Why trade pacts are not working
Source: By Karel De Gucht: The Financial Express
Over the past decade, India’s strategy of engaging with its trading partners has undergone a significant turnaround. Until the early years of the previous decade, India was a staunch supporter of multilateral trade liberalisation, using the mechanisms available under the World Trade Organisation (WTO). The country’s policymakers were somewhat sceptical about the ability of bilateral and regional free trade agreements (FTAs) to deliver on the promises. The only aberration in India’s position was the bilateral trade deal it concluded with Sri Lanka in 1998.
India’s FTA-sceptic stance was evident in a discussion paper submitted to the WTO in 2003. This paper argued that the multilateral framework for international trade under the WTO-rule-based system needs to be strengthened by addressing issues of concern emerging on account of formation of large number of FTAs including their impact on development. India insisted that these agreements must complement multilateral trade liberalisation and should not create complications for that goal or occur at the cost of trade or development of countries not members of particular FTAs.
At the same time, however, India was responding to the overtures of its partner countries for engaging bilaterally. The first signs of this appeared in 2002-03 when India sought to deepen its economic ties with the ASEAN member states. India explored the possibilities of cooperation not only through its bilateral trade links with Thailand and Singapore but also initiated discussions with the ASEAN as a grouping. An unlikely partner in this phase of India’s engagement was China. As far back in June 2003, China and India had agreed to conduct a feasibility study for a China-India regional trading arrangement. Despite the early start, however, formal negotiations never commenced.
In the period since, India has negotiated bilateral trade deals with several of its major partners, including Japan, Korea, Malaysia, Indonesia and the European Union (EU). More recently, India has been begun negotiations with Australia, New Zealand and Canada. The change that took place was not just about the number of countries with which India had agreed to engage, but the content of the agreements also underwent major changes. While with the ASEAN India negotiated an agreement covering only the goods sector, in the later agreements the scope was expanded to include services, investment, intellectual property rights and government procurement. These agreements had thus assumed the character of comprehensive economic cooperation agreements (CECAs).
One general observation that may be made regarding the FTAs/CECAs is that they have laid bare the domestic sensitivities that India has been grappling with in a number of areas. These include a few large industrial sectors like automobiles and textiles and clothing, intellectual property rights and investment. Besides, vulnerabilities in agriculture are considerable, arising from the fact that Indian agriculture is dominated by small farmers and landless labour, whose food security and livelihoods can be seriously undermined by a sudden exposure to international markets. Protecting these sectors has posed formidable challenges for the negotiators.
None of the agreements that India has negotiated thus far have received as much attention as has the one being negotiated with the EU, because of the differences that have cropped up, especially regarding the level of tariff protection for the India’s automobile sector, government procurement and intellectual property rights. The last named issue has possibly been the most contentious.
In the initial stages, the EU had demanded that India must amend some of its intellectual property laws, including patent laws. Such amendments would have directly affected the producers of generic medicines in India, which have, for the past several decades, been supplying cheap medicines not only in India but also in several developing countries that are importing medicines from India. This issue has, however, been laid to rest by the EU Trade Commissioner, Karel De Gucht. In a recent statement to the European Parliament, De Gucht stated that the “intellectual property chapter in the EU-India Free Trade Agreement (FTA) will not undermine India’s ability to produce and export affordable generic medicines for people in need.”
Five agreements have been concluded thus far. However, with the exception of Singapore (concluded in 2005), all the other deals are less than five years old. There can, therefore, be a view that commenting on the gains from these FTAs/CECAs would be somewhat premature since trade and industry need time to find their way through the plethora of rules and regulations that these agreements bring with them.
An equally persuasive view, one that can be used to justify an assessment of FTA/CECA, is that a decision to forge such an agreement should be seen as a signal from the policymakers that a political commitment has been made to deepen economic ties with a partner country. Trade and industry should, therefore, start looking closely at the opportunities that are waiting to be exploited in the market of the partner country and also to understand ways in which it can position itself once the agreement is inked.
A preliminary assessment of the FTAs/CECAs indicates that India has not been able to leverage these agreements sufficiently in order to increase its presence in the markets of its partners. In most cases, the shares of India’s merchandise exports to its FTA/CECA partners have increased only marginally since the decision to enter into the agreements were taken. For instance, the share of India’s exports to the ASEAN increased from just above 9% in 2003-04 to 11% in 2012-13, while its export share to Korea increased from 1.2% to 1.4% over the same period.
One of the positive impacts of the FTAs/CECAs has been that India’s share in the imports of Singapore, Malaysia and Korea nearly doubled since the middle of the previous decade. However, despite this increase, India continues to remain a fringe player in the trade transactions of its FTA/CECA partners, with the solitary exception of Sri Lanka.
India’s major source of concern is the rising trade deficit with most of the FTA/CECA partners. In most cases, there was a steep increase in trade deficit since 2003-04. In fact, in four of these partners, trade deficit in 2012-13 has exceeded India’s exports to these destinations by a fair margin.
One may argue that the conclusion of its FTAs/CECAs would not result in the realisation of all the potential gains for India, unless the country does the necessary homework to exploit the markets in its partner countries. It needs to be recognised that substantial reduction or even elimination of import tariffs does not automatically ensure larger market access since “behind the border measures” are becoming ever so important. These measures include various forms of standards, the more prominent ones being the technical barriers to trade and food safety (sanitary and phytosanitary) measures. In order to maximise the gains from the FTAs/CECAs, India must find mutually agreeable solutions to address the issue of standards. At the same time, India must consider taking immediate steps to put in place effective facilitation measures that would help in reducing the cost of doing business.
Courtesy: http://www.ksgindia.com/study-material/today-s-editorial/8071-27-june-2013.html
Financial Liberty 