A free trade accord with India is only a first step
Asia Pacific Bulletin | April 4, 2007
A Free Trade Accord with India Is Only a First Step
With the US and South Korea reaching agreement on a bilateral free trade agreement (FTA)
this week, and Japan formally signing an FTA with Thailand, it seems the push for bilateral trade
deals in Asia is still far from over. Even Canada has taken a new initiative with the recent
proposal for an Indo-Canadian Free Trade Agreement. The idea, floated in Delhi on March 12
by Ted Menzies, Parliamentary Secretary to the Minister of International Trade on behalf of
Trade Minister Emerson, highlights the desire of the Conservative government to increase
economic contacts with a self-confident India that is growing at over 8% annually. An FTA with
India is a laudable goal. However, a free trade accord should be only one component of a much
broader relationship with Asia’s newest rising power.
Mr. Deepak Obhrai, parliamentary secretary to Canadian Foreign Minister Peter Mackay, had
suggested the possibility of a FTA with India as early as February last year. More recently he
has argued that an accord with India would increase trade in "resources, mining, financial
services, and agriculture, besides education, animation and the auto sector." Given the current
skepticism about reviving the Doha round, it is in Canada’s interest to sign bilateral trade
agreements while maintaining a long-term commitment to multilateral economic arrangements.
Regional trade agreements, despite their affront to trade theory purists, are proliferating, and
Canada cannot afford to be left behind.
India is already pursuing bilateral economic accords with Japan and ASEAN, and has
concluded an economic pact with Singapore. Nevertheless, progress on an FTA with India is
bound to be slow: India and Canada are now in their eleventh round of talks over a much less
controversial Foreign Investment Protection Act (FIPA), which is tentatively scheduled for
completion later this year. Furthermore, the very issues that have plagued multilateral tariff
reduction talks under Doha would pose severe hurdles in negotiations between Canada and
India. Both countries have shown they are reluctant to open their agricultural sectors. And
tariffs in India are significantly higher than in Canada. By every indication, New Delhi has not
found the prospect of trade unfettered by tariffs and barriers quite as alluring as has Ottawa.
An FTA will have a positive impact on emerging high-value-added manufacturing sectors, such
as in automotive parts and engines, power generation and transmission equipment,
semiconductors and other engineering-intensive goods. However, the overall value of a free
trade accord with India for Canada is not self-evident. A reduction in tariffs would certainly
improve trade in manufactured goods. But the extent of these benefits is questionable.
Because of the underdeveloped state of its ports, roads, water and electricity supply, India,
except in a few specific sectors, is not the attractive low-cost manufacturing destination that
China has become.
The government has not clarified how an FTA would affect trade in services, where Canadian
firms do want greater access to the Indian market. Any wide-ranging negotiation over services
would stumble over difficult issues such as financial services. Given the difficulties experienced
in negotiating the FIPA, it might be more worthwhile to sign accords that ease the movement of
professionals involved in the services trade. In this regard, it would also benefit Canada to
rationalize its process of allocating visas to Indian businessmen - an issue that causes much
discontent in Delhi, Mumbai and Bangalore.
Canadian and Indian business is increasing in high-technology sectors: communications,
especially software; information technology enabled services; business- and knowledge-process
outsourcing; and biotechnology. The sorts of economic activity that interest India - investments
in infrastructure, finance and the power sector, for instance - do not require an FTA as a
precondition. Canadian corporations such as Nortel Networks, Manulife, Magna PowerTrain
and CAE are already doing well in the Indian market, and Indian investment has also begun to
arrive in Canada. It is here that government must take a leading role in stimulating the
economic contacts that already exist between the two countries.
Other countries have been far more successful in India than Canada. The absence of an FTA
has not prevented South Korean business from aggressively scouting the country in search of
research and development opportunities in the pharmaceuticals and electronics industries. Nor
has it thwarted Korean automakers such as Hyundai from making India a manufacturing hub.
Of course, such business forays are effective only in the context of regular and sustained, high-
level political visits to India, as the Chinese, Japanese, and Americans know very well. Success
stories from Nokia, Ford, Siemens and Toyota make it clear that an economic pact is not
necessary to catalyze the economic relationship with India. The real prerequisite is to show that
both governments are serious in their desire to foster and encourage business activity between
the two countries.
This requires considerable political will. Long-time bilateral irritants such as Canada’s concerns
about India’s military nuclear program outside the ambit of the Non-Proliferation Treaty - which
stem from a principled stand on the spread of nuclear weapons - have not yet been fully
overcome. Unlike India’s traditional allies such as France and Russia, Canada has also
maintained a studied silence over the Indo-US nuclear deal. To begin with, Canada could
signal its resolve to move forward by advocating India’s membership in APEC, which is due to
lift its moratorium on new membership this year.
The challenge before Canada now is to develop an innovative policy approach toward India. A
skilled blend of economic and political diplomacy at the highest levels is required if Canada truly
wishes to take full advantage of India’s economic rise. With the demise of CIDA’s involvement
in India, the means of promoting institutional partnerships have withered. Much as with China in
the 1980s, Ottawa now needs to increase bilateral political, economic, security and cultural
contacts with New Delhi. An FTA, if it is indeed the most effective instrument of trade policy,
can only be a small component of this far broader relationship. While the government has taken
some steps - such as the signing of a Science and Technology agreement in 2005 - much
more needs to be done much faster if Canada is serious about reaping the fruit of a long-term
engagement with India.
