Trade Agreements: Increasingly Bothersome

Chidambaram, who had refrained from going public with his grievance, made good use of the TERC platform to state his position, in what could escalate the debate on FTAs. Finance Minister complained about the "perfunctory" presentation by the Commerce Department, which pilots FTAs but also spoke against the absence of a study to gauge the effect of the agreements. He then went on to argue how manufacturing was key to the Indian economy. When Ahluwalia, a key aide of the PM who has pushed FTAs, argued for the need to stay engaged as India will otherwise miss the bus, Chidambaram is reported to have retorted by saying that earlier, he too believed that the gains would accrue, but no longer now, as the disproportionate growth of imports into India than export to these countries revealed itself in the lopsided trade turnover with these countries, to our serious disadvantage.

The strong pitch came as a surprise to many, considering that the Finance Minister has often been criticized for his stance on opening up.

Commerce and Industry Minister Anand Sharma has, however, asserted that India's exports have gained from the regional and bilateral free trade pacts. Sharma said India has a huge trade surplus of about $12 billion with SAFTA. He has claimed that exports to the ASEAN countries have more than doubled after signing of the Indo-ASEAN Trade in Goods Agreement in 2009, though imports have also grown as is natural in any trade agreement. Sharma has further maintained that a significant part of India's imports from this region was related to essential imports like edible oils from Malaysia and Indonesia, and petroleum products and coke from Indonesia. In case these essential imports of more than $16 billion are discounted, India enjoys a trade surplus with ASEAN.

Sharma highlighted that there was an inbuilt mechanism of review in all FTAs which provided an opportunity for mid-course correction, if required. A comprehensive study has been conducted by the department of commerce to assess the impact of FTAs in the Indian context. It was outlined that Indian exports to different regions are crucially dependent on competitiveness, which is guided by other factors such as ushering in the second generation reforms on taxation, rolling out of GST, reform in labour laws, up gradation of infrastructure relating to power, ports and roads. High transaction costs and cumbersome procedure on the border at times hamper the ease of doing business in India which needs to be addressed to retain India's competitiveness.

Revisit of model text of FTAs

It would be observed that there has been decline of exports and spurt in exports in 5 out of 7 countries, which lends more credence to the fears of the Finance Ministry. That is why the Finance Ministry is pushing for a review of the model text for free trade agreements (FTAs) after recent misuse of bilateral pacts exposed many loopholes in the pacts India has entered into with its trading partners. The North Block also wants the agreements to provide more teeth to revenue authorities such as powers of automatic suspension of trade in a particular good if gross misuse of the provisions of agreement is discovered. It has asked the Ministry of Commerce to review the draft.

"The draft text should be tighter and provide for specific provisions to deal with situations when an agreement is misused," said a Finance Ministry official. Indian industry has repeatedly raised the issue of negative impact of free trade agreements on the domestic manufacturing sector. There is no provision for suspension of a class of goods in the present text of FTAs. An explicit suspension of provisions would need to be invoked with ease after gross misuse of the agreement becomes quite clear. Some trade pacts also do not have specific provisions to deal with situations when a partner does not carry out a requested investigation or verification in agreed time frame. For example, in the case of India-Thailand, the latter is yet to respond to New Delhi's request of verification of rules of origin certificates. Having known that the trade direction with Thailand is not going the right way, we have failed to take necessary corrective action.

India imports of capital goods are nearing the $1 OO-billion mark while domestic production continues to disappoint, as evident from the index of industrial production IIP numbers. The government has consciously attempted to compress imports this year to rein in current account deficit after it rose to alarming levels of 4.8% of GDP in 2012-13.

The current state of manufacturing sector in India raises a host of issues that need effective address while assessing the effectiveness of free trade agreement frameworks. The FTAs must consider these issues in order to help realise their objectives. The broad principles in this regard need to be:

1. Trade Agreements should result in the flow of investments in manufacturing, engineering and infrastructure sectors to the desired extent.
2. They should not become a means of filling the country short-term supply-deficit through exports made at concessional duty rates.
3. Also trade agreements must not allow advanced partners to salvage "surplus" capacities through exports, "exploiting" concessional duty rates under Trade Agreements.
4. Trade Agreements should be "self-regulatory" to evade scope of "safeguard measures".
5. Concessional duty rates for imports add an anti-competitive element vis--vis imports from other countries. Therefore, the same needs to be complemented with "Specific and time-bound commitment for inflow of Investment", otherwise the purpose of a Trade Agreement gets defeated.

The declining relevance of the Doha Round of global trade talks under the World Trade Organisation (WTO) has been pushing the world towards preferential trade agreements. India has also adopted the preferential trade route in order to increase its economic engagement with its major trading partners.

India has signed as many as 15 free trade agreements including preferential trade pacts and 19 are under negotiations besides 8 are in the pipeline. But the country is still struggling with not so healthy exports growth and sluggish foreign direct investment flows from its FTA partners. These engagements achieved limited results in terms of increasing trade volumes with the member countries.

Therefore, as it appears, the main objective of these market opening pacts is only partially being met. While imports from these countries and regions have increased significantly, India's exports have stagnated or have registered a lower growth with the partner countries with which India has implemented these trade pacts.

Out of the seven major trading partners (South Korea, Japan, Malaysia, Indonesia, Sri Lanka, Singapore and ASEAN) with which India has operationalised free trade agreements, it has trade surplus with only two nations (Sri Lanka and Singapore) while with the rest, we have only adverse trade accounts.

Our view

We feel that the Government should keep under constant review the import and growth trends with the countries, with whom we enter into any form trade agreement and take such corrective action as are called for. We had, in one of our recent issues, a Cover Story titled "Are We Going Overboard In Bilateral Trade Agreements?" relating to the FTAs that India has entered into or is negotiating with our doubts and suggestion that India is indeed going over board which is now being realized by the hard-headed Finance Minister Chidambaram, but still facing resistance from the likes of Deputy Chairman Planning Commission and Minister of Commerce and Industry. We are glad that we had pronounced our judgment on the damage that is being caused by lop-sided trade agreements of different hues and scope by letting in more goods than letting them out and endorsement of our views by the figures put out by Ministry of Commerce support us, as do the trade bodies, apart from a new convert - our Finance Minister.

This article was originally published in the December 2013 issue of the magazine 'The Stitch Times.'