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Why free trade agreements are ever more vital for India


Why free trade agreements are ever more vital for India

Giant agreements like the Trans Pacific Partnership will change global trade. India needs more FTAs tocompete

The direction of global trade is set to change as mega agreements like the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP) come into force. The TPP includes 12 of the Pacific Rim countries including the US and Australia, whereas TTIP is between the US and the European Union. Respectively, they represent around 39 per cent and 60 per cent of the world GDP. They have the potential to adversely affect excluded countries such as India by diverting trade and investment away from them and weakening their positions in global value chains.

In a study that CUTS had done we found an increasing number of products in India’s export basket being threatened by either TPP or TTIP. According to another study by Sao Paulo-based Center on Global Trade and Investment, as a result of TPP and TTIP, India’s nominal GDP (gross domestic product) is expected to be reduced by more than one per cent and the resultant negative multiplier effects on revenue and employment generation will be substantial.

Much of this impact will not be on account of reduction in tariffs in TPP and TTIP countries, as they are already low, but as a result of removal and/or harmonisation of non-tariff measures, particularly in respect to process and product standards, the application of intellectual property rights and other behind-the-border trade facilitation measures.

As a result, some of the TPP and TTIP countries are expected to enhance their internal supply potential which can further shrink the existing export markets that India enjoys with them. The data show that both agriculture and manufacturing sectors are expected to be threatened by these agreements.

Most of those products are highly sensitive to our economy, meaning they are produced and exported in large quantities from India. For example, automobile products where India has considerable amount of production and export capacity are under potential threat from TPP. The effect of TTIP also seems to be on a similar list of products.

This calls for immediate actions including taking appropriate measures through India’s National Foreign Trade Policy, which will expire this year. The new trade policy should have strong linkages with other major macroeconomic policies such as monetary, fiscal, manufacturing policies. There should be specific emphasis on simultaneous reforms in the markets of factors of production for improving trade competitiveness and the existing free trade agreements should be utilised to their full potential.

Furthermore, specific trade policy measures including their compatibility with India’s commitments to the WTO regime and its negotiating strategy with respect to free trade agreements should be taken to safeguard Indian exports and enhance its trade competitiveness against far-reaching expected changes in the global trade scenario over the next five years or so. Enhancing trade competitiveness through subsidies will not be a viable option in the long-run because many such subsidy schemes will gradually become WTO-incompatible.

Although the enhancement of trade competitiveness is a gradual and long-term process, negotiations and implementation of other free trade agreements can be effectively utilised to reduce trade costs and, thus, partially improve trade competitiveness. Unfortunately, Indian industry has remained sceptical about many of these FTAs, particularly in respect to their effectiveness in the long-run, and has under-utilised these channels to get integrated into the global value chains. The government is under considerable pressure to review them. Industry is concerned that the existing FTAs are eating into their domestic market share, which may be true in the short-run.

On the other hand, there is little attempt to use them effectively to integrate into the global value chains. Integrating into and moving up the global value chains is essential conditions for greater competitiveness and higher growth. Effective participation in global value chains is intrinsically linked with foreign direct investment, which can result in more trade through export obligations of FDI. When TPP and/or TTIP come into force they could attract potential investment among its members, some of which may otherwise possibly come to India. This means that India’s hope of integrating into and moving up the global value chains will be hampered.

The options left for any excluded country in such a scenario are either to join these agreements or negotiate counter agreements. At this point the former is not an option for India because the standards set by the members of both these agreements are very high and would be higher than the standards set by the WTO members.

Among others, these agreements propose numerous WTO-plus and extra rules such as enhanced intellectual property protection, harmonisation of process and product standards, regulation of e-commerce, competition rules, liberalisation and protection of investments, regulation of trade-related aspects of state-owned enterprises, provisions on small and medium-sized enterprises, rules of international supply chains.

The Indian economy is not in a position to adhere to such high standards and still be competitive. There should be gradual and incremental progress. The quality and effectiveness of domestic regulatory institutions hold the key.

The latter option is more viable and India has started exercising it in the form of the Regional Comprehensive Economic Partnership agreement, which is being negotiated among India, Australia, New Zealand and Asean+3 countries (China, Japan and South Korea). India is also negotiating free trade agreements with Australia, New Zealand and the European Union. Furthermore, FTAs with the Asean group of countries and with Japan and South Korea are already in place. The coverage of RCEP and many of these FTAs is similar to that of TPP and TTIP. Their scope should remain relatively lower than TPP and TTIP and should be gradually expanded by taking into account domestic regulatory and development concerns.

As over the last two decades the centre of gravity of India’s trade has shifted towards the East, our trade policy officials have rightly decided to strengthen the country’s economic partnership with those in the Asia-Pacific region, particularly in East and South East Asia. India should effectively negotiate the RCEP agreement and its FTAs with key trading partners such as the European Union and Australia in order to gradually remove and/or harmonise non-tariff measures affecting trade among these countries and improve its domestic regulatory regimes for process and product standards, intellectual property rights and other behind-the-border trade facilitation measures.

Simultaneously, there should be gradual reforms in the markets of factors of production – land, capital and other means of production – not only to make reforms in goods and services markets sequentially compatible with those in the factor markets but also and more importantly to enhance India’s trade competitiveness through stronger linkages between inputs and outputs for enhancing the incremental capital-output ratio of the Indian economy. It is true that FTAs are posing some challenges but they should be addressed proactively in order to convert them into opportunities.

The writers are with CUTS International


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