1. India’s FTA tests

India’s FTA tests

Policymakers need to engage in some serious thinking to ensure that India is able to better leverage the FTAs.

Published: November 6, 2014 2:54 AM

Reports of the official review of the free trade agreements (FTAs) that have been trickling in lately suggest that the government is not too unhappy about the performance of these trade deals. According to these reports, the FTAs that India had entered into with major countries such as Japan, Korea, Malaysia and the ASEAN bloc have not caused the country’s trade deficit to widen. The reports indicate that imports under preferential tariffs have increased, but this has not been very significant.

This is only one half of the story. Let’s see what the other half is. Between 2010-11 and 2013-14, India’s trade imbalance with its East Asian FTA partners has increased by more than four-and-a-quarter billion dollars, which is in excess of 29%. This level of trade imbalance has not hurt the overall deficit since India’s trade with these countries comprises just 14% of the total. With the exception of Singapore, India has registered deficits on trade account with all its trade partners, and with three of these the deficits have increased. Deficit with Japan has declined, but with

Malaysia, Korea and the ASEAN as a whole, trade deficit has widened. These numbers have been making news for the past few months and had left the commerce minister genuinely worried. They suggest once again that the policy-makers need to engage in some serious thinking so as to ensure that India is able to better leverage the FTAs that have been concluded.

If the FTAs that are being implemented are challenging enough, much larger tests lie ahead. The FTA with the members of the European Union (EU) being negotiated since 2007 is in suspended animation, but some member states of the EU are pushing for an early resumption of the negotiations. However, the more immediate test is the Regional Comprehensive Economic Partnership (RCEP), which seeks to forge an economic integration agreement involving 16 countries in the East Asian region. There are two major reasons for which the RCEP process assumes importance. One, a quarter of India’s trade is conducted with this group of countries, and is consistently rising as well. Two, the presence of China in the grouping, especially its capability to penetrate into the Indian market.

The RCEP negotiations began in 2013, with the participating countries expressing their intention to conclude the agreement by the end of 2015.

Thus far, five rounds of negotiations have been concluded; the sixth is scheduled to be held in New Delhi in early December. As the host of the negotiating round, India has a very good opportunity to provide some direction to the RCEP negotiating process.

From all accounts, the RCEP was not conceived as any other FTA, in which the predominant motivation of the partner countries is to maximise market access opportunities. These conventional FTAs are, therefore, driven by short-term sentiments; development partnership is not a part of the DNA of these agreements. In contrast, the RCEP was launched with the objective “to achieve a modern, comprehensive, high-quality and mutually-beneficial economic partnership.” The Guiding Principles and Objectives for Negotiating the RCEP that provide its negotiating mandate, include economic and technical cooperation as one of the negotiating planks, which “will aim at narrowing development gaps among the parties and maximising mutual benefits from the implementation of the … agreement.” The guidelines further clarify that “economic and technical cooperation provisions in the RCEP will build upon existing economic cooperation arrangements between the ASEAN and the ASEAN’s FTA partners participating in the RCEP.”

In the five rounds of the negotiations held thus far, countries driving the negotiating process have tended to treat the RCEP as another conventional FTA, with market access objectives being put upfront. Some of these countries have very high trade liberalisation ambitions; they have brought these ambitions from their participation in the Trans-Pacific Partnership (TPP) negotiations. Led by the US, the TPP is being negotiated “with the objective of shaping a high-standard, broad-based regional pact,” which will not only eliminate tariffs and other barriers to trade in a comprehensive manner between the participating countries, but will also ensure regulatory coherence.

This approach to the RCEP negotiations has not gone down well with countries such as India and Indonesia. The two largest developing countries in the grouping, with the exception of China, involved in the negotiations will, therefore, have to make their move to shift the negotiating dynamics closer to spirit of the Guiding Principles and Objectives for Negotiating the RCEP. As the host of the December round of negotiations, India should play a significant role in this regard.

The key issue that needs to be highlighted is that the RCEP should not promote mercantilist sentiments by merely focusing on market access issues, but should instead support the process of building an effective East Asian community that makes the holistic development of the region as its core objective. In the middle of the last decade, serious attempts were made to forge such a community through the East Asia Summit (EAS) process. The EAS, whose membership overlaps with that of the RCEP, has since taken a series of initiatives that would provide the basis for closer integration of the region. The most significant of these is the Comprehensive Asia Development Plan (CADP) aimed at improving connectivity within the East Asian region. The CADP was the forerunner of a large number of subsequent initiatives taken by the World Bank and the Asian Development Bank to address the infrastructure deficits in India and South East Asia that have constrained development in the region.

With these developments afoot, the RCEP can provide the overall framework through which a strong and viable East Asian community can be developed. The RCEP can have two tracks. First, a regional cooperation and development track. Second, a market integration track.

Fast-tracking the latter would merely enable the countries that are better prepared to benefit from the process, and this could exacerbate the existing inequities in the region. Since the RCEP is focusing on generating growth impulses through the regional production networks, the two-phased approach would give the lagging countries equal opportunities to secure the more coveted slots in these networks.

Such an approach should be ideally suited to India’s interests, for it would help the country to be better prepared to meet the challenges of integration than it finds itself at present. In the few cases of economic integration that it has attempted with countries in the East Asian region, the country’s production base been found to be woefully wanting. The manufacturing sector, in particular, has been unable to create new market access opportunities in the partner countries, which has been the primary reason for the large trade deficits. Further, the composition of

India’s trade with the RCEP members shows that for a number of years during the past decade capital goods have been the largest component of the country’s imports, but have been the smallest component of its exports. This suggests that the technology content of India’s exports has been low. Given this nature of India’s specialisation, it can be surmised that the formation of RCEP-wide production network chains would peg the country at the low end of these formations.

Turning around this fledgling sector is amongst the highest priorities of the government. It is, therefore, imperative that the trade regime provides an enabling environment for the new industrial base to take roots.

By Biswajit Dhar
The author is professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University

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