Lakshman rekha for India’s trade talks

The Hindu Business Line, March 04, 2016


For reasons of fiscal impact and protection to key sectors, the average tariff of 15 per cent can’t be lowered in a hurry

Much debate has taken place on whether India has gained or lost in its Preferential Trade Agreements. The Finance Ministry’s Chief Economic Adviser, Arvind Subramanian, a well known economist, was tasked to review the situation. In the latest Economic Survey, he says that we are not doing badly in trade with our PTA partners as compared to non-PTA partners. The survey does touch upon the issue of tariffs, which is a crucial ingredient in how our trade flows would roll out.

Because of varying tariffs across deals, it emerges from the data that the growth of our exports with PTA partners is much below that of imports.

This is not necessarily a bad thing, because imports are also necessary for our exports and to feed a growing domestic market. We cannot be guided by the proverb: ‘exports are good, but imports are bad’, but to look closely into what is best for our international trade basket.

After all, we need to mainstream trade in our development strategy, which has been the success of many emerging economies

Emerging trade architecture

The developing world was shortchanged at the last ministerial of the World Trade Organisation, held at Nairobi in December, 2015, which did not agree to pursue the development agenda as vigorously as was demanded. Furthermore, the arrival of the Trans-Pacific Partnership (TPP) driven by the US will push countries such as ours to seek PTAs as the way forward to enable the stable growth of our exports.

The TPP ‘new issues’ such as competition, investment, government procurement, digital commerce, state-owned enterprises which will come to the multilateral negotiating table over the next few years.

We are currently negotiating the Regional Comprehensive Economic Partnership (RCEP) agreement, other than few others such as with European Union, Australia, European Free Trade Area, and so on. Therefore, we can ill afford to be shy on either the new issues or move defensively to protect our shrinking markets. Such headwinds in the trade arena will continue to push us.

We need to see what best we can offer to our trading partners on services, investment, and other border and behind-the-border measures impacting trade.

Issues such as trade facilitation, intellectual property rights, competition, technology transfer and exchange rate management will become more important bargaining chips that India should play with in order to get a more favourable deal on tariffs.

What should India do?

The question that we should ask: can we reduce our average applied tariff rate to 5 per cent for certain products and 10 per cent for a second group of products over the next 15-20 years?

Fortunately, India is a part of this emerging global architecture for trade governance as it is negotiating with the 10-member Association of Southeast Asian (ASEAN) countries and five countries of ASEAN’s preferential trading partners, viz. Australia, China, Japan, New Zealand and South Korea. Seven countries are common to TPP and RCEP.

While India is a part of RCEP, it is in a unique position. Average applied tariff of all other countries in this group is in the range of 2-3 per cent and the contribution of import revenue to their overall revenue is not that high. It will be easier for them to reduce their applied tariff to preferential trading partners to zero. That will be impossible for India.

The same is true for India’s trade with countries of the European Union and European Free Trade Area. While India is negotiating its preferential trade agreements with both these groups, we cannot reduce our applied tariffs to zero as demanded by them as that will have significant negative impact on our gross revenues and thus reduce fiscal space.

While negotiating its current trade agreements, in near future, India cannot afford to reduce its applied tariff to zero as it would put tremendous pressure on our fiscal management.

India’s current average applied tariff rate is about 15 per cent; its volume of import is approximately US$400 billion and the contribution of import revenue to total revenue is about 15 per cent. More than 90 per cent of our imports are already coming from our existing preferential trading partners and those with whom we are negotiating preferential trade agreements.

Given these figures, as demanded by our preferential trading partners, if we reduce our applied tariff to zero, there will be 3 per cent reduction in gross revenues. Given our overall growth objectives, we cannot afford to do this.

This is the red line of India’s trade negotiations. We cannot afford to reduce our applied tariff to zero. This is to be articulated clearly and told to our trade negotiating partners

Domestic reforms.

Even on tariffs, average applied rates of five and 10 per cent will have significant negative impact on India’s fiscal management. We need to see how it can be addressed through domestic fiscal measures such as the implementation of the Goods and Services Tax.

Furthermore, given our developmental needs, we cannot afford to reduce tariffs on agricultural and processed food products across the board, and on products like steel and cement to this lower level. It is also important to state that we cannot achieve this objective of reducing our average applied tariff to five and 10 per cent overnight. We should negotiate at least 15-20 years transition period to achieve this objective.

We can reduce our applied tariff if we become competitive. We need to take a close look at input- and sector-specific factors impacting our competitiveness.

Balanced stakeholder-oriented domestic reforms are an imperative to reduce the costs of inputs including logistics to improve our competitiveness.

Goods markets reforms will have to be calibrated with factor markets reforms.

For this to happen, the Centre and the States will have to work together to address the political economy aspects of domestic reforms to make our economy more competitive.

Improvements in domestic regulatory environment and domestic factor markets will be the key to our future success on trade.

The writer is Secretary General, CUTS International. Bipul Chatterjee of CUTS contributed to this article.

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