Robust manufacturing base is a must for signing FTAs

India is negotiating seven free trade agreements (FTAs) with countries such as Russia, Australia and Peru that could help it deal with possible loss of share in traditional markets such as the US and the EU that are negotiating mega regional trade pacts.

The key lesson from free trade agreements (FTA) is they offer preferential access to the markets of other countries than is possible through the WTO framework. Big, medium, small – all countries are searching for such access across the world.

We need to look at FTAs with countries in South-East Asia, Latin America, CIS and Africa that will provide us with export destinations to compensate for erosion of preferences in traditional markets.

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

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, 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 mid of negotiations. Of course the mull is mutual, but somewhere down the line it is India’s incompetence which is obfuscating the list of offering under 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. 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 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.

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.