Wary of FTAs, India may be turning trade protectionist

When India refused to join the mega trade agreement Regional Comprehensive Economic Partnership (RCEP) at the 11th hour in November last year after negotiating for seven long years, it only invited more accusations of turning protectionist with its tariffs already on an upward trajectory.

Since 2014, India has raised tariffs on 3,200 items, resulting in average industrial tariff increasing from 13% to nearly 18% in 2019. The largest increases occurred in 2018 when there were nearly 2,500 tariff increases amounting to nearly 4 percentage points. India’s trade as a percentage of gross domestic product (GDP) also declined from its peak of 55.8% in 2011 to 40% in 2019, the sharpest drop coming post-2014 when it stood at 48.9%. Between 2004 and 2014 under then prime minister Manmohan Singh, India signed 11 preferential or free trade agreements (FTAs) while none under Prime Minister Narendra Modi’s government.

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“I would not use the word protectionism, but the government has certainly become more responsive to the demands of the industry because the domestic manufacturing sector was facing serious problems failing to compete with cheaper imports, not only from China but from elsewhere also. The whole Atmanirbhar Bharat Abhiyan to revive the manufacturing sector is a logical corollary to what the government has done in terms of tariffs where the industry will produce behind tariff walls,” Biswajit Dhar, professor of Jawaharlal Nehru University said.

And then the wave of “protectionism” is not an Indian phenomenon alone. Post the Global Financial Crisis (GFC), global trade has plummeted significantly with rising tariff and non-tariff barriers. From 60.8% of GDP in 2008, global trade touched 56% in 2016 and had started improving thereafter before the coronavirus pandemic gave it a body blow. There is growing consensus that global trade is unlikely to revert to its pre-GFC levels amid further structural changes such as waning growth in global value chains (GVCs) and the relocation of production closer to final markets.

External affairs minister S Jaishankar speaking at the Deccan Dialogue last month defended India’s recent trade policy actions holding that while justifying an open and globalised economy, India has allowed import of subsidized products and unfair production advantages from abroad to prevail. “The effect of past trade agreements has been to de-industrialize some sectors. The consequences of future ones would lock us into global commitments, many of them not to our advantage. Those who argue stressing openness and efficiency do not present the full picture. This is equally a world of non-tariff barriers, of subsidies and state capitalism. Without exaggeration, what we will be deciding now will determine whether India will become a first class industrial power or not,” he added.

Jaishankar is not entirely wrong, though blaming FTAs for India’s weak industrial capability is escaping the hard reality of India’s lack of competitiveness in most sectors. But his hint at China’s misuse of state capitalism and subsidies, mounting non-tariff barriers against India’s exports such as pharmaceutical products is spot on. India’s trade deficit with China turned unsustainable in recent years, growing manifold to peak at $63 billion in FY18 though subsequent easing is believed to have been achieved through trade diversion via Hong Kong.

As former diplomat and now minister of state for commerce and industry Hardeep Singh Puri said in a 2017 Carnegie India paper that effective negotiation of FTAs is possible only if decision-makers have the confidence and capacity to execute the necessary corresponding domestic reforms—some of which require painful adjustments. “Crafting a successful trade policy requires an understanding of geopolitics and global economic trends and the ability to negotiate to advantage,” he added.

While domestic reforms including reducing logistics cost and facilitating ease of trade never got the attention it deserved, the bunch of trade agreements that India signed during the UPA era often were ill-thought out and lacked any meaningful market access for domestic industry. This is because India played too safe and defensive, refusing to make sacrifices which ended up in zero sum exercises even for low-skilled manufacturing industries.

The recent move towards production linked incentives to certain sectors will create winners and losers, but is possibly India’s last shot at building any meaningful globally competitive industrial capacity. Government’s announcement that the tariff protections for the domestic manufacturing sector are for a limited period is a welcome signal to rest of the world. India should resist the temptation of signing new FTAs and desist from claiming its preparedness to negotiate trade deals with the US, EU and UK. India is surely not at the top of the mind of these trade partners, especially after India’s embarrassing last minute exit from RCEP deal. India should rather use this cooling off period to prepare a clear-sighted and nimble trade and industrial policy, make it easier for to do business by reducing the compliance burden for both domestic and foreign companies, and create a truly welcoming environment for businesses while making investments in critical technologies.

US president-elect Joe Biden in an interview with the New York Times columnist Thomas Friedman earlier this month said: “I am not going to enter any new trade agreement with anybody until we have made major investments here at home and in our workers.” India should also first put its house in order before again making a leap of faith on FTAs.