Given the significant differences in developing countries’ capacity to open markets fully, the WTO has not managed to move forward in many areas. With WTO making only incremental progress in many areas of negotiations, member countries interested in expanding their global footprint in many sectors have been negotiating bilateral and regional trade agreements.
Trade agreements are familiar to India. New Delhi has been a founding member of the World Trade Organization (WTO) since its inception. It was the founding member of the General Agreement on Trade and Tariffs (GATT) in 1947 and seriously contributed to the eight negotiating rounds covering goods, agriculture, and services.
The Declining Outcomes from WTO
After seven years of negotiations, the Uruguay Round of GATT, completed on December 15, 1993, resulted in an agreement among 117 countries (including India) to reduce trade barriers and create more comprehensive and enforceable global trade rules. The agreement coming out of this Round, the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, was signed in April 1994. This agreement also created the WTO, which came into being on January 1, 1995. The WTO implements the agreement, provides a forum for negotiating additional reductions of trade barriers and settling policy disputes, and enforces trade rules.
At the WTO, India has been at the forefront of negotiating a fair deal for developing countries and has been instrumental in creating several groupings that focussed on the “less than full reciprocity” clause to work in favour of the developing countries when seeking reciprocity in trade openings from the developed world. India continues to be a significant contributor to the current round of negotiations at the WTO. However, given the significant differences in developing countries’ capacity to open markets fully, the WTO has not managed to move forward in many areas. With WTO making only incremental progress in many areas of negotiations, member countries interested in expanding their global footprint in many sectors have been negotiating bilateral and regional trade agreements.
The Push towards Bilateral and Plurilateral Agreements
Over the last two decades, there has been a spurt in bilateral and plurilateral trade agreements that have helped build strong value chains for sectors seeking global markets.
When India under Prime Minister Narasimha Rao began the economic liberalisation process in 1991, he started the “Look East Policy” that called for closer integration with the ASEAN and East Asian Countries. This move by Mr Rao was to help India move its focus from the traditional Western and neighbouring markets to the booming Southeast Asian markets to increase India’s exports and identify products of interest for India to import to move up the value chain in manufacturing.
The Look East Policy was further strengthened under Prime Minister Atal Bihari Vajpayee, who helped India expand its outreach to the markets in the East.
In 2014, Prime Minister Narendra Modi expanded India’s Look East Policy and changed it to the “Act East policy”. Given the rise of Beijing in the region and the new threats emerging in the Indo-Pacific, PM Modi gave a new thrust to intensify economic, strategic and diplomatic relations with countries that share common concerns with India on China’s growing economic and military strength and its implications for the evolving regional order.
FTA utilisation by India has been small
The Look East Policy helped India build several trade agreements with the countries in the ASEAN and East Asia. India started negotiating free trade agreements with ASEAN countries by first inking an agreement with Singapore. The India-Singapore Comprehensive Economic Cooperation Agreement was signed in 2007. Since then, New Delhi has negotiated several regional comprehensive trade agreements. It has a comprehensive agreement with the ASEAN and independent agreements with Thailand, Malaysia, and Singapore. It has also signed comprehensive agreements with South Korea and Japan.
However, several articles indicate that these agreements have yet to help India expand its export basket. Many experts feel that the gains from these agreements with India and the trade partners have been negligible.
In an article in the East Asia Forum, Rahul Nath Choudhury of EY argues that between 2017 and 2022, India’s exports to its FTA partners increased by only over 30 per cent, while its imports increased by 82 per cent. India’s FTA utilisation, he says, remains very low at around 25 per cent, while utilisation for developed countries typically sits between 70–80 per cent. This low utilisation highlights India’s alarming failure to take advantage of the benefits available through its bilateral and multilateral trade agreements. To battle this view that India’s FTAs remain ineffective, the government decided to review the gains achieved by the FTAs in 2019.
