While India has bilateral trade agreements with 14 countries or economic blocs, four of the most substantial ones of these have gone back to the drawing board, for review or fine-tuning.
Even the relatively recent pact with the UAE is undergoing a review at the instance of India, reflecting lack of enough detailing before at least some of these agreements were finalised.
In some cases, it became evident with the operationalisation of these agreements that the partner countries carried away most of the benefits in terms of trade on concessional terms.
In the last 18 months since the India-UAE Comprehensive Economic Partnership Agreement (CEPA) came into force, for instance, there has been a sharp rise in imports of gold, silver and jewellery from Dubai, impacting government revenues and domestic industry.
Without a review, the damage would have been substantial but early this month at the meeting of the joint committee under the CEPA, UAE agreed to India’s request to exercise greater oversight to ensure that Rules of Origin are not circumvented.
The agreement with UAE contains provisions for unlimited imports of duty-free gold, silver, platinum, and diamonds into India over the next few years. In the first year of the pact, silver imports from the UAE increased dramatically by 5,853%, from $29.2 million in FY2023 to $1.74 billion in FY2024. The import of gold jewellery from the UAE increased by 290%, from $347 million in FY2023 to $1.35 billion in FY2024.
As UAE is not a producer of either gold or silver, much of the exports were made possible by liberal application of Rules of Origin. While India has not asked for any amendment in the concessions to the UAE, the issue of diamond trade in the agreement has been left unaddressed, according to the founder of Global Trade Research Initiative (GTRI) Ajay Srivastava.
India imposes 5% duty on cut and polished diamonds and 0% duty on raw diamonds. Zero duty on diamonds in coming years will take away the protection available to domestic industry. This issue will pop up later if left unaddressed.
India entered the FTA game in 2009 when it signed the CEPAs with South Korea and FTA with Association of SouthEast Asian Nations (Asean). In 2011, it was followed up by CEPA with Japan. All three agreements are now undergoing a comprehensive review as India felt it gained less than its treaty partners.
Despite all the pain they might cause, the FTAs cannot be dropped as too much is at stake. Currently, India’s trade agreements cover 26 countries. It is now negotiating new FTAs with 45 countries, including the UK, European Union, Peru and Oman. This will move a large part of India’s exports to preferential route, from the MFN pathway.
Within five years of the agreement on goods trade being activated with Asean, India had started asking for a review of the pact and the scope of review was first discussed in 2015. After years of negotiations, the Asean finally agreed to the review in 2019. By 2022, the scope of the review was agreed to. Now, both sides are working with a 2025 deadline to complete the review.
With Korea, India got tariff elimination or concessions on 93.2% of the tariff lines while conceding lower duties in 83.8% of tariff lines. Even this could not prevent India’s trade deficit with South Korea increasing by 220% since CEPA came into force compared to its trade deficit with the rest of the world at 132.2%. With Japan the deficit has gone up by around 140%, which is in line with the average increase.
With ASEAN, exports grew by 123.9% and imports by 175.7%; with Japan, exports grew by 56.4% and imports by 98.5%; and with South Korea, exports increased by 89.1% and imports by 127.3% post the trade pacts. With this kind of data, the need for the review with Asean and Korea becomes more pressing. Talks with Asean and Korea are continuing without a break. With Japan the pace is yet to pick up.
According to experts, India could not gain much from these FTAs as in absolute terms its tariff concessions were deeper than its partners, who already had lower tariffs. So, exports from Asean, Korea and Japan got a greater boost. One major reason for India’s exports not growing as desired is that Korea and Japan apply stringent standards, regulations, and certification requirements. Conforming to these standards and then obtaining certifications is costly, keeping many exporters out. According to some estimates, the utilisation of FTA concessions by India is just 25% as compared to 70-80% by developed countries.
Many Indian firms choose not to use the FTA route when import duties are low, as FTA-related compliance costs do not justify the tariff benefits which are already low, Srivastava said.
One of the key issues in review of both Japan, Asean and Korea FTA is making compliance with standards easier and more transparent. As it is in world trade, non-tariff barriers are playing a greater role. According to the United Nations Conference on Trade and Development (UNCTAD) the tariffs as the total value of the product has come down to 7% in 2022 from 13% in 1999 while the non-tariff barriers have gone up to 71.97% in 2022 from 53.4% in 1999.
There are challenges related to gaining better market access for Indian agricultural products like shrimp, rice, steel, pharmaceuticals, and services in Korea, which is the key market in Asean — because of the stringent standards, sanitary and phytosanitary measures and technical barriers to trade. Apart from high standards, the procedures to comply with them are made so complex and arduous that it adds to costs and delays.
With Asean, scope for clamping down on imports is limited for balancing the trade. Large part of imports from Asean countries is coal, machinery and equipment, edible oils, plastics and electronics. Most of these are feeding the industry here.
Another explanation for the way trade has developed with FTA partners is the change in the world trade dynamics and the difference in the performance of manufacturing sectors in Asean, Korea and India. Chinese investments in the Asean region have expanded at a brisk pace in the last 15 years.
According to officials, China using these countries to export to India is a risk and addressing it would not be easy. Supply chains of Asean countries and China have become deeply integrated in the past 15 years. China during this period increased its share of imports by Asean to 30% from 10% during that period while India’s share stagnated at 10%. Other countries’ share of Asean imports contracted.
Asean FTA mandates that for availing concessional duties local value addition of 35% is a must. With a local manufacturing base companies with Chinese investments would be meeting these norms.
“Current Rules of Origin with Minimum 35% value addition are sufficient to check pass through imports. They must be implemented meticulously,”
Srivastava said.
While learning from old FTAs will be of use in new negotiations, the balancing of trade in the existing ones can come through more exports by India and strict adherence to rules of origin by partner countries.
From: financialexpress
Financial News
