTA doesn't seem to follow the principle of reciprocity. Since India has higher tariff barriers than EU, an elimination or reduction of tariffs in both EU and India will provide EU businesses a greater market access gain in India than what it would provide Indian firms in EU.
Further, the biggest hurdle that comes in the way of India-EU FTA is the major disagreement between the two parties with respect to intellectual property rights (IPR) protection. EU is keen that India should adopt stringent IPR protection standards even if that means going beyond the WTO specified standards that all countries, including India and the EU, have multilaterally agreed to. India does not agree to additional protection measures as this could compromise public health and could have an effect on the prices of medicines in the domestic market. It could potentially also have an effect on the Indian generics manufacturing industry, which has gained a foothold in many developing countries across the globe. This, according to experts, is in fact a deeply disturbing trend seen in many FTA negotiations, where developed countries shift negotiations on IP standards from WTO and WIPO (World Intellectual Property Organisation) to FTAs.
Hence, from India's point of view, this FTA doesn't seem to be a great investment unless and until it is negotiated well to create a level-playing field. And if Indian policymakers hurry to close the deal, they will only be repeating history!
When negotiators from 12 countries in the Pacific Rim struck a deal called the Trans-Pacific Partnership (TPP) last year, many countries that were not members were justifiably concerned. After all, the mega-trade bloc accounts for 30% of global GDP representing a population of 800 million and a fourth of global merchandise trade. Not to say, it will be one of the largest multilateral trade agreements in history if it comes into effect (the trade pact still needs to be ratified by the member nations), the chances of which are good. Hence, it's an agreement that could have far reaching consequences as it goes much deeper than traditional FTAs.
Interestingly, three major Asian economies – China, South Korea and India – have been kept out of it. Since India has an important say in Asia and is also not a part of the TPP, it is quite obvious that the mega-pact will affect her, both on the policy side as well as on trade front. "If TPP becomes operational, it would have trade diverting effects to the detriment of India as a non-member, as TPP covers the most dynamic area in world trade – Asia-Pacific," agrees Prof. Langhammer of Kiel Institute.
If the TPP monster comes alive, India’s exports – merchandise and services – will be hit hard. The reason is simple. While US is India’s biggest overseas market constituting about 13% of its total merchandise exports, the other 11 members of the mega bloc collectively account for almost 11% of India’s total merchandise exports. That’s a total of about 24% of India’s annual merchandise exports or about $75 billion. Now that's a big number!
Further, a large portion of India’s exports to these countries are in services.With reduction in barriers to services’ trade among members, probability is high that a large portion of India’s services exports to TPP countries will be replaced with services trade from Asian members within the bloc. To what extent? Well, the full-blown impact of the mega trade pact in India can only be felt by 2020! Think tanks and policy experts across the globe claim that India’s annual export losses can be to the tune of $50 billion if India doesn’t take preventive measures. And what would they be? India either becomes a part of TPP (difficult given the standards required to join TPP) or join forums like Asia-Pacific Economic Cooperation (APEC) and Regional Comprehensive Economic Partnership (RCEP), both of which have China as an important member.
(Global carmakers like Ford, Hyundai, etc. have made India their production base. In FY2016, exports of PVs alone grew by 5.2% y-o-y to 6.54 lakh units.)
Next, we come to RCEP. Since the negotiations began in May 2013 in Cambodia, RCEP has been touted as an unconventional and reformist move by ASEAN and other member countries. The 16-member bloc comprises 10 AEASN members (Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Singapore, Thailand, the Philippines, Laos and Vietnam) and their six FTA partners – India, China, Japan, Korea, Australia and New Zealand (accounting for nearly 50% of the world’s population, over 30% of the world’s GDP and a similar share in global trade). No doubt, if implemented, it has the potential to create a new paradigm for economic integration across Asia-Pacific region by creating a mega free trade zone. Many stakeholders and policymakers in India are proclaiming it to be a matter of “macroeconomic exigency”.
Considering China’s dominance in the world of foreign trade in recent years, especially exports, this seems a measured idea from a distance. But closer observation proves that this elixir of a relationship, guaranteed to induce prosperity for India, is nothing but a “poison pill”. 
As per a working paper by Prof. R. Chanda of IIM Bangalore, titled, ‘India-China FTA: Viability, Prospects and Challenges’, “More than 50% of China’s exports come from final processing and assembly of intermediate goods imported from its Asian neighbours. On the other hand, India’s exports are primarily raw material and labour oriented with items such as mineral fuels and precious stones dominating the export basket...from an Indian perspective, a narrow FTA covering only goods trade will not be beneficial to India. Our results indicate that even in a scenario where China completely opens up its markets, while India does not, India will continue to have a [trade] deficit.” From the ongoing discussions on CEPA (India-South Korea FTA) and the manner in which our ASEAN and Mercusor accords have been administered, it is quite clear that our FTA that is being thought of with China will primarily include goods. That is bad news for India.
