India’s Preferential Trade Agreements

Preferential Trade Agreements (PTAs) have been proliferating, especially since the establishment of the World Trade Organisation (WTO) in 1994. As of 1st December 2015, the WTO had received notifications of no less than 619 PTAs (disaggregated by goods, services, or accessions), of which 413 were already in force. All WTO members except Mongolia have concluded at least one PTA.

What are the various types of PTA?

Partial Scope Agreement (PSA)

A PSA is only partial in scope, meaning it allows for trade between countries on a small number of goods.

Free Trade Agreement (FTA)

A free trade agreement is a preferential arrangement in which members reduce tariffs on trade among themselves, while maintaining their own tariff rates for trade with non-members.

Customs Union (CU)

A customs union (CU) is a free-trade agreement in which members apply a common external tariff (CET) schedule to imports from non-members.

Common Market (CM)

A common market is a customs union where movement of factors of production is relatively free amongst member countries.

Economic Union (EU)

An economic union is a common market where member countries coordinate macro-economic and exchange rate policies.

India and Free –Trade Agreements

In addition to its long-standing commitment to multilateralism under WTO agreements and in line with global trends, India has made use of FTAs as a key component of its trade and foreign policy, especially from 2003-04 onwards.

Hitherto, India has mainly focused on partnering with other Asian countries, and in goods more so than in services. Within Asia, India has signed bilateral FTAs with Sri Lanka (1998), Afghanistan (2003), Thailand (2004), Singapore (2005), Bhutan (2006), Nepal (2009), South Korea (2009), Malaysia (2011) and Japan (2011). There have also been two regional trade agreements, the South Asian Free Trade Agreement (SAFTA, 2004) and the India-Association of Southeast Asian Nations Agreement (ASEAN, 2010). Outside Asia, FTAs have been agreed with Chile (2006) and MERCOSUR (2004).

Mega-regionalism

Recently, PTAs have begun to morph into mega-regional agreements, which would encompass a large share of world GDP and trade. The two major mega-regionals are the Trans-Pacific Partnership (TPP), which has been signed but not yet ratified by member countries, and the Trans-Atlantic Trade and Investment partnership (TTIP), which is currently being negotiated. India is not part of these groupings and will hence be outside these large trade zones.

Atlantic Trade and Investment partnership (TTIP)

TTIP, when concluded, will be a PTA between the United States and the European Community of 27 member states and representing “30 percent of global merchandise trade, about 40 percent of world trade in services, and nearly half of global GDP”.

Trans-Pacific Partnership (TPP)

The TPP comprises 12 member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The TPP will cover 40 percent of global GDP and 33 percent of world trade.

What is the possible impact of TPP?

The World Bank estimates that by 2030 the TPP will raise member country GDP by 0.4-10 percent, and by 1.1 percent, on a GDP-weighted average basis, mainly owing to measures to reduce non-tariff barriers. Vietnam and Malaysia would be amongst the TPP member countries benefiting the most. At the same time, the Bank also estimates that non-members will suffer a marginal reduction in GDP as a result of shrinking market access and greater competition in export markets. In India’s case, the effect on exports is marginally positive, but its effect on the country’s GDP is about -0.2 per cent.

Impact of FTAs

The impact of an FTA on the trade balance is unclear, as it may favour one region over the other. The FTAs, in contrast to unilateral trade liberalization, give rise not only to beneficial trade creation but also to trade diversion. Trade diversion occurs when tariff preferences offered under an FTA causes a shift of imports from firms in non-FTA member countries to less efficient firms within the trade bloc, which now become competitive due to tariff reliefs.

Review of India’s FTAs

India’s FTAs have increased trade with FTA countries more than would have happened otherwise. Increased trade has been more on the import than export side, most likely because India maintains relatively high tariffs and hence had larger tariff reductions than its FTA partners. The trade increases have been much greater with the ASEAN than other FTAs and they have been greater in certain industries, such as metals on the import side. On the export side, FTAs have led to increased dynamism in apparels, especially in ASEAN markets.

Should India continue to negotiate FTAs and if so with whom and what should be the India’s response towards new mega-regional agreements?

Multilateral trade liberalisation remains the best way forward. But the WTO process seems to have been overtaken by preferential trade agreements. Against this background, India has a strategic choice to make: to play the same PTA game as everyone else or be excluded from this process.

In the current context of slowing demand and excess capacity with threats of circumvention of trade rules, progress on FTAs, if pursued, must be combined with strengthening India’s ability to respond with WTO-consistent measures such as anti-dumping and conventional duties and safeguard measures. No matter what India ultimately decides, one thing is clear. Analytical and other preparatory work must begin in earnest to prepare India for a mega-regional world.