MATTERS OF FACT. Why trade deals are the next logical step

The Minister’s statement confirmed India watchers’ worst fears about the world’s fifth largest economy turning inwards. Reacting to the Regional Comprehensive Economic Partnership (RCEP) agreement signed by 15 Asia-Pacific countries on November 15, India’s External Affairs Minister, S Jaishankar, gave a scathing assessment of trade agreements.

“In the name of openness we have allowed subsidised products and unfair production advantages from abroad to prevail,” he said, adding that “the effect of past trade agreements has been to de-industrialise some sectors. The consequences of future ones would lock us into global commitments, many of them not to our advantage.”

Then came the dreaded words. The government, he said, has decided to move away from trading arrangements towards an ‘Aatmanirbhar Bharat’.

It is true that India’s experience with trade agreements has not been good. Most of the 15 free trade agreements (FTAs), many signed during the UPA government, have resulted in trade deficits. For instance, FTAs with Asean, Japan and South Korea have seen India’s share of exports to these markets decline from 51 per cent to 46 per cent. Dumping and re-routing of merchandise in violation of the Rules of Origin norms have been causing lot of challenges for the domestic industry.

But does this mean India should turn its back on all bilateral and multilateral trade agreements? For India to become a $5 trillion economy rapidly, domestic demand alone will not suffice. Global demand (or exports) is critical. Leave alone additional demand. India will lose its present competitive advantage in exports if it does not strike trade deals as its competitors are actively pursuing them. Take the case of Vietnam’s recent FTA with the European Union (EU). Its textile exports into the EU from August 1 this year benefit from nil import duty whereas India suffers a 12-14 per cent tariff. Bangladesh has been eating into Indian textile exports to the EU and the US, taking advantage of its ‘least developed country’ status. Only an FTA with the EU and the US will offer Indian exporters a level-playing field to regain the volumes.

Far-reaching reforms

Avoiding trade agreements will also negate some of the far-reaching reforms that the Modi government has taken to revive the economy and make India a global manufacturing hub.

Last year, in October, the government cut corporate tax rates. The rate cut for manufacturing companies incorporated after October 2019 (and those that start manufacturing before March 2023) was particularly sharp — from 34 per cent to 17.01 per cent. It was done to capture a fair share of the global manufacturing capacity realignment triggered by the US-China trade war and a permanent change in their relationship from being ‘co-operating rivals’ to ‘competing rivals’.

The government sees an opportunity here to make India a global manufacturing hub. But companies which are looking to de-risk their dependence on China will come to India only if they can export their products in the most competitive manner. Here again Vietnam, which is competing with India for these capacities, offers a better deal as it has attractive trading arrangements with major economies. Not surprising that global players are already moving into Vietnam in a big way overlooking India.

The same logic holds good for the production-linked incentive scheme that the government has rolled out for 13 sectors at a cost of over ₹2 lakh crore. The policy not only aims to reduce India’s import dependence in these sectors but also, over time, make India an export hub. Why will Apple set up its manufacturing unit in India if it cannot export the handsets at a low or a zero rate of duty to large markets?

The government, to attract foreign investments, has also reformed the foreign direct investment norms for defence production, contract manufacturing, apart from opening up space, atomic energy and commercial coal mining for the private sector. For all these measures to deliver effectively, the global market access that India offers is key. Thus, the next logical step for the Modi government is not to turn its back on trade deals but embrace them.

Why FTAs have failed

It should start by looking into the reasons why existing FTAs have not worked. It has already taken an important step in plugging dumping and re-routing of merchandise imports by implementing CAROTAR — The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020. The rules, which came into effect from September, seeks to weed out those who are trying to misuse the FTAs. At the same time, the government should focus on negotiating FTAs with countries that have high potential to improve trade. According to a study, untapped export potential with the US, as a percentage of current exports, is 60 per cent. In the case of the EU, it is even higher at 90 per cent. The UK, post-Brexit, is another potential market to tap. All these countries are tough negotiators but it makes immense sense to work with them.

India’s talks with the EU for FTA remains stalled since 2013, after 16 rounds of talks, due to wide gap in the level of ambition. Today, the partners can’t even come to an agreement on what to discuss if talks resume. High value trade disputes (including Vodafone’s retrospective tax issues) have ensured that FTA talks with India will not be a priority for the UK after Brexit. Talks with the US is also on a slow pace.

It is time for India to think long term and look beyond the various vested interests that are holding back a deal. It is wine, auto, dairy and fishery in the case of the EU while it is pharma, agriculture and data security as regards the US.

It is the access to agriculture that is preventing a deal with Australia despite nine rounds of talks that extended over eight years. The government has to adopt a ‘give and take’ approach to make these deals happen, keeping in mind the long term interest of the country.

India may have had strong reasons to walk out of the RCEP deal but trade agreements cannot be completely wished away. The External Affairs Minister has used ‘Aatmanirbhar Bharat’ as a reason to move away from trade deals, but the question is: Will India achieve ‘Aatmanirbharta’ without them?