Business Standard | 22 April 2022
India’s trade pacts: A toss-up between strategic interests, economic gains
by Subhomoy Bhattacharjee
After a long hiatus, India has resumed its engagement with trade pacts. Question is: To what extent do these deals weigh on economic considerations? More importantly, how similar are they to strategic alliances?
This year, India concluded a Comprehensive Economic Partnership Agreement with the United Arab Emirates (UAE) and a more limited Economic Cooperation and Trade Agreement with Australia.
But that is not the end of its ambition yet.
A free trade agreement (FTA) is due to be signed with Israel in June. By the end of 2022-23, at least one more FTA will possibly be entered into with the UK.
“These are strategic without a doubt,” said former commerce secretary Rajeev Kher.
It is a thought closely aligned with that of Robert Bruce Zoellick’s, former US Trade Representative and 11th World Bank president, who famously argued that a US-Australia FTA (signed in 2002) would ‘strengthen the foundation of India’s security alliance’.
The biggest demonstration of India’s nature is of having lowered its protection bar to allow companies from the UAE to bid for government contracts. It corroborates its stand on cooperation to pull investments inwards on a grand scale.
“India cannot sign a trade deal with the US for various reasons. The UAE has become a springboard to tap into India’s infrastructure opportunities,” said a commerce ministry official.
No trade deals were signed by India after the Narendra Modi-led government came to power in 2014. Soon after the government won the popular mandate again in 2019, India spectacularly refused to join the Regional Comprehensive Economic Partnership (RCEP) to create the largest trade group in the world, covered by 16 nations. India withdrew hours before the agreement in November 2019. External Affairs Minister S Jaishankar put it bluntly last year: “You cannot have a tense high-friction border and have great relations in other parts of life.”
Trade, in other words, has to follow the flag.
There were concerns with how the earlier trade pacts impacted India. An oft-quoted assessment by the government in 2019 showed cumulative growth in trade with partners over the last five fiscal years at just above a modest 7 per cent. While both exports and imports grew with these ‘FTA partners’, the utilisation rate has been ‘moderate’ across sectors.
It is in this context that makes a study of the current trade deals useful. While the commerce ministry under Piyush Goyal will expect the utilisation rate of the current round of trade deals to be higher, the choice of partners shows a close fit with India’s strategic interests.
The connection has not escaped most observers.
Jayant Dasgupta, India’s former ambassador to the World Trade Organization (WTO), said, “In the case of Australia, our co-membership of the Quadrilateral Security Dialogue (Quad), the Supply Chain Resilience Initiative will have been taken into consideration. (Similarly) with Israel, our dependence in matters of advanced avionics and intel-sharing with respect to Islamic terrorism will give an added push.”
India’s trade data shows a clear overlapping trend. Among India’s top 25 trading partners (March 2019), 10 entered the list as suppliers of mineral commodities — petroleum, oil, and lubricants, and coal.
India’s top trading partners (as of 2019) were the US, China, Singapore, Germany, and South Korea. While India has Comprehensive Economic Partnership Agreements with both Singapore and South Korea, they have slid in terms of priorities of the commerce ministry. With South Korea, the volume of trade was $13.7 billion in 2020-21. Indian officials are not hopeful of a $50-billion trade by 2030 as was expressed by ministers of both nations at the January meeting.
Indian businesses, said officials, have gained far less from the trade deal than what South Korea harvested. There is a ‘need’ for a pact upgrade — one that favours India and narrows the trade gap.
It is anybody’s guess if the new trade deals being hammered out will avoid this asymmetry. But they will improve the security alliance between India and each signing partner, observed Zoellick.
This is the reason why India has championed a deal with the UK, even though it ranks 14th as India’s trade partner, or eighth, if commodity exporters are omitted.
If trade was the singular necessity, going by the countrywise rank, the US and China should have been sitting with India’s commerce ministry officials right now.
A former aide of a commerce minister said a future trade deal with the US will go beyond trade. Issues like labour and environment standards will surface, said a former official, possibly the reason why India is not keen to enter into one.
“The UAE agreement is a good example of diplomacy and economic considerations overlapping. When geopolitical considerations are added to the mix, there is further impetus — as we are seeing in the Economic Cooperation and Trade Agreement signed with Australia and the FTA with Israel. All these agreements will benefit the economy and create a global trade alliance,” said Suhail Nathani, managing partner, Economic Laws Practice.
But in what order should the economic and strategic issues enter negotiations with reference to priorities?
“The choice of partners could be based on many factors, including strategic considerations. But negotiations thereafter have to be on sound economic logic, keeping commercial interests in view,” said Abhijit Das, head and professor, Centre for WTO Studies, Indian Institute of Foreign Trade.
Dasgupta concurs. “Strategic considerations will always be a factor in deciding whether we go in for an FTA. However, they cannot outweigh economic considerations or other factors,” he said. Dasgupta lists other factors as ‘coherence in governance’, Trade-Related aspects of Intellectual Property Rights++ commitments, investor-state dispute settlement and so on.
India seems to have followed this tactic, as evidenced by its choice of partners to enter into trade deals with. Australia, for instance, exports 6 per cent of its products and services to India, whereas India does only 1 per cent.
Kher said the negotiations began when he was in Udyog Bhavan as commerce secretary. “Australia is a mineral exporter, and of education. While it has offered quite a bit, I really did not see what more value addition a trade deal could provide India with. But New Delhi has estimated an alliance with Canberra as a good fit. Significantly, the negotiations had begun in 2011, but were restarted in September 2021.”
Again, with Israel, the same dynamics are at play. Israel has some of the best agrotechnology to offer. But as Kher said, those could have been secured through specific collaborations rather than a trade deal.
“Typically, economic considerations are the first priority, especially if the other country is not a direct competitor in many areas but has a complementary economic structure,” said Dasgupta. He, however, acknowledged that trade deals sit most comfortably when the two sides also ‘share strategic ties’.
The biggest fit, they agreed on, is the India-UAE trade agreement.
Dasgupta, who was India’s permanent representative at WTO, described the UAE agreement ‘as a door opener to the other five Gulf Cooperation Council countries and also a means of ensuring India’s energy security as well as to tackle the Organization of Islamic Cooperation’.
Taking a more long-term view, Harsh Vardhana Singh, India’s former deputy director general at the WTO, said strategic interests have always coloured India’s choice of FTAs. He said the agreements with Sri Lanka, Nepal, and Bhutan emerged from the same principles. Recounting his experience with the Trans-Pacific Partnership, he said ‘politics is always involved’. It stiffened as India walked away from RCEP.