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We need to be more careful in future

Economic Times, India

We need to be more careful in future

By D K Nair, Secretary-General, Confederation of Indian Textile Industry

6 October 2009

It is normal for trade agreements to have a political overtone. The Free Trade Agreements (FTAs) initiated by the USA during the 1990s are a good
example of this. Its FTAs with Caribbean, South American, North American and African countries covered ‘substantially all the trade’ as required under the WTO norms, but in practice they were all textile-centric , providing for duty-free import of apparel products manufactured out of raw materials obtained from the USA. The ostensible objective was to help garment exports from the poor countries in the neighbourhood, but improving the political relationship with them was part of the agenda. EU followed this approach in Europe, around the same time.

India was inspired by these initiatives of the USA and EU to get into FTAs of geo-political significance with neighbouring countries. But while the objectives may have been similar, the economic consequences of our FTAs have been quite different from those of the western countries. The US and EU derived net economic gains from most of their FTAs, in addition to political gains. In the case of textiles, by mandating the use of their raw materials for eligibility to duty-free import of garments, the USA and EU could substantially increase their export of yarn and fabrics, outstripping the economic gains that their trading partners derived.

In our case, the FTAs implemented so far have resulted in widening our negative trade balance with the respective partners. The FTAs with Singapore, Thailand and Sri Lanka are the glaring examples. This will also be the case with our FTA with ASEAN, and BIMSTEC which is on the cards.

True, trade agreements will necessarily increase trade. But it is important to keep a proper balance between the increase in imports and exports through the trade agreements. Our ‘Lookeast’ policy has been driving us to trade agreements with other Asian countries which have substantially smaller markets and better infrastructure and lower transaction costs, making the competition both in their markets and our domestic market unequal. Thus, we have been opening up our huge market to the trading partners, without any corresponding gains. And this is true of auto parts, marine products and several other agriculture and industrial products, in addition to textiles.

The uncertainty in the successful completion of Doha Round is likely to enhance the interest in FTAs as the second best alternative to global trade liberalisation. We need to be more careful at least in future.

There is nothing wrong in pursuing political objectives through trade agreements. But we also need to make a proper analysis of economic gains. The initiation of FTA proposals with the EU, Mercosur and now the USA are positive steps in this direction. We need to be more pro-active in pursuing such FTAs, which will provide us better market access for several products, with negligible impact on the domestic market.

The US and EU have been preaching benevolence but in practice pursuing their economic interests in the FTAs, in addition to geo-political gains. We have been preaching and practising benevolence, with adverse economic consequences and uncertain geo-political gains.