Concerns of Indian actors must be taken into account when drafting FTAs

In recent months, India has signed trade agreements with Australia and the United Arab Emirates. During the last week of June, New Delhi began talks for a similar deal with the EU. These talks could have an impact on tariff issues in agriculture and industry. India’s thriving sectors like textiles, pharmaceuticals and leather could benefit from these deliberations, which would also be closely watched by representatives from the service and renewable energy sectors.

Over the past decade, India’s exports to EU countries have grown at a faster rate than the country’s overall exports. The Netherlands, Germany, Belgium, Italy and France have become key markets for Indian products. A successful free trade agreement (FTA) with the EU could help India expand its presence in markets such as Poland, Portugal, Greece, the Czech Republic and Romania, where the country’s exports have experienced double-digit annual growth rates over the past decade.

Before entering into trade deals, India needs to consider a few key concerns. These agreements boost cross-border trade flows by dismantling various tariff and non-tariff barriers. It has been observed that when India is an importer, the preferential tariffs resulting from trade agreements are significantly lower than the tariffs applied to countries to which New Delhi has granted Most Favored Nation (MFN) status. But when the partner country is the importer, the preferential tariffs on Indian products, in most cases, are closer to MFN tariffs. As a result, Indian exporters are not getting the same returns as their counterparts in partner countries – India’s trade with South Korea is a case in point. Before concluding a trade agreement, it is therefore necessary to ensure that the national industry is not led to compete under unequal conditions with the partner countries.

The comprehensive economic partnership agreement between India and the United Arab Emirates is a good example. It includes a strong clause on rules of origin. Value added of 40% or substantial processing of up to 40% in the exporting country is required to qualify for reduced tariffs. Rules of origin have been a bone of contention in most Indian trade agreements. In 2020, the country notified customs rules (administration of rules of origin under trade agreements) (CAROTAR, 2020), which require a basic level of due diligence from the importer. It will be interesting to see how these rules work in FTAs.

“Compensation clauses”—where the exporter is obliged to undertake activities that directly benefit the economy of the importing country—should be built into trade agreements, especially for technology-intensive sectors. An emergency action plan could be another useful element of trade agreements. In February 2020, the United States made India ineligible for claims under the GSP, the United States’ oldest preferential trade regime. The US Trade Representative’s office considered India a developed country and suspended the favorable treatment under the GSP. A contingency plan should be in place to deal with such situations.

India should also emulate the agreement between the United States, Mexico and Canada to incorporate a “sunset” clause in trade agreements. The pact between the three North American nations provides for periodic reviews and the agreement should automatically end in 16 years unless the countries renegotiate it.

Finally, India should negotiate parity between services and goods. India’s trade in services is weak and its overall score in the OECD’s Services Trade Restrictive Index (STRI) exceeds the world average. It is particularly high in legal and accounting services due to licensing requirements in these two segments. There is also significant scope for trade expansion in the banking and financial services sector.

A well-crafted trade deal could help India increase its share in world trade and help achieve the government’s goal of making the country a $5 trillion economy.

Mazumdar and Khurana are economists at India Exim Bank. Views are personal

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