Towards ambitious FTAs: A major barrier for broader
Financial Express - 8 January 2024
Towards ambitious FTAs: A major barrier for broader
India is currently negotiating free trade agreements with the UK, European Union and Oman, besides broadening its economic cooperation and trade agreement with Australia, among others.
With the compulsion to boost exports as an engine of growth when adverse headwinds are buffeting global trade, India is currently negotiating free trade agreements with the UK, European Union and Oman, besides broadening its economic cooperation and trade agreement with Australia, among others. The level of ambition in these agreements is much higher than the comfort levels to ink early-harvest agreements or mini-FTAs for trade in a limited set of goods and services and entail tariff reductions on selected items while leaving out more sensitive areas.
A major barrier for broader, new age FTAs has been the high levels of tariffs in the trade-dynamic sectors and in manufacturing as a whole. India has in fact the highest import duty among most major economies, with an average most favored nation rate of 18%—twice the global average. For concluding the deeper FTAs being negotiated, at least 90% of trade must be covered under substantial liberalisation. This entails tariff reforms. Towards this end, the recognition of this problem by India’s trade officials is to be welcomed.
A government official was quoted by The Indian Express as saying that India is a high-tariff economy. Even if you see the major ASEAN countries or the global landscape, the average tariff has gone down quite a bit. There is a tendency to remove tariff barriers across the globe. It is because of global value chain integration, and India is also doing that with the help of free trade agreements.
The official added that the country is likely to lower duties on a range of items, including high-tariff products such as cars, whiskey and machinery items for the first time under FTAs with the developed economies, and is moving away from looking at tariffs as a source of revenue during negotiations. All of this comes amidst consultations between the Union finance ministry and commerce ministry to assess the impact of duty reductions that could be announced as part of the FTAs being negotiated.
The revenue angle to FTA negotiations adds an additional dimension to why India has the highest tariffs beyond the pressure of India Inc and farmers for greater protection. According to the official, “Things are moving in the direction where tariffs cannot be a source of revenue. Tariffs contribute to revenue but a free trade agreement cannot be accessed on the basis of tariffs because when free movement of goods and services happen, the overall economic growth is immense.” While such thinking is a step in the right direction, it cannot succeed unless stakeholders are on board.
For instance, the government is reportedly making it clear to domestic automakers that allowing greater market access through concessional duties for electric vehicles will be inevitable under the proposed FTA with the UK. Their acquiescence is critical for inking this ambitious deal as the simple average tariffs on goods imported into India from the UK are three times higher than tariffs on Indian goods exported to the UK.
To address the challenge of greater global value chain integration through FTAs, the most efficacious policy response is to maintain an open and unrestrictive trade policy. Since revenue considerations are likely to be relatively less important, supportive policy inputs include a phased reduction in the average MFN tariff in line with the global average.
