Context

India’s international trade posture appeared to turn protectionist in the past week, with two indicators the government sent out.

What were the two indicators?

• The first-Signal sent out in the Budget: The first indicator, which played out live on television was contained in the Union Budget.
  • Laying out the Budget for the year, the finance minister made several references to the problems with free trade and preferential trade agreements (FTAs and PTAs).
  • Raise in tariffs, changes in the act: The Budget raised tariffs on the import of more than 50 items and changed the Customs Act provisions substantially to penalise imports suspected to originate from third countries.
• The second- India declined negotiations: The other indicator was that India declined to attend a meeting of trade negotiators in Bali that was discussing the next step in the Association of Southeast Asian Nations (ASEAN)-led Regional Comprehensive Economic Partnership (RCEP) trade agreement.

Issues with the Free Trade Agreement

• What the FM told Parliament: It has been observed that imports under Free Trade Agreements (FTAs) are on the rise.
  • Undue claims of FTA benefits have posed a threat to the domestic industry.
  • Such imports require stringent checks, adding that the government will ensure that all FTAs are aligned to the conscious direction of our policy.
• What could be the consequences of the Govt. policy?
  • Discouragement to imports: While the Govt. motive may be to protect Indian markets from dumping-primarily by Chinese goods-
  • The consequence of the changes will be to put Indian importers on notice and discourage imports in general.
  • Even as the government reserves the right to modify or cancel preferential tariffs and ban the import or export of any goods that it deems fit.

The rise in the trade deficit and decision to walk out of FTA

• The trade deficit with FTA partners: The government’s problem with FTAs was a key theme in its decision to walk out of the RCEP negotiations (of 16 countries) the rise in trade deficits with FTA partners.
• Review of all agreements: The government says it will now review all those agreements and wants to “correct asymmetry” in negotiations with new partners. The agreement that would be reviewed includes-
  • TAs signed with the 10-nation ASEAN grouping (FTA).
  • Japan (Comprehensive Economic Partnership Agreement, or CEPA).
  • And South Korea (CEPA).

Why it would not be easy to negotiate bilateral treaties

• The bilateral agreement would not be a priority for other countries: If India makes a complete break with RCEP, negotiating the bilateral trade agreements (TAs) will not be a priority for the other countries until RCEP is done.
  • The process of legal scrubbing is likely to take most of the year, and any talks with India will probably only follow that.
  • Difficulty in getting better deal: It is also hard to see any of them being able to offer India a better deal bilaterally once they are bound into the multilateral RCEP agreement.

India’s pending talks on bilateral treaties

• Negotiations of CECA with Australia: The case of the Comprehensive Economic Cooperation Agreement (CECA) being negotiated with Australia, will be a difficult task, not the least due to its history.
  • India and Australia began CECA talks in 2011.
  • However, talks hit a dead-end in September 2015. With the focus on RCEP, no progress has been made since then.
• Negotiations of FTA with the UK: A similar scenario awaits the announcement of the India-United Kingdom FTA talks.
  • It is unlikely that the U.K. will actually be able to talk until next year after terms for the K.’s full withdrawal from the European Union (EU) are completed.
• Negotiation of BTIA with the EU: Bilateral Trade and Investment Agreement (BTIA) negotiation are also unlikely to make headway until the UK’s complete withdrawal from the EU.
  • Both sides will have to decide how to revive from where they left off in 2013.
  • Why the negotiations are pending? Making the negotiations harder is the government’s decision to scrap all bilateral investment treaties with 57 countries including EU nations, and bringing in a new Bilateral Investment treaty (BIT) model in 2015.
  • Only Kyrgyzstan, Belarus and most recently Brazil have agreed to sign a new investment treaty based on that model.
• The US-India trade issue: Finally, there is the much-anticipated resolution of U.S.-India trade issues ahead of the visit of U.S. President.
  • The talks in that visit could also include talks on an FTA.
  • At present, there have only been some non-paper talks on the issue.
  • And given that the U.S. has expressed deep misgivings about India’s BIT model, these talks will also take several years to come to fruition.

Why India should rethink its stand on FTA

• First-Prospect of no dispute settlement mechanism: The decline of multilateralism, accelerated by the retrenchment of the U.S. and China’s intransigence have all meant the World Trade Organization (WTO) has lost steam as a world arbiter.
  • This leaves states that are not part of arrangements without a safety net on dispute settlement mechanisms.
• The second-trade deficit of other countries with India: The government has invoked the massive $57-billion trade deficit with China to explain protectionist measures, but it forgets its own trade surpluses with smaller economies.
  • Particularly in the neighbourhood, where Indian exports form more than 80% of total trade with Nepal, Bangladesh, Bhutan and Sri Lanka, respectively.
• Third- The rise of regional agreements: It is clear that most of the world is now divided into regional FTAs, for example-
  • The North American Free Trade Agreement (NAFTA) for North America.
  • The Southern Common Market (MERCOSUR for its Spanish initials) for South America.
  • The EU, the Eurasian Economic Union (Russia and neighbours).
  • The African Continental Free Trade Agreement (AfCFTA).
  • The Gulf Cooperation Council (GCC) FTA in West Asia.
  • And now the biggest of them all, RCEP, which minus India, represents a third of the world’s population and just under a third of its GDP.
• Fourth- Finally, the trend across the world does not favour trade in services the way it does in goods.
  • India’s strength in the services sector and its demand for more mobility for Indian employees, is thus becoming another sticky point in FTA negotiations.

Conclusion

India’s demographic might is certainly attractive for international investors, but only if that vast market has purchasing power and is not riven by social unrest and instability. India’s demographic might is certainly attractive for international investors, but only if that vast market has purchasing power and is not riven by social unrest and instability.

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