Restrictive rules tilt trade agreements against India
Financial Express | Jul 08, 2013
Restrictive rules tilt trade agreements against India
Kirtika Suneja
New Delhi : India’s bilateral trade pacts including the relatively recent ones with Asean, Singapore, Malaysia, Japan and South Korea have arguably gone more to the partner’s advantage if one takes into account the widening trade deficit or increased imports. That could be a case of lack of circumspection on the part of India’s policymakers when deciding the schedules/items for tariff cuts/elimination, apart from the inability of the domestic industry to compete with counterparts in the partner country.
But according to some trade analysts, the relative under-performance of these agreements for the country has also a lot to do with the restrictive rules of origin (ROs) clauses built into them. Because of the difficulty in complying with the ROs and the low tariff differential between the free trade agreement (FTA) and non-FTA routes, sections of Indian exporters do a cost-benefit analysis and choose not to claim FTA benefits. Although the figure could vary for various trade pacts and across industries, experts estimate on the basis of anecdotal evidence that on average, roughly a fifth of India’s trade with countries with which it clinched trade pacts in recent years take place outside the ambit of these agreements.
ROs are meant to reduce chances of third-country exporters becoming unintended beneficiaries of various bilateral trade pacts by stipulating that a certain level of value is added in the trade-originating (exporter) country bound by the trade pact to claim the duty benefit. A defined percentage of domestic value addition (up to 40% in case of the India-Singapore CECA or comprehensive economic cooperation agreement, for instance) and/or change of tariff heading (product description) and the newer “two-step process” (as in the case of India-Japan CEPA or comprehensive economic partnership agreement and India-Thailand early harvest scheme) are employed under the ROs.
“There is a general compliant from exporters that sometimes ROs are very difficult to comply with. But since the official trade statistics doesn’t distinguish between FTA and non-FTA trade, there is no hard evidence to suggest ROs hampering trade through the bilateral pact route,” an official told FE. In the case of the India-Japan CEPA, exporters from some sectors where the value chain is not too long (like chemicals and pharmaceuticals) raise the issue of ROs more frequently.
This is partly because India- Japan trade is facilitated by the generalised system of preferences (GSP) which in many cases makes the CEPA benefit almost redundant.
"Sometimes there is a lack of clarity in preferential and non-preferential rules of origin and this increases the cost of compliance to exporters. They therefore prefer to send their goods via the normal (most favoured nation) route," said Manab Majumdar, assistant secretary general, Ficci.
"With preferential tariffs (benefit of trade pacts), the RO imposes conditions (including elaborate documentation requirements) to prove that the product has originated from the (partner) country. This could make it difficult for some categories of exporters to use the trade-pact route," noted Biswajit Dhar, director general, Research and Information System for Developing Countries. The customs procedures are not always well equipped to cope with a multiple tariff regimes and in India’s case, ports too have to develop additional capacities.
However, in the case of the textile industry, the ROs are not a problem because the import content in exports are limited. "As far as the textile and clothing exporters are concerned, the ROs practically have the function of only to protect our markets (from imports)," said DK Nair, secretary-general, Confederation of Indian Textile Industry.
FTAs have indeed added to the pace of trade growth in some cases. Since 2011, bilateral trade with Asean has increased by 43% to reach $79.8 billion, making India the sixth largest trading partner of the bloc, but imports from the 10-country group have also increased at the same pace in that period. But in some other cases, the converse is true. For example, in case of the India-South Korea, CEPA, which was signed in 2009, both India’s imports from and exports to Korea sharply declined in 2011-12 vis-a-vis 2010-11. India’s imports from Korea rose 3% in 2012-13, not higher than the trend growth in the immediate pre-CEPA years. The India-Japan CEPA pact has led to imports from Japan increasing at a faster rate than exports from India to that country.
But trade pacts not only have economic implications but political ones too. "These bilateral agreements have a geopolitical significance which delays the economic gains expected from them. The general economic conditions have also slowed down trade with our partner countries," said Bipul Chatterjee, deputy executive director of the Jaipur-based CUTS International. He added that India has been unable to penetrate into the Asean markets as much as it desired due to the presence of other established players.
Of course, a steeper growth in imports from FTA/CEPA partner countries than in exports to them cannot always be to the detriment of the Indian economy. If higher import growth is about capital goods and raw materials, it could make domestic output more competitive.
The priority areas for India while signing the FTAs are seeking market access through negotiations in goods, services and investments. India has set a bilateral trade target of $40 billion with South Korea by 2015 and $15 billion with Malaysia by then, while India and Japan have set a bilateral trade target of $25 billion by 2014.
