India’s FTAs: Threat Or Opportunity?

India signed a series of Free Trade Agreements (FTA) in Asia that came into force in the 2000s. Across industry and policy-makers, a view has emerged that these FTAs have not served India well, and even actively damaged Indian industry. Is this view correct? Tales of woe of specific sectors and individual firms abound. What does the aggregate data show?

The success of an FTA should be judged against its objective of enhancing trade. If the proportion (and not just absolute level) of both imports and exports between the countries concerned has grown, then an FTA is successful for both parties. That is its intended effect — to move trade in the direction of the FTA country relative to others. If only one of imports or exports have grown, then the benefits have been one-sided. If the proportion has stayed the same or fallen, then the FTA has had no effect.

To FTA or not to FTA

The table shows India’s trading volumes for 1999-2000 and 2018-19. Strong annual growth over 19 years in both imports (14 percent) and exports (12 percent) has taken our trade volume from $85 billion in 2000 to $850 billion last year. The volume was $152 billion with the FTA countries. Both exports and imports have grown. In 13 of 20 instances, the proportion of imports or exports has grown. The India-Japan FTA would seem to have been completely ineffective for both countries — as our share of imports and exports have fallen substantially. The South Korean FTA seems to have worked to South Korea’s advantage, with our share of exports staying the same, while our imports have risen.

Compare trade patterns with our major non-FTA trading partners: The US, China and the EU. These three accounted for 32 percent of our imports in both 2000 and today, and 50 percent of our exports in 2000, falling to 38 percent today. The US has retained its importance for us in both imports and exports, while the EU has declined. The big winner is China: From 2.6 percent of our imports and 1.5 percent of our exports in 2000, it now accounts for 13.7 percent of our imports and 5.2 percent of our exports, making it our largest trading partner after the US.

Decoding trade data

Overall, our FTAs have had little effect on our trade flows: Accounting for 16.3 percent of our trade in 2000 and 17.9 percent of it today. They have not, contrary to perception, been a disaster for Indian industry, but we have certainly not seen the benefits from the FTAs that we expected.

Three reasons why: First, India is not the only country signing FTAs. ASEAN, South Korea and Japan have FTAs with many more countries than we do, including China. Some of these are much wider and deeper than ours — so-called zero-for-zero agreements, where zero items are excluded from the FTA and a zero tariff applies in both directions. This enables close supply-chains to develop and prosper — for example, in electronics, where components and sub-assemblies wander around Asia with tiny bits of value-addition at each step in each country. As Adam Smith pointed out in 1776, the degree of specialisation is limited by the extent of the market. By excluding many items from agreements, we limit the extent of the market and our ability to participate in these supply-chains.

Second, tariffs are not the only barriers to trade. My favourite non-tariff barrier (NTB) from some years ago: France required electronic consumer products to be imported only through the port of Lyon — which would have been fine, except that Lyon is not a port. Our pharmaceutical firms report great difficulty in getting approvals to sell in Indonesia, South Korea and Japan — in spite of specific inclusion in the FTA. Sector-specific sub-committees are to be set up to address such issues, but have not been formed — a clear opportunity.

Third, trade patterns reflect underlying industrial competitiveness. It is no accident that we have seen the greatest growth in our imports from China (up 54 times), South Korea (up 15 times) and Vietnam (up 65 times). These are among the world’s most competitive countries, and almost any country’s trade balance has moved substantially in favour of these three. We might complain about NTBs and higher costs of doing business, but improving our competitiveness is the surest way of improving our trade balance.

So what must change?

India is on the verge of signing the RCEP —which brings together the ASEAN 10, Japan, South Korea, Australia, New Zealand, China and India — 16 countries which make up half the world’s population and a third of its GDP. I have written separately (Business Standard, August 29, “Is RCEP Good for Indian Industry?”) about our strong interest in joining the RCEP. But for us to truly reap the benefits of RCEP, we need to learn from our lukewarm experience with our existing FTAs and change two things.

First, policy must adopt a strong export-promotion stance, starting with a competitive exchange rate. A strong rupee may be good for our psyche, but it makes imports cheaper and exports more expensive. Around Rs 80 to the dollar would restore the rupee to the real effective exchange rate of 2014. Our export policy must also focus on markets where we have complementary strengths. We need FTAs with the US, EU and the emerging pan-African Free Trade Area. As we negotiate with the EU, we must ignore the growls from the auto industry and hear the opportunity of the auto-component and garment industries. And let us enable our exporters to scale by raising the capital of the Exim Bank and the export credit guarantee cover to global levels.

But even more importantly, Indian industry must see its future in export. In the Confederation of Indian Industry, we have been holding discussions with different industry groups on RCEP. There is over-whelming focus in protecting the Indian market — and under-whelming interest in accessing Asian markets. This must change. We have dozens of great Indian firms that see the world as their market, but we need tens of thousands of Indian firms to export their way to greatness. We must use our technical talent to develop products and services that we seek to then sell around the world. An FTA, such as RCEP, enables access. It is for Indian industry to turn this access into opportunity. Instead of howling about imports, let us howl instead about anything — infrastructure, the cost of power, delays at ports, the strength of the rupee, NTBs, the Ease of Doing Business — that comes in the way of our being great exporters.―Authored by Naushad Forbes, co-chairman Forbes Marshall, past president CII and Chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre for Business Standard