India needs a better deal from trade pacts

Business Standard, March 06, 2013

By Bipul Chatterjee & Purna Chandra Jena

Political rather than purely economic concerns govern negotiations with other countries and regions

India has signed 15 preferential trade agreements with various countries and regions, and about as many are currently under negotiation. In terms of export growth, India’s trade deals with bilateral or regional partners reveal a stark kink. The first-generation agreements signed in the 1990s were more beneficial to India than the second-generation ones of the last decade. It is worth clarifying that the north-south variants, such as the India-Japan Comprehensive Economic Partnership Agreement, are second-generation deals, and differ from the first-generation ones, such as the South Asian Free Trade Agreement, in their scope and coverage. It is the former set of trade deals that should be assessed and monitored closely over a time period to distil the lessons to be learned and apply appropriate corrective measures.

In 2011, India’s trade in goods with its bilateral and regional partners accounted for about 39 per cent of its total trade. This figure has not registered much change since 2006 (see table). This means that the country is yet to derive specific benefits from its bilateral and regional trade deals of recent years. One of the reasons is some of the most important agreements with high potential, such as comprehensive economic partnership agreements with Japan and South Korea, were signed recently and are yet to generate notable results for India.

Though earlier agreements like the India-Sri Lanka Free Trade Agreement and the India-Singapore Comprehensive Economic Cooperation Agreement were beneficial in terms of enhancing trade and investment, these countries remain small trading partners in terms of India’s share in their overall trade volume.

A moot question is if India is not deriving much benefit from its bilateral and regional trade deals, why is so much negotiating capital, which is limited, being invested on these? Often, we have found that there are more important political reasons than purely trade concerns that determine a country’s decision to deal preferentially with a particular country. On the other hand, the main economic reason is to align India’s trade policy and other important trade-related flanking policies, such as on investment, with its major partners – so as to make Indian producers much more competitive by getting them engaged with regional and global value chains that are mostly originating from these countries.

Second, though trade in goods is the first stage in economic integration, services, investment, competition, government procurement, safeguards, intellectual property rights and dispute-settlement mechanisms to address non-tariff barriers are essential ingredients for a mutually beneficial international economic cooperation deal. Currently, the scope and coverage of these subjects is low in India’s trade deals.

India has huge potential to improve its trade competitiveness, especially in relation to those countries and regions with which it engages in a deeper trading relationship through comprehensive economic cooperation or partnership agreements. Though our second-generation trade deals may have resulted in a higher growth in imports than exports – mainly owing to their coverage and tariff structure in partner countries and in India – they are generating considerable direct and indirect benefits. For instance, the import intensity of India’s exports is increasing, resulting in a better allocation of domestic resources, making our exports more competitive and facilitating our producers to link with regional and global value chains.

While negotiating new agreements, particularly comprehensive economic cooperation or partnership ones with developed and newly industrialised countries, India needs to set fixed targets and take steps to improve its domestic preparedness, particularly those of regulatory bodies. For instance, owing to an unfavourable exchange-rate regime and low difference between preferential and Most-Favoured-Nation tariff rates in Japan, the India-Japan Comprehensive Economic Partnership Agreement is not creating much market-access opportunities for Indian products. But a huge gain is expected with diligent application of safeguards, careful selection of products and services sectors and complementary policies to attract Japanese investment with technology transfer.

In the medium to long run, India needs to diversify its trade portfolio, which will increase its competitiveness by broadening the productive base, particularly in the manufacturing sector, which has a lot of untapped potential. To become competitive in its exports to world markets, India should put all exports under a special focus market scheme.

India also needs to harmonise its industrial and trade policies in order to leverage more and better benefits from its trade deals. Trade agreements are a means to achieve better economic benefit and not an end in itself; therefore, domestic preparedness through regulatory reforms and harmonisation of regulatory measures are paramount.

Among others, India’s strategy to negotiate and implement bilateral and regional trade agreements should take into account four important objectives. First, there should be a better alignment between India’s trade policy and the objectives of other major macroeconomic policies, such as the national manufacturing policy.

Second, the importance of inclusiveness in trade policy making is increasingly being recognised at the national level, and this practice of good governance should be percolated to a sub-national level. All relevant stakeholders such as business associations, including bodies representing micro, small and medium enterprises, the civil society and community-based organisations should be given due representation in trade policy-making process and its implementation. This will ensure better political buy-in for India’s trade policy in general and trade negotiations in particular.

Third, comprehensive analyses of market access and other opportunities in prospective partner-country markets, including analyses of factors relating to enhancement of competitiveness of India’s exports through the right mix of import intensity, should be undertaken before initiating trade negotiations. Negotiations should start after a thorough understanding of the sustainability impact – economic, social and environmental – of trade.

Fourth, the impact of third-party agreements – which is between two or more countries with which India has significant trade relations but does not have a bilateral or regional deal – on the Indian economy should be analysed, and appropriate decisions taken to mitigate possible negative effects of trade diversion on the Indian economy.

Given the limited nature of our negotiating capital, addressing these challenges into opportunities will optimise our trade negotiations and draw more benefits from them.

Bipul Chatterjee is Deputy Executive Director and Purna Chandra Jena is Assistant Policy Analyst, respectively, at CUTS International, Jaipur. These views are personal.

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