Flop Trade Agreements: Exports need policy impetus, not low tariffs
Times of India
Flop Trade Agreements: Exports Need Policy Impetus, Not Low Tariffs
RAHUL BAJAJ
27 April 2005
Free trade agreements (FTAs) are the current flavour in India. There was a recent suggestion to enter into one with China, but the consensus was to move slowly on the matter. The Indo-Thai FTA has been in effect from September 2004. The SAARC Free Trade Agreement (SAFTA) is expected to come into effect from January 2006. Some people are talking about similar agreements with the EU and the US. How should we go forward? Trade economist Jagdish Bhagwati says FTAs divert trade and doesn’t favour these "spaghetti bowl" arrangements. But all countries seem to be tripping over each other to get into them. Till recently the focus was on regional trade agreements like the EU, Association of South East Asian Nations (ASEAN) and the North American Free Trade Agreement (NAFTA). The World Trade Organisation (WTO) has 250 trade agreements registered with it, and they are growing by the day. Sixty per cent of global trade now happens within FTAs. With India not being part of any large geographical grouping, it experiences a sense of isolation.
What about the WTO route to liberalisation and lowering of tariff barriers? The FTA protagonists, especially the US and EU, feel the WTO moves very slowly, and with the emergence of the G-20 they are unable to have their way. The global experience on FTAs suggests that regional FTAs (e.g. EU) and those between the North & the South (NAFTA) work. However, South-South FTAs are less inspiring. A key issue is whether the economies of the countries entering into an FTA complement or compete with each other. Till recently, India had a preferential tariff agreement (PTA) only with SAARC countries. In 1999, we entered into an FTA with Sri Lanka. In 2003, we signed framework agreements with Thailand, ASEAN, Afghanistan, Singapore and a PTA with a Latin American trade bloc, Mercosur. In 2004, we signed SAFTA. We’ve recently signed one with Mauritius. While FTAs have a political context, they have serious economic consequences. An assessment of costs and benefits of an FTA should be the paramount criteria for deciding on them. In the US, it is mandatory for the government to consult with the legislature before finalising an agreement, and present an analysis of its impact. A similar process needs to be put in place in our country.
Exports of Indian industry have been increasing rapidly, across size and age of companies. They are over 12 per cent of their sales from 7 per cent five years ago. More Indian companies are seeking export markets and not merely defending their domestic turf. I am for more trade with all countries. In our experience tariffs are not barriers to increasing our exports. Indo-Thai and Indo-ASEAN might be ways to engage with Asia, but to whose benefit it is not very clear. We are competitors in a number of fields in both agriculture and industry. Therefore, we should be cautious in our dealings with ASEAN. At the same time we need to note that Asia, especially China, is growing very rapidly and we cannot afford to miss the bus. The experience so far with the Indo-Thai FTA has not been encouraging. Till 2004 we had a significant trade surplus with Thailand.
In January-February 2005 there was a deficit. Perhaps PTAs, which permit greater fine-tuning, should be considered first. The Indian economy is inefficient for policy reasons - be it inverted tariffs, inflexible labour policy, high cost and irregular electricity and inefficient logistics. These are estimated by McKinsey and ICRA to increase costs by 15-20 per cent. At least this level of import tariff is necessary to provide a level playing field. Removing these policy glitches should precede our entering into FTAs. I understand that even the commerce minister is of this view. In fact, when these FTAs were signed, there was a commitment from the government that issues like anomalies in the duty structure would be resolved before the FTAs are implemented. But this has not happened. The government must take into account how a proposed FTA would affect value addition, employment and technology upgradation in the country. There is a danger that FTAs would create a disincentive to invest in India, something that we are seeing in the auto and consumer durables sectors after the Indo-Thai FTA. Some Japanese companies have frozen or rolled back investment in India.
Even a cursory look at the composition of trade between China and India and an understanding of the Chinese economy and regime would make one pause about an FTA with China. We essentially export commodities like iron ore and import manufactured products. China is not a market economy, a fact endorsed not only by us, but also by the US and EU. Are we rushing in where angels fear to tread? SAFTA can help us. However, the benefits of other deals, such as Indo-Thai and Indo-ASEAN, may not be very promising till our handicaps are removed. Economic ties with China should be encouraged, but an FTA is unviable. Unlike other countries, we do not adequately pursue our interests. A few weeks ago the Chinese government increased customs duties on car components from 15 per cent to 30 per cent, to incentivise value addition. We should pursue openness but of the kind which does not blow us off our feet.
The writer is chairman, Bajaj Auto.
