India to go slow on trade pacts with US and EU
Financial Express
India to go slow on trade pacts with US and EU
KG Narendranath & Amiti Sen
New Delhi, July 7 2005 - The Prime Minister’s Trade and Economic Relationship Committee (TERC) comprising finance and commerce ministers has decided to go slow on bilateral economic/trade agreements with Washington and Brussels. Even in the limited context of Free Trade Agreements (FTAs) in services, the government here would rather remain unget-at-able to the two largest trading partners of the country in the medium term. Much less would New Delhi harbour the idea of entering into more comprehensive economic agreements covering trade in goods, investment and financial services with the twosome.
According to senior officials, immediate trigger for the decision is the recent "unexciting Mode 4 offers" in services by both the US and the EU under the World Trade Organisation. Mode 4, which pertains to the movement of natural persons, is an area of great interest to India, proud of its human resources. Also, it is reckoned that the US has shown scant regard for India’s call for a shift from ad valorem to specific duties on imports in the ongoing WTO negotiations. These apart, TERC weighed political factors also, before making up its mind. "Requirement of FTAs is not purely economical, there are political dimensions to it," said a senior official.
TERC has, however, decided that India should study, purely domestically, the implications of clinching such bilateral pacts with the West. Nothing should enter the bilateral domain before internally assessing the pros and cons of such agreements, sources said.
In fact, the commerce department favours an aggressive policy on FTAs and CECAs. While FTA with Thailand and CECA with Singapore have already been ratified, similar pacts with at least a dozen more countries/trading blocs are currently being pursued. This includes the proposals of FTA with Mercusor, an FTA-plus deal with ASEAN, mostly on the lines of the India-Singapore pact, SAFTA, a larger economic pact to supplant the FTA with Sri Lanka, and FTA/CECAs with China, Isreal, Japan, Malaysia, etc.
Recently, the commerce minister Kamal Nath has said India’s merchandise exports to the US and the EU would not increase at the desired pace, if they did not dispense with the heavy specific duties on imports and move, increasingly,to the ad valorem duties. Specific duties, he said, virtually negate market access obligations under WTO. The government reckons that developed countries’ obligation to cut tariff peaks and curb tariff escalation would not be met if they maintain non-ad valorem duties.
At present, nearly 50 per cent of the tariffs in the US are on account of specific duties, which are linked to quantity, often measured as weight. This provides a cushion to avoid deeper tariff cuts on items of export interest to the developing countries like India. The EU also has a similar policy, with most of the tariff lines in the ad valorem category. On the other hand, 99 per cent of Indian tariffs are determined on value.
While an India-US FTA restricted to services would certainly be more to India’s liking (provided if the US opens up Mode 4 liberally), an agreement in goods is not possible for many years as the Indian industry is not strong enough to withstand competition from duty-free imports from developed countries.
Disconcerted with the US and EU’s Mode 4 offers, India decided not to give much to developed countries in Mode 1 (related to cross-border movement of services) and Mode 3 (related to establishment of commercial presence).
