India’s withdrawal from the 16-country Regional Comprehensive Economic Partnership (RCEP) negotiations last year has put the future of India’s Free Trade Agreements (FTAs) into the limelight. India’s FTA record has been patchy. While it signed many FTAs in 2003-2011, there has been a lull since then. At present, India has FTAs with as many as 13 countries, notably the Comprehensive FTAs with Japan, South Korea, and ASEAN.
Comprehensive trade deals (including goods, services, investment, etc.,) enable countries to access each other’s markets, since each agrees to lower the import duties or tariffs on the other’s exports in goods.
Note that none of the current FTAs (barring the ones with Japan and Korea) are with developed countries even though they are our major trading partners. Moreover, India has not gained much from the FTAs it has entered into. Though most developed countries have on average lower tariffs than India, gains can come for India in services or through investment. In order for India to gain from FTAs, it has to improve market access in both goods and services. In case of goods, identifying and anticipating non-tariff barriers (NTBs) can help. In services, we need to understand our strengths and weaknesses and negotiate effectively.
International production, trade and investment are increasingly organized within global value chains (GVCs), where different parts of production processes are located across different countries. Today’s trade agreement feasibility studies and negotiations are not based on analyses of GVC data. Using value added data for trade policymaking and negotiating agreements on that basis can help India identify the global input-output linkages and facilitate her integration in GVCs. This might also lead to better utilisation of the FTAs.
However, conventional trade statistics do not provide a measure of domestic and foreign value added in bilateral trade flows and a different approach for such estimations is needed. At the most basic level, for instance, depending on whether one uses the gross trade data or value added data for computing indices of revealed comparative advantage (RCAs) in sectors, one gets different results. A granular approach to measuring the fragmentation of production processes across countries, computing the share of trade flows accounted for by industry categories, is useful. More recently, customs data at the firm level have also been used to measure GVC linkages internationally. The trade war between the US and China has led to a restructuring of GVCs though its impact on FTAs remains uncertain. India has been negotiating a Bilateral Trade and Investment Agreement (BTIA) with the EU since 2007, though the negotiations have been stalled since 2013. If Brexit were to happen, India could also negotiate a separate agreement with Britain. There is talk of an agreement with the US which is India’s major trading partner. In all of these negotiations India needs to have an approach that combines some elements of the current strategy vis-a-vis NTBs and services. In addition, India’s approach to FTAs must consider how she can either use these agreements to enter GVCs, or if already part of existing GVCs, upgrade her technology via the FTA.
Saon Ray is senior fellow at the Indian Council for Research on International Economic Relations (ICRIER).