India's revamped FTA strategy

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, coveri.....
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 full-fledged 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 most-favoured-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. 

Illustration: Ajay Mohanty
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. 
/> The writer is professor, School of International Studies, JNU. Views are personal



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