Tough choices on trade front

Tough choices on trade front

The case for free trade is pretty clear. What isn’t is the route to that final goal. As elsewhere, Indian trade czars are divided on strategy — should we stick to multilateral deals or should we enter into regional free trade agreements (FTAs)?

A new study by Carnegie Endowment for International Peace, a US think tank, shows that trade policy choices are not easy. The study simulated multilateral and regional free trade agreements — and their effects on economies. No clear-cut prescriptions emerge from these simulations.

If India inks a Doha type of multilateral trade agreement, its real income would increase six times more than if it goes in for a bilateral (or regional) FTA. Yet, the big numbers are unimpressive. Real income would increase by only $1.2 billion (Rs4,764 crore). Exports would increase by about 4%; but imports would also grow by 3%.

In an India-European Union FTA, exports would be greater at 5.5% than in a Doha-type agreement. However, the overall impact on the economy would be slightly negative, with real income and private household consumption declining.

The other two possibilities, FTAs with the US and China, would have even lesser impact: Exports and imports would increase, but by much smaller amounts compared with a Doha agreement.

So, it might seem right to go in for a Doha-type agreement. But there are significant risks in doing so. The Carnegie study also simulated the impact of changing global crop prices on the Indian economy. For example, it found that a 50% decrease in the world price of rice would wipe out the gains from the multilateral trade agreement. Even a 25% decrease in this price would have a tremendous impact on the Indian economy in terms of private consumption, exports and imports.

Here, it’s appropriate to point of the likely fallout of regional (or bilateral) versus global FTAs. The impact of the former is often concentrated in one particular region of the country. For example, the India-Sri Lanka FTA of 1999 had a much more concentrated effect in southern Indian states that were affected by imports of tea and other plantation crops. Similarly, India’s attempts to get into the Association of Southeast Asian Nations, or Asean, by offering sweet deals to Vietnam and Malaysia (in terms of pepper and palm oil) have raised political temperatures in south India.

Before India signs any such deal, hard-nosed evaluation of the economics is a must.

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