How India is resetting its trade ties with the world

A day after Prime Minister Narendra Modi dramatically announced India’s exit from the China-led Regional Comprehensive Economic Partnership (RCEP) deal at the Bangkok summit on 4 November, trade minister Piyush Goyal addressed a packed house of journalists in the National Media Centre, reflecting on the lessons learnt from the prolonged trade negotiations where India was always a reluctant participant.

Goyal said India should never finalize a trade agreement in a hurry, citing the examples of the 2009 and 2011 pacts with Japan, South Korea, Malaysia and with Asean countries. “Trade discussions and negotiations should allow enough time and enough considerations so that they are done carefully keeping the best interest of our people and our national interest in mind,” he added.

While countries like Japan are still trying to woo India back to the RCEP fold, India has now signalled a shift in strategy when it comes to signing free trade agreements. It is now showing readiness to renew negotiations on the long-pending free trade agreement (FTA) with the European Union as well as with Britain after the impending Brexit deal is signed. India is currently negotiating a limited trade package with the US after which both sides may sit down for a comprehensive FTA negotiation.

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“I have started talking to EU on a very informal basis. Barely a few days ago, their trade commissioner has been appointed and over the next few months, we will start a dialogue with the EU. Hopefully, Brexit should be done by January. We already have some preliminary exchange of dialogue with Great Britain. I hope to take that forward on a fast-track basis. With the US, we had several rounds of engagement; we are ensuring that even the first leg of our trade deal with them is for the benefit of both countries equitably. I can assure all of you going forward none of these FTAs will be settled in a hurry or will be settled to the disadvantage of Indian industry and Indian exporters,” Goyal said last month.

The shift in strategy is deliberate. “While we realize that India needs to integrate more with Asean economies to be part of the regional value chain, that strategy has inherent weaknesses. India and Asean often compete on the same products at the global stage due to the labour-intensive nature of their export basket. On the other hand, with the US, EU and Britain, we will have many complementarities,” a commerce ministry official said on condition of anonymity.

Negotiations for the proposed India-EU FTA started in 2007 but talks were suspended in 2013 due to differences. Both sides explored restarting negotiations after the Bharatiya Janata Party-led government assumed power in May 2014, but uncertainties over Brexit and inflexibility on both sides have prevented a formal resumption. Though both sides may resume talks once Brexit formalities are over, it may not be a cakewalk. EU has always been particular about including non-trade issues such as labour and environmental standards in the FTA, which India has been opposed to. Similarly, the US may seek stringent intellectual property rights and higher product standards which a developing country like India may find difficult to match. The unexpectedly long time that the limited trade package under negotiation between the two countries is taking is proof of the tougher road ahead for a full-fledged FTA between India and the US.

However, FTAs with EU and the US have their inherent advantages for Indian exporters. India has lost preferential market access to both economic regions, which has adversely impacted India’s labour-intensive textile exports. In June, 2019, the US also withdrew duty-free benefits to India’s exports, further denting India’s competitiveness in certain product lines.

But signing new FTAs is the least of India’s problems. Most of India’s existing FTAs are poorly negotiated and remain under-utilized. For example, in Indonesia, the average tariff for India in non-agricultural goods was 5.5% in 2012, while that for China, it was 2.1%, as a result of the China-Asean FTA. This could be because India has been a reluctant globalizer and prefers to sign defensive trade deals that do not hurt domestic industry much, even though it means little additional market access in the partner country.

While India’s global trade competitiveness has been hampered by high logistics costs, the reluctance of Indian businesses to look beyond the shores has often led to complacency in updating their technological and product standards. “A nation-wide, cross-sectoral campaign to increase awareness about existing FTAs and the ways in which specific provisions of FTAs can be leveraged by MSMEs would be critical. Greater information dissemination about compliance issues are all important for companies to truly be able to take advantage of FTAs,” industry lobby CII said in its export strategy report unveiled last month.