How India took a leap from Look East to Trade West
PremiumIn a short span of just a few years, India has swung from ‘Look East’ to ‘Act East’ to ‘Trade West’.
NEW DELHI : On 4 November 2019, such was India’s indecisiveness that until Prime Minister Narendra Modi formally announced India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP) trade deal—a seven-year-long saga of intense negotiations and many flip flops—even many in the Indian trade negotiating team who had assembled at Bangkok that evening were unaware of the final call.
While uneasiness about the widening trade imbalance with China and fears over the dumping of Chinese goods through circuitous routes have always been festering concerns on the Indian side, it is the long-stretched border conflict between the two Himalayan neighbours that is believed to have decisively tilted the opinion against the trade deal.
Cut to 2021 and India is all set to start negotiating free trade agreements (FTAs) with the United Kingdom (UK) and the European Union (EU) by the end of the year, while aiming to simultaneously conclude a preferential pact with Canada after putting aside some initial inhibitions. A trade deal with the United Arab Emirates (UAE) is also in the offing.
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Thus, in a short span of just a few years, India has swung from ‘Look East’ to ‘Act East’ to ‘Trade West’. This shift in focus is part imperative and part compulsion, as many of India’s Asian partners have expressed displeasure over the country’s exit from RCEP after years of negotiations. The unfolding shift will have long-term implications and it will shape decisions such as which countries India trades with, what the country’s export basket might constitute and how fast it is likely to grow.
Trade secretary B.V.R. Subramanian recently said that India has revamped its FTA strategy. “We have to engage with the rest of the world. Without that, India will be shut out of global markets. We are not in any regional arrangement. So, where does India go if it wants to be a global economic player and a global trading power? We need to have FTAs. But at the same time, we have to do it in a balanced manner. We should buy enough but we should sell enough also," Subramanian said.
Setback in the east
While former prime minister P.V. Narasimha Rao unveiled India’s ‘Look East’ policy in the 1990s, it is under Prime Minister Manmohan Singh that India started to sign a slew of trade deals—with Asean (2009), South Korea (2009) and Japan (2011). After Prime Minister Narendra Modi came to power in 2014, he tweaked the policy, terming it as ‘Act East’. It was meant to convey India’s interest towards increasing its engagement with Asian neighbours. RCEP was believed to become the fulcrum of that engagement, since it was expected to seamlessly connect India to the regional value chain.
However, with India’s annual exports stuck at around the $300 billion level for about a decade—even as the trade deficit with FTA partners widened—there was growing discomfort within the domestic industry and policy circles. This led to a sense that FTAs signed during the Manmohan Singh regime may not have delivered the desired results.
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The National Democratic Alliance (NDA) government has sought a review of existing trade pacts, even indicating that some of them may have to be dumped. While several rounds of talks have been held with South Korea to renegotiate the FTA (with little progress to show), Asean and Japan have flatly resisted India’s demand for a review so far.
Mohan Kumar, chairman of the Research and Information System for Developing Countries (RIS), said that the reason India has not benefitted much from its existing FTAs is due to a slew of non-tariff barriers (NTBs) by these countries. “Everything that you (India) are trying to export—pharmaceuticals, rice, buffalo meat—all of these are not like selling shoes and watches and garments. These are subject to regulatory approvals in those countries. Asean countries are very clever and misuse SPS (sanitary and phytosanitary measures) and other such technical trade barriers," he said. “Unfortunately, none of our FTAs address NTBs; they address only tariff barriers. We have been so far terrible in creating NTBs. When tariff barriers are lowered by India, any country can export anything to India. Actually, we are an open economy in that sense," Kumar added.
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A former trade negotiator at the commerce ministry while requesting anonymity said that India’s rules of origin are extremely conservative in these FTAs because the whole idea was to prevent imports from China. “The same rules of origin are applicable to our exports, which require high local value addition (originally meant to safeguard against circuitous trade)," the negotiator said. “It is far better for Indian exporters to go through the non-preferential tariff route and pay an extra tariff of 3-4% to export their low value-added products, rather than go for preferential tariff under FTAs where the criterion is so cumbersome."
Naturally, India’s utilization of its existing FTAs is low. According to a Deloitte study from 2017, while FTA utilization is as high as 70-80% for developed countries, in India it is less than 3% of the available opportunity. In effect, a measure that was meant to target China has left behind a trail of unintended consequences on India’s MSME (micro, small and medium enterprises) ecosystem, accounting for a big chunk of the country’s exports. Complying with the rules of origin requirement is more challenging for MSMEs compared to the large companies, said Ajai Sahai, chief executive officer, Federation of Indian Export Organisations (FIEO).
