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View: India must tread carefully on free trade agreements.

Date: 07-05-2018
Subject: View: India must tread carefully on free trade agreements
Trade theory has consistently been a strong proponent of free trade of goods, services, capital and labour. However, a growing wave of protectionism has dominated global trade of late. While it is difficult to assess whether this will lead to a significant shift in the global trade paradigm, a review of India’s existing free trade agreements (FTAs) before negotiating new ones is necessary. 

India is a fairly open economy with overall trade (exports plus imports) as a percentage of GDP at around 40%. Its exports have diversified both in terms of markets and products in the past two decades. Indian exports have gradually found their way into new markets and the export sector has moved up the value chain, leading the way with high-value products like industrial machinery, automobiles and car parts, and refined petroleum products. 

Indian exports are sensitive to price changes, global demand and supply-side bottlenecks. Estimates suggest that a 1% increase in the country’s international relative export price could reduce export volume growth by about 0.9% for all industries, and by about 1.1% for the manufacturing sector. However, global demand operates with a factor slightly above 1.5, suggesting that, given the composition of our export basket, increase in global demand drives India’s exports much more than price cuts. 

India’s exports to FTA countries have not outperformed overall export growth, or exports to rest of the world. Both have grown at a commensurate rate of 13% y-o-y. FTAs have led to increased imports and exports, although this has widened the trade deficit. For example, India’s trade deficit with Asean (Association of Southeast Asian Nations), South Korea and Japan has doubled to $24 billion in FY2017 from $15 billion in FY2011 (with the signing of the respective FTAs) and $5 billion in FY06. 

Also, India’s exports are much more responsive to income changes as compared to price changes. So, a tariff reduction or elimination does not boost exports significantly. Utilisation rate of regional trade agreements (RTAs) by exporters in India is very low. Most estimates put it at less than 25%. Lack of information on FTAs, low margins of preference, delays and administrative costs associated with rules of origin, non-tariff measures, are major reasons for under-utilisation. 

When it comes to the India-Asean FTA, there is a deterioration of the quality of trade. Apart from the surge in total trade deficit due to tariff cuts, sectorwise trade flows also paint a grim picture. As per the UN’s Harmonised System of Product Classification, products can be grouped into 99 chapters, and further into 21sections like textiles, chemicals, vegetable products, etc. India has experienced a worsening of trade balance (deficit increased or surplus reduced) for 13 out of 21 sectors. 

This also includes value-added sectors like chemicals and allied, plastics and rubber, minerals, leather, textiles, gems and jewellery. Sectors where trade balance has improved include animal products, cement and ceramic, arms and ammunitions. Sectors where trade deficit has worsened account for approximately 75% of India’s exports to Asean. 

So, there are genuine concerns of trade asymmetry when India signs up new FTAs because of past FTA experience. However, FTAs are instrumental in creating seamless trade blocs that can aid trade and economic growth. Here are some suggestions while going forward with future FTA negotiations. 

Before getting into any multilateral trade deal, India should review its existing FTAs in terms of benefits to various stakeholders like industry and consumers, trade complementarities and changing trade patterns in the past decade. Negotiating bilateral FTAs with countries where trade complementarities and margin of preference is high may benefit India in the long run. 

Also, higher compliance costs nullify the benefits of margin of preference. Thus reducing compliance cost and administrative delays is extremely critical to increase utilisation rate of FTAs. Proper safety and quality standards should be set to avoid dumping of lower quality hazardous goods into the Indian market 

Circumvention of rules of origin should be strictly dealt with by the authorities. Well-balanced FTA deals addressing the concerns of all the stakeholders is the need of the hour. 

Source: economictimes.indiatimes.com

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