Event Reports

India need to rework most FTAs, says former Govt Secretary

FTAs
FTAs
FTAs
FTAs
FTAs
2017
Feb
24

Free Trade Agreements (FTAs) in India, even though it benefits the economy, is in a jumbled, overlapping mess, requiring to be reworked with time, according to Dr G Sundaram, retired Secretary, Government of India.

Initiating an interaction on “’Free Trade Agreements and India” at the Chennai Chapter of Observer Research Foundation on January 28, 2017, Dr. Sundaram began explaining the evolution of FTA, leading up to the current scenario. He noted  that the time for “capital-labour trade-off” is over, and is replaced by a “globalism-nationalism trade-off”. Practically speaking, Dr Sundaram stated that FTAs involved not only a comparative advantage but a relative advantage of two or more nations on trade.

 Dr. Sundaram pointed out that India has had a long history on international trading. Roman and Greek traders frequented southern India for silk and spices through the overland caravan routes via Asia Manor and the Middle-East and also through oceans. Securing trade with the sea-faring Sangam dynasties and establishing trading settlements which secured trade with the Indian sub-continent by the Greco-Roman world since the time of the Ptolemaic dynasty, in turn a few decades before the start of the Common Era, remained long after the fall of the Roman Empire. Indians had trade with Egyptians and Chinese also.

Later on, Adam Smith eulogised the virtues of the division of labour and David Ricardo spelt out the comparative advantages of trading with other nations. The modern world has become increasingly more economically integrated. International trade has expanded, and trade agreements have increased in complexity, Dr. Sundaram recalled.

Liberalised trade

While the trend over the last few hundred years has been towards greater openness and liberalised trade, the path has not always been straight. Since the inauguration of the General Agreement on Tariffs and Trade (GATT), there has been a dual trend of increasing multilateral trade as well as more local, regional trade arrangements. In Europe, six countries formed the European Coal and Steel Community (ECSC) in 1951 which later went on to become the European Economic Community (EEC) in 1958.

Since the onset of the Cold war, the United States has often been a proponent of reduced tariff-barriers and free trade. The U.S and European Countries helped establishing the GATT and later the World Trade Organisation (WTO). Then the North American Free Trade Agreement (NAFTA) and Dominican Republic-Central American Free Trade Agreement (CAFTA) were established. Two core objectives of the EEC were the development of a common market and establishing a customs union between its member states. After the expansion of its membership, the EEC was reframed to the European Union (EU) in 1993 and it concluded FTAs with many countries around the world.

Black and white sides

Importing or exporting of goods or services between nations without regulatory barriers such as tariffs or quotas, which has its own white and black sides, the FTA increases economic growth. It gives a way to investors adding much needed capital to expand local industries and boost domestic business. Free trade allows local companies, access to the latest technology and business practices from their foreign partners which caused economies grow, so do job opportunities.

Often, businesses were protected before the agreement. As a result, these local industries risked becoming stagnant and non-competitive on the global market. With the protection removed, they have the motivation to become a true global competitor. When government’s subsidies on local industries are removed after the trade agreement, those funds can have better opportunity cost, while the dark side of the FTA are job outsourcing, theft of intellectual properties, fall of domestic industries, degradation of natural resources and Environmental pollution, destruction of native culture, Dr Sundaram said.

According to him, given the theory of comparative advantage and by analysing the impact of a tariff, a country can understand the proposed benefits of free trade. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade. It is economically efficient for a good to be produced by the country which is the lowest cost producer, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer can lead to trade diversion and a net economic loss.

Binging back jobs

The US, now under President Donald Trump, being fervently acting against out-sourcing and pulling down NAFTA, calling off the Trans-Pacific Partnership (TPP) and wanting to build a wall along the border with Mexico, in order to bring back the jobs, and also Britain’s exit from the European Union are all more in the nature of nationalism seeking/trying to reverse globalisation.

Against this, China today is going pro-globalist and the modern day ‘silk route’, which is officially known as ‘one belt, one road’ trade-policy, is trying to create a modern version of the ancient networks of trade routes over Europe, Africa and Asia, both in land and maritime routes. The economic belt along the Silk Road will be home to almost three billion people which will serve as the biggest market in the world. Chinese President Xi Jinping wanted it to boost global free trade and help 60 countries along the route to coordinate their economic policies for which the Chinese government has earmarked a trillion dollar into the project.

 Template for FTAs

India has FTAs with 42 countries. Touching upon India’s trade with neighbouring countries, Sri Lanka being the first FTA for the nation, Dr Sundaram said it’s being used as a template for other FTAs. Sri Lanka, though having a good relationship with India in trade, has been impacted by non-tariff barriers (NTB). Along the northern border, India has transparent trade with Bhutan, considering the environmental laws of the Himalayan kingdom. With Nepal, there are several factors that affect the trade, he said.

On cross-border land trade, Dr Sundaram said, delays at border-posts causes very long queues of trucks laden with good, leading to cost escalation of every kind.  Indo-Bangladesh trade relations can be better explained through the occasional ‘Hilsa fish issue’, which has more demand than supply. Myanmar has a long time of relationship in trade on agro-products, especially in pulses. Teak woods, which is not been traded at present, had a demand over time down the South. Many products such as electronics, communication products are imported from China. Indo-Japan FTA has predominance in automobiles.

India has also signed many multilateral FTAs. The India ASEAN TIG is an FTA with South-East Asian Countries, especially for Goods trade. India-Brazil-South Africa FTA and Indo-EU FTA are under negotiation. The Indo-EU FTA is an important game changer for the trade in India. But there are many stumbling blocks to sign the FTA with the EU – mainly because of the strict policies of the EU.

This report is written by S Sivanesan, Associate, Observer Research Foundation, Chennai