Don’t be suspicious of free trade pacts

There is general scepticism and distrust about the benefits of Free Trade Agreements (FTAs) in some sections of Indian industry and policy establishment. FTAs are seen to be ineffective in ensuring market access for Indian businesses, while benefiting foreign partners who take advantage of significant tariff reductions to access India’s large market.

Compliance with FTA requirements, such as Rules of Origin certification is seen as complicated and often too costly for the smaller Indian entrepreneur-exporter. This narrative misses the point about FTAs, especially the new architecture of FTAs that is emerging globally. The problem lies in the fact that this view of FTAs is essentially a narrow and static one.

The first problem with such a narrative is the over-emphasis on tariffs. Tariffs are increasingly an ineffective determinant of production and consumption decisions. If tariffs were effective then entire segments of India’s low-end consumer electronics would not have been dominated by Chinese imports, and the higher end dominated by Japanese and Korean brands. One can argue that tariff walls forced some investment into large markets such as India, and the Korean and Japanese success story in electronics is as much one of FDI into manufacturing in India as of imports.

But future trends in automation, greater customisation, and ability of consumers to directly access many products through e-commerce would substantially reduce the bandwidth of tariffs as an instrument for FDI and technology transfer. Automation and robotics will also drastically cut cost of production, and change the quality frontier. This would mean a high quality product can be priced much lower, making tariff protection largely redundant.

While criticism about the procedural complexity of availing FTA benefits is somewhat valid, the adaptation of new technologies such as secure ledgers or blockchain in trade compliance means that in the future obtaining and verifying instruments such as rules of origin certificates would be much less cumbersome and expensive. This would make FTAs much more attractive, even to smaller enterprises.

Tariffs are passé

But the critical point that standard narratives that reject usefulness of FTAs miss out on is that such agreements are increasingly less about tariff-based market access, and more about rules and institutional measures dealing with market access in services and dealing with technical standards.

With increasing focus on quality and customisation, market access in manufacturing is increasingly driven by the ability to meet and demonstrate quality. The current crop of trade agreements provide an opportunity to find institutional solutions to deal with such product market issues. The key objective for India would be to reduce the cost of compliance with product market standards for Indian exporters, and FTAs provide an interesting platform to achieve this, if Indian negotiators choose to pursue this avenue with greater vigour.

It needs pointing out that none of India’s existing crop of FTAs — with Japan, Korea, Malaysia or Singapore — have pursued this goal comprehensively.

Services: Advantage India

On a similar vein, with increasing ‘servicification’ of manufacturing, where services capture larger and larger shares of the value-added, has led to negotiations on services trade from being an afterthought in trade negotiations to being on the centre stage. India’s comparative advantage on a range of technical services, and potential to develop capabilities in others, makes it imperative that it pursues its interests in services market access aggressively.

Since the market access concerns in services are typically related to regulatory issues behind the border, for instance difficulty in obtaining certain licenses for professional services, or cumbersome requirement for local commercial establishment to be eligible to serve customers, institutional solutions to these challenges can only be found in FTAs that comprehensively deal with these issues.

Related to services trade is the issue of data and cross-border data flows, a critical area of interest for India’s IT and IT enabled services (ITES) industry. As the IT/ITES sector undergoes transformational changes with new services related to data management, analytics, and internet of things (IoT) becoming growth drivers, it is inevitable that the rules and regulations on data, its location, and ability to transfer it across borders would become central to the debate on trade agreements. E-commerce, which is intrinsically linked to the issue of data flows and trade in services, would emerge as another key element in trade negotiations.

The design of modern day trade agreements, and the debate on them, is increasingly on these issues and their institutional solutions. Given the nature of diversity of members in terms of economic size and stage of development, a multilateral forum like the WTO is unlikely to be the platform for workable solutions, and would be used to develop general global guidelines.

It would be FTAs and regional agreements that would drive solution based protocols on such issues. Thus, FTAs assume great importance for India’s future economic engagement with major players in the global economy, including the larger trade partners in Asia. Disengagement from the FTA process, or focusing on the more ‘shallow’ tariff related concerns while ignoring the ‘deep’ institutional aspects in negotiations would be to India’s longer term detriment.

In fact, India can be the driver for innovative solutions. Take, for example, the area of investment protection and investor-state dispute settlement which many of the new age trade agreements incorporate. Such measures can allow private parties to sue governments for treaty violations that damage their interest and seek compensation.

This is obviously an area of great concern for developing countries like India, where sovereign decisions for the welfare of its citizens can be construed as a treaty violation leading to compensation claims. However, there is nothing stopping India from insisting on including language in such agreements to ensure sensitive sectors are excluded, or for special and exceptional treatment of sectors that are related to welfare and economic development.

But in order to innovate and protect its interest, India would have to become an aggressive participant and engage. The strategy of ‘masterly inactivity’ at a time when the world is working to develop the institutional solutions for trade networks of the future would ensure that the interests of a very important group of people are left out — that of 1.3 billion Indians.

The writer is Senior Director-South Asia, Corporate Public Policy, Deutsche Post DHL Group. The views are personal

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