New paradigm: FTAs, multilateral exposure limited to supply chains, governance

Source: The post is based on an article “New paradigm: FTAs, multilateral exposure limited to supply chains, governance” published in The Indian Express on 12^th September 2022.

Syllabus: GS 2 – Bilateral, regional and global groupings and agreements

News: India has recently decided to stay away from trade part of the Indo-Pacific Economic Framework (IPEF). This decision has come on the backdrop of declining trade in India.

What is IPEF and why has India taken decision to stay away from IPEF?

IPEF has four pillars trade, supply chains, tax and anti-corruption and clean energy.

It is not like a regular trade agreement as the 14 members are not obligated by all the four pillars even though they are signatories of it.

India has decided to stay away from trade part of the agreement and has joined other three pillars.

What are the other problems with IPEF?

IPEF is being seen as an alternative to Trans-Pacific Partnership (TPP).

America recently decided to stay away from Trans-Pacific Partnership (TPP) and IPEF is led by America.

Therefore, IPEF is being seen as re-establishing America economic existence in the Indo-Pacific.

What are the concerns behind the withdrawal of India from the IPEF?

One of the reasons behind it, is the increase in imports from China.

Second, IPEF also does not incorporate issues such as tariff reduction or reciprocal commitments.

Third, India is looking to find a place in the Minerals Security Partnership (MSP).

Minerals Security Partnership (MSP) is an eleven-member partnership program led by the US that focuses to secure supply chains of critical minerals with an aim to reduce dependency on China.

Fourth, India is also more impacted than other countries when global trade slows down.

For example, the net exports to real GDP growth were at minus 6.2% in April-June 2022-23 even as the country’s trade deficit went low to 28.7 billion dollars in August from a record high of 30 billion dollars in the month of July.

Fifth, the trade deficit also remained high in the month of August and there are other concerns coming up in the future.

What are the future concerns for India in trade?

First, the European Union is heading towards recession.

Second, there are shipments being postponed because of the confirmed orders.

Third, inflation in the US has led to lower demand.

Fourth, there are new items added to the negative list of exports such as wheat, steel, and iron pellets. These all worsen the balance of trade situation.

Fifth, there is an estimate from the experts that Current Account Deficit could rise to 3.3 percent of GDP in FY23.

Why staying away from IPEF is not of much concern to India?

Even though India has stayed away from IPEF agreement there are other agreements with which India is looking to move forward.

The agreements are – a) trade agreements with UAE and Australia, b) a free trade agreement (FTA) with the United Kingdom, and c) there are trade talks with Canada going on.

Although exports have been impacted globally there are demands for low-value products which will help India’s MSMEs.

This is a positive sign for India in the medium and long term and countries are also moving away from China because it has become costlier and less reliable.