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S. Majumder

India should not expect any big FDI flows from the proposed FTAs, as most of the countries concerned, barring Singapore and South Africa, receive FDIs rather than invest abroad.

AFTER the clamour for WTO entry, it now seems to be the turn of FTAs (free trade agreements). The origin of FTAs is not recent, though. They date back to the creation of the European Coal and Steel Community (ECSC) in the 1950s. But the concept did not take off, as it was confined to Western Europe. And as emerging economies began pressing for a fair share of global trade, FTAs were swamped by multilateral negotiations.

But the 1990s saw a resurgence in FTAs, thanks to multilateral negotiations at the WTO failing to yield the desired benefits and boost global trade. The WTO emerged as a roundtable for debate and discussion rather than as a forum for consensus-building to improve global trade.

Developing countries continued to be pressured into opening up their economies further to the developed world. And in compliance with the WTO norms, countries such as India have had to break down the entry barriers to their domestic markets and industries. In contrast, developed nations have done little to provide greater market accessibility — a case in point being agriculture.

Till June 2002, 143 FTAs were in operation. Of these, 117 (80 per cent) were launched in the 1990s. This seems to indicate that countries now believe that regional FTAs offered quicker and more beneficial trade liberalisation than multilateral negotiations. As many as 86 FTAs were signed between 1995 (when the WTO was established) and June 2002.

Why have FTAs outsmarted mutilateral negotiations? The main reasons are the scope for quicker decision-making, preference among partner-countries to enhance trade within the bloc and greater control in shielding the interests of domestic industry. The Japan-Singapore FTA is a unique example.

While Singapore virtually does not have agriculture, forestry and fishery sectors, in Japan, these sectors are strong and they are opposed to any trade liberalisation.

FTA is also an important FDI (foreign direct investment) channel for partner countries, as it increases their markets sizeably. NAFTA, for instance, has helped increase four-fold FDI flows into Mexico from the US — from $2386 million in 1991 to $10,280 million in 2000. Further, NAFTA's share in global FDI flows rose from 16 per cent in 1992 to 36 per cent in 1999.

In addition to economic benefits, FTAs strengthen the political and strategic designs of the contracting parties. One of the reasons for the slow progress of WTO negotiations is the political clout of the rich nations. Such deterrence is easily resolved in FTAs, as no FTA is purely for economic reasons.

Again, FTAs act as a platform for national security. Ministerial meetings and regular interaction among officials on economic issues built on mutual confidence can thaw military tensions. After September 11, the US is said to have utilised FTAs with Australia, Morocco and the Asean to gain strategic political and economic alliances to fight terrorism. Also, FTAs can help smaller countries strengthen their bargaining power at multilateral negotiations and quell the paranoia of developing nations against economic imperialism. Finding `friends' is said to be one of the reasons why Japan seems to be keen on entering into FTAs.

Thus, FTAs have multiple benefits over multinational agreements.

Realising its isolation, India has launched an FTA drive. It plans to sign FTAs with as many as 10 countries — these include Thailand, Afghanistan, Bangladesh, Myanmar, South Africa, Singapore, the Asean and the Mercosur (Argentina, Brazil, Paraguay and Uruguay) — in the near-term. One of the first FTAs India signed (besides Nepal and Bhutan) was with Sri Lanka in 1998, but it took about a year and a half to finalise the list of items and make the FTA operational in 2000.

A Comprehensive Economic Cooperation Agreement (CECA), showing the roadmap of PTA/FTA, has been entered into with Singapore. The next FTA is with Thailand, which is expected to be signed during the Prime Minister, Mr Atal Bihari Vajpayee's visit to that country in October.

What specific benefits would India gain from this FTA drive? Can it bolster exports to nations with which it has signed or intends to sign FTAs? Or, is FTA seen more as a strategic tool to prevent China's dominance in the Asian political and economic landscape. Paradoxically, India's `Look East' strategy (of greater economic ties with the Asean) has been given a leg up at a time when China is already the economic powerhouse of Asia.

Again, it would be too early to predict the likely benefits that may accrue to India. Would it be on the export front? But the countries with which FTAs are intended have markets that are much smaller than ours. While the fundamental goal of any FTA is enlargement of markets and improvement of the investment environment, how can India gain through FTAs with smaller nations? In fact, these nations would benefit more from FTAs with India than vice versa.

This is perhaps why Thailand is keen on having FTAs with large countries such as China, India, Japan, Russia and the US. Though India's share in Thailand's trade is a mere 1 per cent, the latter expects to gain more by importing information technology and exporting value-added goods — electronic goods, for instance, make up a third of its exports to India. In contrast, India's main exports to Thailand are gems and jewellery and oil meals, which would certainly not be thrust items under the FTA.

Further, India should not expect any big FDI flows from the proposed FTAs, as most of the countries concerned, barring Singapore and South Africa, receive FDIs rather than invest abroad.

It is wrong to conclude that the swelling of India-Sri Lanka trade by over 50 per cent in 2001-02 and 2002-03 was because of the FTA. The increase was because of the over 100 per cent jump in India's export of transport equipment — an item not included in Sri Lanka's concessional tariff list. Further, there has been no FDI gain from the FTA since 2000, when the pact was entered into.

It is essential, therefore, that India studies the experience of countries that who went on an FTA spree. What drove the US to launch NAFTA and why is Thailand's Prime Minister, Mr S. Thaksin, keen on more FTAs despite the launch of AFTA? The US' main aim was to support its domestic industries when the Uruguay Round stalled in late 1980s.

NAFTA assured it greater access to not only neighbouring country — Canada and Mexico — markets but also cheaper and abundant workforce for its industry.

As regards Thailand, it appears to be a case of frustration with multilateral and regional liberalisation processes. A quick recovery from the currency crisis through AFTA did not materialise. After the failure of the WTO Seattle Ministerial Conference, Thailand started considering FTA seriously.

Are similar frustrations with multilateral negotiations forcing India to go for FTA? In much of the multilateral negotiations, India has been mainly on the defensive, protecting its own economic sovereignty rather than bargaining for more benefits. In this context, is it worthwhile going in for FTAs, especially as not much economic benefits are likely to accrue?

Plausibly, in the initials stages at least, there are two important gains which India can reap through FTAs. One, mustering the support of smaller nations to strengthen its bargaining power at the WTO. And, two, taming China's threat which is likely to swell after it signs the FTA with Asean.

Correspondingly, Asean, which once turned down India's `Look East' effort, is realising India's potential in IT, which would be an integral part of global trade in future.

(The author is a senior researcher in a Japanese multinational.)

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