By JS Deepak
The signing of the Regional Comprehensive Economic Partnership (RCEP) agreement by 15 nations of the Asia-Pacific, accounting for 30% of the international trade, late final year, and the launch of the African Continental Free Trade Area (AfCFTA) comprising 54 nations in January 2021, have revived the narrative on cost-free trade agreements (FTA). The parallel improvement to ‘take back control’ that propelled Brexit highlighted the backlash against globalisation and cost-free trade. Nobel laureate Milton Friedman held that the economics profession has been pretty much unanimous on the desirability of cost-free trade. However, very good economics is not usually very good politics. From India, which in the final 5 years has hiked tariffs on a fourth of all goods traded, to the US, which promotes purchase American, protectionism is the flavour of the season.
Trade, one of the engines of financial development, has not fired for India in the final decade. Merchandise exports that generate jobs in manufacturing have been flat about $300 billion. Simultaneously, import of goods—which generates employment in services like transportation and logistics, delivers worth and selection to customers and low-priced inputs for our exports—has also remained stagnant. This is a double whammy as our comfy foreign exchange reserves enable us to safely leverage the benefits that imports provide. It is noteworthy that India’s trade as a percentage of GDP has plummeted from 56% in 2011 to 40% in 2019, a period throughout which we have not signed any FTA.
What is an FTA?
FTAs in between two or more nations boost trade by minimizing customs duties and non-tariff barriers on substantially all trade. They also cover services and non-trade problems like investment. ‘High standard’ FTAs, becoming aggressively promoted by the US, also contain guidelines on e-commerce, intellectual house, labour requirements and atmosphere protection measures. FTAs became well known as the globe lost patience with the ‘consensus by exhaustion’ strategy of the World Trade Organisation. Today, the spaghetti bowl of FTAs involves about 500 arrangements with linkages and overlaps.
India’s initially extensive FTA was in 2005 with Singapore, an entrepôt with a close to-zero tariff regime. We lowered duties on a variety of goods, receiving small in return. Perhaps it was the price tag we paid for entry into the ASEAN+6 club. The ASEAN FTA in 2009 was worse. A ‘goods only’ agreement with a quantity of manufacturing tigers, when our primary strength was services, ended up sacrificing numerous industrial sectors. Moreover, bereft of negotiating leverage, we have been forced to accept a dud as the ASEAN Services Agreement.
Surprisingly, the improved offers have been with stronger economies like South Korea and Japan. These FTAs of 2009 and 2011, respectively, enhanced our trade deficit, but also our competitiveness in some essential locations. Take for instance automobiles. The Japanese and Koreans negotiated decrease tariffs for their specific steel. Investment in vehicle production in India elevated, riding on robust promotion and protection measures incorporated in the FTAs. Their auto majors expanded factories in India to meet the big domestic demand and by leveraging low-priced skilled labour helped transform India into a compact-vehicle hub. Later, with economies of scale, they created inroads into the incredibly competitive export marketplace.
Negotiating FTAs can be a challenge as it entails an element of give and take. Since corporations trade and not nations, some advantage when other folks drop out. That is the nature of the beast! Negotiators can fight for the king, the queen and bishops, but have to throw away the pawns. This is contentious as it can generate losers who finish up kicking and screaming. However, FTAs can assistance India achieve substantial access to massive markets at concessional duty for goods exactly where we are competitive. Sectors like automotive, textiles, handicrafts, leather, pharmaceuticals, light electricals, some chemical substances, numerous agricultural products, jewellery and experienced services, which are all employment-intensive, could advantage. It can trigger big job creation riding on exports. In textiles and clothes, our competitors Vietnam and Bangladesh take pleasure in tariff-cost-free access to the massive and profitable EU and US markets on account of their FTAs or LDC status. Tariff elimination below FTAs can provide our exporters a level-playing field and cease erosion of our marketplace share and income.
What need to then be the path for the future?
Reduction in tariffs on intermediates enhances competitiveness of completed goods. Doing so below FTAs permits trading off liberalisation. Therefore, we need to have to restart our FTA journey urgently and scale it up quickly with the previous practical experience serving each as a lesson and a warning. Conclusion of the India-EU agreement need to be a priority. Negotiations tottered on variations on Indian tariffs on wines, Scotch whisky and luxury vehicles, and EU intransigence on nation-certain quotas for Indian IT experts. But the actual deal breaker in 2015 was India’s insistence on cost-free cross-border information flows, which the EU identified inconsistent with its privacy law. In the era of artificial intelligence, information is the new oil. With technological evolution there is an chance of monetising India’s information so our position on this situation has reversed, removing a main hurdle to a deal.
An FTA with the UK need to be a low-hanging fruit also in view of the complementary interests in services and the need of the UK to quickly diversify trade to cushion the influence of Brexit. Leaders’ meetings major to the G7 summit in the UK in June 2021 provide an chance to prepare and cement the vision for a deal. Engagement with the Eurasian Economic Union (EAEU), comprising Russia and numerous of the erstwhile Soviet republics, need to be an additional higher priority location. The EAEU is wealthy in power sources, has a hunger for our pharmaceuticals, textile and agriculture exports, and classic goodwill for India. Africa is an additional massive, increasing marketplace and we need to leverage their apprehension of Chinese dominance and take a lead in initiating a dialogue with the AfCFTA.
Equally essential is drawing up a damaging list of FTA partners. China, the factory of the globe, with its big subsidies and scale of manufacturing, is clearly one. The government wisely abandoned the RCEP, exactly where the proposed tariff elimination on 80% trade would have wrecked our domestic market. The US, with its insistence on binding guidelines on digital trade and intellectual house and ambitious marketplace access for US exports, is an additional one to stay away from. Many knowledgeable negotiators liken an FTA with the US to the computer software licensing agreement of a web-site. Ultimately, you have to place aside all your issues and sign off ‘I agree’.
For the rest of the globe, India is prepared.
The author, retired IAS, is former secretary, GoI, and ambassador to the WTO [email protected]