India & RTAs: Learning the right lessons from history

• The Finance Ministry has commenced a review of India’s past FTAs to analyse their impact on the economy.
• The majority view is that these trade agreements have generally been more beneficial to the partner countries.
• India’s trade with major trade partners in RTAs for past 12 years shows that India has been experiencing a trade deficit with them on an aggregate basis and this deficit has increased post-2013.
• Stricter and well defined rules of origin are a must to prevent re-routing of imports through RTAs leading to revenue loss for government and enhanced competition for industry.

With inputs coming from across sectors that free trade agreements (FTAs) have been a bane for India’s manufacturing sector, the Ministry of Finance has begun a comprehensive review of past FTAs. The review will try to ascertain the impact of these agreements on the overall economy, as the majority view seems to be that they have been more beneficial to the partner country. 

Moreover, the government is concerned over reports that imports have been re-routed through FTAs compared to the domestic tariff route when the government raises customs duty, thereby defeating the purpose of restricting imports of a particular product. According to the Department of Revenue there is a history of blatant violation of rules of origin and value addition norms to increase exports to India. 

History the best teacher?

According to the RTAIS database of WTO, India is a signatory to 18 regional trade agreements (RTAs) that are in force at present including the Global System of Trade Preferences among Developing Countries (GSTP) and two accessions – to China in APTA and Afghanistan in SAFTA. Major RTAs of India are free trade agreements with ASEAN, Japan, Korea, Malaysia, Singapore & Bhutan, and partial scope agreements with Chile, MERCOSUR, Thailand, Nepal and Afghanistan.

The first RTA that came into force was the Asia Pacific Trade Agreement in 1976. By the beginning of new millennium, only 3 RTAs were in force. However, between 2000 and 2010, the cumulative number of trade agreements increased to 14. Following the roller coaster ride, only 2 RTAs have been added to the list since 2010. This indicates that India was very ambitious towards enhancing regional trade in the first decade of the new century as 11 RTA came into effect.

Source: RTAIS, WTO

RTA Name	Coverage	Type	Date of notification	Notification	Date of entry into force	Status
1.        Asia Pacific Trade Agreement (APTA)	Goods & Services	PSA & EIA	02-Nov-1976(G) 17-Jun-2019(S)	Enabling Clause & GATS Art. V	17-Jun-1976(G) 17-Sep-2013(S)	In Force
2.        Global System of Trade Preferences among Developing Countries (GSTP)	Goods	PSA	25-Sep-1989	Enabling Clause	19-Apr-1989	In Force
3.        South Asian Preferential Trade Arrangement (SAPTA)	Goods	PSA	21-Apr-1997	Enabling Clause	07-Dec-1995	In Force
4.        India – Sri Lanka	Goods	FTA	17-Jun-2002	Enabling Clause	15-Dec-2001	In Force
5.        Asia Pacific Trade Agreement (APTA) – Accession of China	Goods	PSA	30-Apr-2004	Enabling Clause	01-Jan-2002	In Force
6.        India – Afghanistan	Goods	PSA	08-Mar-2010	Enabling Clause	13-May-2003	In Force
7.        India – Thailand	Goods	PSA	18-Jun-2017	Enabling Clause	01-Sep-2004	In Force
8.        India – Singapore	Goods & Services	FTA & EIA	03-May-2007	GATT Art. XXIV & GATS Art. V	01-Aug-2005	In Force
9.        South Asian Free Trade Agreement (SAFTA)	Goods	FTA	21-Apr-2008	Enabling Clause	01-Jan-2006	In Force
10.     India – Bhutan	Goods	FTA	30-Jun-2008	Enabling Clause	29-Jul-2006	In Force
11.     Chile – India	Goods	PSA	13-Jan-2009	Enabling Clause	17-Aug-2007	In Force
12.     Southern Common Market (MERCOSUR) – India	Goods	PSA	23-Feb-2010	Enabling Clause	01-Jun-2009	In Force
13.     India – Nepal	Goods	PSA	02-Aug-2010	Enabling Clause	27-Oct-2009	In Force
14.     ASEAN – India	Goods & Services	FTA & EIA	19-Aug-2010(G) 20-Aug-2015(S)	Enabling Clause & GATS Art. V	01-Jan-2010(G) 01-Jul-2015(S)	In Force
15.     Korea, Republic of – India	Goods & Services	FTA & EIA	01-Jul-2010		01-Jan-2010	In Force
16.     India – Malaysia	Goods & Services	FTA & EIA	06-Sep-2011	Enabling Clause & GATS Art. V	01-Jul-2011	In Force
17.     India – Japan	Goods & Services	FTA & EIA	14-Sep-2011	GATT Art. XXIV & GATS Art. V	01-Aug-2011	In Force
18.     South Asian Free Trade Agreement (SAFTA) – Accession of Afghanistan	Goods	FTA	29-Jul-2016	Enabling Clause	07-Aug-2011	In Force

Source: RTAIS, WTO; PSA- Partial scope agreement; FTA – Free Trade Agreement; EIA – Economic Integration agreement

A look at the graph showing India’s trade with major trade partners in RTAs for past 12 years indicates that India has indeed been experiencing a trade deficit with these countries on an aggregate basis and post-2013, the deficit has remained higher than pre-2013 period. These 24 trade partners account for nearly 20% of India’s exports and 17% of India’s imports. In the year 2018, India’s total exports to these countries were US$ 75.76 billion while imports were at US$ 98.16 billion.

