A trade agreement is like a game of chess
India decided to enter into trade agreements with key partners like the UK, UAE and Australia and announced an ambitious plan for an early harvest deal by March 2022. These trade agreements are launched at a time when India is coming out of the Covid-19 pandemic-related slowdown and wants to become “Atmanirbhar” and play “a bigger role in the global value chain”.
While India’s ambition matches with that of its major trading partners who want it to be a key player in their supply chains, India’s previous efforts at negotiating trade agreements have often led to a “stalemate” situation after years of negotiations, and have not offered Indian exporters a “level playing field”. India gave little and received a lower level of commitment, compared to its competitors in these markets. Even in the case of early harvest with Thailand, gains have been more on the Thai side. Hence, some critics believe that India has not gained from its trade agreements. In this situation, what should India do as it re-launches the trade agreements?
Given that India has one of the highest tariffs in the world and trade agreements lead to tariff liberalisation, Indian industry is always worried about tariff liberalisation intensifying competition in the domestic market. Somehow, the possibilities of attracting more foreign direct investment, gaining greater market access and partnership have always taken a back seat in our industry consultations. These consultations have to look beyond tariff and into business partnerships.
A trade agreement is like a game of chess. In any such agreement, some sectors will gain at the cost of the others but, overall, the country should have long-term gains. A defensive negotiation can lead to a “stalemate” situation. It is important to look at the wider objective of a trade agreement in the current geo-political situation. Focus should be on attracting investment and development of value chains. Lower tariffs can be traded for attracting greater investment. Further, gains can be cross-sectoral, focusing on areas of export competence and interest. Let us take the example of the Indian IT sector and the UK alcoholic beverage industry. Indian IT companies want non-discriminatory access to the UK government procurement market, while 75 per cent of the liquor procurement in India is through the government route and the UK companies want access to this channel. Can the two countries negotiate to reach a win-win situation on removal of barriers to government procurement on both sides? Similarly, can phasing out of tariffs and cess in alcoholic beverages to zero by India be traded for removal of immigration skills surcharge and all surcharges other than the health surcharge as has been agreed to in the UK-EU free trade agreement?
In the food and drink sector, India has a positive trade balance with the UK, which increased from $0.36 billion in 2010 to $0.55 billion in 2020. In 2020, the UK accounted for 2.13 per cent (with a rank of 13) of India’s total exports of agro-food products. However, this share has declined from 2.93 per cent in 2010 to 2.57 per cent in 2015 to 2.13 per cent in 2020. Interestingly, domestic policies that have become more protectionist have not been able to enhance our export share in key markets like the UK. Can we not revisit our policies? If we allow UK companies greater market access, they may source more from India, as they are doing from Asean countries, and there is a good chance that our exports will increase.
Modern trade agreements are WTO-plus and they seek regulatory certainty, transparency, and policy predictability. Policy uncertainty has been a key issue in many sectors in the case of India. Sometimes policies are designed to meet certain objectives, like reducing the trade imbalance with China, but they may adversely affect countries other than China. An example of this is the ban on the procurement of imported liquor, including geographical indication (GI) products, by the Canteen Stores Department (CSD), under the Ministry of Defence. This ban is despite the fact that as a founding member of the WTO, India is a signatory to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), which includes protection of GI products. For wines and spirits, the TRIPS Agreement provides higher levels of protection. The EU and India have recently announced the launch of GI negotiations. The EU and the UK have a strong interest in market access for GI alcoholic beverages. Interestingly, the ban on imported alcoholic beverages in CSD is based on an article by Laxman Kumar Behera from the Manohar Parrikar Institute for Defence Studies and Analyses, which called for mandatory ban on the sale of imported items in CSD and replace them by locally produced items, following the geo-political tensions with China. According to the article, of the 5,500 items sold by the CSD, only around 420 are imported from 25 countries. There are hardly any liquor imports from China, but companies from countries like the UK, EU, Australia and the USA have been hard hit due to the ban.
Further, the ban on GI products is considered by some as a violation of India’s GI obligation under TRIPS. As India enters into trade negotiations, there is a need for policy consistency and transparency. The lack of alignment between domestic policy objectives and desire to sign trade agreements will weaken India’s position in trade negotiations. In a globalised world, it is important to make India a bigger player in the global value chain, but import substitution may not lead to greater global integration. Examples of countries like Vietnam, which has successfully signed trade agreements, show that manufacturing can grow with global integration and reduction of trade barriers. India may look at such global best practices as it designs its domestic policies and enters into trade agreement negotiations.The writer is a professor at ICRIER