India’s Trade Policy Shifts and EU

The India- EU Trade alliance has been an important issue since India’s decision to terminate most bi-lateral agreements has been executed. This particular article lays emphasis on the shift of India’s foreign policy that makes it imperative to understand the comparison of  bi-lateral agreements to Free Trade Agreements and why it matters so much for the European Union and India to come to a common ground.

Since the Bretton Woods system, WTO has been the sole guardian and enabler of the world trade on the basic principle of free market. However, we have seen a trend in the growth of Free Trade Agreements (FTAs) with the advent of agreements like Trans Pacific Partnership (TPP), Regional Comprehensive Partnership Agreement (RCEP) in Asia, Pacific Alliance in Latin America (Chile, Colombia, Mexico and Peru), Tripartite Agreement between parties to Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and Southern African Development Community (SADC) in Africa along with many other such bilateral and plurilateral foreign trade pacts. Ideally, a global trading system along the lines of WTO would maximise the benefits from exploiting the competitive and comparative advantages of all countries and reducing transactional costs. The argument from WTO suggests that FTAs should not exist in such a multilateral trading system, as they potentially create preferential bilateral or regional markets that disrupt a level-playing field.

Ideally, states should balance their short-term benefits against long-term interests as part of a community of nations. However, the global trading system operates in a political reality that is increasingly cautious about trade liberalisation, and many countries impose significant trade barriers. FTAs are enabling accessible economic trend for states by eliminating tariffs and making FTA partners get market access into one another’s markets via a Most Favored Nation (MFN) status. An MFN status eliminates trade tariff barriers on all goods and services whereas in a bilateral agreement, the favored status is pertaining to certain goods only. The former benefits exporters because they get preferential treatment over non-FTA member country competitors. For example in the case of Association of South East Asian Nations (ASEAN), which has an FTA with India but not with Canada the custom duty on leather shoes is 20%, but under the FTA with India this has been reduced to zero therefore an Indian exporter, because of this duty preference, will be more competitive than a Canadian exporter of shoes. FTAs also protect local exporters from losing out to foreign companies that might receive preferential treatment.

One of the reasons why India embarked upon this journey of FTAs was the decreasing relevance of the Doha Round of global trade talks under the WTO, where the developing countries were not able to clinch favorable deals with the developed ones. With its growing significance as a large economy, with a high-potential manufacturing and vibrant services sector, India looked to emulate its Asian peers – Japan, South Korea and China – whose economic successes were largely export-driven. In the eleven years leading to 2016, imports from our bilateral trade partners (including the blocs) have actually increased by 14.9% being 12.7% rise of import bill from non-FTA partners. Even the trade pact with ASEAN, Japan and South Korea, our trade deficit has increased about 596%. (Economics Survey 2015-16, Ministry of Finance, GOI)

FTAs signed by India over time

Hence, these failures stand to hold that India’s efforts to sign trade agreements with East Asian countries is illogical. Therefore agreements based on just reducing tariff barriers – which has been India’s policy for long now – will only mean giving up more and getting less. Similarly, since India’s strength is in the services sector, the fact that it has not been able to negotiate enough trade pacts to Western nations as well, in services puts serious question marks over objectives of the country’s policy. Leveraging services as a pivotal aspect of an agreement, India should capitalize on such opportunities and not make rash decisions as in the past, leading to an overwhelming situation, compelling India to revisit all her agreements with each nation.

An FTA works well if all partners to the agreement are equal in economic sense or the trade agreements are negotiated based upon reciprocal tariff reductions, leading to the exchange of equal amounts of market access to all partners. The India-EU FTA doesn’t seem to follow the principle of reciprocity. while India is demanding data secure status for the country, liberalised visa norms for its professionals and market access in services and other sectors, including agriculture, chemicals, pharmaceuticals, textiles, apparels and leather goods, EU wants India to liberalise its professional services sector, particularly accountancy and legal services, apart from seeking massive cuts in India’s tariff on automobiles, auto components, wines and spirits. Since India has higher tariff barriers than EU, an elimination or reduction of tariffs in both EU and India will provide EU businesses a greater market access gain in India than what it would provide Indian firms in EU. Hence, from India’s point of view, FTA with EU doesn’t seem to be a great investment unless and until it is negotiated well to create a level-playing field.

Given the backdrop of TPP, that India is not a part of, it becomes important for India to soon come on a common ground with EU as well as the RCEP with China. India’s negotiation capacity plays a important role in FTA’s and their successes, Ministry of Commerce is already aware of the weakness and has been sensitizing the negotiators trough awareness and strategic building. Being a part of 18 FTAs already, India needs to balance strategic and economic benefits in a way in which she can capitalize on the service sector that is her biggest strength. As a nation we need to first choose which partnerships are most important to us and why. Even if it leaves us with only a few agreements, it is better than rampant signing of papers just to achieve the global footprint. The need of the hour is also to strengthen our manufacturing base and quality of production, rather than discussing FTAs that will get our raw material across the border with ease and stifle the Indian spirit to create world beating brands.

 

 

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