Pacts with developed nations to take Indian trade into new era
Economic Times, India
Pacts with developed nations to take Indian trade into new era
20 May 2008
By K G Narendranath, TNN
NEW DELHI: India is currently negotiating preferential trade and investment agreements with some developed countries - the European Union, Japan and Korea.
It is also contemplating similar agreements with Australia and New Zealand. If these agreements materialise (they are most likely to), it would mark a new era in not only India’s global trade but also its globalisation per se.
All of India’s present bilateral agreements for trade liberalisation are with under-developed or developing countries (barring the Comprehensive Economic Cooperation Agreement with the city-state of Singapore, which, essentially, is a trading economy, and not of the likes of EU or Japan that are strong in manufacturing and large markets themselves).
The extant arrangements - including time-tested FTA with Sri Lanka, the trade treaties with Nepal and Bhutan and the agreement with Bangladesh - are essentially political and so, economic objectives are only secondary in their construct. (Under the pacts with Nepal, Bhutan and Bangladesh, India gives tariff-free access to their products as an act of neighbourly camaraderie, without any reciprocity for that matter).
Even the early harvest scheme with Thailand (to be converted into a full-fledged FTA), the fledgling SAFTA dispensation, the older APTA and SAPTA frameworks, and a clutch of bilateral pacts on the cards with South Asian (Indonesia, Malaysia), the Gulf (GCC) and Latin American (Mercosur) countries have strong political undertones. The proposed much-touted India-Asean trade and investment agreement also has a robust political content, which could undermine economic right-thinking in defining its contours.
Here’s where the agreements being negotiated now with the likes of EU, Japan and Korea differ in substance. They are almost totally to be products of hard bargaining based on economic self-interests of the parties concerned. Another way to describe these pacts in the offing is as antibodies being administered to the Indian economy to prepare it for the impending comprehensive and near-total opening up, to be culminated in the full float of rupee. Once these bilateral agreements are operational, the Indian industry can more than get a taste of imports free from tariffs from highly competitive economies and foreign investments treated at par with its own by the country’s policymakers. The question is what more would we get from these pacts?
The relevance of these bilateral pacts would anyway diminish if liberalisation happens under the multinational WTO framework. But going by the way the WTO talks are being directed, the most likely scenario will be a crumbling of tariff walls facing goods trade, to precede any WTO-mandated reduction of national regulatory curbs on trade in services, cross-border investments or a weakening of autonomous (national) regimes on competition and IPR policies. To speak more plainly, there’s no guarantee that areas such as investment and competition and IPR policies would witness WTO-driven mandatory liberalisation any time soon.
So, India ought to focus on making maximum use of the proposed bilateral pacts with the developed countries for the liberalisation of their policies on foreign trade in services and investment. That doesn’t mean we have nothing to gain from these pacts in the area of goods trade. It’s myth that tariff walls seldom exist in the developed world.
True, the EU’s average level of Customs duty protection is around 4% on industrial goods, taking into account Most Favoured Nation (MFN) rates. But tariff levels are 10% and more on many items of export interest to India, like textiles and clothing and processed agricultural goods. Then, there is the issue of tariff escalation which curbs export of value-added products to the EU countries. Similarly, Japan maintains zero Customs duty on 30% of its imports, but the tariffs are very high for certain farm goods. For example, the duty on some varieties of rice is 1,200%.
It is reasonable to believe that preferential trade pacts with developed countries would immensely benefit not only Indian consumers but the economy as a whole. Let us consider India-EU trade, which is currently $50 billion-plus and is growing at a brisk pace. EU’s imports from India consist mainly of textiles, clothing, chemicals, agro- and marine products. EU, on the other hand, exports machinery and high value consumer items like gems to India.
“Manufacturing systems of developed countries are very different from ours. They (developed countries) make high-tech and value-added items whereas we have strong and potentially strong employment-intensive industries,” says former commerce secretary S N Menon. He notes that an India-EU free trade pact would “really bring down” the EU textile tariffs vis-a-vis India and even “equate” these tariffs with the rates prevailing for our competitors in the area of textile exports like Pakistan and Bangladesh, that currently take advantage of the EU’s Generalised System of Preference (GSP) and tariff suspension regimes.
The thorny issues involved in the finalisation of India-EU economic pact make it a mirror image of the ongoing WTO talks. The two sides have flagged their separate “negative lists” (items for which tariff concessions wouldn’t offered in the light of respective domestic sensitivities) and the negotiations for the pruning of these lists to make the pact meaningful are now underway. The India-EU pact is much more feasible than an India-US pact on this score where the divergence over the sensitive lists could be wider.
But tariffs are only one thing. When it comes to trading with developed countries, India, like many other developing countries, faces the former’s indiscriminate invocation of the tool of non-tariff barriers (NTBs) to deny market access. “Targetting NTBs is already a priority for Indian interlocutors as far as the proposed pact with EU is concerned,” says Biswajit Dhar of Indian Institute of Foreign Trade. Mr Dhar, however, says New Delhi should be wary about taking positions on areas other than trade in goods and services in the India-EU pact.
“If the agreement is confined to traditional area of trade, it is well and good. If other areas such as investment and competition policies are also to included, we do have certain amount of sensitivities, as our autonomous policy regime is still in a flux. Giving binding commitments to a major trading partner like EU is hazardous at this juncture,” cautions Mr Dhar. The contrarian view is that India is anyway mulling to open up sectors such as financial services where foreign investment restrictions exist. “I think the proposed economic pacts with the developed world would make eminent sense if we are able to get market access for products such as textiles, leather and processed agricultural goods, and also facilitate short-term contractual movement of our professionals to the partner countries. We are very much in a position to liberalise foreign investment in financial services,” says Mr Menon.
The moot point is that with industrial tariffs likely to be close to zero even in India in the next few years, the proposed bilateral economic pacts with developed countries would be more pertinent in the area of trade in services, investment and competition policies. Whether these pacts are a gain for India in the final analysis would depend on the fine print of the agreements. The outcome of the current talks should be of our genuine liking.
