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Trade agreements and India: Way Forward

• Free trade has several benefits such as it allows a country to specialize in the goods it can produce cheaply and efficiently relative to other countries (concept of Comparative Advantage).
• India has been consistently engaging at the regional and unilateral level across regions to increase economic cohesion. These agreements are complimentary to WTO-based negotiations.
• Pepper growers has been raising the issue of misuse of rules of origin certificate in Sri lanka under SAFTA
• In the recent past, the government has been keen on revisiting trade agreements based on the gains and losses made by the country. The biggest furore across all quarters is seen largely in the case of ASEAN-India trade agreement.

David Hume, renowned classical economist quoted that “Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expense. In opposition to this narrow and malignant opinion, I will venture to assert, that the increase of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbours..… Where an open communication is preserved among nations, it is impossible but the domestic industry of everyone must receive an increase from the improvements of the others.” 

Two important assertions that David Hume made are –

1. Growth of a nation fuels the growth of the neighbouring countries
2. Open communication is a prerequisite for the first assertion to hold true.

Most economists agree on the proposition that free trade between economies, too, results in similar efficiency and growth. Such sentiments have been drivers to the formation of first the GATT and later the WTO.

Free trade literally means absence of trade barriers. Trade barriers can be in the form of tariffs, quotas, or other governmental impediments to international trade.

Free trade has several benefits such as it allows a country to specialize in the goods it can produce cheaply and efficiently relative to other countries (concept of Comparative Advantage). Most of the developed world is an example of how resultant efficiency and specialisation has enabled countries to achieve higher real incomes and upward movement in the product life cycle. Additionally it helps in minimising trade risk through diversification and better market access.

Although free trade provides innumerable benefits, it also hurts a few interests such as shift of low value addition industry from developed to developing world, which has resulted in large scale unemployment of low skilled labour of the developed world.  It further exposes domestic industry to global competition.

India has been consistently engaging at the regional and unilateral level across all the regions to increase economic cohesion. These agreements are complimentary to WTO-based negotiations. These agreements aim at trade creation and trade diversification besides strengthening the political ties. The most prominent trade agreements are – SAFTA, ASEAN-India trade agreement, South Korea –India CECA etc.

In the recent past, the government has been keen on revisiting the trade agreements based on the gains and losses made by the country. The biggest furore across all quarters is seen largely in the case of ASEAN-India trade agreement, which entered into force on January 1, 2010.

As evident from the below graph, India-ASEAN trade strengthened post the FTA in 2010; however the degree of increase in imports has been much higher than exports to ASEAN.

The wedge between import and export from and to ASEAN has increased post the FTA, which was intertwined till 2005. The trend of trade deficit evinces that India-ASEAN trade balance deteriorated for India post the FTA, in spite of the fact that deficit has not followed a constant trend of increase or decrease. But it can be concluded that the trade deficit of India with ASEAN has not improved post 2010, except 2013. 

The key observations emerged after analysing the product wise trade between India and ASEAN pre and post FTA are-

Rise in import of electronic products: Few products such as HS Code- 851762: Machines for the reception, conversion and transmission or regeneration of voice and images, HS Code- 851770: Parts of telephone sets, telephones for cellular networks and HS Code- 854231: Electronic integrated circuits as processors and controllers etc. saw a sudden jump in import from ASEAN to India around the year 2009-10. Electronics industry of ASEAN is the biggest gainer of India-ASEAN FTA.

India’s skewed gain: Top 10 products which saw a jump post the FTA in India’s export to ASEAN are primarily basic food products such as meat, shrimps, groundnuts and fruits and vegetable except refined petroleum oil products (RCA>1). India’s export basket is highly concentrated with only refined petroleum contributing more than US$ 10 billion of export to ASEAN in 2018 while the remaining top 10 products such as pharmaceutical products, diamond, cyclic hydrocarbon, cotton etc. have an export value of below US$ 2 billion. The only product that gained significant edge post the FTA is frozen bovine meat. Hence while ASEAN’s export surged in electronics post FTA, India’s export boosted primarily in agriculture and food products.

Rise in import of minerals and metals: FTA between India and ASEAN has led to a sudden spike in import of copper wire and Bituminous coal from ASEAN especially Malaysia and Indonesia respectively. It also saw decrease in import of copper from Australia and Korea.

Trade concentration of top 10 products imported by India from ASEAN – 61% of light vessels that ASEAN exports to the world are destined for India, over 40% of copper wire exported to world by ASEAN is imported by India, coal imports too are over 35%, which shows that the trade diversification of such products is low for ASEAN. So post-FTA, the import increased from a lesser competitive country as seen in the case of copper wire and light vessels.

Top products imported by India from ASEAN (4 digit HS) % share of ASEAN’s export to India vis a vis World in 2018
Coal 35.01
Palm oil 21.39
Telephone sets 4.55
Crude petroleum oils 13.65
Automatic data-processing machines 3.98
Cyclic hydrocarbons 15.42
Copper wire 43.36
Light-vessels, fire-floats 61.28
Petroleum oils 1.15
Electronic integrated circuits 0.54

The relative gain in terms of market access for manufactured products is lesser for India as compared to the other party to the trade agreement. Hence the current uproar against FTAs in general is not an anomaly. India’s withdrawal from RCEP is another such case in which the relative gain rendered to other parties such as Australia was much higher as compared to India. Hence the deal turned sour.

The best way forward in short term should be to undertake a comparative study of non-tariff measures such as quality standard, rules of origin etc. For example, time taken to grant Rules of Origin certificate by the competent authorities in the partner country must be evaluated to assess the unapparent impediments to fructification of an FTA. Pepper growers for instance have been raising the issue of misuse of Rules of Origin certificate in Sri Lanka under the SAFTA. In the long term, commodity-focussed trade agreements can be a solution wherein a post facto analysis must be done to analyse whether the FTA brought the anticipated effect on the export of said commodity or not.

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