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BW Businessworld

Depth Of India's Free Trade Agreements

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In the recent past, India has shown a keen interest in bilateral/regional trade negotiations, which are known as free trade agreements. It has signed 13 FTAs with different countries/regions having varying depths of engagement across different sectors and is negotiating more comprehensive trade pacts such as the Regional Comprehensive Economic Partnership agreement of Asia and the Pacific (RCEP).
 
However, many trade analysts have pointed out that the coverage and depth of India's free trade agreements are rather shallow and that is why they are not helping the Indian products becoming more competitive in the world market. This is because a product can no longer remain competitive in the world market through tariff protection. 
 
In today's world of trade, export competitiveness lies in how best a product is complying with regulatory requirements of a country. Therefore, domestic reforms for regulatory convergence among key trading partners are fast emerging as facilitators of export competiveness. This is the essence of mega regional trade agreements such as the Trans-Pacific Partnership, the Trans-Atlantic Trade and Investment Partnership, and should be a guiding principle of negotiating the RCEP agreement. 
 
Where does India stand in this respect? It is difficult to gauge the depth of free trade agreements because: a) it needs detailed and painstaking examination of the legal texts of such agreements and that requires deep understanding about their frameworks and skills to interpret them, and b) there is no standard methodology to gauge their depth against best international practices. 
 
In the context, a study, carried out by Ganeshan Wignaraja ('Economic Reforms, Regionalism and Exports: Comparing China and India', East West Center, 2011), has developed a set of simple legal and economic criteria to assess the depth of free trade agreements. They relate to three sets of issues which are now an integral part of free trade agreements.
 
First is about their tariff liberalisation agenda as per Article 24 of the General Agreement on Tariffs and Trade, the predecessor of the World Trade Organisation. Article 24 clearly defines that tariffs eliminated on at least 85 per cent of tariff lines in a bilateral/regional agreement within a time span of ten years are generally classified as a 'fast' approach to tariff liberalisation, while others are considered 'gradual'. 
 
The second one relates to services liberalisation as per the key principles of the General Agreement on Trade in Services (GATS) of the WTO members. Free trade agreements that cover more than five key sectors of the GATS are considered 'comprehensive'. Others are 'partial'.
 
The third set of criteria relates to those issues which are beyond goods and services per se but are closely related to their trade. In the WTO context, they are known as Singapore Issues: investment, competition, government procurement and trade facilitation. Free trade agreements that cover these issues are regarded as 'comprehensive'.
 
Keeping the above-stated sets of criteria in mind, it is clear that out of 13 FTAs that India has signed so far, only five have adopted a 'fast' approach to trade liberalisation, while others are moving gradually towards greater degree of tariff liberalisation. For instance, the India-South Korea Comprehensive Economic Cooperation Agreement has agreed to liberalise up to 75 per cent of tariff lines within a time frame of eight years.
 
Furthermore, India is yet to give much emphasis on the inclusion of service sectors in its FTAs. It has only four FTAs which have a comprehensive coverage of services liberalisation: with ASEAN (Association of South East Asian Nations), Japan, Singapore and South Korea. Similarly, there is very selective coverage of Singapore issues in these agreements with South East and East Asian countries.
 
On the other hand, China's FTAs have greater degree of tariff liberlisation as it has adopted a 'fast' approach. This is mainly because of its desire for relatively deep integration with the global economy. A greater degree of tariff liberlisation helps China to integrate better with other growth centres of the global economy and enhances its export competitiveness which, in turn, is helping it to penetrate itself into global value chains. China's FTAs are also deep in terms of their services coverage but it is yet to expand its coverage of Singapore Issues. 
 
It is evident that, as compared to China, India's free trade agreements are shallow in terms of their tariff liberalization and services coverage but they have better coverage of Singapore Issues. However, all three are inter-related and the shallowness of tariff liberalization and services coverage is one of the reasons behind their low level of utilisation, whose average is about 27 per cent and therefore, raises serious questions about their effectiveness.
 
On the other hand, China's utilisation of its FTAs is close to 40 per cent. Despite less comprehensive coverage of Singapore Issues, China's tariff liberalisation agenda and services coverage in its FTAs are relatively so comprehensive that it is experiencing a much better utilisation.
 
It is time for the Indian trade negotiators to take these facts into account and enlarge the coverage of its FTA negotiations with the European Union, European Free Trade Area, Australia and New Zealand as that would help India to better negotiate the RCEP agreement, which covers the 10 member ASEAN group of countries plus, Australia, China, India, Japan, New Zealand and South Korea, and will also enhance India's export competitiveness, which is one of the most necessary conditions for penetrating into global value chains.
 
The authors are Bipul Chatterjee, Deputy Executive Director, CUTS International ([email protected]) and Surendar Singh, Policy Analyst, CUTS International ([email protected]