India must protect its interests in trade pacts

India must protect its interests in trade pacts

New Delhi: India should evaluate the impact of differences in competitiveness and productivity with its partners before signing bilateral free-trade agreements (FTAs) and regional trade agreements (RTAs), and also refrain from inking overlapping pacts, cautions a study by the Indian Institute of Foreign Trade, or IIFT.

The study, commissioned by the Associated Chambers of Commerce and Industry of India (Assocham), pointed out that since import duties are higher in India, its partners stood to gain more from such pacts—which generally led to levelling or removal of tariffs.

“In order to have a balanced game, India should consider taking a comprehensive approach towards such agreements by including issues like services, market access and removal of non-tariff barriers," it said.

Trade pacts usually spell out timelines for cutting tariffs of sensitive products.

But the study doubted if large differences in productivity and competitiveness can be eliminated in specified periods.

“This is particularly true of certain sectors which are likely to be the hardest hit given the relative advantage that the FTA partner has in commodities like tea, pepper, coffee and palm oil," it said.

For example, productivity of pepper is 380kg per ha in India, while it is 1,000kg per ha in Vietnam and 3,000kg per ha in Indonesia, the study pointed out.

It also criticized the multiplicity of trade agreements that India has opted for with the same partners. For instance, India is engaged with Sri Lanka under a bilateral FTA, Asia Pacific Trade Agreement, South Asian Preferential Trade Agreement, South Asian Free Trade Area and the Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation.

The study said such pacts result more in trade diversion than trade creation, reducing their welfare effect on the Indian economy.

But some analysts do not agree with the fears raised by the IIFT study.

“What FTAs do is to look at competitive industries in India which are engaged with rest of the globe," said T.S. Vishwanath, principal adviser on trade policy at APJ-SLG Law Offices.

“FTAs are signed after a joint study group submits a report (reviewing its cost and benefits). Each such trade agreement is a progressive step which integrates India’s market with other regions."

Vishwanath also said free-trade agreements usually had enough checks and balances to prevent trade diversion.