Issues with India’s FTA

Source: The post Issues with India’s FTA has been created, based on the article “Prioritise deep trade agreements” published in “Business standard” on 27th June 2024

UPSC Syllabus Topic: GS Paper 3– Economy

Context: The article discusses India’s need to reform its FTA strategy. It suggests focusing on deep trade agreements to integrate with global value chains. This involves reducing tariffs, improving manufacturing competitiveness, and negotiating investment, intellectual property, and environmental standards. The “Chintan Shivir” initiative, organized by the Ministry of Commerce, aims to address these issues by developing new strategies and standard operating procedures for future FTA negotiations.

For detailed information on India’s Foreign Trade Agreements (FTAs) read Article 1, Article 2

What is deep FTA?

1. Deep FTA covers extensive regulatory policy issues including the liberalization of investment, protection of intellectual property rights, and environmental, social, and governance (ESG) issues.
2. These agreements extend beyond commitments made at the World Trade Organization and often include aspects not covered by the WTO, which helps anchor domestic producers in global value chains (GVCs).

What are the various Provisions in FTAs?

1. Tariff Reductions: FTAs typically include substantial reductions or complete elimination of tariffs on traded goods between member countries to promote bilateral trade.
2. Intellectual Property Rights (IPR): Deep FTAs often enhance protection beyond WTO commitments, safeguarding innovations and creative outputs which are crucial for competitive edges in global markets.
3. Investment Liberalization: These provisions facilitate foreign direct investment by providing a clearer and more secure legal framework for investors, essential for integrating into global value chains.
4. Environmental, Social, and Governance (ESG) Standards: FTAs increasingly include ESG issues, addressing sustainability and ethical practices within trade agreements to ensure comprehensive regulatory alignment.
5. Service Sector Liberalization: Many FTAs also focus on liberalizing trade in services, expanding market access for service providers in partner countries.

What Are the Current Issues with FTA?

1. Negotiation Delays: India’s FTA negotiations with the European Union and the UK have faced repeated delays, showing inefficiencies.
2. High Tariffs and Trade Deficits: India’s high MFN tariffs, especially in manufacturing, create significant preferential margins (10-15%) in FTAs, leading to trade deficits favoring partner countries.
3. Skepticism in Negotiations: Past experiences of increased trade deficits with FTA partners have led to a skeptical approach, affecting deeper engagements.
4. Lack of Deep Provisions: India struggles to negotiate deep provisions like investment liberalization and ESG issues, limiting the effectiveness of its FTAs, as seen with the Australia-India agreement lacking an investment chapter.

What should be done?

1. Focus on Deep FTAs: India should prioritize deep FTAs that integrate regulatory policies, ensuring alignment with global value chains and enhancing export competitiveness.
2. Reduce MFN Tariffs: Aligning India’s MFN tariffs closer to the global average of 0-5% can reduce preferential margins and balance bilateral trade.
3. Calibrate Preferential Tariffs: India should strategically set preferential tariffs in FTAs to benefit sectors that are dynamic in global value chains.
4. Address Non-Trade Issues: Negotiating deeper provisions like investment liberalization and ESG standards is essential, moving away from viewing these areas as non-trade issues to remain competitive globally.

Question for practice:

Examine why India should prioritize negotiating deep FTAs over shallow FTAs, considering their potential impact on integrating into global value chains and enhancing export competitiveness.