Further, UNCTAD data proves that currently, India’s merchandise export structure is skewed towards petroleum products, jewellery, furniture, chemical products and textiles and wearing apparel, quite resembling the basket of China’s exports about 25 years back! It is therefore clear that India in its present shape is not competitive enough in manufacturing of high technology and superior quality goods to the extent that even a skewed FTA – formulated to favour India’s competence and sectoral strengths – will fail to help improve India’s deficit.
Another fact often missed by scholars is the diversified Chinese basket of offering. Of the $8.20 billion in exports to China during the first 11 months of FY2016 (April 2015 to February 2016), just 16 products from India (exports value equal to or exceeding $100 million at the six-digit HS code level) accounted for about 55% of total exports. These were products like cotton, iron ore, slag, ash, copper, petroleum oils, granite, human hair, etc. – none of which you can be proud of. Next, imagine China’s altar offering at the ports. There were 76 products (6-digit HS codes) whose exports crossed the $100 million mark and made up for 55% of its exports to India. And a proud Chinese won’t be wrong to claim that more than a quarter of these products can be categorised as ones that require a "science" to manufacture! In fact, at present China exports 3,734 products to India (6-digit HS code) as compared to 1,952 items that it imports from India!
A bigger export basket of bestsellers will automatically mean that RCEP will ensure China getting the clear upper hand. And if this happens, the current act of “dumping” will become legal. What happens to India’s domestic manufacturing industry then? More so, under the current state of affairs in India, it is clear that trade opening with China under RCEP, especially in electronics, high-tech goods, and “every” form of manufactured goods will only lead to more imports than exports.
India has to wake up to the fact that an FTA involving China will only mean mass assassination of brand India and all its stakeholders. It cannot forever remain a raw material supplier to the world. And an FTA, which has the dragon nation as a partner, will only encourage the complacent side of India’s exporters.
Interestingly, India is on a tricky terrain. While on one hand joining RCEP is crucial for India as it’s not a part of the other two ongoing mega regional trade negotiations – Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP), joining it would mean Chinese rivals posing a big threat to Indian export-manufacturers. India's Commerce Minister Nirmala Sitharaman too had said that TPP will certainly have an impact on India’s exports in sectors such as pharmaceuticals, textiles and chemicals. The RCEP may be able to negate some of the losses that India will suffer because of trade diversion due to TPP. But at what cost? Is India ready for a face-off with China in manufacturing already? You know the answer.
Those supporting the accord say India is following a three-tier approach in negotiations related to RCEP. While India has offered to open its market most widely for ASEAN countries (with which it has an FTA in place) and plans to eliminate duties
( The Indian Government is organizing FTA outreach programmers to create awareness among exporters, claim many in the policymaking wing.)
or tariffs on 80% of items for the 10-nation bloc, for Japan and South Korea, the country has offered to open up 65% of its product space. But when it comes to Australia, New Zealand and China, New Delhi has proposed to eliminate duties on only 42.5% of products. Though this is a sensible gradual liberalisation strategy that has found favour with policymakers and experts, still eliminating duties on about half of your product lines with a partner like China doesn't make sense.
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Hence, the future of RCEP depends heavily on how India and China negotiate and accommodate each other’s interests, and how other participants react to it. Moreover, if member countries really want to forge a mega alliance, they will have to stop looking at RCEP as yet another typical market access initiative and view it as a strategic cooperation that would lead to the overall development of the Asia-Pacific region.
Rcep while designed along the lines of tpp is not 'deep' enough to counter tpp
While MRTAs and FTAs are the talk of the town, one wonders, as trade barriers come down across countries, how effective would FTAs be in pushing forth trade in the long-term? And then we have regime change in the offing in US, where both Donald Trump and Hillary Clinton have talked about their opposition to the TPP. US Presidential candidate Donald Trump has gone so far as to suggest a variety of tariff and non-tariff measures to diminish the influence of China (and possibly India; who knows?). Logic would say that US will not be able to survive without China and India, and the anti-trade talk could be mere lip-service by Trump to win voters hearts (as also suggested by most experts who spoke to The Dollar Business on the ongoing
US elections).
When it comes to India, she has to stop being politically timid for once, and not avoid hard truths that make business sense. Hope-driven incalculable extrapolations should give way to direct action and incentives for exporters. The need of the hour is also to strengthen our manufacturing base and quality of production, rather than waste time discussing FTAs that will get our raw material across the border with ease and kill the Indian spirit to create world beating brands.
