FTA with Japan holds promise

The tsunami and its aftermath might have pushed the recently signed India-Japan Comprehensive Economic Partnership Agreement (CEPA), popularly known as the ‘free trade agreement', into the background, but it does mark a turning point in the bilateral trade and economic relationship.

Over the last decade, India and Japan have chosen to deviate from their traditional preference for multilateral trade liberalisation within the framework of the World Trade Organisation (WTO), towards free trade agreements with select countries, including Sri Lanka and Singapore (by India), Mexico (Japan) and the Asean, by both.

Trade Gains for India

India-Japan trade may not overly impress with its figures, particularly when compared with China-Japan trade, which amounts to a large portion of India's aggregate global trade itself. The comparison, however, should not be pushed too far. The future of Indo-Japan trade, as visualised by a joint study group of the two countries five years ago, provided the inspiration for India to go for a free trade relationship with Japan.

A country would do well to play the game of free trade with another country that is more advanced than itself. The gains will come eventually through competition with more efficient producers, on the one hand, and in demanding markets, on the other. The India-Japan CEPA, through its free trade provisions, holds such possibilities for India.

GRADED TARIFF CUTS

All free trade agreements between countries are given to protection of domestic agriculture and industry, and the Indo-Japan agreement is no different. Commitments in the accord have been hammered out through arduous bargaining on the scope of tariff reductions and the pace of transition towards free trade.

The core of the agreement is an eight-fold classification of goods for tariff reductions, ranging from category X, comprising goods which are excluded from the process altogether because of their sensitivity vis-à-vis domestic agriculture or industry, to category A for immediate elimination of customs duties. Between these two are a range of groups of products on which duties will be eliminated in varying instalments.

From an Indian point of view, however, the nub is how far the CEPA would help Indian exports, particularly those that have the best potential in the Japanese market. Obviously, the inclusion in category A of whole clusters of textiles, garments, leather products, pharmaceuticals, chemicals and a wide range of manufactured and engineering goods speaks for itself.

In addition, there are a vast number of goods falling in the lists for phased tariff elimination. In all this, the CEPA provides a substantial leg-up to Indian exports, not only traditional, but those resulting from newly created capacities.

The agreement carefully measures out market access for Japan; categories such as textiles have been opened up while imports from Japan, wherever important for domestic consumption or use in production, have been liberalised, mostly placing them in the category of tariff reductions over 10 years.

Japan's simple average tariff rates being in the region of 6 per cent with numerous goods already subjected to low duties, it is the non-tariff measures that a CEPA should be addressing. Japan has a reputation for all manner of non-tariff trade barriers, notably in the shape of technical standards and regulatory procedures. The agreement provides broad-based measures to deal with such barriers. Sub-committees on Customs procedures, technical standards and business environment under the Joint Committee on implementation are prominent features.

As the world's second largest market for pharmaceutical products, Japan holds exceptional interest for the Indian pharmaceutical industry, all the more because of the Japanese government's policy disposition to encourage prescription of generic medicines so as to bring down the costs of healthcare for an aging population. Hence, the significance of the specific reference to cooperation on generic medicine in Article 54.

But seizing the opportunities for generic and other medicines in the Japanese market would call for a long-haul strategy for Indian pharmaceutical industry. It would need to overcome the challenge posed by the Japanese consumers' wariness about the quality of medical products from developing countries and the restrictive nature of the Japanese distribution system.

Joint ventures with Japanese companies, as already being attempted by some Indian companies, would seem to be the best course. The CEPA provides enabling conditions for such ventures.

Services and Investment

The part relating to services in the CEPA is important in view of the increasing salience of service exports in India's external trade. There are provisions for mutual recognition of educational and practical qualifications, as well as of licensing procedures.

For effective implementation of provisions on trade in services, a sub-committee on trade in services has also been set out in the agreement. The separate Annex on trans-border movement of people permits entry and temporary residence in Japan for IT and related services. Employment of qualified Indian nurses is expressly foreshadowed in a paragraph in the Annex, with stipulation for negotiations on a time-bound basis.

The agreement seeks to reinforce the increasing Japanese interest in investing in India through a kind of bilateral investment protocol, with national and most favoured treatment for investors from each other's countries. The shyness of Japanese investors towards India has been overcome in recent years because of the opportunities that India offers, including better protection of intellectual property rights, compared with China.

(The author, a former Indian envoy is now Professor at XIME, Bangalore.)

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