"Currently, we are not ready for unchecked free trade due to lacking domestic industries and already existing trade deficits that we fund through foreign reserves earned from remittances. But we would be ready for free trade very soon. The only condition required would be proper transparency and control." Amandeep Singh explores the past, present, and future of Indian free trade agreements.
Free trade is the practice of trade without any discrimination imposed by the state on various domestic and/or international companies and/or individuals. It also does not provide preferential treatment to any of the foreign or domestic players. This ensures that no unconducive or disadvantageous situation arises for any party and leads to unfair competition. However, the state does not let control go of its hand completely. Hence, it does not mean a free flow of trade (misleading because of the presence of the word ‘free’). The state tries to minimize the tariffs, trade barriers, other fees and procedures required for trading.
World Trade Organization (WTO) is the international agency that promotes free trade among member countries. It defines free trade as’ Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange. The concept of free trade is the opposite of trade protectionism or economic isolationism.’ This agency categorizes the member countries as Developed and Developing nations. It lays down rules to be followed by two countries entering a Free or preferential trade agreement. It also provides for restrictions that can be imposed by one party on another (specific goods in specific contexts and duration). Among some other provisions are the provisions of Preferential Treatment (PT) and Most Favoured Nation (MFN).
After the era of Liberalization, Privatization, and Globalization (LPG) in the early 1990s, India went on to sign many trade agreements with countries in Asia. India currently has 40+ Trade agreements with different countries or blocks of countries (like SAARC and ASEAN), most of which are functional and a few are under review or negotiation. India has had mixed experiences from the trade agreements. While almost all of the trade agreements have led to an increase in the volume of trade, in most cases, India faces a deficit of billions of dollars. The trade agreement with SAARC is the only one to largely benefit the country, that too due to heavy reliance of Nepal and Bhutan n India for multiple products. The experts attribute many reasons for this experience of the country with the trade agreements.
The difference in standards between the countries is a major reason for the inefficient performance of the Indo-Sri Lankan free trade agreement. It might seem very counterintuitive to a person when they come to know that under this agreement the tariff was reduced to zero for certain commodities. The Sri Lankans do not follow the packaging of sanitary wares used in India. Hence the cost of repackaging brings a disadvantage. In addition, Sri Lankan importers agree to the certifications issued by Indian credible institutions but Indian importers do not reciprocate this faith. This leads to a delay of product in the yard before it can be sent to market as per Indian standard certifications. The stark difference between negotiations and actual implementations has worsened the situation. Thus, many traders use the SAARC trade agreement (with comparatively more tariff) instead of this one while trading between India and Sri Lanka.
The trade deal with countries like South Korea and Japan did not benefit India to the expected level. The tariffs in these countries were already very low. When the Trade deal came into effect, it marginally decreased these tariffs for Indian goods. However, India had to make a substantial cut in the tariffs. Hence, the partner countries made more profit out of the deal. As a result, despite of increase in the trade volume the rate of imports from these countries usually exceeded the rate of exports to these countries. India saw a rise in trade deficit by 7-10 percent during the last decade. We currently sit on a deficit of billions of dollars.
The trade deal with ASEAN led to ruining of local Industries as well as trade deficits. Many of products like PVCs from ASEAN got tariff cuts in Indian markets, while the process was not reciprocated. While Chinese goods made into the ASEAN market for almost NIL tariff. Hence, this led to a situation where the goods from ASEAN got a position in the Indian market but India was not able to sell to ASEAN because they got their goods from China. The trade deficit with ASEAN also saw a rise after the implementation of the trade deal. In addition, since some of the market share in India that traditionally belonged to Indian industries was lost to ASEAN and our local industries perished instead of expanding.
The trade deals with our neighbors gave a severe blow to our local industries. Being in the proximity of each other, we have cultural and industrial overlapping to a greater extent. Hence, the products that were common to the markets played an important factor. The availability of textile from Bangladesh ruined the textile Industry while tea and coffee from Sri Lanka gave a major setback to the beverage industry. We never explored our options out of Asia and remained concentrated. Thus, most of our trade deals did not make much room for new products from other countries to other markets. Instead, they just gave exposure to our consumer base to the manufacturers of the same or similar products in partner countries.
Countries like China use these trade deals to dump their products in our market by bypassing the existing checks. Many Chinese companies have established their offices in Vietnam and Sri Lanka and are using these countries as bases. The trade agreement between these countries with India become a loophole in the system. Initially, they dump the products in huge quantities even at very marginal profits or even losses. These companies sometimes have the backing of the Chinese government. For example, Xiaomi (a Chinese Enterprise) has captured the major stake in the Indian smartphone sector. After destroying their competition and monopolizing the market, they can use it to earn profit or political advantage. According to GOI, India exited RCEP because the transparency and controls in case of emergency i.e. when the market gets flooded with foreign goods was not granted.
Thus, the reasons are multiple for our bad experiences. But we can not stay back and watch it happening. We need to strengthen our domestic sector so that when deals come we can compete at global quality. In this direction, AtmaNirbhar Bharat is a welcome initiative. We need to review the existing deals and make reasonable and compliable promises while negotiating these deals or even new ones. We need to explore the emerging economies of Africa for new deals. Also, culturally dissimilar countries of Americas and Europe can be placed to find a market for our goods and new goods for our market. The government is in talks of negotiation to strike a trade deal with countries like US, UK and Israel, and the whole European Union. Currently, we are not ready for unchecked free trade due to lacking domestic industries and already existing trade deficits that we fund through foreign reserves earned from remittances. But we would be ready for free trade very soon. The only condition required would be proper transparency and control.