Speed up FTA reviews

India hasn’t gained much from its trade deals with countries like South Korea

trade, economy
There is no denying that some of the import growth can be attributed to essential goods, which are not produced or assembled in India due to insufficient/absent capacity. (IE)

Union commerce minister Piyush Goyal reportedly said on Saturday that Korean auto giants Hyundai and Kia have cost India billions of dollars in trade deficit with Korea and other nations. The minister attributed this to the free-trade agreement (FTA) with South Korea, which allowed them to import “indiscriminately.” Even without a specific focus on the auto giants’ imports into India, it can be argued that the country hasn’t gained much from its Comprehensive Economic Partnership Agreement (CEPA) with South Korea. Over the past six years, India’s trade deficit with that country has averaged $10 billion—doubling from a deficit of roughly $5 billion in FY10 (the CEPA became effective on January 1, 2010). So, while the merit of singling out the two Korean auto majors can be debated, India’s frustrations with the CEPA can’t.

There is no denying that some of the import growth can be attributed to essential goods, which are not produced or assembled in India due to insufficient/absent capacity. But there has been a spurt in non-essential imports also. Auto majors, even Indian ones, tend to stick to their network of suppliers, and while there could have been substitution in India, this hasn’t happened. Indeed, in 2016, the government had to urge Korean steel giant Posco to use local raw materials for its automotive steel facility in Maharashtra, in a bid to cut imports and boost local high-value steel production. Of course, it will be argued that Posco wanted to build its largest steel plant in Odisha and it was thwarted by politicians. But, matters have changed in the interim and a Pocso can’t claim it is apprehensive of investing in much greater value addition here.

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India Inc’s distress from ballooning imports is visible in the fact that, between 2012 and 2022, India applied for more than 70 trade remedial measures against South Korea, including bilateral safeguard measures under the CEPA. The FTA has also been misused to channel trade from other countries via Korea, despite its origin rules. This has been somewhat remedied with India’s Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, under which importers are mandated to do due diligence to comply with origin rules. But, the CEPA’s deficiencies on this account remain. There are also cases of inverted duty structure to contend with. Therefore, reviewing and renegotiating the trade deal—this has been ‘fast-tracked’ since 2021—is an absolute necessity. Indeed, many of India’s vintage trade deals need review, and the government must move fast on these.

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But, even as India walks the renegotiation tightrope, it must have clarity on many aspects. First, it needs to comprehensively articulate what it wants from the trade deals, and what its non-negotiables are—services exports, which India could have leveraged to offset any deficit in competitiveness of its merchandise exports, remain a sticky point in the FTA with Asean, as also in India’s FTA talks with the UK. What was done with diplomatic interests in mind, must be corrected keeping economic interests at the centre. Also, trade pragmatism calls for letting industry decide from whom to procure while taking into account every little concern and opportunity it flags with respect to FTA negotiations. To that end, the government has done well to have extensive industry and other stakeholder consultations before it sits at the FTA table—a marked change from the vintage FTAs.

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First published on: 28-02-2023 at 04:15 IST
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