Editorial. In doing FTAs, India should avoid earlier errors

After a hiatus of many years, India is back to pursuing free trade agreements with gusto. Following the Economic Cooperation and Trade Agreement with Australia and the Comprehensive Economic Partnership Agreement with UAE, under active negotiation are pacts with the EU, UK, Canada and Israel. In the pipeline are possible pacts with the Eurasian countries, and South Africa and neighbouring republics. Of particular interest, going forward, is the strategy adopted by the Indian side with respect to talks with the EU and UK, as they have picked up some momentum.

India appears keen to stitch the two trade and investment pacts for at least two reasons. First, India and the Western blocs, it believes, are complementary rather than overlapping in the products and services they offer, which distinguishes it from India’s dealings with China and the ASEAN economies. The fiasco over the earlier FTA with ASEAN has in some measure been attributed to the lack of complementarities. While this principle is fine, India’s internal competitiveness too needs to gear up. Second, India as well as the West are keen to wean themselves away from China, both for economic and strategic reasons, and create a new web of supply chains.

However, FTAs are meant to be about give and take. India’s key gain would lie in getting the Western countries to open up movement of professionals and students. The EU, India’s second largest trading partner with a bilateral trade of $116 billion in FY22, seeks access in automobiles, wines and spirits and agriculture, while India will want an opening in markets for textiles and garments, and leather. A slashing of duty from 4-5 per cent (MFN rates) to nil in textiles and clothing is expected to put India on an even keel with Bangladesh and Vietnam, provided the product matches market needs. This advantage was lost in India’s FTAs with Japan and Korea. The EU is especially keen to explore new markets, as it remains mired in recession with a greying population. Post-Brexit UK has run into a skilled labour deficit, a gap that India can hope to fill with its scientific and technological expertise.

However, UK-EU will not hesitate to impose environment, labour and gender standards as a protectionist measure. On Tuesday, the EU cleared the decks for a tax on imports that do not conform to its climate protection standards. India should be wary of such tactics. In conceding government procurement, as India has done with the UAE, it should be meticulous about the terms in order to protect MSMEs. Strict IPRs can perhaps be carefully negotiated, to arrive at a middle ground that debars ‘evergreening’ and allows minor patents. As for tariff cuts, it should be noted that most of their tariffs are zero-rated anyway, whereas India needs to climb down from higher levels, therefore conceding more. The EU has expressed reservations over data localisation, while not yet declaring India as ‘data secure’ for sharing data. This will be a major trade issue.

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