Ability of Indian industry hampered by domestic constraints
However, given India’s growing global influence and with the desire to enter diverse markets India has in the last few years started the process of engaging with several important partners in the West as well to sign comprehensive trade agreements. However, the progress of the FTAs have been painstakingly slow as Indian industry is still finding it difficult to compete due to several constraints in the domestic market.
Further given the push for an “Atmanirbhar Bharat” the government too is cautious to ensure that the FTAs do not lead to any disruption to the growing investment prospects in the country.
While India is engaging with several countries to sign a comprehensive FTA the two largest ones that are on the anvil are the India-UK comprehensive agreement and the India-EU comprehensive agreement. The India-UK trade agreement has been nearly fully completed and only a political will is now required on both sides to complete the agreement. The India-EU agreement, however, still has a long way to go before it nears completion.
The three most recent FTAs that have been signed include the India-GCC agreement and the Early harvest of the India-Australia comprehensive agreement. India has also signed the India-EFTA Trade and Economic Partnership Agreement (TEPA) that has an interesting aspect.
Speaking at the launch of this agreement Commerce and Industry Minister, Piyush Goyal said that “TEPA is a modern and ambitious Trade Agreement. India is signing FTA with four developed nations for the first time – an important economic bloc in Europe. For the first time in the history of FTAs, the binding commitment of $100 bn investment and one million direct jobs in the next 15 years has been given. The agreement will boost “Make in India” sentiments and provide opportunities to a young and talented workforce. The FTA will allow Indian exporters to access large European and global markets.”
The agreement comprises 14 chapters, with the main focus on market access related to goods, rules of origin, trade facilitation, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, investment promotion, market access on services, intellectual property rights, trade and sustainable development and other legal and horizontal provisions.
As the Minister said the comprehensive agreement for the first-time binds countries to making investments in India that will lead to employment. The taste of the pudding, however, will be in these countries actually bringing in these investments into the country.
Hopefully these announcements will not be similar to the earlier plans when FTAs where singed when India looked at expanding its export basket as also multiplying its exports exponentially to the new markets.
What Ails India’s Past Agreements
An important issue while discussing FTAs and India will be to see as to what ails India’s trade agreements.
First, India’s industry has never fully supported any trade opening. It has, over the years, always looked at protecting its market with high tariffs. Therefore, while the government engages with all sectors to try and build a win-win situation, the negotiators receive no serious feedback that will help them negotiate a trade deal that will help India become part of the global value chain.
Second, given India’s vast product list, building a customs duty regime that strictly kills the inverted duty structure regime is difficult. While considerable progress has been achieved in this area, it is still work in progress.
Third, industry in India has very little idea of how to provide any inputs for the rules of origin negotiations. Since most Indian sectors are not part of a global or regional value chain, they do not understand the exact nature of inputs to be provided. This leads to India using the follow back position of supporting general rules of origin over specific rules of origin. Rules of origin help finished goods build high value products while taking advantage of cheaper and advanced raw materials and intermediates.
Fourth, in the services sector, India’s main demand remains in the movement of professionals. Countries fail to understand that movement of professionals will not lead to migration of people from India to those countries. Given the lack of understanding among India’s major trade partners, New Delhi fails to make headway in the services negotiations. Since this is an important ask for India, the negotiating flounder.
Finally, India’s comprehensive agreements continue to have low ambitions as trade partners like the EU keep changing their goal posts. The EU, it is understood would want to bring issues on climate, labour and investment into a trade agreement. Since the development levels of India differ from these countries, Indian negotiators find it difficult to find a common ground on issues.
However, despite the challenges faced India has remained very focussed on building trade agreements and has managed to create capacity in its negotiating teams as also in industry to build stronger FTAs. With the WTO losing steam it will be important for India to continue building these agreements to help Indian companies expand its global foot print.
ABOUT THE AUTHOR
T S Vishwanath is Co-Founder & Partner, VeCommunicate; a leading journalist on economy and international trade, formerly with Economic Times.
