India turns wiser on bilateral trade pacts

Economic Times, India

India turns wiser on bilateral trade pacts

KG Narendranath

Times News Network

21 June 2007

Just two bilateral free-trade pacts behind it and a handful of them under negotiation, India has turned wiser. India and Thailand have come to differ on how to progress the 2004-born free-trade arrangement between them. New Delhi wants further liberalisation to happen simultaneously on trade in goods, services and investment.

Thailand, on the other hand, would like India to liberalise trade in goods first and then consider other areas. The divergent positions have brought the talks to an impasse so much so that government officials say they don’t expect FTA to be finalised during Thai premier General Surayud Chulanont’s visit to the country starting June 26.

A similar hardening of Indian position is obvious in respect of many other trade liberalisation negotiations (FTAs, PTAs or CECA as they are variously termed). The case of the proposed FTA/CECA with Asean is no different - the pact won’t be signed in July, the earliest possible conclusion of the talks appears to be the next Asean-plus-one summit in November.

The underlying principle of India’s new stance is clear. India’s manufacturing capability compares variously with its potential free-trade partners sans invariable advantage. Many segments of the domestic manufacturing industry need to gear up and acquire competitive strength to take on tax-free imports.

But in services, the country’s comparative advantage is real and universal and span many sectors, from health and tourism to law and accounting. Also, India needs to be agog in attracting large amounts of foreign investments to spur its manufacturing and services industries, with concomitant gains for the agriculture. In short, free trade in goods is not India’s priority while entering into these agreements.

India’s position is influenced by its early harvest scheme experience with Thailand and the not-so-heartening outcome of its FTA with Sri Lanka. Thailand, which used to run a deficit in its trade with India, almost abruptly wrested a $140-million trade surplus in 2005-06, even before tariffs on 82 items covered under the scheme were brought to zero in September last.

Government circles now admit that India should have done its homework before committing itself to FTAs and CECAs. It was not that the country did not undertake studies before taking the obligations. There had been joint study groups (JSG) with every potential FTA partner country.

But these were superficial and tended to make intuitive rather than empirical conclusions. JSG projected trade increases which, when reviewed with the knowledge of ground reality, were found to be overstatement. That the industry was not let to partake in these studies made them prone to error.

In fact, the standard FTA format, which lays emphasis on tariff elimination, has become irrelevant. With tariffs being increasingly brought down on a non-preferential basis, the preferential margin one can accord the FTA partner is already minimal.

India stands to gain little from these pacts as most potential partners already brought their applied tariffs to levels lower than India’s. India, however, has some more room left with it for further tariff cuts, especially in the case of farm products. India hardly faces tariff barrier in major export markets, but comes up against non-tariff barriers (NTBs).

It is condescending to call sanitary and phytosanitary measures and technical barriers to trade as NTBs. Bar on movement of professionals or non-recognition of their qualifications are obstacles to expansion of trade in services and cross-country investments. NTBs, however, remain out of the basic FTA framework. This needs immediate correction.

One might ask why India should not use NTBs effectively in its interest? The answer is that bound by the multilateral obligation to give national treatment to all MFN trading partners, it is not in a position to use this tool as much as its main trading partners.

Rigorous enforcement of quality control norms could enrage or even kill many industries in India. If they are spared, then the MFN partner cannot be punished, as that would lead to illegal discrimination. Still, considering the alacrity with which some developed countries, especially the EU, are imposing NTBs on India, weaving NTBs into the FTA frameworks could benefit India.

Many domestic manufacturing industries are, after all, upgrading their standards. Indian negotiators must put ‘services’ upfront during CECA talks. They ought to avoid flip flops to the extent possible. India’s drastic pruning of its original negative list for trade in goods in the FTA talks with Asean was discreditable. Rather, it should have been more honest and realistic.

The US and EU plan trade/economic agreements with other countries in full public glare. The legislative processed prior to ratifying such pacts are truly accommodative in those countries. India’s industry bodies have now volunteered to assist the government during CECA/FTA negotiations.

For instance, CII had said it would like to collaborate with the government to do in-depth, sector-specific analysis to gauge the competitive pressures that the domestic industry comes under due to FTAs. The government should listen to them.