Can regional trade agreements boost India’s exports?
India’s lack of competitiveness in exports has hindered its ability to leverage opportunities provided by free trade agreements
Mumbai: As the World Trade Organization (WTO) comes under mounting attack from the Trump-led US administration, there is a clamour in India to negotiate regional trade agreements with peer countries to boost exports, and to insulate India’s trade from the uncertainties of the global trading system. However, a Mint analysis of trade agreements suggests that India has often failed to gain from such agreements. This could explain why Indian policymakers have become cautious about pursuing new trade agreements in recent years.
The rise of regional trade agreements (RTAs) globally coincided with the end of the Uruguay round of WTO talks in the mid-1990s and their growth has often been explained as a result of slow progress in multilateral negotiations.
RTAs here include both preferential trade agreements and free trade agreements (FTAs). The WTO defines RTAs as “reciprocal trade agreements between two or more partners”.
While some policymakers and economists see RTAs as building-blocks to a multilateral trading system, RTAs also face criticism for being detrimental to the spirit of multilateral free trade as countries that are not part of a regional agreement find themselves at a disadvantage.
This has often led countries to seek counter agreements to try and level the playing field.
In fact, such concerns have been a major driver of the proliferation of trade agreements over the past few decades, wrote Leonardo Baccini of the London School of Economics and Political Science and Andreas Dür of the University of Salzburg in a 2013 research paper.
To illustrate, India signing a free trade agreement with South Korea in 2009 spurred Japan to seek a similar agreement with India. This is because the FTA with South Korea would have endangered Japan’s Nippon Steel Corp. The FTA would have allowed South Korean makers of steel plates to export to India without tariffs while Nippon would have still had to pay a 5% tariff. Eventually, India’s FTA with South Korea came into effect in 2010, while that with Japan came into effect in 2011.
Thus, while trade agreements might not lead to any increase in trade, they might still be pursued by countries prompted by fears of being locked out of preferential agreements.
This is especially true in an era of rising protectionism and uncertainty.
It is of course possible to address such issues to some extent by creating mega-trading blocs.
One such bloc being negotiated is the Regional Comprehensive Economic Partnership (RCEP), consisting of China, India, Japan, south-east Asian nations, Australia and New Zealand.
There might be scope for India to increase its trade with the Asia-Pacific region, given that its level of integration with the region is relatively low.
However, India has remained ambivalent about the RCEP, with officials expressing concern that it might actually harm India.
India’s lack of enthusiasm seems to be driven by its past experience with RTAs. India’s existing agreements with South Korea, Japan and the Association of South East Asian Nations (Asean) are often deemed to have benefited the partner countries at India’s expense. The import-export ratio with these countries deteriorated in the years following the implementation of the trade agreements. Even as partner countries have benefited, Indian exports to these regions have remained lacklustre.
“India has not been able to sufficiently leverage these agreements to increase its presence in the markets of its partners,” wrote trade economist Biswajit Dhar in a 2014 article.
“In most cases, the shares of India’s merchandise exports to its partners have either stagnated or declined since the middle of last decade,” Dhar wrote.
India’s inability to gain market share in these regions may be partly explained by its lack of competitiveness in exports. Unless India removes the structural bottlenecks hurting its exports, it is unlikely to make big gains in the world market.
“At a practical level, India’s policymakers have not been strategic and forward looking in evaluating its free trade deals,” said Vivek Dehejia, a Mint columnist and a senior fellow at the Mumbai-based IDFC institute.
“The focus needs to be on where India can promote its exports; it does not necessarily mean entering into regional trade agreements. India needs to be careful in weighing each trade deal on its own merit. When it comes to free trade agreements, no deal may be better than a bad deal.”
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