Former Sr Eco Adv in GOI Calls for Full FTA Review with Developing
Countries, Advocates Join in FTAs with Majors
·
India’s Preferential/Free
Trade Agreements (PTAs/FTAs): Strategies and Policies
[By
Dr H A C Prasad - International Trade and Services Consultant and Former Senior
Economic Adviser, MOF, GOI]
·
Most
of India’s FTAs have been more beneficial to its FTA partners than India.
·
There
is some sort of an ‘Unequal Exchange’ for India in its FTAs in terms of both
tariffs and preferential imports/exports with some exceptions.
·
Balance
in terms of Preferential trade can be seen only in the case of India-South
Korea preferential trade, where both the preferential trade shares and
preferential tariffs on both the import and export sides are near to each
other.
·
In
the case of ASEAN also the share of preferential imports by ASEAN from India is
less than India’s preferential imports from ASEAN. The preferential tariffs,
are low and preference margin is high for India’s imports from ASEAN.
·
While
preferential tariffs are extended by India’s FTA partners to India, unlike
India, majority of items are not covered in the given sector at the 2-digit
level.
·
The
Margin of Preference given by India to its FTA partners is higher than the
Margin of Preference given by them.
·
The
DIPP has also recently come up with a proposal to identify sectors to be kept
in the Reserved list in the context of FTAs.
·
Imports
of Natural Rubber has increased mainly from Indonesia, Malaysia, Thailand,
Singapore and Vietnam. Domestic price has come down much below the Cost of
Production resulting in huge loss to producers which has compelled many
producers not to tap rubber.
·
Under
SAFTA, NR is allowed to be imported from least developed country members at
zero duty from 2011.
·
NR
is also affected by the import of low tariffed synthetic rubber, though in 2023
Budget import duty on Compounded Rubber was increased. Tariffs on Synthetic
rubber should be rationalized by not only taking note of the concern of its
users, but also the producers of NR.
·
Under
ASEAN, duty payable is 51% whereas under Indo Sri Lanka Free Trade Agreement
(ISFTA) and SAFTA the duties are zero percent and 8%.
·
Large
quantities of pepper are also being smuggled into India via Nepal, Myanmar and
Bangladesh borders.
·
Continuation
of the Quota under ISLFTA as this has livelihood concerns of large number of
people
·
Arecanut has 100% import duty and MIP
of Rs 351 per kg at present. India produces more than 50% of the World
production of Arecanut and about 10 million people
depend on this Crop.
·
Imports
are mainly from Srilanka and Indonesia though there
are reports of informal or illegal imports from Myanamar.
·
In
the case of the leather and footwear sector, while under India-Japan CEPA,
Japan has agreed to eliminate tariffs for most of the items in Chapter 41
(finished leather) and Chapter 42 (Leather goods) by 2021-22, for footwear,
duty concession to India has been given only for some categories and most items
have MFN duties as high as 27%-30%.
·
In
the case of Marine products, India’s present FTAs have not helped much compared
to EU-Vietnam and EU-Ecuador FTAs where Vietnam and Ecuador have greatly
benefitted. Despite having a CEPA with Japan, farmed shrimp exports are subject
to 100% sampling of Vannamei and 30% sampling of
farmed Black Tiger Shrimp from India for antibiotic residue (AOZ).
·
India
can negotiate with Japan on these issues during the proposed Review of the
India -Japan FTA.
·
Higher
concessions are given by India’s FTA partners like Japan, South Korea, China
and the Philippines to other countries compared to India with respect to
Coffee.
·
FTAs
with the strategic developed countries and blocks instead of its competitors or
other developing countries.
·
Strategic
regional forum of India with QUAD countries could be taken forward to the level
of some form of economic and trade grouping.
·
FTAs/CECAs
with some advanced countries like US, UK, EU could be beneficial for India and
its FTA partners.
·
There
is now a realisation that past FTAs were flawed.
·
some
countries are in multiple FTAs and the same commodities are included in tariff
concessions in different FTAs, there should be some uniformity.
·
This
will help in avoiding an FTA partner trying to use or misuse the best
concessions in the FTA which has relatively lower preferential tariffs. This
will also help in removing the confusion to domestic producers and make actions
of a multiple FTA partner predictable.
·
These
countries get tariff concessions in India’s FTAs, some as LDC partners. These
very countries which continue to enjoy US GSP benefits, compete against India
in the very same commodities for which GSP has been withdrawn for India,
particularly Bangladesh, which is also mulling to join China-dominated Regional
Comprehensive and Economic Partnership (RCEP).
·
During
negotiations for new FTAs in the future, if the MFN tariffs of the partner
countries are already zero, near-zero or low, India should try to get maximum
gains in areas other than tariffs as the preference margins for India would be
low.
·
But
inclusion of Services for liberalization in FTAs should not just be based on a
Request-Offer approach, but should also be based on a common template for
India’s services sector.
