India’s revamped FTA strategy

Synopsis: Early Harvest Schemes (EHS) as an FTA strategy is misaligned with India’s immediate requirement of an employment-promoting trade policy.

Introduction

Recent statements from the commerce ministry have indicated that India is going to revamp its Free Trade Agreement (FTA) strategy and that FTA negotiations would be expedited towards early conclusion.

The revamped FTA strategy is welcomed. However, its immediate agenda of Early Harvest Schemes (EHS) with Australia and the UK is misaligned with India’s immediate imperatives for an employment-promoting trade policy.

How India has progressed in signing FTAs?

India has not signed any major FTA in the last 10 years, when the cumulative number of regional trade agreements in force globally has increased from 224 to 350.

India signed its last trade agreement, a Comprehensive Economic Cooperation Agreement (CECA) with Malaysia, in 2011. Since then, only a comprehensive economic cooperation and partnership agreement, covering a few commodities, was signed with Mauritius in 2021.

Not long ago, India withdrew from the Regional Comprehensive Economic Partnership (RCEP) in 2019 after seven years of protracted negotiations. Whereas the FTA and CECA with Asean and Korea, respectively, are under review.

Why signing EHS is not the right strategy?

EHS lacks comprehensive coverage: EHS as a trade liberalisation mechanism contradicts with the global trend of developing and developed countries actively pursuing membership of deeper FTAs.

Global Value chains: Global trade over the last two decades has been dominated by global value chain (GVC) activity. FTAs are therefore being designed with a comprehensive coverage, motivated by trade and investment linkages that are integral to GVCs. An EHS, on the other hand, is only a limited trade initiative that will undertake liberalisation of trade in a small set of commodities.

FTAs with the UK or even Australia will not offer India the opportunity to integrate with low-skill, labour-intensive supply chains: Australia is not at the centre of the Asian regional value chain production network. The UK is seeking to expand its value chain linkages with the East/ South-East Asian region through the CPTPP.

Both countries have value chains that are technology and knowledge intensive. Integration with these segments will not yield India the benefits that it should be seeking, i.e., employment generation.

Lastly, India’s success in converting EHS in to full-fledged FTA is poor.

What are the reasons for India’s poor success in converting EHS in to full-fledged FTAs?

Higher domestic tariffs: India has higher domestic tariffs in some of the most trade dynamic sectors, relative to other developing countries.

India hesitates to offer “more” preferential tariff lines in its FTAs.

Industrial lobby from domestic sectors limits the potential of trade liberalisation: For example, this has been India’s experience of the EHS with Thailand wherein 83 commodities, including from the electronics and automobiles sector, were delineated for preferential liberalisation in 2004.

Effective opposition from the protected industry in these sectors has not allowed, in the last 17 years, for the EHS to graduate to an FTA with Thailand.

Persisting Issues in the negotiations of trade: For example, liberalisation of the dairy sector, that most recently, in 2019, was among the major contributory factors for India’s withdrawal from the RCEP.

Similarly, issues around liberalisation in the auto sector and alcoholic beverages that have been difficult to resolve in the India-EU trade negotiations could continue to be sore points in the India-UK trade pact.

What is the way forward?

If the underlying idea of getting into FTAs is to enhance exports, then concluding reviews and increasing depth of FTAs with the GVC-intensive East Asia and ASEAN member economies should be the way forward.

Source: This post is based on the article “India’s revamped FTA strategy “published in Business standard on 16th September 2021.