Too many FTAs, too few benefits?

By : Nayanima Basu
Last Updated: Sun, Jun 23, 2013 11:53 hrs

India tops the list of countries that are signing free trade agreements (FTAs) with partner countries in order to gain preferential market access for its goods and services. But gradually as the results come in, it appears that the purpose of these agreements is only partially being met. While imports from these countries and regions have increased sharply, India's exports have stagnated. So, while consumers have benefitted from the FTAs, the Indian manufacturing sector has failed to take advantage. The rising trade imbalance can be seen in two ways: one, these so-called "free" trade agreements have led to the dumping of goods into India, thereby threatening the livelihood of millions, which is a concern for all developing countries; and two, India is simply a huge market with an insatiable appetite for imported goods.

Whatever the viewpoint, the question remains: what is the relevance of these FTAs which India had been signing or negotiating at a blistering pace for past few years? Since 2009 India has signed large-scale bilateral deals encompassing all sectors with Japan, Korea, Malaysia and the Association of Southeast Asian Nations (ASEAN), to name a few. Meanwhile, it has also initiated similar deals with Canada, Australia, European Union, New Zealand, Africa, Chile and Israel, among others. According to some critics, this has resulted in huge trade distortions rather than a "spaghetti bowl" of benefits.

One of the reasons why India embarked upon this journey was the decreasing relevance of the Doha round of global trade talks under the World Trade Organisation (WTO) where the developing countries were not able to clinch favourable deals with the developed ones; so regional or such bilateral arrangements probably seemed a more comfortable route. But it seems today that the government's strategy has sort of boomeranged.

As of now, India has clinched 15 such trade agreements with various countries and regions and a similar number of agreements are in the pipeline. However, if one looks at the export numbers, the situation looks grim. In 2012-13 the country's total exports stood at $300.60 billion, down 1.76 per cent from 2011-12. In 2011, India's trade in goods with its FTA partners was about 39 per cent of the total trade. This figure has not registered much change since 2006, according to CUTS, a Jaipur based think-tank.

According to experts, the problem lies with India's uncompetitive (read inefficient) manufacturing sector, thanks to which India has not been able to achieve any gain compared to its partner countries. "Our manufacturing sector has failed to raise its level of efficiency in order to compete in the markets of our partner countries, though one could argue that the enterprises operating in India are too focused on the domestic market that they have not felt the need to export in order to remain in business," says Biswajit Dhar, director general, Research and Information System for Developing Countries.

For example, in 2011 India signed an ambitious bilateral Comprehensive Economic Partnership Agreement (CEPA) with Japan. India's trade deficit with Japan was at $3.6 billion in 2010-11 before the CEPA was implemented and it almost doubled in 2012-13 to $6.3 billion. Exports from India to Japan in 2012-2013 stood at $6.10 billion, down from $6.33 billion in 2011-12. Recently, Union Commerce and Industry Minister Anand Sharma raised concerns of the rising trade deficit with Japanese Foreign Minister Fumio Kishida. This is just one of the several examples where such a scenario can be seen. Trade data obtained from UN Comtrade suggests that India's exports to most of its FTA partners decreased in 2012. However, it needs to be kept in mind that most countries have seen exports under pressure because of the slowdown in world trade, crisis in the Euro Zone and uncertainty in West Asia.

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Opportunities for enhancing India's exports are definitely there in these markets but there are challenges as well. India is facing tough competition from China, Japan and Korea in accessing the markets. These countries are very strong in manufacturing. On the contrary, Indian manufacturing has not been doing well in recent past, according to a Confederation of Indian Industry paper. The recently announced National Manufacturing Policy (NMP) promises to create 100 million more jobs and contribute 25 per cent to the country's GDP in a decade, up from around 15 per cent at present.

It is hoped that this change in policy will change the fate of manufacturing in India and turn around the overall economy, the paper said. According to Jayant Menon, lead economist (trade and regional cooperation), Office of Regional Economic Integration, Asian Development Bank, while the manufacturing sector needs to be developed, domestic reforms need to be brought about in terms of a complete overhaul of the country's infrastructure.

"Today it takes more time to transport goods from Tamil Nadu to Kerala than from Tamil Nadu to Korea," says Menon who also feels that like any other developing country, India is also seeing a growing appetite for imported goods. He adds, "India and China are the fastest growing markets in the world; so countries that are facing a severe downturn would surely like to take advantage of these rapidly growing markets teeming with consumers. But we have to keep in mind that FTAs cannot be a substitute to domestic reforms." Says Bipul Chatterjee of CUTS: "We are unable to export because we are unable to manufacture. It is as simple as that. We have to take a closer look at the negotiating strategy before sitting for negotiations. We should do some significant assessment of the complementarities before starting the talks for having a deal. A proper homework is lacking."

Recently, there had been some sharp criticism over the ongoing talks for a bilateral trade and investment agreement between India and the European Union (EU) since it covers a wide range of subjects including goods, services, investment, government procurement and intellectual property rights. The criticism got aggravated because of the government's adamancy of not sharing the main talking points, which has roused public sentiments. Adding fuel to the fire, leaked documents of draft negotiating texts reached the hands of several NGOs and lobby groups.

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Interestingly, there is also a geopolitical angle to it, which cannot be ignored. It has been observed that economic ties can lead to healthy political ties. This can be seen in the way in which India is trying to normalise trading relations with Pakistan. Lack of awareness among industry and exporters, mostly from the small scale sector, is another reason for non-accrual of the benefits from the FTAs. Government of India is trying very hard and organising several FTA outreach programmes to create awareness among exporters.

"Business and industry have failed to fully exploit the potential of the FTAs signed by India in terms of market access opportunities, while the enterprises from the partner countries have strengthened their presence in the Indian market. Therefore, the net impact would seem to be unfavourable to India. Indian industry needs to become more aggressive and exploit opportunities that the FTAs provide rather than remaining as passive onlookers to Indian domestic market. There may be cases where the FTAs may have given unfair advantage to partner enterprises. In such cases it would be possible to invoke safeguards that are built in each agreement," says Nagesh Kumar, chief economist, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

Under UPA II, India has been mainly demanding more access in the services market than for industrial goods. India has been ranked by the WTO as the seventh largest player in the global services trade with the value of exports and imports aggregating $261 billion in 2011. With exports at $137 billion and imports at $124 billion, India is among the top ten countries which ended the year 2011 with a surplus of trade in commercial services, according to a WTO report. Today service sector contributes more than 50 per cent of the country's Gross Domestic Product (GDP). Under the India-EU FTA talks, India is aggressively pushing for greater access for its professionals in the European markets. Dhar of RIS believes, arguing for additional market access under services trade is likely to give rise to problems in our negotiations with the EU because of the current state of the economies in Europe. Several economies have been battling with huge unemployment (especially, Spain) and this does not augur well for our negotiating position.

So what will be the end result? "I think there will be point where sooner or later India will have to take a call to harmonise these FTAs on multilateral basis in a non-discriminatory way," says ADB's Menon.

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