It's time we believe in our own worth, and stop taking in signing on papers that make India rich in FTA numbers. Yes, numbers matter; but trusting history, those spelling outcomes of FTAs do. Not the mere count of how many friends we have made overseas. [Friends? We can put that aside for social media.]
Dr. Amitendu Palit, Senior Research Fellow, ISAS, National University of Singapore
TDB: What’s your take on India’s stance on free trade agreements (FTAs)? What impact have FTAs had on the country’s foreign trade, particularly exports?
Dr. Amitendu Palit (AP): The Economic Survey 2016-17, the annual document of the Ministry of Finance, Government of India, points to India’s trade having increased with countries with whom it has FTAs. In most cases, however, the trade has been driven by Indian imports, rather than exports.
TDB: FTAs and free markets, isn't there a dichotomy?
AP: Economists agree that a multilateral trade framework is better than a regional or a bilateral trade framework. The WTO framework is ideally expected to yield maximum benefits. However, WTO has not been able to move forward due to differences among members in Doha Round. Hence, countries have been forced to seek market access options outside WTO through regional or bilateral trade agreements.
TDB: Why have most of India’s FTAs not borne fruits?
AP: Most of India’s FTAs have shallow coverage. They don’t cover as many tariff lines as most other comparable FTAs do. These FTAs also maintain large sensitive and negative lists. Most of India’s FTAs, except the more recent ones like with Singapore, Malaysia, Japan and Korea, are also limited to goods and hardly include services and investments.
TDB: How do you foresee the fate of ongoing negotiations between EU-India, India-Australia, India-Israel, and RCEP? What, according to you, could be the stumbling blocks and how will they impact India's foreign trade?
AP: All of India’s FTA negotiations are stuck at the moment. India is unwilling to reduce tariffs on agriculture, dairy and automobiles. On the other hand, the partners are not ready to give Indian skilled workers and professionals greater access to their domestic markets. On both RCEP and its inconclusive FTA with the European Union, India is being criticised for being obstructive and delaying negotiations. However, India’s Commerce and Industry Minister, Nirmala Sitharaman, has dismissed these allegations and blamed some of India’s negotiating partners for the lack of progress.
She criticised EU negotiators for continuing to demand deep tariff cuts from India in sensitive sectors like agriculture, dairy and automobiles, while not acceding to India’s demands for easier migration of professionals to their home markets. India’s approach to negotiating FTAs has become focused on apparent ‘non-negotiables’ that have made its posture overly defensive and unproductive. In fact, the RCEP negotiations are a good example. Various negotiating partners within RCEP want India to reduce tariffs on agricultural and dairy products. RCEP members such as Australia, Malaysia, Indonesia, Thailand and New Zealand have strong comparative advantage in these sectors and want greater access to India’s large domestic market. However, India considers slashing import tariffs in these sectors ‘non-negotiable’ for domestic political reasons.
While most RCEP members know this, the lure of the large Indian market at a time when Chinese demand could wane compels their negotiators to keep demanding greater access from India – with no success.
TDB: What about Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP)? How will they impact India?
AP: TPP and TTIP will introduce a variety of new trade rules and regulations. With the world’s largest economies like US, EU, Japan, Canada beginning to use these rules actively, India is likely to get isolated from global trade rule-making and governance over time.
TDB: What will be the fate of TPP & TTIP after a regime change in US. What if Trump becomes the President?
AP: TPP has become a major source of controversy in the US presidential election. But much of the controversy could be pure electoral rhetoric. While criticising TPP, Donald Trump is yet to point out how he plans to amend it down the line. The TPP is likely to be ratified with amendments.
TDB: What about Regional Comprehensive Economic Partnership (RCEP)? How will it impact India and, of course, the countries which are also a part of TPP or TTIP?
AP: RCEP is much less ambitious than TPP. So far it has failed to sufficiently engage with many complex, ‘new generation’ trade issues (such as government procurement, the role of state-owned enterprises, labour and environment) than the TPP. But, within its scope, RCEP is still aiming to achieve greater market access than is available to members through existing FTAs. It is important for India because this is the only major mega-regional trade agreement that India is a part of. But India’s defensive posture has been a source of disturbance within the trade bloc. India needs to conclude the negotiations fast and positively.
Pradeep S. Mehta, Secretary General, CUTS International
TDB: What has been the impact of free trade agreements (FTAs) on India as well the global economy?
Pradeep S. Mehta (PSM): Some FTAs, particularly those which are deep – encompassing much more than just tariffs – have had a significant positive impact on the global economy. When it comes to India, with its billion-plus population, the country makes for a great FTA partner. However, most of India’s FTAs, even the recent ones such as with Japan and South Korea, are not very comprehensive and as such have not had much impact on the Indian economy.
