Are zero-tariff regimes redefining the well-being of commodity ecosystem?

Some two decades ago, when edible oils were placed under the Open General Licence, signals were pretty clear: Indian agriculture has to gear up to face emerging challenges of the liberalised agricultural trade. Trade liberalisation in other sectors began even before that. Over a period of time, zero-tariff regimes for many commodities have become fashionable. By zero-tariff regime, however, we do not mean that tariffs are literally zero: what we mean is a substantial reduction in the import duties, in order to create enabling environment for trade.

One instrument to achieve such a zero-tariff regime is Free Trade Agreements. The agreements are important from the perspective of trade liberalisation, more so for complying with the WTO norms. India has signed FTAs with 20 countries, while it is negotiating more such agreements with Australia, New Zealand, Canada and the European Union.

Economic pacts So far, the approach taken to analyse zero-tariff regimes is through the prism of balance of trade. Viewed through this, India has not benefitted from the FTAs or in commodities trade where tariff regimes have been too liberal.

India has six FTAs in all in the East and South-East Asian region. Some are in the form of comprehensive economic partnership agreements (CEPAs), examples of which are the India-Japan CEPA and the India-Korea CEPA; others are in the form of FTAs, examples of which are the FTAs between India and Thailand and the one between India and ASEAN; yet others are in the form of comprehensive economic cooperation agreements (CECAs) such asthe India-Malaysia CECA and the India-Singapore CECA. The balance of trade in all the cases is negative for India.

A closer analysis reveals that in the case of the India-Thailand Free Trade Agreement, in 2003-04, in the pre FTA period, India’s negative trade balance stood at $122.69. This stood at $1.64 billion in 2013-14, representing a deterioration of 1234.2 per cent. The FTA has been operational since 2004.

The prime commodity exported from Malaysia is palm oil, while India’s prime commodity exported to Malaysia is food items.

In the India-Singapore CEPA, India’s negative trade balance has swung from $1.34 billion in 2003-04 prior to signing of the CECA to $5.75 billion in 2013-14. This represents a deterioration of 326.03 per cent.

In the case of the India-ASEAN FTA, which has been operational since 2010, India’s negative balance of trade with ASEAN of $7.68 billion in 2009-10, worsened to $8.14 billion in 2013-14, representing a deterioration of 5.99 per cent.

Even in the Malaysia-India CECA, operational since 2010, the balance of trade worsened for India from a negative balance of $2.34 billion in 2009-10 to $5.03 billion in 2013-14. Commodity groups driving this worsening balance of trade were crude oil, their derivatives, electronic goods, and edible oils such as palm oil. The situation is no different either for other FTAs with Japan and Korea.

Telecom industry In the context of telecom industry, it has been allegedly stated that the zero-tariff regime applicable through the WTO 1997 ITA agreement is a lost opportunity for R&D, indigenous manufacturing and human resource development. While some local telecom manufacturing firms closed down, foreign companies including those from Korea and China accessed the vast Indian market and prospered. A similar claim has been made for domestic edible oils industry, where processing margins have diminished substantially ever since palm-soya oil complexes were subjected to the zero-tariff regimes.

Zero-sum game On the other hand, there are some compelling claims that trade liberalisation has helped industrial productivity due to cheaper imports of intermediate goods that act as inputs. This has mostly happened for the manufacturing sector, as reported by one of research studies of UNCTAD in 2012. Further, some research studies corroborate that while domestic industries have been affected due to lack of protection, this has helped consumers by increasing the consumer surplus.

The concern that arises is complicated. There is clear trade-off that arises with zero-trade regimes: across commodity value-chains, there are winners and losers. Clearly, zero-trade regimes including FTAs are zero-sum games! Though many have assessed the impacts of zero- trade regimes or FTAs through the lens of balance-of-trade (BoT), a negative BoT is definitely not the right benchmark to assess the failures of zero-trade regimes. The adverse balance of trade figures in the context of FTAs result from the higher elasticity of the import demand in India, which actually helped in increasing the consumer surplus. From another perspective, this has negative implication for “Make in India” philosophy.

So, how does one really infer on the impact of a zero-tariff regime? The need is to assess their aggregate impacts considering the entire value-chain, beginning from the consumer, entrepreneur, primary producer, processor, intermediaries, distributors, retailers and the government (as a zero-tariff regime impacts government’s revenue). By considering an econometric or a general equilibrium framework, one needs to look at the change in the welfare functions of each of these stakeholders due to change in tariff regimes, and aggregate the welfare changes across scenarios of tariff regimes. This implies that a holistic picture needs to be viewed for the impact assessment of tariff regime changes, as we move from positive tariffs to a zero- tariff regime. This framework will only allow for a better assessment and more informed decision-making on tariff regime changes. Zero-tariff regimes indeed redefine the well-being of the commodity ecosystem.

Nilanjan Ghosh is Senior Fellow (Professor) and Sriparna Pathak is Associate Fellow (Assistant Professor) at Observer Research Foundation, Kolkata Chapter. Views are personal.

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