(Trade with Afghanistan, Argentina, Bangladesh, Bhutan, Brazil, Brunei Darussalam, Cambodia, Chile, China, Indonesia, Japan, Korea, Republic of, Lao People’s Democratic Republic, Malaysia, Maldives, Myanmar, Nepal, Pakistan, Paraguay, Philippines, Singapore, Sri Lanka, Thailand, Uruguay, Viet Nam; Source: ITC Trade MAP, Values in US$ million)

Some of the significant studies and conclusions on the impacts of RTAs of India are as follows:

1. Jha(2013) reviewed the impact of India’s RTAs on traders. The study found that after implementation of these RTAs, both aggregate imports and exports increased but much of the increase in post-RTA exports was in non-preferential items, while preferential items were driving an increase in imports.

2. Nag, Sikdar (2011) and Sikdar, Nag (2011) argued that ASEAN members will derive more benefits in terms of welfare growth than India from the India-Asean FTA. ASEAN members will gain from higher ‘terms of trade’ effect while India would gain mainly from the resource reallocation and change in domestic production activities reflected through ‘allocative efficiency’, but these gains would get dampened due to the presence of negative ‘terms of trade’.

3. Ahmed (2010) analyzed the impact of the India-Japan FTA. The analysis also concluded that the FTA would result in welfare loss for India and gain for Japan. Also, the revenue loss for India would be 13 times that of Japan. But a more recent study Bhattacharya et al (2015)5 presented a contrasting argument that India’s exports to Japan would increase more than those of Japan to India while positive net welfare gains are expected for both countries as a result of trade liberalization.

4. Ahmed (2011), in context of India-Korea CEPA, suggested that the CEPA may not be deliver static gains in terms of trade but dynamic gains for India may be huge in terms of Korean FDI inflows, trade in services and technology transfer. It may encourage collaboration between small and medium size Korean and Indian companies.

5. Wignaraja (2018) studies the implications of RCEP on India as a member. The study suggests that India is the only country in South Asia to potentially gain but the magnitude of its gains will depend on the depth of the final RCEP agreement

6. Niti Aayog’s “a note on free trade agreements and their costs”, reviews performance of India’s exports and trade relations with its FTA partners – ASEAN, Japan and Korea and points towards the unfavorable gains to these trade partners and India’s increasing trade deficit with them. The paper recommends that FTAs should be based on mutually reciprocal terms and focus on products and services with maximum export potential.

These discussions gain significance especially in context of the ongoing debate over the Regional Comprehensive Economic Partnership (RCEP) agreement that India has been negotiating with ASEAN countries and their five FTA partners – Australia, China, New Zealand, South Korea and Japan. Preliminary analysis has shown that in terms of goods trade, India could potentially increase exports to these countries by US$ 5.5 billion, while imports are expected to increase by around US$ 29 billion annually. Moreover, as reports indicate, India’s demand for enhanced mobility of its services professionals is not acceptable to some other members.

Given the past experience of rise in trade deficit and impact on domestic industries, the government is justified in carefully considering the implications of the RCEP before signing it. Moreover, most Indian industries have been complaining of being hit by lower priced imports and competition due to RTAs instead of benefiting from the preferential market access gained.

One major factor behind the industry’s problems is Rules of Origin (ROO) – the criteria needed to determine the national source of a product, hence used for determining duties and restrictions depending upon the source of imports. ROO help in deciding if the good entering the custom boundaries attracts preferential treatment or MFN treatment. Lenient ROO leaves a scope for routing products through the preferential route when the MFN route is applicable.

There have been quite a few cases where imports have been routed under RTAs, thereby adding to revenue loss for the government and competition for the industry. A recent example is the influx of pepper from Vietnam via Sri Lanka, Bangladesh and Nepal, falsely claiming the benefits applicable under SAFTA and ISFTA. Another case that has caught attention is routing of palm and vegetable oil from Malaysia and South American countries via Nepal at zero duty. These incidences necessitate stricter and well defined ROO under the RTAs as any crack has huge implications for the domestic industry.

1. Jha, Sejuti. “Utility of regional trade agreements? Experience from India’s regionalism.” Foreign Trade Review 48.2 (2013): 233-245.

2. Nag, Biswajit, and Chandrima Sikdar. “Welfare implication of India-ASEAN FTA: An analysis using GTAP model.” Indian Institute of Foreign Trade Working Paper No. EC-11-06 (2011).

3. Sikdar, Chandrima, and Biswajit Nag. Impact of India-ASEAN Free Trade Agreement: A cross-country analysis using applied general equilibrium modelling. No. 107. ARTNeT Working Paper Series, 2011.

4. Ahmed, Shahid. “India-Japan FTA in goods: a partial and general equilibrium analysis.” Goods: A Partial and General Equilibrium Analysis (April 15, 2010) (2010).

5. Bhattacharyay, Biswa Nath, and Kakali Mukhopadhyay. “A comprehensive economic partnership between India and Japan: Impact, prospects and challenges.” Journal of Asian Economics 39 (2015): 94-107.

6. Ahmed, Shahid. “India-Korea CEPA: An Assessment.” Korea and the World Economy 12.1 (2011): 45-98.

7. Wignaraja, Ganeshan. What does RCEP mean for insiders and outsiders? the experience of India and Sri Lanka. No. 181. ARTNeT working paper series, 2018.