India’s zinc-trade deficit with Korea tells why we need industry input on deals

Photo: Bloomberg
Photo: Bloomberg


India’s vast zinc-trade deficit with Korea shows why we need the inputs of domestic industry before we negotiate agreements

India aspires to be third largest economy in the world by the year 2047 and there is a strong push by the government to make India “atma-nirbhar" or self-reliant and play a bigger role in the global economy. Indian industry has responded enthusiastically to this call for self-reliance, and many have been investing heavily in the domestic market. Yet, the example of past trade agreements show that imports of certain raw materials and intermediate goods rose significantly after India signed these trade pacts, leading to a large deficit in the trade of select products for which India has ample domestic manufacturing capabilities. The core issue raised here by Indian industry relates to the Rules-of-Origin (RoO) in some of the earlier trade agreements. For example, our steel and zinc industry has raised concerns over the RoO in the India-Korea Comprehensive Economic Partnership Agreement (CEPA), which was signed on 7 August 2009 and came into force on 1 January 2010. During recent stakeholder consultations organized by the Indian Council for Research on International Economic Relations (Icrier), Indian industry recommended that the government should carefully look at the RoO, and that this should not be neglected in a rush to sign trade agreements.

The India-Korea zinc story
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The India-Korea zinc story

Let us take the example of zinc. At the time of signing of the CEPA, India’s domestic production and demand were both low. Our installed capacity of zinc manufacturing has increased from 450 kilo-tonnes (KT) in 2010-11 to 880KT at present through structured investments in both mining and smelting along with development of downstream industries, which are mostly small and medium enterprises (SMEs). When the India-Korea CEPA was signed, India used to export a sizeable quantity of zinc to the Republic of Korea (RoK) due to weaker domestic demand, while the latter too had low production, hardly 300KT per annum. Hence, at that time, imports from the RoK did not look like a threat. Taking cues from the India-Korea zinc-metal trade case history, India needs to be cautious in its early-harvest efforts with Australia and trade deals with the UK, Canada and the EU.

Bilateral trade data between India and the RoK shows that the imports of zinc and zinc alloys (HS code 7901) to India have increased manifold, especially since 2013-14, when the duty was phased down to zero for the RoK, leading to a large and growing trade deficit, which was -$149.89 million in the period April to November of fiscal year 2021-22 (see table). In 2010-11, the RoK has a minor share of 9.1% in India’s imports, which increased to 24.7% in 2012-13 and 52.2% in 2017-18. In 2020-21, more than half of India’s imports of zinc products came from the RoK. While Seoul eliminated tariffs on zinc products at the time of the CEPA’s implementation, India committed to eliminate tariffs by dropping them from 7.5% to zero over a period of five years. Therefore, since 1 January 2015, the imports of zinc products from the RoK are duty-free.

Globally, the RoK became the leading exporter of zinc in 2020, accounting for 10.5% of global exports. This is because over a decade, the RoK has increased its manufacturing capabilities manifold from around 300KT at the time of the CEPA’s signing to around 900KT and has also benefited from RoO in its trade agreements with countries that have large resources or mines, like China, Australia and the US.

The sudden influx of imports from the RoK after the CEPA was put into effect has taken Indian industry by surprise, as the RoK does not have mines. The data from the United States Geological Survey (2020) shows that in 2019, India was the fifth largest country for zinc mining (with a share of 5.67%), after China, Peru, Australia and the US. In India, 100% of the value addition can be done within the country, from the metal’s mining to downstream industry usage, with both large businesses and SMEs involved in this value chain.

Zinc manufacturing in India has almost doubled since 2010-11, as stated earlier, to 880KT. However, as of now, our domestic industry is only producing 750KT, as it is facing tough competition from low-cost imports from the RoK. This has not only increased India’s negative trade balance, it has also adversely impacted several downstream industries, especially micro-firms and SMEs that invested in the die-casting alloy sector. These firms are not able to utilize their manufacturing capacities in full and many are on the verge of shutting down their units.

During the consultation session organized on India’s trade agreements by Icrier, industry representatives pointed out that the RoK has over time enhanced its smelting capabilities and is able to supply zinc at highly competitive prices to countries like India, primarily due to its lower logistical costs and other advantages inherently available to zinc producers in that country, including its “smart free trade agreement negotiations". They requested the inclusion of a minimum 35% value-addition clause for zinc, which would correct it from the present product-specific rule that only allows a ‘change in tariff’. Given that there has been a surge in imports and nil mining in the RoK, the consultations highlighted a need to examine the existing product-specific RoO for zinc and discuss a change in tariff subheading (CTSH) plus a requirement of 35%value addition in the RoK, aligned with the general RoO specifications under the India-Korea CEPA, during the course of such a review.

Given that growth of our domestic industry can lead to employment creation and tax revenue generation, as India negotiates more trade agreements and reviews its earlier arrangements, we need to address the negative trade balance caused by RoO anomalies. The multiplicity and complexity of global value chains, along with the lengthy process of negotiating more than 1,000 HS codes in a country, could mean there’s a chance of RoO requirements of specific HS codes getting overlooked. India needs regular engagement with domestic industry for their inputs before rules are negotiated and this must be done carefully so that Indian industry gains from our trade agreements.

Arpita Mukherjee & Ramneet Goswami are, respectively, professor and consultant, ICRIER

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