Free Trade Agreements (FTA) are back in the news. After the RCEP episode, they had gone into cold storage. First, came the announcement that the India-EU talks which had stalled in 2013 would be resumed. Then came the announcements in the last few weeks that FTA's with other countries are in various stages of discussion and a possible early harvest too is in the offing. August has seen a lot of focus on trade and exports -and a confidence that the ambitious $400 billion export target for 2021 -22 is doable. It would appear this exuberance is riding on the country’s July foreign trade performance when merchandise and service sector exports exhibited a positive growth of 36.19 percent over the same period last year and a positive growth of 23.24 percent over July 2019. India had also registered its highest-ever annual FDI Inflow of $$81.72 billion (provisional figure) during the last financial year 2020-21.
The Prime Minister in his address in early August to the Heads of Missions abroad and stakeholders of the trade and commerce spoke at length about the role of exports. He highlighted the fact that exports constitute only about 20 percent of GDP which given the country’s size and potential was far too less. This was followed by three back-to-back interactions of the Union Commerce & Industry Minister with trade associations- with the CII, the Export Promotions Councils and Industry associations. The primary focus in all the meetings was highlighting the policy measures in place to meet the export targets, with FTA's being mentioned as an important medium of achieving them. The minister spoke of revamping FTA's highlighted progress being made in FTA’s with UK, EU, Australia, Canada, UAE, Israel and GCC countries and that early harvest agreements with UK and Australia can be expected.
These are welcome developments; however, for FTA's to indeed succeed to the extent that we want them to, we need to get our act together. It is essential that we study our 16 existing FTA's- how have they panned out? How have we benefited? Has any cost-benefit analysis been done? What is the balance of trade with these countries? We have the study of NITI Aayog in the public domain- (A Note on Free Trade Agreements and their Costs) which points out that India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world. Only about 22 percent of exports are to the FTA partner countries. On the contrary, imports through the FTA route have increased; nearly 30-35 percent of all imports are from FTA partners with a corresponding cost in terms of revenue impact being in the region of about Rs 65,000 crore for 2019-20. An RBI paper on FTA’s has also pointed out "the increase in exports could not keep pace with the spurt in imports.” What then are our learnings from these FTA’s?
A major failing in all our FTAs was that there was little recognition that we need to take our trade and industry into confidence and made them partners in the journey. Trade associations also have failed the FTA process by not speaking for the entire industry or speaking only what the government wanted to hear-not articulating the challenges exporters faced. Fortunately, all this is changing.
We need to be clear why we wish to have an FTA with a particular country. The list of countries we have preferential agreements with currently are baffling. China with whom we have a trade deficit in excess of $55 billion has access at a preferential rate for more than 2,000 product lines as part of the Asia Pacific Trade Agreement (APTA).
We need to be aware of the present pattern of exports to the target country, the impediments which exporters are facing and then analyze if an FTA will help. We need to clearly identify sectors and understand from the exporters their concerns. Rates of duty in the countries presently under consideration will not be an issue- the Non-Tariff Barriers (NTB) will, however, be very challenging. We need to educate our exporters and prepare them to meet the NTB challenges.
FTA's are a two-way street. Given our high rates of duty and protection which our domestic industry enjoys, we will be giving much more in terms of duty reduction. We need to be clear if our domestic sector is in a position to meet duty-free/reduced duty competition. Have we prepared our domestic sector accordingly? Which are the sectors we would like to ring-fence? The service sectors we wish to focus on? Similarly, the country we are engaging with -what are the service sectors in India they are focusing on? Is our domestic industry suitable prepared?
FTA's are much more than merchandise and services -what are the investment opportunities in the country we are engaging with? Is anybody from the domestic sector in a position/interested in investment in that country? Which are the sectors we are prepared to open up for foreign investment?
Every FTA has provisions for causing verification regarding the certification of origin, to confirm if value addition, an essential ingredient for extending benefit, has indeed happened. We would need to look at our experience of such verifications and fix the loopholes. An early harvest has been spoken of as the way forward. Early harvest is a precursor to an FTA, whereby tariff barriers are reduced in a small number of goods between partners. Our early harvest experience has not been good.
And most important how well are our negotiators trained to handle these complex negotiations? Experience is vital -are we prepared to keep the same negotiators till the completion of the process? Can we prepare a team of experts? Are we prepared to empower our negotiators to take decisions if required? Most countries have the same set of negotiators for the entire period of discussions.
Our newfound enthusiasm with FTA's has to be juxtaposed with the constant concern we have of consequent unbridled imports. We had made changes in the Customs Law in the last budget to check them; the FM had declared that “undue claims of FTA benefits have posed threat to the domestic industry. Such imports require stringent checks." We would need to balance these contradictions.
Trade takes place because of comparative advantage- it should be the endeavour of the government to create such a comparative advantage by adopting a dynamic trade policy. The last word in the matter is the Prime Ministers. He had emphasized four factors crucial for increasing exports- increasing qualitatively competitive manufacturing within the country, improving logistics, the need for government to "walk shoulder to shoulder with the exporters” and finding an international market for Indian products. These are the areas where a lot of work needs to be done before we can indeed achieve our targets- $400 billion by 2021-22- and $2 trillion by 2030.
— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
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(Edited by : Jomy Jos Pullokaran)