TDB: The idea of FTAs seem contrary to that of free markets, and yet we see it flourishing. Do economists see a
dichotomy here?
PSM: Not true. In practice, there is nothing called “free markets”. FTAs, including agreements under the WTO, are about gradual liberalisation of global trade and investment rules. So, there is no dichotomy here.
TDB: Are we not creating an elite club of trading countries in the name of mega trade blocs like TPP, RCEP, etc.?
PSM: It all depends on the way one looks at them. True, that some countries are being left behind. Most of them are the poorest of the poor, but in order to address the issue, we need a multi-pronged approach including trade adjustments and strengthening of the multilateral trading system.
TDB: When there is a difference in economic power between two parties in a bilateral free trade agreement, who stands to gain? Is there a way that a smaller economic power can gain more out of an FTA?
PSM: It again depends on how one defines economic power. Even small countries can have comparative advantages in some products and their liberalisation can result in significant gains from trade. In the overall scheme of things, the bigger economic power always has an advantage.
TDB: Many foreign trade enthusiasts and industry sectors in India claim that the country has not been able to leverage its FTAs. What have been the biggest hindrances that have stopped India from fully utilising its FTAs?
PSM: This is because we did not negotiate the liberalisation of products in which we have comparative advantage. Secondly, in several cases, rules are so complicated that our exporters and importers prefer not to take advantage of preferential routes. Further, awareness among our exim community is also low.
TDB: Negotiations are on for free trade agreements between EU-India, India-Australia, India-Israel, RCEP, etc. When do you see them being ratified?
PSM: Some of them are in the final stages of negotiations but there are a few contentious issues which are yet to be resolved. One of them is about flexibility given in our intellectual property rights regime. Such issues now have to be resolved politically as we have already crossed the stage of economic arguments. Further, India needs to strengthen its negotiating capacity if it really wants to benefit from its bilateral and multilateral agreements in the long run.
TDB: How does one choose a partner for an FTA?
PSM: Both economic and political arguments are there. One has to balance between strategic needs and the possibility of trade & investment expansion.
TDB: Which countries should India have FTAs with?
PSM: Particularly with those countries which can not just get more market access but also enable our firms to become more competitive and help them enter the global value chains.
TDB: What will be the impact of TPP and TTIP on global trade? And how do you think will they impact India?
PSM: TPP and TTIP will have profound impact on global trade as it will get more and more concentrated and service-oriented. And no doubt, India’s trade in goods as well as services will be impacted. More importantly, there will be a significant impact on FDI inflows into India.
TDB: How do you see the fate of TPP & TTIP if a Republican wins the US presidential election?
PSM: Initially, there will be some murmurs but they will sail through. US, as a country, has invested much political capital in these negotiations and naturally it would like to reap political and economic benefits. Having said that, while TPP was easier to conclude, TTIP is much more difficult.
TDB: What is the significance of Regional Comprehensive Economic Partnership (RCEP) for India?
PSM: Regional Comprehensive Economic Partnership (RCEP) combines tariff liberalisation and regulatory harmonisation with a greater emphasis on the former. It will have a significant positive impact on the Indian economy, provided we take it as an opportunity to reform our own markets.
TDB: What will be the impact on countries which are part of both the blocs – TPP and RCEP? How long will it take for these mega trade agreements to get off the block?
PSM: Such countries are poised to enjoy more benefits. While TPP is expected to operationalise in late 2017 or early 2018, materialisation of RCEP will depend on how quick the member countries can successfully conclude the negotiations.
Rolf Langhammer, Senior Researcher, Kiel Institute
TDB: FTAs have become increasingly prevalent since the early 1990s, and India is no exception. What impact do FTAs have on an economy or economies?
Rolf Langhammer (RL): In the past, FTAs could not compensate for the lack in supply or demand impulses from the world economy. Technological innovations together with unilateral trade and investment liberalisation of individual countries had a stronger impact. India, as a relatively closed economy so far, could give itself and the world a strong growth momentum, if it would open its market gradually and unilaterally, instead of tying its reforms to reciprocal concessions from its trading partners.
TDB: Don’t you think FTAs are against free market theory – if two countries sign an FTA, others are at a disadvantage?
RL: For free trade, no agreement is required. Each state can liberalise unilaterally. Yet, for mercantilists who see more exports as a good thing and more imports as a burden, agreements to discipline mercantilism are necessary. Both in terms of efficiency and equity, global agreements under the auspices of the WTO are first best. FTAs are second best. FTAs comprising larger shares of world trade are preferable to FTAs comprising small trade shares because in large FTAs the efficiency-augmenting trade creation effect outweighs the efficiency-reducing trade diversion effect. Trade diversion just replaces trade with non-member countries by trade with member countries due to of tariff cutting among FTA members. Trade creation replaces domestic production by trade with
member countries.
