FTA review: Govt faces a tough choice, what should it do?

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The definitive feature of any trade deal should be premised on the idea of fairness and reciprocity. Free trade agreements (FTA) between nations, aimed to eliminate tariffs, subject to the rules of origin that determine the economic nationality of the subject goods, are back to central focus in the context of the Regional Comprehensive Economic Partnership (RCEP).

Media reports have indicated that against this backdrop the finance and commerce ministries have initiated a comprehensive review of all our existing FTAs (14 in force and a dozen under negotiations).

A national consensus is evolving that the FTAs affect domestic manufacturing, cause increase in imports, cripple the ‘Make in India’ scheme and have no significant impact on the investment scenario. What exactly should the government be exploring at the time of this review?

The specifics of the FTA data pertaining to sector-wise import-export are not available in the public domain. However, a NITI Aayog paper -- a note on the FTA and their costs -- that analysis India’s four key comprehensive FTAs with the ASEAN (Association of Southeast Asian Nations), Korea, Sri Lanka and Japan affirmatively suggests that imports from these FTA partners into India increased more than our exports.

India’s increasing trade deficit with FTA partners juxtaposed with the data pertaining to violations of anti-dumping safeguards -- read circumvention post imposition of trade remedies -- and countervailing duties should be factored in to assess the overall impact. This will also reflect on the extent of the unfair trade practices adopted by foreign countries, particularly China, which constitutes 10.99 per cent of India's total trade and accounts for over 44.38 per cent of our trade deficit. Trade deficit with China must be viewed through the similar prism in relation to Hong Kong, which has increased considerably.

Let us analyse gold, which was included in our FTAs. Rules of origin, local value added content, multiple gradations in tariff lines and complexities of the ‘restrictions’ notwithstanding, we faced multiple cases of exploitative violations in imports from Thailand, South Korea and Indonesia. If prudence is the driving feature, gold should stay out of the RCEP, if at all India inks the deal.

The Economic Survey 2016-17 details that the average effect of an FTA is to increase overall trade by about 50 per cent over roughly four years. Subsequent surveys are silent on the success, if any, owing to FTAs and the investment numbers from FTA nations do not add flavour to this story. FTA frauds detected by various law enforcement agencies heighten the existing concerns.

The Micro, Small and Medium Enterprises (MSME) ministry must go in for a sectoral study to analyse the impact of the increased imports from the FTA nations on the domestic industry. A simple case relates to the electronics sector – Why would anyone want to manufacture in India when the same can be imported for reduced or zero duties?

The loss of jobs owing to the FTAs must not be missed out, especially at a time when India is facing a serious economic slowdown. Data regarding the number of domestic firms that opted for liquidation before the National Company Law Tribunal (NCLT) after the FTA onslaught may also throw open an interesting perspective to this ongoing debate.

A reverse study pertaining to Indian exporters benefiting from the preferential market access -- in foreign countries where the import duties are already very low -- must be done. Average productivity of firms is a crucial factor that determines export competitiveness. This is connected to various factors, including ease of doing business and trading, improved logistics infrastructure, compliance costs, simplified tax regime, conducive labour and land laws and a climate of economic certainty. For the exports to flourish, the domestic sector must grow strong. The logic that India would benefit from being a part of the global value chain has been just empty talk.

It is also unclear as to whether India actually benefited from the ASEAN-India FTA, which is under review for making it more user-friendly to facilitate trade. In addition to fairness and reciprocity, there is a very important third dimension to every FTA – that is, timing.

The United States, under President Donald Trump, has renegotiated their trade agreement with North America, withdrawn from the Trans-Pacific Partnership (TPP) and has threatened to pull out of the WTO (World Trade Organization). National interest must be the only guiding pole when it comes to our trade diplomacy.

Though the ideas of reforming trade relationship and bringing in greater trade accountability to prevent unfair practices must be the desired outcome of the FTA review processes, the studies already conducted and the review currently being undertaken must be made public to initiate an informed debate on the fundamental question – What have we gained and do we actually need these FTAs at this juncture? Till then, India must not sign any fresh FTAs.