Business Standard

India’s revamped FTA strategy

Its focus is at odds with the country’s imperative of having an employment-promoting trade policy

- The writer is professor, School of Internatio­nal Studies, JNU. Views are personal

Recent statements from the commerce ministry have indicated that India is going to revamp its Free Trade Agreement (FTA) strategy and that FTA negotiatio­ns would be expedited towards early conclusion. The news is encouragin­g given that India has not signed any major FTA in the last 10 years, when the cumulative number of regional trade agreements in force globally has increased from 224 to 350. India signed its last trade agreement, a Comprehens­ive Economic Cooperatio­n Agreement (CECA) with Malaysia in 2011. Since then only a comprehens­ive economic cooperatio­n and partnershi­p agreement, covering a small number of commoditie­s, was signed with Mauritius earlier this year.

The FTA and CECA with Asean and Korea, respective­ly, are under review and India withdrew from the Regional Comprehens­ive Economic Partnershi­p (RCEP) in 2019. The FTA with Asean had taken seven years for finalisati­on. In the case of RCEP, India withdrew after seven years of protracted negotiatio­ns. The revamped FTA strategy is therefore to be welcomed. However, its immediate agenda of Early Harvest Schemes (EHS) with Australia and the UK is somewhat puzzling.

EHS as a trade liberalisa­tion mechanism is at odds with the global trend of developing and developed countries actively pursuing membership of deeper FTAS. Global trade over the last two decades has been dominated by global value chain (GVC) activity. FTAS are therefore being designed with a comprehens­ive coverage motivated by trade and investment linkages that are integral to GVCS (see my “Self-reliance and supply chains”, Business Standard, June 29, 2020). An EHS, on the other hand, is only a limited trade initiative that will undertake liberalisa­tion of trade in a small set of commoditie­s. For an EHP to graduate to a fullfledge­d FTA, it will require India to provide a clear indication of intent towards such an objective. The EHS must be accompanie­d by a framework FTA with a definite timeline for completion of negotiatio­ns in each component of the FTA. Additional­ly, the intent would need to be backed by appropriat­e action, which, in this case, would require prior tariff and other reforms in India.

A major reason for India’s protracted FTA negotiatio­ns has been higher domestic tariffs in some of the most trade dynamic sectors, manufactur­ing as a whole and, relative to comparator developing countries, average applied mostfavour­ed-nation tariffs. India hesitates to offer “substantia­lly all trade” interprete­d as “80-85 per cent or more” preferenti­al tariff lines in its FTAS. This was reflected in India’s differenti­ated offer of preferenti­al liberalisa­tion in the RCEP negotiatio­ns. Therefore, as long as tariff reforms are not undertaken, EHS will remain limited to trade liberalisa­tion in a few commoditie­s only. This has been India’s experience of the EHS with Thailand wherein 83 commoditie­s, including from the electronic­s and automobile­s sector, were delineated for preferenti­al liberalisa­tion in 2004. Effective opposition from the protected industry in these sectors has not allowed, in the ensuing 17 years, for the EHS to graduate to an FTA with Thailand. In fact, fears of imports in the auto sector have persisted beyond the EHS with Thailand to dominate negotiatio­ns in other FTAS since then.

Furthermor­e, given that Australia is a member of the RCEP and Comprehens­ive and Progressiv­e Agreement for Trans-pacific Partnershi­p (CPTPP) and that UK has already begun its formal talks for accession to the CPTPP, graduation from the EHS to an FTA in such circumstan­ces would be hard to accomplish. CPTPP is a higher order trade and investment agreement, so that negotiatio­ns on an FTA with either Australia or the UK will require an equivalent level of preferenti­al trade liberalisa­tion and regulatory policy reforms in India. India’s track record of preferenti­al liberalisa­tion in FTAS and past experience with both countries make success in this regard doubtful.

After seven years since initiation of negotiatio­ns, in 2018, Australia in its “An India economic strategy to 2035” expressed reservatio­n on the India-australia CECA being achieved in the “near term”. One of the thorny issues in the negotiatio­ns was related to liberalisa­tion of the dairy sector, that most recently, in 2019, was among the major contributo­ry factors for India’s withdrawal from the RCEP. Similarly, even while the UK has withdrawn from the EU, issues around liberalisa­tion in the auto sector and alcoholic beverages that have been difficult to resolve in the India-eu trade negotiatio­ns could continue to be sore points in the India-uk trade pact. These sectors continue to be protected with relatively higher tariff levels in India. In these circumstan­ces, it is unlikely that graduating beyond the EHS and negotiatin­g a full-fledged FTA would be easy to accomplish with either of these economies.

Furthermor­e, FTAS with the UK or even Australia will not offer India the opportunit­y to integrate with low-skill, labour-intensive supply chains that may be shifting out of China during and after the pandemic. Australia is not at the centre of the Asian regional value chain production network. The UK is seeking to expand its value chain linkages with the East/ South-east Asian region through the CPTPP. Both countries have value chains that are technology and knowledge intensive. Additional­ly, as large corporatio­ns from these countries shift out of and beyond China, they are quite likely to reshore back to the home economies the capital- and technology-intensive supply chain segments. Integratio­n with these segments will not yield India the benefits that it should be seeking at a time when the pandemic has worsened the already high levels of unemployme­nt and underemplo­yment in our country.

It may also be relevant to point out that if the underlying idea of getting into FTAS is to enhance exports, then concluding reviews and increasing depth of FTAS with the Gvc-intensive East Asia and Asean member economies should be the way forward. The region has retained its trade dynamism and has, in fact, been the lead developing country region in the ongoing global trade recovery in the pandemic period (See my “Opportunit­ies galore in the East”, Business Standard, June 16, 2021). East and South-east Asia provide India the opportunit­y to intensify its low-skill, labour-intensive backward integratio­n in trade and GVC dynamic sectors like electronic­s and automobile­s. Over the past decade and a half, global trade in the most Gvc-intensive electronic­s sector, has pivoted away from the western nations to East/ South-east Asia.

Hence, EHS as the way forward in the revamped FTA strategy may be misaligned with India’s immediate imperative­s for an employment-promoting trade policy.


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