India
has a variety of Trade Agreements– Preferential Trade Agreements (PTAs), Free
Trade Agreements (FTAs), Regional Trading Agreements (RTAs), Comprehensive
Economic Cooperation Agreements (CECAs), Comprehensive Economic Partnership
Agreements (CEPAs), Comprehensive Economic Cooperation and Partnership
Agreements (CECPAs) and Economic Cooperation and Technical Cooperation
Agreements (ECTCAs), etc. There are also some countries that are part of
multiple PTAs/ FTAs/ RTAs/ CECAs of India.
Part
1: India’s Earlier FTAs and Unequal Exchange
Studies
by Dr H A C Prasad in collaboration with India Exim Bank1 have shown
that most of India’s FTAs have been more beneficial to its FTA partners than
India.
In
terms of share in total imports/exports of India in 2018 among India’s earlier
RTAs/FTAs in existence, APTA (18.2%/10.7%), ASEAN (11.3%/11.2%) and SAARC
(0.8%/7.6%) as country groups and Singapore (2.8%/3.2%), Korea Republic
(3.2%/1.5%), Japan (2.5%/1.5%) as individual FTA partners are the major trading
groups/countries.
The
importance of the different FTAs in India’s Trade in the context of Preferential
tariffs, need to be seen by looking at the extent of preferential trade with
these FTAs and not just general trade with the FTAs.
Our
studies show that there is a sharp contrast between the share of Preferential
imports and tariffs of India’s different PTAs/FTAs on the import and export
sides. The share of preferential imports from India by India’s FTAs in their
imports is much lower than India’s share of preferential imports from these
FTAs in India’s imports for most FTAs except APTA and MERCOSUR. Even the
preferential tariffs for imports from India by many FTAs are relatively higher
than India’s preferential tariffs for imports from these FTAs leaving some
exceptions Thus, there is some sort of an ‘Unequal Exchange’ for India in its
FTAs in terms of both tariffs and preferential imports/exports with some
exceptions.
Some
sort of balance in terms of Preferential trade can be seen only in the case of
India-South Korea preferential trade, where both the preferential trade shares
and preferential tariffs on both the import and export sides are near to each
other. In the case of APTA and MERCOSUR, the balance seems to have shifted in
India’s favour in terms of both the preferential
tariffs and share of preferential trade. While APTA’s preferential trade with India
is not too low, India-MERCOSUR preferential trade is limited. In
India-Singapore CECA, India has not gained any tariff concessions as
Singapore’s MFN tariffs are already low, instead, India has given substantial
tariff concessions. The gains need to be seen only in other parameters covered
in the CECA.
In the case of ASEAN also the share of
preferential imports by ASEAN from India is less than India’s preferential
imports from ASEAN. The preferential tariffs, are low and preference margin is
high for India’s imports from ASEAN, while preferential tariffs are
relatively higher and preference margins are low for ASEAN’s imports from
India. India-ASEAN preferential trade though not one of Equal Exchange, has
some elements of fairness in terms of tariffs as average MFN tariffs of ASEAN
(both simple and weighted) are already relatively low for India.
One
more thing to be noted is that more than the utilization rate of FTAs being
lower by India
on the export side as mentioned in some studies, it is the low coverage of
items under preferential trade in the imports of FTA partners of India and the
relatively low preference margins which are important. While
preferential tariffs are extended by India’s FTA partners to India, unlike
India, majority of items are not covered in the given sector at the 2-digit
level.
Another
thing to be noted is that the Preferential tariffs (weighted) are much lower
than MFN tariffs on India’s import side, while in India’s partner’s import
side, Preferential tariffs are closer to MFN tariffs with some exceptions. This
indicates that, the Margin of Preference given by India
to its FTA partners is higher than the Margin of Preference given by them.
The
Services sector was also not considered in many of these earlier free trade
agreements.
Thus,
India’s earlier FTAs with some exceptions seem to have been less beneficial
from the tariff point for
India, though there are other considerations. The new FTAs/CECAs like the
India-Australia CECA and the India-UAE CEPA and the ones in the pipeline need
to be examined in the light of the above findings.
Part 2: India’s FTAs: Need
for Caution while liberalising some sensitive sectors .
Our studies have shown how
earlier FTAs affected some sensitive sectors of India. There is a need to be careful
while liberalizing some sectors/items for FTAs though the list of such items
/sectors in the Exclusion list should be kept to the bare minimum. The
DIPP has also recently come up with a proposal to identify sectors to be kept
in the Reserved list in the context of FTAs. However, many parameters have
to be considered while identifying these sectors. Some examples of
sector-specific issues/ experiences in this context are the following.
