India is currently engaged in almost 20 Free Trade Agreement (FTA) negotiations. Besides these ongoing consultations, it has concluded around 10 FTAs?including both bilateral and regional agreements. These agreements have taken off and are functional. Given the current trend, India will have many more FTAs going over the next few years. As it develops more of these deals, it becomes imperative for domestic industries to look closely at the impact of these agreements.
Why do countries enter into bilateral or regional trade pacts?
Theoretically, there are a variety of arguments including the ?trade-creating? effects of FTAs, as well as gains to be obtained by contracting countries from greater access to each others? markets. Such gains are expected to be highest when all countries offer each other equal access. In other words, each becomes a most favoured nation (MFN) for the other. MFN is the key principle of the WTO framework. Nonetheless, India has been part of a rather ironical movement in global trade that has witnessed an upsurge in FTAs in spite of the establishment of a multilateral trade framework. An effective multilateral trade system should always discourage regional and bilateral deals. However, ineffectiveness of the system can create incentives to the contrary. This is exactly what has happened with India and most emerging markets. Failure of the WTO-led global trade framework in removing imbalances from the world trade system has encouraged countries to seek and cement one-on-one exchange relationships.
While disappointment with the WTO, particularly the failure to get the Doha Development Agenda moving, has been a proximate motivation for pursuing FTAs, India has focused on the latter for obtaining strategic gains as well. Trade pacts with countries are often concluded for obtaining strategic leverage. Some of India?s concluded trade treaties, such as those with Afghanistan, Bhutan, Nepal, and its figuring in the South Asian Free Trade Area, has more to do with securing political gains than economic gains. Notwithstanding economic benefits arising from the FTAs with South Korea and Asean, and the Comprehensive Economic Cooperation Agreement with Singapore, these are visible manifestations of India?s earnestness in pursuing its ?Look East? policy for securing strategic gains in East and Southeast Asia. FTAs have been important in India?s economic diplomacy, which is a hallmark of its post-Cold War foreign policy.
At the end of the day, however, FTAs remain conduits for facilitating market access. But do such conduits automatically guarantee greater access for domestic (Indian) industries? On certain occasions, industries find FTAs costly conduits for access. Obtaining benefits of low tariffs and other measures can require industries to undertake cumbersome paperwork and procedural compliance. This increases transaction costs on part of both the exporters and importers. Under such circumstances, domestic industries find it more economical to stick to the non-FTA route.
In a region becoming increasingly cluttered with FTAs and developing into what Jagdish Bhagwati refers to as ?spaghetti bowl?, Indian industries, irrespective of compliance costs, need to look at FTAs closely for cracking them to their own advantages. The key issue here is to identify the advantages that industries, particularly the small and medium enterprises (SMEs), can obtain from the existing agreements. In this respect, SMEs need to accept the FTAs as instruments reducing access barriers and exploit them accordingly.
From the vantage point of Indian SMEs, many of India?s FTAs, particularly those with Singapore, Asean, Korea, and the ones in the pipeline with Japan and the European Union (EU), offer them considerable scope for enterprise upgrade and quality enhancement. The reason for this is as follows. In a globalised environment, SME products need to achieve higher quality standards for obtaining toeholds in international markets. A sure way of achieving such standards is to start focusing on global markets. The moment ?focus? markets become targets of SMEs, manufacturers need to respond to quality certifications. However, it is difficult for SMEs to directly access global markets under normal circumstances. FTAs offer the appropriate opportunities in this regard. The Asean FTA, for example, offers Indian SMEs the scope of digging deep into Southeast Asian markets, with the eventual prospect of accessing mature high-economy markets of East Asia.
The above argument can be carried forward to an emphatic posture on the possibility of Indian SMEs entering regional and global production networks through FTAs. With international production increasingly getting broken up into processes spread vertically across different locations, country ownership of brands and final products is becoming increasingly ambiguous. The Levis Jeans production chain is a classic example. The yarn is spun in South Korea, and woven and dyed in Taiwan. The finished fabric is cut in Bangladesh and assembled in Cambodia. The finished product is organised for retail delivery in the US and the EU. And the whole process is supervised by managers from Hong Kong. The arrangement clearly indicates that a variety of diversely capable firms from different parts of Asia are embedded into a common production process. There is little reason why Indian SMEs cannot be planted into similar networks by using the bilateral and regional FTAs.
While accessing larger networks is obviously the brighter side of FTAs for SMEs, the latter need to be conscious of certain other issues. These particularly relate to value addition norms in terms of rules of origin, as specified in the FTAs. Such norms tend to vary sharply between countries. Similarly, customs invoicing procedures may also be different between different pacts. On the whole, the SMEs are obviously better off, if instead of trying to manage multiple FTAs and getting confused in the process, they stay focused and look at some specific markets.
The least that Indian SMEs can do in a world mired in FTAs is to approach them in a manner that aims to make best use of the agreements in whatever way possible. In a way, this is easier said than done. However, with FTAs continuing to mushroom, whether as strategic or economic tools, reconciling to their growth and using them for their own good, are probably the best options.
?The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. Views are personal