1. Negotiations
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Can India negotiate a new trade strategy?

East Asia Forum | 12 May 2016

Can India negotiate a new trade strategy?

Author: Amitendu Palit, NUS

India’s approach in negotiating regional and bilateral free trade agreements (FTAs) is again in sharp focus. Concern is rising over long delays in concluding a number of major agreements India is a part of. Foremost among these is the Regional Comprehensive Economic Partnership (RCEP) involving the 10 ASEAN economies, Australia, China, India, Japan, South Korea and New Zealand.

On both RCEP and its inconclusive FTA with the European Union, India is being criticised for being obstructive and delaying negotiations. India’s Commerce and Industries Minister, Nirmala Sitharaman, has dismissed these allegations and blamed some of India’s negotiating partners for the lack of progress. She criticised EU negotiators for continuing to demand deep tariff cuts from India in sensitive sectors like agriculture, dairy and automobiles, while not acceding to India’s demands for easier migration of professionals to their home markets.

But some members of the Indian government are urging for more proactive engagement in ongoing negotiations to facilitate a speedy conclusion of FTAs, even if this entails a compromise.

India’s approach to negotiating FTAs has become focused on apparent ‘non-negotiables’ that have made its posture overly defensive and unproductive. The RCEP negotiations are a good example. Various negotiating partners within RCEP want India to reduce tariffs on agricultural and dairy products. RCEP members such as Australia, Malaysia, Indonesia, Thailand and New Zealand have strong comparative advantage in these sectors and want greater access to India’s large domestic market.

India considers slashing import tariffs in these sectors ‘non-negotiable’ for domestic political reasons. While most RCEP members know this, the lure of the large Indian market at a time when Chinese demand could wane compels their negotiators to keep demanding greater access from India — with no success.

For its part, India has established comparative advantage in service exports. A lot of these exports involve Indian professionals travelling overseas and working onsite on IT and software projects. Indian service providers are also filling up skills gaps in the labour markets of many advanced countries, particularly in industries like medical services and higher education as well as finance and human resources. This large expatriate community has been a major source of inward remittances for India.

As a result, India keeps demanding easy access for its professionals from negotiating partners in RCEP. But for many countries, granting access to foreign professionals is politically sensitive and likewise ‘non-negotiable’. Focusing on supposed ‘non-negotiables’ in RCEP won’t yield meaningful outcomes so long as both sides remain inflexible.

The prospective EU deal faces similar problems. The European Union’s demand for lower import duties on automobiles and their components is being vociferously resisted by Indian industry, in turn forcing the government to stay firm on tariffs. The European Union, similar to the RCEP parties, is reluctant to allow easier entry to Indian professionals given political demands for it to protect local jobs.

It is easy to figure out why many RCEP members consider India obstructionist. Despite sharing several members with the Trans-Pacific Partnership (TPP) — Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam — RCEP is seen as a less ambitious trade agreement. So far it has failed to sufficiently engage with many complex, ‘new generation’ trade issues (such as government procurement, the role of state-owned enterprises, labour and the environment) that the TPP embraced. But, within its scope, RCEP is still aiming to achieve greater market access than is available to members through existing FTAs.

Eliminating tariffs among members is a major objective of RCEP. It is generally expected to remove at least 95 per cent of tariffs. This is not difficult for most RCEP members, since their average tariffs are already less than 5 per cent. India’s applied average tariffs are around 15 per cent. Eliminating tariffs would mean much greater cuts for India than the rest. It would also mean India’s giving up much greater market access than what it seems likely to get in return. This makes tariff elimination a more politically difficult prospect for India than other RCEP members.

Making ‘non-negotiables’ fundamental to trade negotiations is counterproductive and threatens to isolate India from participating in the development of global and regional trade rules. Prolonging talks with RCEP partners and the European Union in the name of defending politically sacred tariffs is depriving Indian apparel, pharmaceuticals and jewellery exporters of greater access to Asia-Pacific and European markets. Demanding more access for Indian professionals complicates matters further at a time when immigration is a sore issue in developed countries’ politics.

One possible way forward is to push for more bilateral discussions with key RCEP members. If the United States and Japan can resolve huge outstanding differences on market access as part of facilitating the TPP, there is no reason why India cannot work out differences bilaterally with China, Australia, New Zealand and key ASEAN members for the sake of concluding RCEP. Ultimately, India must accept that greater flexibility — and indeed compromise — has to be the way forward.

Amitendu Palit is Senior Research Fellow and Research Lead (Trade and Economic Policy) at the Institute of South Asian Studies at the National University of Singapore. A version of this article was first published here by ISAS.