Turning West
With RCEP in the back burner and little measurable gain from the existing FTAs, India was hopeful that a trade package that has been under negotiation with the US since 2018 will at least settle the acrimonious stance taken by the previous administration under former president Donald Trump that had touted India as a “tariff king". However, the new Biden administration has made it clear that it is in no mood to sign trade deals in a hurry.
Given the circumstances, the European Union (EU) and UK—keen to re-establish their credentials as credible trade partners—have emerged as India’s natural choices for a trade deal. While Asean nations and India compete with each other to export similar labour-intensive products (making a bilateral trade deal less effective), the belief is that India may be better poised to benefit from complementary ties with advanced Western countries. Post Brexit, UK is also in a hurry to scout for new trade partners to expand its trade and business opportunities. And despite the bitter experience with the derailed Indo-EU Broad-based Trade and Investment Agreement (BTIA), which was dropped after six years of negotiations, both India and Europe seem to be in the mood to give it another shot.
The need for a trade deal with the EU has become more urgent after Vietnam operationalized its FTA with the European grouping. Indian exporters directly compete with Vietnam in a range of sectors, ranging from apparel and leather goods to footwear and marine products. Garments produced in Bangladesh also have preferential access to the EU and UK markets under the generalised system of preferences (GSP), due to the least developed country status of India’s eastern neighbour.
The former trade negotiator quoted above said that while a trade deal with UK is doable and makes sense, India has to carefully watch how the Brexit arrangement actually unfolds. “Now, UK is talking about not honouring the Brexit arrangement. We should not do a deal in a hurry. We should wait and see whether we get integrated market access to the EU or not," he said.
Stumbling blocks
However, trade deals with UK and EU will not be easy. The EU’s insistence on labour and environmental standards, access to government procurement, stricter intellectual property rules and cross-border data flow will not be easy for India to meet. With India’s move towards data localization, negotiations could be acrimonious. While India will seek to have zero duty access for textiles, garments and leather products, UK and EU will seek market access in automobiles, wines and Scotch whisky. Also, unlike the still-born BTIA, which didn’t move past the negotiating stage, EU has also been pushing for the trade pact to be split into three separate agreements—trade, geographical indications (GIs) and investment. While the commerce ministry maintains that all the negotiations will be carried out in parallel and a deal will be concluded simultaneously, experts believe that the new arrangement will favour the EU.
“The EU is a great trade partner, and we should have a trade deal with them. But by trifurcating the deal, we have lost our leverage completely," the former trade negotiator said. “This is what they wanted from us, and we hadn’t allowed it earlier. If they get their investment agreement and (an agreement on) GIs, they will give two hoots about the rest. Our best bet is a broad-based trade and investment agreement."
Data access will be yet another flashpoint. Until now, data has been streaming in from EU to Indian IT/ITES exporters through commercial contracts. Smaller Indian IT firms are at a disadvantage, however, since signing such exclusive commercial contracts are an expensive affair. The process could be smoothened if India receives EU’s ‘data adequacy’ status.
“Data adequacy can’t be resolved through an FTA," said a trade expert at a government-backed think tank, requesting anonymity. “It can be secured (only) by having a domestic law in India which is in conformity with the EU’s GDPR (General Data Protection Regulation) law." The trade expert added that India must instead insist on the mutual recognition of qualifications in educational institutions as part of the FTAs with EU and UK, which could potentially allow skilled Indian professionals to provide services in those markets. “That has to be concluded at the time of finalizing the FTAs. In the existing FTAs, there was a promise to have MRAs (mutual recognition agreements), but that promise never got fulfilled," he added.
Ultimately, while India may find it somewhat easier to settle with the West than with the East, it has to take some painful decisions in the months ahead, said Kumar of RIS. “You can’t tell the East ‘Sorry our dairy industry and steel industries are sensitive’ and you can’t tell the West ‘We will not do digital trade or sustainable development’. Then you can’t sign FTAs. You live all by yourself. You go back to economic autarky," he said.
That could very well be the eventual outcome of this new round of frenzy over integrating India with the world. There is, after all, adequate precedent for India backing off from trade deals in the past. “I believe robust trade deals with EU or UK are not likely in the next few years," said Richard M. Rossow, Wadhwani Chair in US India policy studies at the Center for Strategic and International Studies (CSIS). “Weak trade deals are possible, but India’s focus on stimulating (its) domestic manufacturing overrides any nascent interest in really knocking down the (existing) trade barriers with key partners," he said. “Luckily, India is a large and growing market. So, many global manufacturers have already established a presence to feed into the local market. But real success will lie in utilizing India as a base for global manufacturing and attracting small and medium suppliers."
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