The Hindu Business Line : FTAs: India must tread with caution

It is important for India to ensure that FTAs work to its advantage. Thorough homework is needed on the political and economic fronts before finalising long-term commitments on global trade.

IN THE early 1990s, India moved abruptly from a regime of controls to an open market economy. The suddenness of the transformation did not give industry time to face the avalanche that followed, in terms of investments from global majors and new foreign business. Caught unawares, industry spent precious time and resources in stalling the reform process instead of gearing up to meet the challenges of globalisation. Powerful political and economic lobbies (such as the Bombay Club) tried to influence the government on the dangers of reform to domestic industry. These lobbies did their best to block and delay the reforms that were set in process by a vulnerable government with few alternatives.

The industrial sector made little effort during the early reform years to shed flab and eliminate the inefficiencies that had crept in because the protective policies. The years lost have cost India dear, especially in international trade, which is defined by `cruel competitive ability'.

Industry, however, did come to terms with the irreversible nature of economic reforms. By default, the tardiness in implementation gave the sector time to pull up its socks.

But while industrial growth has since been rapid, the sector is not quite geared to compete in global markets. In this context, it is important for India to ensure that free trade agreements (FTAs) work to its advantage. Thorough homework is needed on the political and economic fronts before finalising long-term commitments on global trade.

There is some concern at the haste in which the FTAs are being discussed. India's dalliance with FTAs could be a tactic to combat the WTO multilateral approach promoted by the developed countries. The ultimate success of these FTAs has to be viewed in totality with the country's economic preparedness.

The robust economic growth in Asia over the last few years is an opportunity to consolidate regional trade. China, with its double-digit growth in recent years, is way up on the ladder. India has the consolation of just about breaking the `Hindu rate of growth'. An FTA with China will certainly enlarge markets and, more importantly, create a powerful trade institution with other South-South economies for better bargaining power with the developed nations. Up to 162 regional trade agreements are in force today under GATT and the WTO.

Between 100 and 200 new regional trade formations are anticipated by 2005. Regional or bilateral agreements may bring faster results than the multilateral process, and may enable partners to achieve higher levels of liberalisation.

Such arrangements may also address specific issues that do not register on the multilateral menu and result in substantive achievement in trade liberalisation that complements the WTO system.

However, in practice, such a process could be easily blocked by the economic superpowers that cannot reconcile to an emerging Asia. In reality, the Asian confederation, if one were to call it as such, has never been better knit.

Trade between India and other countries in the region, is on an uptrend.World trade is a combination of imports and exports. Economically weaker countries import more than they export, but they have to keep their trade balance within budgetary limits to gain near equal advantage as their bigger trading partners.

The WTO has always advocated multilateral agreements as the preferred instruments for a world economic order. The larger reasoning is the non-discriminatory character of such pacts resulting in potential mutual benefits for all parties. They reduce trade distortions and simplify administration. Economists, especially those from the developed countries, strongly support the new broad-based round of multilateral trade negotiations that were started a few years ago in Doha.

It has been often said that regional and bilateral trade agreements can result in trade diversion and distortions that can eventually destabilise the multilateral system because of their discriminatory nature. Preferential rules of origin have been known to suppress technological developments, networks and joint manufacturing, and to restrict third-country sourcing, leading to trade diversion.

Moreover, these can be obstacles to trade facilitation due to administrative complexity at customs.

One example is the proliferation of preferential rules of origin — a prominent source of trade costs in today's global marketplace, where companies depend on the rapid delivery of products and components from multiple overseas sources. Such effects are costly to business and detrimental to regional trading areas.

Harmonisation and simplification of preferential rules of origin could ease some of the barriers to trade facilitation.

The US administration is aggressively negotiating regional trade agreements with Australia, Morocco, Bahrain, and nations of the Central American Common Market and the Southern African Customs Union, apart from Singapore and Chile. These are smaller trading nations, but when combined they cover a substantial portion of US trade.

FTAs deviate from the multilateral principle of non-discrimination, and they can divert trade from more efficient to less efficient but favoured import producers. But under the right conditions, FTAs can inject new competition into the domestic economy, lowering prices for consumers and shifting factors of production to more efficient uses.

To maximise the benefits of FTAs, India should seek agreements with countries that can provide import competition in the domestic market and export opportunities abroad. They should be reform-oriented with a transparent approach that will create a win-win situation for all. But the goal must be to emerge a truly globally competitive economic power.

The Commerce Ministry must address the anomalies in the tariff structure, local taxes and infrastructure bottlenecks that increase cost of inputs. An equitable FTA must work on the logic of a common set of parameters within which the partner countries can operate.

Further, the selection of the product and service basket has to be made cautiously to ensure that the import-export balance is range-bound and helps the trading partners become globally competitive.

Trade agreements being finalised between India and other Asian countries will create a strategic pressure to keep multilateral talks on track.

On the other hand, the US will keep open the option of negating this factor with a "coalition of the willing" in pursuit of trade liberalisation. The European Union and the US are economic superpowers that cannot be ignored for long in any global trade architecture.

The recent re-slapping of textile quotas on China by the US is a clear demonstration of its might and its blatant disregard for committed norms.

The US pressure to curb China's growing textile exports through a revaluation of the yuan may result in a stronger and bonded Asia with multiple sources of supply to face the might of the developed world.

Asia is poised for an economic era in which China and India will play key roles.

(The author is Chairman, All India Resort Development Association, industry analyst and advisor. He can be reached at anil_rathor@vsnl.net)

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