FTA Helps Consumers but Producers Lose Margin

Existing literature rely on examining Balance of Payments to assess the impact of Free Trade Agreements. This paper views such methodology as reductionist, and offers alternative lenses in studying the well-being of stakeholders in response to changes in the tariff regime.

An FTA leads to import of cheaper factors of production making the domestic industry more competitive, it can lead to an increase in “producer surplus” by boosting the bottom lines of an organisation. However, the same is not true with the imports of final products that pose a direct competition to domestically produced goods.

In a large number of cases of India’s trade agreements—especially with those of Southeast Asia—Indian trade deficits increased after the FTAs came to effect. This is because the demand for imported commodities increased with decline or complete elimination of tariffs and non-tariff barriers, thereby, making these products cheaper for the Indian consumer, when compared with similar Indian products. This is true for palm oil, where a low tariff regime by around 2014–15 resulted in a massive spurt in palm oil imports from Malaysia and Indonesia. It has been allegedly stated that with the dominance of the imported palm (from Malaysia) and soya (from South America) oils in the consumption basket, processing margins diminished substantially thereby, posing a threat to the very existence of the domestic oil processing industry.

Despite the above, these FTAs have actually helped the consumers. The reason for increasing consumption of imported palm oil in the last decade was precisely because of lower prices helping consumers’ cause. Larger volumes of cheap imports increase the “consumer surplus” as also consumers’ choice basket. With constant advocacy from domestic industry groups, the government raised the import tariffs of both crude and refined edible oils over time from the zero-tariff regime of crude oil during the middle of the last decade.

Therefore, in this entire penchant for signing FTAs, it becomes imperative that there should be a more comprehensive impact analysis conducted. This should entail understanding the impacts on the economy through a value chain analysis, and the geo-economic and geopolitical repercussions. The value chain analysis, ex ante or ex post, turns out to be beneficial on two grounds. Firstly, it provides the Ministry and policymakers an opportunity to assess the changing natures of bottom lines/ well-being of the various stakeholders of the commodity value chain, as also provide an aggregate value of the surplus/ loss generated in the chain, and take a more informed decision rather than going by sheer assumptions posed by trade theory. Secondly, this also helps the policymakers to design their negotiation strategies across stakeholder groups on one hand and incentive strategies, on the other, to compensate for the losses that might occur to some of the concerned stakeholders in the value-chain. India’s decade-long caution against FTAs have often been attributed to reaching conclusions on successes/failures of FTAs through FTA utilisation rate, market penetration, integration with regional or global production networks, and trade deficits. This essay adds alternate two layers of criteria to assess FTAs.