Look West can't replace Act East

Soon after pulling out of the Regional Comprehensive Economic Partnership, the commerce ministry was suggesting placing renewed emphasis on the Look West Policy. This is clearly not an alternative to not joining the RCEP, and in some sense, not being a part of this century belonging to Asia. 

India hardly has a presence in Asia. The South Asian Association for Regional Cooperation (SAARC) is non-functional. We don’t yet have a fully functioning India-Asean free trade agreement (FTA), nor India-Japan or India-Korea FTA. These are just signed agreements but not operating as full-fledged FTAs. Even our India-Singapore FTA is in limbo, with differences over temporary relocation of labour issues. We are not a part of the Asia-Pacific Economic Cooperation (APEC) either. Hence, not joining the RCEP was a big blunder, unless our position was a tactical bargaining move.

The European Union and the US are not ideal for us to get into a binding FTA. Tariffs are near zero there, and these countries will be much more demanding than the RCEP not only in terms of lowering our tariffs, but also in non-trade barriers, intellectual property rights (IPRs), competition policy, investment policy, trade in services, and even labour and environmental standards. I don’t see how our industry can meet these stiff demands. If they can, then why did we exit the RCEP?

India-EU FTA discussion has been ongoing since 2007, with little or no progress to date.  This is on account of:
  • India’s inflexibility on lowering tariffs for cars. 
  • India’s reluctance to fully liberalise the wines and spirits market.
  • India’s reluctance to fully liberalise professional services. 
  • EU’s reluctance to provide a comprehensive Mode 4 visa to India.
  • EU’s reluctance to certify India as a “data secure” location within the FTA itself, in a manner that allows Indian regulators the primacy for enforcement.
  • EU’s reluctance to provide India with technical barriers to trade (TBT) assurances for key sectors such as textiles, engineering, agro-processed foods, pharmaceuticals and chemicals.
  • IPR issues.
To resolve these issues, and to begin planning an India-US FTA, we need a strong Indian negotiating team that is up to date with key developments in trade and investment. Our negotiations with both the US and the EU should take the following points in focus:
  • Mode 4 of General Agreement on Trade in Services (GATS) was crucial in the 1990s and 2000s. Starting mid-2010s, increasing automation and artificial intelligence (AI) has made Mode 4 very limited. 
  • Mode 1 of GATS: Real focus is here. Anticipate future regulatory barriers around data privacy/security/localisation, as well as tariffs in the form of taxes that disincentivise offshoring of knowledge work such as high-end big data analytics, and code writing for AI, and app development and maintenance of remote medical consulting, legal, and financial research.
  • On manufacturing the focus should be on processed food, textile/garments/chemicals/pharmaceuticals. Not on tariffs (already low) but on TBTs to ensure compliance at minimum cost for their standards.
  • For engineering, the major focus would be to get a liberal Rules of Origin. This helps us use our mature engineering sector integrate with lower cost champions of intermediates in Vietnam/Thailand and do the finished products in India. Think of Pune, Chennai and Ahmedabad clusters being able to integrate into value-chains across Southeast Asia, and deliver value-added final products to these mature markets. This would also become a magnet for foreign direct investment (FDI).
  • In manufacturing, there is a case for protecting small cars for giving a good deal on higher priced vehicles (over $20,000) 
  • Buy time (10-year liberalisation with back-loading towards the end of the period) for e-vehicles, including e-scooters and bikes. Use the time to develop local industry at breakneck speed. Use the tariff protection and economies of scale to get investment and tech into the country.
  • For services, we should resist any protection to legal services and accounting (powerful vested interests), and e-retail, and go for liberalisation of media and airlines.
  • On IPR, we need to insist on not going beyond the World Trade Organization norms because that would impact our ability to have flexibility on innovation for years to come.
The bargaining issues discussed above are difficult to resolve especially with the current negotiating team in the commerce ministry. They will be matched with very competent United States Trade Representative and EU negotiating teams. We immediately need to create the Trade Policy Council that I proposed in my piece “PM Needs to Oversee Trade Policy and Negotiations, Business Standard, November 13). We need an experienced trade negotiator to strike a win-win trade deal with US and EU. On all accounts, it will take time for us to gain enhanced market access in these countries. Hence, we should definitely sign the RCEP in February 2020 and focus on Asia for immediate and lasting gains.
The writer is a former economic advisor to the Union commerce ministry

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