In
the case of the electronics sector, the Industry
has pointed out that FTAs have done great damage to the local industry as India
is a huge consumer market and in signing FTA with the ASEAN, domestic
electronic manufacturing was adversely affected. This sector has been badly
affected by ITA1 with 217 tariff lines at zero duty since April 2005. By the time the ITA1 was implemented, the Newly
Industrialized Countries (NICs) of Asia had become competitive in this sector,
while India was just entering this sector. Thus, ITA1 badly affected the
domestic Electronics sector. Further damage should not happen to this sector
due to FTAs. So, the option of
lowering tariffs in this sector is limited except for inputs needed to strengthen
domestic manufacturing. A carefully thought out tariff
rationalization policy is needed if India has to make up for the loss in
missing the bus and make its dream of ‘Make in India’ a reality in the
semiconductor sector.
In
the case of Agricultural Sector, there are some sensitive items with livelihood
concerns, where caution is needed. But the issues in each of them differ. Some
examples are given below.
Natural
rubber (NR):
NR
is not covered by the Agreement on Agriculture (AoA)
though it is an agricultural product due to the irrational product coverage.
The applied Import tariff on NR is 25% or Rs 30 per kg whichever is lower for
Dry forms of NR and 70% or Rs 49/- per kg whichever is lower for Latex. Though
Import duty for latex is relatively high, latex accounts only for around 7% of
NR consumption in India and less than 2% of it is imported. Imports of Natural Rubber has increased mainly from
Indonesia, Malaysia, Thailand, Singapore and Vietnam. Domestic price has come
down much below the Cost of Production resulting in huge loss to producers
which has compelled many producers not to tap rubber.
Tariff
lines on NR under HS 4001 were included in exclusion/negative lists in all
major FTAs (except SAFTA). Under SAFTA, NR is allowed
to be imported from least developed country members at zero duty from 2011. Least
developed country members of SAFTA are Nepal, Bhutan, Bangladesh, Afghanistan
and Maldives. Among these countries, Bangladesh is the only producer of NR and
hence NR can be imported into India at zero duty from Bangladesh. Tariff
concessions were also given under APTA, by applying a 20% tariff with effect
from 1st July 2018.
In
view of the above facts, further Tariff liberalization for Natural Rubber for
FTAs is not advisable as it has major livelihood implications in South India.
While APTA countries are not major
exporters and the threat is less, export of NR by Bangladesh is also not high.
But rules of origin should be implemented strictly. NR is also
affected by the import of low tariffed synthetic rubber, though in 2023 Budget
import duty on Compounded Rubber was increased. Tariffs on Synthetic rubber
should be rationalized by not only taking note of the concern of its users, but
also the producers of NR.
Pepper
Pepper
has an import duty of 70% at present. The price of pepper which in 2015-16 and
2016-17 was around Rs.700 per kg came down to Rs.300 per kg in 2018-19, but has
rebounded to Rs 600 plus per kg this year. While the Government of India
imposed minimum import price on Pepper which is more or less equal to the cost
of production, any reduction in MIP could jeopardize the interests of the
predominantly marginal & small growers of Black Pepper.
India
imports pepper mainly from Sri Lanka, Vietnam and Indonesia. Inclusion of
pepper in some FTAs with differing tariff concessions is causing problems. Under ASEAN, duty payable is 51% whereas under Indo Sri Lanka
Free Trade Agreement (ISFTA) and SAFTA the duties are zero percent and 8%. So,
diversion of Pepper to avail the best preferential duty is resorted to by
unscrupulous elements who reroute Pepper of Vietnamese or Indonesian origin via Sri Lanka. In Sri
Lanka, importers manage to get the certificate of origin of Sri Lanka easily
for Pepper originating from Vietnam or Indonesia which is of poor quality with
chemical residues and avail the benefits under these FTAs. Large quantities of pepper are also being smuggled into
India via Nepal, Myanmar and Bangladesh borders.
In
view of the above, Pepper should not be included in any new FTAs and Minimum
Import Price of Rs.500/- needs to be continued. The above also indicates the
need for having a uniform preferential tariff under all FTAs for a particular
item, including for Pepper, proper implementation of Rules of Origin including
imposing a ban on imports from those countries which do not grow Black Pepper
even if they are part of any FTA of India,
scrutinizing all duty refunds on re-exports as re-exports are sometimes
done even without value addition only to get refunds, and continuation of the Quota under ISLFTA as this has
livelihood concerns of large number of people in states like Karnataka, Kerala and Tamil
Nadu. India is now in the process of relaunching the Economic and
Technology Cooperation Agreement (ECTA) with Srilanka
and these concerns need to be taken care of.
Arecanut
Arecanut
has 100% import duty and MIP of Rs 351 per kg at present. India produces more
than 50% of the World production of Arecanut and
about 10 million people depend on this Crop. Import duty exemptions/ concessions are
given to goods imported from Myanmar through Land including Arecanut/Betelnut.
SAFTA LDCs (including Bangladesh, Bhutan, Maldives, Nepal, