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How to Make FTAs Work

India's experience with free trade agreements has been bitter. Can the country learn from its mistakes?

How to Make FTAs Work

Illustration by Raj Verma

On March 6, Commerce and Industry Minister Piyush Goyal made a candid admission on the floor of Parliament. He told the Rajya Sabha that India's Free Trade Agreement (FTA) with the 10-country ASEAN (Association of South East Asian Nations), its biggest trade pact so far, has increased the country's trade deficit with them. India's trade deficit with ASEAN was $5 billion at the time of implementation of the FTA (FY11). In FY19, it was $21.8 billion, a four-fold increase, he said.

The discomfort with large trade agreements like the one with ASEAN was visible in November 2019 too when India walked out of talks for the Regional Comprehensive Economic Partnership (RCEP) - seen as leading to create the world's largest economic block - signed among 16 East Asian economies, including ASEAN members.

However, worries about older existing trade deals are not preventing India from exploring new trade pacts. The RCEP may have been aborted, but the country has been in discussion for a trade agreement with its biggest trade partner, the US. The commerce ministry has also hinted that the country will explore opportunities arising out of shakeup in global supply chains due to trade wars (especially US-China) and outbreak of the novel coronavirus (Covid-19) influenza.

India has till date signed about two dozen trade agreements - from FTAs to preferential trade pacts - with countries and groups of countries. It is negotiating an equal number of deals with others. It seems to be confident that it can make future deals work. This is only possible if it can learn from its mistakes.

Global Minnow

Goyal says asymmetrical tariff commitment is the biggest reason for India's rising trade deficit with ASEAN countries. "Non-tariff barriers in many FTA partner countries are also an important factor contributing to this. While exports and imports vis-a-vis FTA partners continue to grow, the utilisation rate of FTAs, both for India and its partners, has been moderate," says Goyal. India accounts for just 2 per cent of global trade. Its plans to engage with economic giants are driven by a desire to increase its global footprint.

Incidentally, India's cumulative trade with its FTA and bilateral trade agreement partners adds up to 15 per cent of its total global trade, with ASEAN member nations such as Singapore and Malaysia, and South Korea and Japan, accounting for a bulk of this. On the other hand, its top five trade partners - US, China, UAE, Saudi Arabia and Hong Kong - with whom it does not have a trade pact account for 35 per cent of its $844 billion goods trade (in FY19). India hopes to find more opportunities in markets like the US, where it already has a bigger presence, if trade pacts facilitate better market access. But for that, it needs to understand what went wrong with the earlier FTAs.

Steep Tariff Cuts

Biswajit Dhar, a trade expert associated with the Jawaharlal Nehru University, New Delhi, says India failed to take advantage of market access offered by comprehensive economic partnership agreements (CEPA) with ASEAN, Japan and South Korea. "The absolute value of exports to the Republic of Korea and Japan fell from FY11. Exports to ASEAN rose initially but declined until FY16. Import trends from CEPA partners are in contrast with trends in exports. Imports increased for all countries; increasing nearly 130 per cent for ASEAN and 50 per cent and 60 per cent for Japan and Korea, respectively," says Dhar. "CEPA partners exploited India's markets easily. Indian exporters were unable to leverage the lower tariffs offered by the partner countries," he says.

One of the major findings of studies by Dhar is that India gave up much more than what was needed. In all three cases, ASEAN, Korea and Japan, India agreed to deep cuts in tariffs. "While India's obligation under the WTO was to remove tariffs on just 2 per cent imports, the range of tariff cuts it offered was in the range of 74 per cent to 86 per cent," he says.

Non-Tariff Barriers

In the run-up to India's hectic talks with ASEAN and its FTA partners such as China, Australia, New Zealand, Japan and Korea for the RCEP deal, New Delhi-based PHD Chamber of Commerce and Industry (PHDCCI) had identified non-tariff barriers as causing harm to India-ASEAN trade. It noted that "proliferation of non-tariff measures in the ASEAN market has contained the economic integration of Indian products in ASEAN". The measures cited included import controls, import permits, sanitary and phyto-sanitary measures, product standards and technical barriers. It cited the example of gems and jewellery, where India is competitive, saying that shipments to Thailand had to be routed through Hong Kong due to high Customs duty and complex Customs procedures. This added to costs. ASEAN markets have stringent regulations, including different marking/labeling/packaging requirements, testing/quarantine requirements, pre-shipment inspection by authorities, etc. The cost has to be borne by exporters.

