How effective will be the free trade agreements with East Asia

The Centre seems to be keen on development of Free Trade Agreements (FTAs) with our East Asian and South-East Asian neighbours. The general idea floated in this context is: Trade is good. More is better.

However, unbridled market force in the form of unbridled trade without the concomitant safeguards in regulation and risk management mechanisms might not be a wise idea. Moreover, there are too many riders associated with Free Trade Agreements, resulting in removal of tariff and non-tariff barriers for trade.

East Asia has become India’s principal trade partner, leaving traditional partners such as the US and Europe behind. In the context of bilateral free trade agreements between India and East Asian countries, the Comprehensive Economic Partnership Agreement (CEPA) with South Korea and the India-Japan Comprehensive Economic Partnership Agreement (IJCEPA) deserve special mention.

As perceived, the CEPA, signed in 2009, firmly placed India on the path of greater integration with East Asia. In the process, India’s exports to South Korea increased marginally from $3.4 billion during the pre-CEPA (2007-08 to 2009-10) to $4.1 billion post-CEPA (2010-11 to 2012-13) period. However, during the same period, India’s imports from Korea increased from $7.8 billion to $12.1 billion. This led to trade deficit increasing from $4.4 billion to $8 billion during the period.

The case of iron and steel is pertinent here, as it is an important commodity in Korea’s exports to India. Maximum gains for Korea have been in vehicles, in which various sub components of iron and steel are required.

In May 2014, it was reported that the Steel Ministry, worried over growing imports from Japan and Korea, suggested that shipments from these nations be brought under the negative list to safeguard interests of domestic companies.

The Association of Chambers of Commerce and Industry (Assocham) said that there was a need to exclude steel products under Chapter 72 of the CEPA to ensure the sustainability of the domestic steel industry.

Now, while these are indicative evidences of FTAs benefitting the other party, the gains of these FTAs to India are yet to be established. Removal of tariff barriers or bringing tariffs to zero or near zero might not always result in “Pareto Improvement”.

A research paper for UNCTAD-India in 2008 showed that in the case of edible oils (imports of soya and palm oils), bringing down tariffs can help consumers, but can affect processor’s margins badly as also oilseed farmers. After 2009, this turned out to be true when tariffs on soya and palm oil were reduced: the consumption pattern shifted more towards imported soya and palm oils, raising fears over the fate of the domestic processing industry.

The other critical issue that needs consideration is that of commodity price risk. As India moves towards a greater free trade regime in compliance with WTO norms, it gets more and more exposed to the vagaries of international commodity trade, arising from extensive price risks across the value chain. While there are attempts to develop commodity exchanges for risk management, the problem still remains with their accessibility, lack of innovation due to archaic regulatory norms, and uncertainties in the context of policies governing them.

The recent change in the form of regulatory convergence, however, seems to be promising, and augurs well with innovation to promote macro-level risk management for commodities.

FTAs – whether with East Asia or others – therefore, need to consider some critical elements that concern not only India’s comparative advantage but also impacts across the commodity value chain, such as producers, consumers, government revenues and the associated risk across the value chain.

Going forward, there is a need to identify the sensitive industries in the country, while negotiating FTAs or CEPAs, as also conduct a comprehensive impact assessment through mathematical economic or econometric models.

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

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