GS Paper III

News Excerpt: 

India's trade policy reorientation in late 2019, away from the Regional Comprehensive Economic Partnership (RCEP) and  towards the Western Free Trade Agreements (FTAs), faces criticism due to growing trade deficits.

Global challenges to free trade:

• There are currently issues with free trade on a worldwide scale. A number of nations, mostly in the West, are raising trade barriers, indicating a departure from the ideals of free trade.
• After three decades, globalization is running low due to geopolitical tensions, and the World Trade Organisation (WTO) is perceived as largely ineffective.
• Contentious negotiations have produced a patchwork of bilateral agreements rather than a coherent global market structure.

Concerns about India’s trade policy:

• By walking away from the RCEP and focusing on FTAs with Western and West Asian economies, India aimed to boost exports.
• India’s rejection of RCEP can be explained partly by Eastern FTAs having let us down. They led to swelling imports from FTA partners without an equal upswell in Indian exports to their markets. Entering into RCEP could have risked even larger imbalances for us.
• Critics argue that the asymmetry in tariff reductions, where India lowered barriers more than its FTA partners, created a mismatch, resulting in a growing influx of goods and little benefit for Indian exporters.
• The move led to substantial merchandise deficits, especially with ASEAN, South Korea, and Japan. The Global Trade Research Initiative report reveals significant trade imbalances, with Indian exports unable to match the pace of imports.
  • From the pre-FTA period of 2007-09 to the recent two years of 2020-22 show that India’s merchandise deficit grew by over 300% with ASEAN, 160% with South Korea and 138% with Japan during that span of time, while the overall external gap went up only 81.2%.
• This has prompted concerns about the effectiveness and fairness of India's current trade strategy.

Other issues:

• Inadequate industry and stakeholder consultation during negotiations led to a narrow understanding of potential impacts.
• Complex certification requirements and rules of origin hindered streamlined processes for exporters, increasing compliance costs on the Indian side.
• The government's lack of post-implementation efforts to popularize FTAs among industry stakeholders led to underutilization. 

Why should India consider a strategic reversal of its tariff barrier policy?

• Enhance competitiveness: India should consider a strategic reversal of its tariff barrier uptrend. The emphasis should be on reducing import tariffs to enhance competitiveness and attract global investments, especially in the context of evolving trade patterns.
• Align with India’s broader goal: Lowering barriers aligns with the government's broader goals, including reducing friction, compressing logistical costs, and boosting exports through other enabling measures.
• Creating level playing field: The focus should be on creating a more level playing field, as indicated by the criticism of asymmetrical tariff reductions in FTAs.
• Low-tariff economies & Global Value Chains: This move not only supports the global trend of low-tariff economies but also facilitates the attraction of Global Value Chains (GVCs) by minimizing input costs.

Conclusion:  

Global trade patterns are in flux but it is better for India to lower import duties to sharpen domestic competitiveness. By reconsidering its tariff policy, India can position itself more favorably in the dynamic and competitive landscape of global trade, fostering sustainable economic growth.  Strategic participation in multilateral forums, coupled with industry-driven negotiations should be focused upon to optimize all future FTAs.