Led more by political concerns than economic rationale

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: increases competitive strength of both nations.

However, if the country that requires steel, keeps the import duty on steel at same level but reduces the import duty on machines, it will lead to reverse tariff escalation. This could erode the country’s competitiveness, as it would be more economical to import machines in that country than to manufacture locally.

Therefore, PTAs and FTAs present both an opportunity and a threat. Every industry needs to check: One, the prevailing import duty on its product and the likely change in duty after the PTA/FTA; Two, the prevailing import duty on the inputs (major raw materials) and after the PTA/ FTA; And three, the detailed rules of origin. After the agreement, if the import duty on the product is reduced and there is no corresponding reduction on inputs, the industry might be in trouble.

Further, rules of origin must be framed such that tariff preferences are accorded only to goods ‘actually produced’ in partner countries and not to goods from other countries seeking entry by exploiting preferential tariff. The latter caused quite a controversy during FTA discussions with Singapore recently.

The issue assumes significance because, firstly, India’s tariff structure, even after the proposed reduction to 15% in Budget 2005-06, is considerably higher than most of potential FTA partners which increases the chance of exploitation of lax rules of origin by countries seeking entry into India. Secondly, Indian tariffs are marred with distortions, which could further escalate reverse tariff stances, rendering several product categories un-competitive.

The current drive of FTAs seems to be led more by political concerns than by sound economic rationale. The complexity of rules inherent in these causes serious concern among SMEs and could stunt their internationalisation efforts. Even if it was for many wrong reasons, negotiations at WTO sparked off debates among stake holders and slowly but steadily civil society institutions started having their say in matters of WTO, at least in India. Sensitisation through public debates led to institutionalisation.

On the contrary, FTA deals are shrouded in bureaucratic secrecy. Indian SMEs are almost completely bypassed from the consultation process. For SMEs, a rule based single multilateral trading system is still the best bet. But while industry may continue to raise questions, some FTAs have already become functional and their impact is real. The industry must start studying these seriously and strategise to exploit whatever opportunities they offer.