Trade is not just about transactions between two or more parties. It is more about networking and building relationships. They help create positive externalities, resulting in low transaction costs.
Trade is then possible even under adverse conditions. Free trade agreements help in better networking and relationship-building.
This is one of the major reasons behind the rise of free trade agreements (FTAs) in the recent past.
Over the past two decades, the total number of such agreements, which are globally in force, has risen to almost 400, as notified by the World Trade Organisation.
India, too, has signed a large number of FTAs and many more are under negotiation. However, many studies have shown that India is yet to reap optimal benefits from such agreements.
In this respect, a recent study conducted by the Economist, covering 800 executives from companies in Australia, China, Hong Kong, India, Indonesia, Malaysia, Singapore and Vietnam, revealed some interesting insights. The usage rates of more than 50 trade agreements signed by these countries show the total utilisation rate is 26 per cent.
Usage rates are lowest in Australia and Malaysia, 19 per cent and 16 per cent, respectively. That is expected because both are leading commodity exporters and there are still high barriers to trade in agriculture and allied commodities as compared to non-agricultural goods.
The usage of preferential trade agreements is defined as trade under preferential tariffs and other conditions of such agreements as compared to those under conditions as per multilaterally agreed WTO agreements.
In the case of India, its average usage rate is 27 per cent, the highest being 40 per cent in the case of the India-Singapore comprehensive economic cooperation agreement. In case of India-MERCOSUR preferential trade agreement, the usage rate is as low as 14 per cent. Why are we unable to make better utilisation of our free trade agreements?
In order to find an answer to this question, CUTS International recently conducted a survey of Indian business. Our results showed that lack of awareness among Indian traders is the main cause of the low level of utilisation of free trade agreements. The complexity of these agreements is also a significant factor. Hundreds of pages of dense legal text, annexes and tariff schedules make it difficult for small traders to use them effectively. The most important among them are the multiple sets of rules of origin.
It is also noteworthy that the usage of free trade agreements varies across firms. Due to lack of skilled human resources and financial resources, necessary to stay informed about potential benefits of new deals, and for dealing with a plethora of new rules and regulations, large firms are in a better position to utilise them more effectively. Ironically, they are the ones who are making more noise about their negative impact. How much of those legative impacts are on account of a particular trade deal is yet to be firmly established.
Considering these factors behind the low utilisation rates of our FTAs and India’s exclusion from mega regional trade agreements such as the Trans-Pacific Partnership, Trans-Atlantic Trade and Investment Partnership, and EU-ASEAN free trade agreement, India needs to adopt a more comprehensive nuanced approach to negotiate and implement FTAs.
First, India should refrain from entering into the “goods only” agreements. Instead, it should go for comprehensive economic cooperation agreements covering goods, services and investment and subjects such as competition, government procurement, electronic commerce and exchange rate management. In an ever-integrating world, one cannot really separate trade, investment, competition and other trade-related subjects.
Second, India should allow a greater degree of liberalisation in those sectors in which imported inputs are largely used for the purpose of further consumption —domestically and/or for exports. Such imports should not be seen as the cause of a trade deficit as they contribute to domestic consumption and exports. India needs to recalculate its trade balance with its major trading partners, particularly those with which it has, and will have, free trade agreements, in respect to trade in value added.
Value-added exports allow a country to enhance its trade competitiveness and enter into value chains of production. It is also important to understand the position of value chains that one should aim to enter. While a position at the higher end of a value chain can generate more profit, employment is greater at the lower end. There is a need to balance the entry of Indian firms into regional and global value chains by considering their profit as well as employment effects.
Third, there is an urgent need to enhance the capability of small and medium enterprises so that they can utilise FTAs more effectively. Implementation concerns of these agreements should be looked at more from the point of view of small and medium enterprises as their contribution to India’s domestic economic activities and external trade is significantly large.
This can happen and India’s engagement with FTAs can help the country create positive externalities from trade with low transaction costs if, and only if, there is a whole-of-government approach to trade negotiations and their implementation in an environment of policy coherence, particularly among trade, manufacturing, agriculture and factor market liberalisation policies.
Such policy coherence can help India adopt a firm-centric approach to trade liberalisation, which will help Indian companies penetrate better into regional and global value chains.
(The writer, secretary-general of the Consumer Unity & Trust Society, is an expert on trade and competition issues.)