TDB: Which FTAs do you think have been successful and which ones have failed to deliver?
RL: In the past, so-called North-North agreements among rich countries (for instance, the EU) haven’t proven to be most stable and sustainable. South-South agreements among poorer countries were plagued by distributional conflicts and often suffered from trade diversion effects. For poor countries, linking up to rich countries (Mexico to US in NAFTA, or Eastern Europe to EU, or Turkey to EU) promise the best results in terms of becoming partners of market networks.
TDB: Why is the percentage of trade through the FTA route still less in South East Asian economies?
RL: South Asia is one of the regions which so far has showed only modest and even negligible effects of regional and bilateral agreements. This is very much not only due to the closed economy character of many countries in the region (including India) but also because of severe political tensions including border conflicts. Such conflicts are not a fertile ground for trade agreements. Just the contrary.
TDB: Why have most of India’s FTAs not borne fruit?
RL: FTAs require both a minimum of political understanding between neighbouring countries and insight into the gains of unilateral opening up of domestic markets. Such opening can be cautious and gradual but it must be visible, consistent and credible. India’s FTAs are still far from such a perspective.
TDB: India has been negotiating several bilateral and multilateral free trade agreements such as EU-India, India-Israel, RCEP, etc. for long now? What are the stumbling blocks?
RL: What they have in common is that their success depends on parallel steps of India in opening up globally. Otherwise the bilateral agreements will lead to fragmentation and segmentation of markets, overlapping membership in many agreements and a lot of red tape such as controlling rules of origin. The most important stumbling blocks will be the Indian agricultural sector which is vulnerable and the fate of India import substitution industries which would have to adjust drastically if the agreements would be targeted to duty-free trade in manufacturing. The Indian service sector could be a winner if the agreements would relax barriers of Indian trading partners against so-called Mode 4 supply of services that allows Indian residents to move to the trading partners to offer services.
TDB: What should India look for while choosing partners?
RL: It is difficult to “pick cherries” both in terms of partner as well as in terms of markets. The preferred pecking order for India should be: Global agreements first, agreements with large (and already important) trading partners such as EU and East Asia second. “Early harvest” agreements in sectors with low barriers to trade should ideally be the first target for manufacturing. Further, “light” or “shallow” agreements should be preferred over comprehensive agreements which suffer from the single undertaking syndrome (nothing is decided unless everything is decided).
TDB: How will TPP and TTIP affect the global trade? And also how will they impact India?
RL: TPP will have a larger effect than TTIP because it covers the most dynamic area in world trade (Asia-Pacific). TTIP is most unclear in its negotiation stage. Given the growing resistance of the public in Europe against TTIP, it is even possible that TTIP will end in “coma”, like the Doha Round. Should both agreements become operational, it would have trade diverting effects to the detriment of India as a non-member, which perhaps are mitigated by income spillover effects for India, that is more demand for Indian products in the two regions because of stimulated growth there.
TDB: Republican Presidential nominee Donald Trump is against TPP and TTIP. What if he wins the election?
RL: The fate of TTIP will be decided in Europe not in US. If there is no conclusion this year (which is unlikely), it will be most difficult to conclude TTIP in 2017 because of two important elections in Germany and France. TPP will become subject to efforts of both Democrat and Republican presidential candidates to change some details. It does not really make sense to speculate about US politics after the end of the Obama administration.
TDB: RCEP has largely been seen as an alternative to TPP. How do you view this? And how will it impact Indian trade?
RL: Seen from Europe, RCEP is driven very much by some East Asian countries’ efforts to produce a counterweight to TPP. Yet, while TPP has already been negotiated, RCEP is still in the negotiation stage. RCEP comprises extremely heterogeneous countries with highly diverging and diffused interests and targets. One should therefore compare RCEP to TPP and not to the TTIP. As the core of RCEP is ASEAN plus its three major FTA partners (China, Japan, South Korea) plus Australia and New Zealand, India is not the driver in the negotiations. RCEP is more of a traditional trade agreement (unlike the TTIP) and will very likely exclude sensitive sectors like trade in agriculture. RCEP’s fate will be decided by the fate of TPP. Should TPP under US dominance materialise and should China be “forced” to join TPP in order to protect its part in regional intra-TPP supply chains, RCEP may become redundant. Then the “overlapping membership” syndrome would become a reality. Protection of industries in the poorer member states against the strength of industries in the advanced economies (China, Japan, South Korea) will be the major concern. Such a concern will be shared by India.
