Trade deals: How India can benefit
Trade expansion is critical for growth. But, achieving economically meaningful deals will need political will and management of the competing interests of domestic stakeholders
India’s ongoing free trade agreement (FTA) negotiations with the European Union (EU) and the United Kingdom (UK) have generated the hope that the trade deals, once implemented, will help revive India’s stalled export growth and boost employment. However, the proponents of these trade deals have had to contend with the prevalent view that India’s past agreements have failed as they widened the country’s trade deficits without yielding any tangible benefits to Indian manufacturing or employment.
What exactly, then, is India’s past record with its trade agreements? And, what lessons does this experience hold for India’s future negotiations?
Since roughly the mid-2000s, India has negotiated more than a dozen trade agreements, mostly with countries in Asia. A comparison of changes in trade under these agreements (between 2007 and 2017) shows interesting patterns: First, the share of imports coming from partner countries declined slightly (instead of rising) over this period from 13.3% to 11.8%. Second, the share of exports to partner countries from India rose (as expected but only slightly) from 13.7% to 14%. Thus, India’s agreements appear to have had only a small effect on its trade.
Significantly, the share of the overall trade deficit contributed by the deficits with partner countries declined from 12.6% to 7.5%. While these data allay any concerns about the role of past agreements in widening India’s trade deficits, they do leave us with the question of why India’s FTAs have had such a modest impact.
Some background regarding the international trade system is relevant in understanding this issue: The World Trade Organization (WTO), of which India is a member, mandates that non-discrimination in trade relations between member countries (through Article I of the General Agreement on Tariffs and Trade, popularly known as the “Most Favoured Nation” clause). However, the WTO permits exceptions. Through Article XXIV of the General Agreements on Tariffs and Trade (GATT), countries may give each other preferential market access by forming FTAs (such as NAFTA, or the North American Free Trade Agreement) or Customs Unions (such as the EU) — both of which require liberalisation on “substantially” all trade. Crucially, in a further and quite distinct exception, relevant for developing countries, the enabling clause of
GATT (introduced in 1979) permits them to sign preferential agreements that achieve only partial ( even extremely limited) liberalisation.
These distinctions are important in India’s case. With the exception of the agreements signed with Japan and Singapore, all of India’s agreements have been under the enabling clause. As such, the agreements have been shallow, with only limited amounts of liberalisation undertaken. Vast numbers of goods are generally excluded from the agreements altogether, and preferences are often offered in “nonsensitive” sectors that are subject to very low multilateral tariffs in the first place. Furthermore, goods given preferences are subject to “rulesof-origin” requirements, i.e., domestic (partner-country) content requirements that can be restrictive enough to be simply prohibitive.
As a consequence of this and related bureaucratic encumbrances, the actual utilisation of preferences is low. Some of India’s trading partners (for example, South Korea) have noted that preference utilisation rates in their FTAs with India are the lowest among all the FTAs signed by them. With restricted tariff liberalisation, it is no surprise then that the impact of India’s past agreements has been correspondingly small.
Can trade outcomes be improved upon in the deals India is negotiating with the EU and UK? Both agreements will have to be notified under Article XXIV, implying that substantial liberalisation will be needed for the agreements to be WTO-legal. But, trade negotiations face an essential tension: The expected benefits of liberalisation (cheaper imports of both final and intermediate goods, improved market access for exports, and productivityenhancing investment flows) need to be considered against the instinct to protect domestic producers from import competition. There will be a significant divergence of expectations on liberalisation between the negotiating countries.
European concerns include high Indian import tariffs (for instance, on automobiles and liquor) and Indian restrictions in the services sector (including on accounting and legal services). From India’s side, European visa restrictions on Indian professionals entering the EU and the EU’s posture on the pharmaceutical sector and data security-related issues will likely be high on the list. Similar concerns are relevant in the trade negotiations with the UK. Finally, using the trade agreements to advance non-trade issues such as those concerning environment and labour regulations will be important for the EU and the UK. It is unclear how much and in what directions India will be willing to move in the trade and non-trade areas.
Trade expansion is a key imperative for Indian economic growth. This requires higher productivity and/or better market access. In today’s world, with multilateral liberalisation stalled, FTAs offer an opportunity to achieve both. But, achieving economically meaningful agreements will require a great deal of political will to surmount negotiation challenges and manage the competing interests of multiple domestic stakeholders. And, all this needs to be done in the context of a tough global economic environment with significant recessionary concerns and a pandemic that is not yet fully in the rearview mirror. The timing is perhaps not the best, but the opportunity is here — can we seize it?