Post-RCEP Retreat: India likely to sign clutch of FTAs in FY21

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Published: February 12, 2020 5:45 AM

In a move that could disprove the perception that India’s trade policy has lately tilted towards protectionism, the government has stepped up efforts to forge “balanced” bilateral free trade agreements (FTAs) with some of its major and potentially growing trading partners.

New Delhi aims to ensure “enhanced trade and better trade balance” through these agreements.

In a move that could disprove the perception that India’s trade policy has lately tilted towards protectionism, the government has stepped up efforts to forge “balanced” bilateral free trade agreements (FTAs) with some of its major and potentially growing trading partners. New Delhi is planning to launch or fast-track bilateral talks with countries, including South Africa, Australia and Mexico, to firm up FTAs, senior government officials told FE. Talks with the EU will be revived too and a limited trade deal with the US is expected to be clinched this month when President Donald Trump visits India; a broader deal with the world’s largest economy could be hammered out later. Besides, with Brexit now over, formal talks with the UK for a trade agreement could be launched soon.

India’s refusal to join the 16-nation Regional Comprehensive Economic Partnership (RCEP), the recent spikes in import duties on a host of items, and the rhetoric of some senior government functionaries raised doubts that the country may have become more circumspect, if not protectionist, when it comes to trading with other countries.
According to the sources, as the appellate body of the World Trade Organization (WTO) remains dysfunctional and chances of its early return to RCEP talks appear remote, India, an ardent advocate of the multilateral trading system, would use “balanced” bilateral FTAs to deepen its economic engagement with select countries.

Australian trade minister Simon Birmingham will likely visit India later this month and meet commerce and industry minister Piyush Goyal to boost talks for an FTA, which is at an advanced stage of negotiations and could be clinched in the next 6-9 months, according to one of the sources. Similarly, India will speed up talks with European Free Trade Association members — Switzerland, Norway, Iceland and Liechtenstein — for a separate trade pact in parallel to its discussions with the EU.

However, sticking to its stance, New Delhi aims to ensure “enhanced trade and better trade balance” through these agreements, in contrast with earlier FTAs that “worsened India’s trade deficit”, according to one of the sources. It’s also seeking to rework its existing FTAs with Asean, Japan, Malaysia and South Korea to trim its trade deficit with these nations. Importantly, the Economic Survey for 2019-20 has pointed out that generally FTAs have been beneficial for India. Between 1993 and 2018, India’s exports of manufactured products grew at an annual average of 13.4% and such imports grew 12.7%. In comparison, its overall goods exports grew at an average of 10.9% and imports 8.6% during this period.

Already, on the sidelines of the World Economic Forum summit in Davos last month, Goyal held bilateral meetings with EU trade commissioner Phil Hogan, Mexico’s secretary of economy Graciela Márquez Colín, South African trade minister Ebrahim Patel and Japan’s state minister of economy, trade and industry Makihara Hideki to boost prospects of bilateral trade through enhanced cooperation.

India’s tactical shift from multilateralism to bilateral engagements comes at a time of heightened uncertainties in global trade, as countries world-over increasingly resort to protectionism to help local industries. This has manifest in a trade war between the US and China that is still not over despite a temporary thaw, and the WTO’s dispute appellate system has collapsed, as the Trump administration has blocked the appointment of judges to it.

India, too, has proposed to raise imposed duties on a host of products — including shoes, toys, wooden furniture, kitchenware, appliances and certain food items — which will only increase its average import duty from the already-elevated level of 17.1%. Although some other countries, including China, Japan and South Korea, boast of lower tariffs than India, they have erected massive non-tariff barriers to discourage imports that they deem non-essential. The country’s merchandise exports have remained in the negative zone, having contracted for a fifth straight month through December, as external headwinds, on top of subdued domestic manufacturing, continue to hurt. Exports have barely risen in recent years. In real term, the share of exports of goods and services in the country’s GDP shrank from 25.2% in FY14 to just 20.8% in FY19. In the current fiscal, it’s all set to drop even further.

Already, India had pulled out of the RCEP talks in Bangkok on November 4 last year on ground that its key issues–including extra safeguard mechanism to curb irrational spike in imports, mainly from China, and tougher rules on the origin of imported products — were not addressed adequately. Even without RCEP, India’s merchandise trade deficit with China stood at $53.6 billion in FY19, or nearly a third of its total deficit, even without factoring in the deficit with Beijing-proxy Hong Kong. Its deficit with potential RCEP members (including China) was as much as $105 billion in FY19.

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