If RCEP succeeds to come to conclusion, it will have long transition periods. I do not see RCEP as a major regional block in Asia-Pacific because of a lack of an accepted hegemony within RCEP member states.
TDB: There has been a rise in the number of FTA negotiations in recent years. What makes them popular?
Ajay Sahai (AS): If we look at history we will see that FTAs came into focus in the early part of the 21st century. WTO negotiations have remained stalled for a while now, and most countries do not see WTO delivering in the short run. In any case, under the WTO there are provisions for both goods and services trade through the FTA route. As far as India is concerned, we were a little late in the game as we were committed to the multilateral framework of the WTO. But we have now picked up pace. We already have some 18 FTAs in place and are negotiating a few very important ones like the EU-India FTA, the RCEP, the India-Australia FTA and the India-Israel FTA.
Moreover, the share of trade in the world GDP has increased from about 38% in 1990s to about 60% at present. So, more and more countries are looking to trade to boost their GDP and therefore they are turning towards methods of improving trade, and FTAs are possibly the fastest route for that.
TDB: Critics argue that FTAs have led to trade deficits for India. What is your take on this?
AS: I would want to address this at multiple levels. We must realise that historically India has had high rates of tariffs when compared to some of our FTA partners, particularly the South East Asian countries. Naturally, the preferential rates that they received after the agreements were signed, improved their margin of operations more than that of the Indian side. Our imports went up by much more than our exports. But then FTAs are not a short-term play, we have to look at the long term. As India moves up the global value chain, and we export more finished products, our deficits will fall. We also need to look at the global economic conditions.
TDB: Statistics reveal that utilisation rate of India's FTAs is one of the lowest in Asia. What are the reasons?
AS: There are many reasons. It is true that utilisation rate of India's FTAs is very poor, especially with respect to South East Asian countries. Data suggests that our utilisation of FTAs is between 5% and 15%. One major reason is that there is very low level of awareness amongst the traders. The Ministry of Commerce is aware of the issue. The government is trying to sensitise the industry and is in the process of carrying out an awareness programme across the country. The ministry has carried out 30 awareness programmes in the last quarter of the fiscal in conjunction with FIEO and other leading trade bodies and there are plans to do 50 more. The other reason is the lack of information and data that is available to traders. To address that, the ministry has created the “Indian Trade Portal” which is managed by FIEO. Through this, we are making all the relevant information and documentation processes available to traders including the preferential tariffs available to India under various agreements, the rules of origin, etc. The other reason is that tariffs are generally low in South East Asian countries, which vary from 4% to 5%, so when traders look at the FTA and look at the compliance cost, they see that there is not much to gain. At present, the process of getting a Certificate of Origin is more or less on a manual mode, and when there is doubt at the end of the importing country, it takes 15 to 20 days to have a resolution, which is a disincentive for traders.
TDB: What is FIEO and the government doing to smoothen this process?
AS: There are talks going on to put the entire Certificate of Origin process on an electronic platform so that the time taken can be reduced to a minimum.
TDB: What can we learn from South Korea and Japan which have FTA utilisation rates of 20.8% and 29% respectively?
AS: I was looking at the reasons for their success, and it seems a lot has to do with sensitisation of small and medium industries. They have carried out massive awareness programmes and have been able to get the medium and small players to participate. If we look at India’s exports, we will see that a large percentage, about 80% of exports, are from medium and small players. These medium and small players need to be taken into the fold and helped to avail benefits of FTA. We also need to help the industry understand that one of the benefits of FTAs is that it allows us to procure inputs at a cheaper rate so as to improve our competitiveness. Awareness has gone up over a period of time but there is a lot that still needs to be done.
TDB: We have tasted some success with the SAFTA agreement. What was different?
AS: SAFTA is an exception. India is more industrialised than other members of SAFTA so the threat that we face when we compete with other ASEAN countries is not there. Even if we look at our decline in exports, our exports to SAFTA have not declined. So, we have a huge trade surplus with SAFTA.
TDB: How do you see the ongoing FTA negotiations with EU? How will it affect India's trade with the region?
AS: The negotiations have been going on for a long time and both parties are keen that it is signed early. They have asked for a sharp reduction in tariffs in automobiles and wine, but we have to protect the investments that have already gone into the industry. On our side, we have asked for free movement of professionals under Mode 4, which EU has not agreed to. The other is that we want the ‘Data Secure’ status, that EU is reluctant to give. Once the FTA is signed, it will be a huge relief to our traditional sectors like garments and leather.
"RCEP Can Significantly Reduce Our Losses From TPP"
Atul Kumar Saxena, President, Indian Importers Chamber of Commerce and Industry
TDB: How do you view the pace of India’s FTA negotiations?