The PHDCCI's fear has a solid base. Take Japan, with which India has an FTA. The World Banks database, World Integrated Trade Solution, says Japan's imports have a coverage ratio of 76.18 per cent and a frequency ratio of 61.20 per cent for non-tariff measures. In other words, 76 per cent products exported to Japan face some non-tariff regulation. In comparison, India's imports have a coverage ratio of 45.52 per cent and a frequency ratio of 43.71 per cent.

Services Stuck

The comprehensive agreements are not only about goods trade. They have a services component too. Services is considered India's strong area but its performance here is hampered because mutual recognition agreements (MRAs), which allow qualified personnel in one region to automatically qualify for offering services in any partner country, are either absent or not implemented in spirit. The slow pace of implementation even in cases where MRAs exist further affects Indian exporters. A trade expert associated with the commerce ministry says there isn't even a proper way to understand the quantum of services trade among FTA partners. "We do not have bilateral services data. Some of these FTAs had a built-in promise for negotiating MRAs. That process has been slow and far from complete. With ASEAN, I think we have an MRA for nursing services. Similarly, with Singapore, we have MRA for some areas, but it took decades to negotiate. The government missed the opportunity to finalise MRAs while FTA negotiations were on and left it for a later date," says the person, who did not want to be named.

The Way Ahead

One way to make FTAs work is to negotiate the new ones in a more informed manner and re-negotiate (if possible) the existing ones. Minister Goyal says "impact assessment of FTAs is a continuous process which is undertaken both in terms of data analysis and stakeholder consultations". He also says that awareness about FTAs is spread through outreaches across the country so that we can enhance the utilisation rate of preferential exports. Further, to protect the interests of the domestic industry and agriculture, FTAs provide for maintaining lists of sensitive, negative or excluded items on which limited or no tariff concessions are granted. He also says that in case of surge in imports and injury to the domestic industry, India can take remedial measures such as imposing anti-dumping duty and safeguards.

These routine safeguards may not be enough. In fact, whatever you do, FTAs may not work for India, says Ashwani Mahajan, National Co-convenor of the Swadeshi Jagaran Manch (SJM). He says a very cleverly and intelligently negotiated bilateral agreement may be a possibility but a blanket free trade agreement or a regional trade agreement can never work. "In bilateral trade discussions, we talk to each other. Take the case of the US. We can tell them we are purchasing oil or aircraft from them. We cannot bring up individual trade matters while talking to a group of countries, which means hard bargain is not possible. Thats why we favour bilateral trade deals over FTAs. The experience shows that plurilateral and multilateral agreements are not doing the country any good," says Mahajan. He says India failed to reap benefits of bilateral agreements with Korea and Japan due to bad negotiation tactics. "The problem was not with the bilateral in principle but because we didnt heed to our competitive advantage. If youre not competitive in, say, 70 items, and you still open up those items, only they gain. See what gives you competitive advantages and make deals accordingly," says Mahajan, adding that "the fact that ASEAN, Japan and Korean agreements were bad is evident from the absence of an exit clause."

To governments credit, it has taken a decision to review bad FTAs. While some countries such as Singapore have agreed to a review, one cannot expect too much change, as all such decisions are based on mutual agreement. Indias plans to pursue a deal with the US and continue talks with the European Union may take a backseat in the wake of the Covid-19 threat. But talks are set to resume once matters settle down. It will be interesting to see how India can negotiate a bilateral deal with the global majors with a long list of non-negotiable items from its side.

For instance, as far as the India-EU FTA talk is concerned, any discussion on dairy will be met with stiff resistance in India. Intellectual property rights will remain a thorny issue, so will agriculture. Sectors such as medical devices, stents, etc, will remain a problem in concluding talks with the US too. Talks for a comprehensive FTA that encompasses all products and services seems to be extremely difficult at the moment. A truncated, limited deal, as was talked about during the first visit of US President Donald Trump to India early this year, seems to be the only possibility.

Coronavirus days are not the best time to reach out. However, once social distancing gives way to global integration, governments will begin to talk to each other. Better strategy will have to be prepared. That alone will tell if preferential trade will have a role in the post-coronavirus world and, if so, whether India can benefit from change in the global supply chain dynamics.

@joecmathew

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