Why India Hasn’t Signed a Single Trade Agreement in Last Five Years?

• Regional trade agreements (RTAs) are now being increasingly leveraged in a world governed by an improved and disciplined multilateral trading system.
• It is just the beginning of 2019 and two trade agreements have already come into force – EU-Japan and Hong Kong, China-Georgia.
• However, the utilisation rate of regional trade agreements (RTAs) by exporters in India is very low. Most estimates put it at less than 25%.
• According to the WTO, 80% of world trade among regions is merchandise trade — that is, only 20% of world trade is in services.

The proliferation of regional trade agreements has continued unabated since the early 1990s. In recent years, this has led to widespread debate on the advantages or disadvantages of regionalism over multilateralism. The debate stems from the increased use of regional trade agreements (RTAs) in a world now ruled by an improved and disciplined multilateral trading system. It is just the beginning of 2019 and two trade agreements have already come into force, which are EU-Japan and Hong Kong, China-Georgia (as notified to the WTO). From 2015 till February 2019, 41 trade agreements came into force, none involving India.

The structure of regional agreements varies hugely, but all have one thing in common — the objective of reducing barriers to trade between member countries. At their simplest, they merely remove tariffs on intra-bloc trade in goods, but more now go beyond that to cover non-tariff barriers and to extend liberalisation to trade and investment. On the whole, the newer agreements tend to have deeper coverage, extending into areas of domestic disciplines beyond the exchange of tariff concessions, and a number of agreements now also cover the services sector and other areas of cooperation.

In this context, it is difficult to arrive at a clear conclusion on India’s stance on RTAs. To do so requires careful consideration of India’s place in the global economy, and the impact of potential trade diversion on its domestic industries. Traditionally, India has been a supporter of the multilateral system, but given the slow pace of negotiations and the developmental needs of its economy, it has also joined the RTA bandwagon, signing 16 trade agreements post-2000.

India’s exports to its FTA countries have not outperformed overall export growth, or exports to the rest of the world, signalling demand-driven exports even with relatively unreduced tariff rates.

India’s exports to the world grew at a CAGR of 5.52% from 2008 to 2017 and an almost similar growth rate was experienced in exports to those economies with which India had trade agreements for the same period. On the other hand, the growth rate of India’s imports from economies with which we have trade agreements from 2008-2017 was 6.2%, but with the world, it was 3.4%. In fact, by signing any trade agreement in the past, we have opened Indian markets to a greater extent as compared to getting access to the foreign markets. Utilisation rate of regional trade agreements (RTAs) by exporters in India is very low. Most estimates put it at less than 25% (V. K. Srivastava, 2017).

India’s negotiations on RTAs

India is negotiating several trade agreements including free trade agreements (FTAs) with countries such as Russia, Australia, EU and Peru that could provide gain in market share in these economies. The key lesson from free trade agreements (FTAs) is they offer greater preferential access to markets of other countries than is possible through the WTO framework. Big, medium, small – all countries are seeking such access across the world.

But there has been procrastination in inking these trade agreements due to analogous reasons with most of the trade agreements which are under negotiations. For example, with EU, no consensus has been possible, as they are demanding market access for automobiles, dairy and wines, which we cannot afford to provide. Similarly with the India-Australia CECA, we cannot give access to our dairy and agricultural sector by opening up markets for them. It is logical for India to be wary of opening markets for these products, as livelihoods of the poorest will be affected and their economic condition will be exacerbated.  

But the real question that arises is, what do we have to offer even after signing the FTA apart from trading at preferential rates? Does technical know-how get affected after signing any FTAs/PTAs? Or why are most of our FTAs dormant? The issue of what has been termed the “deindustrialisation” of the developed world has kept academics and policy makers occupied at least since the 1980s. The shift came in a majority of industrial economies due to low productivity growth and the emergence of new challenger nations such as Japan and Taiwan.

China’s Dominance

Over the past two decades, the emergence of China as a global manufacturing powerhouse has further challenged the existing manufacturing base within other countries. This raises further concerns over whether or not it matters that an economy retains a manufacturing sector. A country can’t trade services for most of its goods. According to the WTO, 80% of world trade among regions is merchandise trade — that is, only 20% of world trade is in services. This closely matches the trade percentages that even the US, after allegedly becoming “post-industrial,” achieves. If in the extreme case an economy was composed only of services, then it would be very poor, because it couldn’t trade for goods; its currency would be worth very little. The dollar is also vulnerable in the long-term. A “post-industrial” economy is really a pre-industrial economy — that is, poor.

Services are mostly the act of using manufactured goods. We can’t export the experience of using something. From 2014, India hasn’t signed any trade agreement or rather has been procrastinating on ones which are in the middle of negotiations. The expansion of markets gives rise to new businesses, so individual countries can earn more national revenue from business tax. Finally, trade agreements typically include investment guarantees, meaning investors — especially those from developed nations — can invest in developing countries with protection against political risk.

Manufacturing-related activities among global nations are rapidly evolving. Manufacturing earnings and exports are stimulating economic prosperity, causing nations to increase their focus on developing advanced manufacturing capabilities by investing in high-tech infrastructure and education. In fact, technology-intensive sectors dominate the global manufacturing landscape in most advanced economies and appear to offer a strong path to achieve or sustain manufacturing competitiveness.

It must be noted that India’s approach to negotiating FTAs has become focused on apparent ‘non-negotiables’ that have made its posture overly defensive and unproductive. Concern is rising over long delays in concluding a number of major agreements that India is a part of. Foremost among these are India-EU, India-Australia, India-Russia, India-US and RCEP. For example, the European Union’s demand for lower import duties on automobiles and their components is being vociferously resisted by Indian industry, in turn forcing the government to stay firm on tariffs.

It is debatable whether past FTAs have worked in favour of India, but it is true that imports have increased much more than exports. The focus needs to be on where India can promote its exports; it does not necessarily mean entering into regional trade agreements. India needs to be careful in weighing each trade deal on its own merit. When it comes to free trade agreements, no deal may be better than a bad deal.

Many RTAs contain elements that deepen co-operation across regulatory issues, and new market opportunities are created even as participants address structural impediments in their own economy. Next-generation RTAs strive to go even further. Countries wishing to participate in, and benefit even more from, global markets will need to increasingly integrate trade and investment measures in their wider domestic structural reform agendas. In fact, countries may be able to use current and prospective negotiations on “behind the border” regulatory provisions as drivers for desired domestic reforms. The larger structural issue of whether, when, and how to multi-lateralise provisions in RTAs is primarily a political question for governments to address.