Atul Kumar Saxena (AKS): We are moving very slow, and I believe that one of the reasons is a lack of efficiency in bureaucratic system. I don't mean bureaucrats are not competent, but that we need more trade experts and negotiators to pick up speed.
TDB: Do you mean that we are spreading ourselves thin by negotiating multiple FTAs simultaneously?
AKS: No, that is not the point. We need FTAs if we want our economy to grow, and for these FTAs to operationalise soon we need more bureaucrats and negotiators focusing on negotiations.
TDB: But then FTAs have benefited our partners more than us – India's imports have increased at a faster pace than its exports with partners. Where do you stand on this issue?
AKS: I must concede that as an importer and as the President of Indian Importers Chambers of Commerce & Industry (IICCI), we are on the other side of the argument. We have definitely benefitted. But I also believe that we are not the only sector that has benefitted. Consumers have benefitted; they have more choices now; industry has benefitted because they have access to cheaper inputs. I also strongly believe that imports lead to investment, which in turn leads to industrial growth and export growth. Let us take the case of Japan and South Korea. When companies from these countries first set up shops in India, they were largely import oriented. Once they understood the country and the culture, they started investing in manufacturing facilities, which in turn helped the domestic industry in setting up ancillary units. Now these companies like Toyota, Honda, LG, Hyundai and Samsung are making in India and exporting from India. I believe once a particular product reaches a threshold volume of exports, it makes sense to start locally producing it, as we have seen with certain food products like cheese and wine. But unless there is product introduction through imports, markets are not created.
TDB: What impact will TPP have on India?
AKS: Certainly the initial thoughts are that it would impact our exports. For complimentary products we will be hurt, but we can expect some spillover effects. Let us take the example of Vietnam. Vietnam is a part of TPP, and many Indian companies have invested in manufacturing in Vietnam. I was in Vietnam some days ago, and I saw a lot of Indian companies which are interested in ramping up investments in Vietnam to take advantage of the Trans-Pacific Partnership (TPP).
TDB: What are your thoughts on RCEP?
AKS: RCEP can be a game changer for India, and it is very much in line with our Look East–Act East policy. RCEP can significantly reduce our losses from TPP. We however need to negotiate RCEP and EU-FTA such that they are beneficial to the parties involved, and conclude negotiations soon. And while negotiating we need to remember that it has to be a win-win situation for all. These FTAs can never materialise if we maintain our stance and expect other parties to agree to our demands without us showing any flexibility with respect to their demands.
TDB: Which FTAs, according to you, have or can produce desired results for India?
AKS: Our treaties with Sri Lanka and Bangladesh have produced good results. So will be the case with Laos, Cambodia, Vietnam and Myanmar. This is when I talk with respect to exports, but as I have mentioned before, we should not look at FTAs only from the exports perspective. We also gain by learning from our partners, by having FDI inflows and through technology transfer agreements if we go for FTAs with developed nations.
TDB: What about our FTAs with Latin American countries and African nations? Haven't they borne fruit?
AKS: Although we have agreements with MERCOSUR and African nations, we have been late in leveraging these agreements. China is already well entrenched in these economies in terms of both trade and investments, so it will be difficult for us to gain a foothold. Especially with the left inclined Latin American countries, it may be difficult to replace China as a favoured partner. In Africa we have made some inroads. There is a long history of trade with Africa, but we need to keep in mind that we need to respect the African countries. We cannot think of them as our poorer cousins. The African countries are well aware of their importance in global trade, and we need to deepen our ties with them as equal partners.
TDB: To what extent can foreign policy affect trade policy?
AKS: Our foreign policy has always influenced our trade policy, and that is natural. And this is the case with almost all countries. The reverse is also true where trade priorities have influenced foreign policy. But sadly for India's foreign policy has been in the cold storage for long now. Then again not everything depends on bilateral foreign relationship. If you look at TPP or TTIP, it was not formed with an intention to harm India's foreign trade. The parties to these trade pacts or for that matter all trade pacts came together because they thought that it would be beneficial for them. It had nothing to do with keeping India out. US is a party to both these agreements. While over the years, in foreign policy terms, India and US have moved closer than ever, yet India is not a part of these agreements. The reason is simple – India does not fulfil or will not be able to fulfil the conditions of these agreements. That said, the doors are not closed, as these are what are called 'living agreements' – these accords have the scope to add more members and India could perhaps be a part of these agreements in the not so distant future.
Dr. Biswajit Nag, Associate Professor, Indian Institute of Foreign Trade (IIFT)
TDB: Are mega trade blocs really in tandem with the spirit of the World Trade Organisation (WTO)?
Biswajit Nag (BN): The multilateral framework of WTO gave rise to these blocs. WTO’s consensus-based approach made it slow and countries needed other routes to enhance trade. I believe trade blocs like TPP are "WTO+" as they go much beyond what WTO envisages. These are comprehensive trade treaties that look at quality standards, environment and labour laws.
TDB: How do you think TPP will affect India's foreign trade?
BN: Beyond the obvious that our exports to TPP countries will suffer, I fear that our investments in some TPP countries like Vietnam will also suffer. To take advantage of TPP through the Vietnam channel, India-based companies, which have invested in Vietnam, would now have to improve quality standards, and adhere to norms set by the TPP. Further, because of the 'country of origin' rules, they may also not be able to leverage sourcing from their base in India. If they are not able to do that these investments will lose value. On the flip side, if they are able to do this, it could be an opportunity.
TDB: And what about RCEP? What is the significance of this mega trade pact for India?
BN: We keep talking about this being the Asian Century, and RCEP could make that come true. China and India coming together is a giant leap. It would be a marriage of Indian service industry, our English speaking professional human resource and the gigantic and sophisticated Chinese manufacturing sector. India should look to conclude negotiations at the earliest.
TDB: With most FTA partners our trade deficit has increased over time. Are we choosing the right partners?
BN: It is not fair to look at success or failure of FTAs just on the basis of bilateral trade. There are spillover effects. We also need to look at the tariff lines in question. It depends on whether we are trading in intermediaries or finished products. We should strive for allocative efficiencies in our target markets. Also, if we look at specific cases like the FTA with Singapore, Singapore already had low tariff barriers. So, there was not much to be gained by Indian exporters, and on the service side we haven’t really been able to access their market. We did not negotiate that treaty well. But we are getting better, and future FTAs will yield better results.
TDB: Were we late to enter the FTA fray?
BN: We had our domestic concerns. The industry was not ready and we were not in a position to lower our trade barriers.
TDB: Even today we don't seem very gung-ho about FTAs?
BN: A segment of the industry believes FTAs should be scrapped. A lot of this is because Indian industrial productivity has not increased. We should not delink trade policy with industrial policy. Unless the domestic industry sees robust growth, we will not be able to leverage FTAs. As an aside, we must realise that in most countries exports are driven by MSMEs. And of the MSMEs, the medium scale enterprises are the ones that are best poised to export. The small and micro industries rarely have the capacity or the capability to produce export-oriented products. In india we have not paid much attention to the medium sized enterprises, though the government has done a lot for the small and micro enterprises. We must look after the small and micro industries, but it is time we pay more attention to our medium scale industry.
TDB: How, according to you, can the medium scale industries take advantage of FTAs?
BN: What these medium sized enterprises need is help with internationalisation. We can take a leaf from the Japan model. They went for fragmentation of innovation. They identified a product that could be exported and fragmented it into many components which could be manufactured by medium enterprises and then agglomerated these components into a finished product for export. It has been a successful model and can be replicated in India.
TDB: Why are so many of India’s FTAs stalled in negotiations?
BN: A lot of this has to do with the view point of the industry and domestic concerns related to giving market access. The government reflects the wariness of the industry. Also, service exports and movement of professionals is a sore point for many FTA partners.
TDB: How far have FTAs influenced the country’s exports?
BN: Exports are declining because of a fundamental reason. The global economy has slowed down and our export basket consists of many elastic products. As is the case with a household, the first place you can cut costs are on elastic products, and so has happened to our exports. We need to diversify our export basket to be more resilient. There is also the issue of regime change that affects industry. In developed countries trade policies do not depend on changes in government. That is not the case with countries like India, where we have seen policy priorities change and some really effective policies being sidelined. We need stability for industrial growth.
TDB: Why is India’s trade through the FTA route so miniscule?
BN: One there is hardly any data available to determine what trade followed which route, but according to estimates, India’s trade through the FTA route is barely 15%. Second, while many traders are unaware of the benefits and the documentation process, many others avoid this route because of the many compliances involved. The other factor is that tariffs for FTAs and MFNs are reaching similar levels, and as RTAs like TPP, TTIP and RCEP proliferate we will see a much more level playing field. With economies competing for markets we are bound to see trade barriers going down.
TDB: We have seen rhetorics from both sides in the US presidential election against the TPP. Do you think a Trump presidency will alter the trajectory of trade?
BN: Campaign rhetoric and trade policy are two very different things. I believe everyone in America knows how important China and India are for the US economy. With the amount of trade and services that US imports from us, it will be a very difficult thought for any policymaker to draw up plans without taking India and China into consideration. Then again there are foreign policy concerns, and US while it remains the leader of the free world, it is not loved by many. Obama has gone to great lengths addressing the concerns of other countries, and I do not think US is in a position to aggravate the situation again.
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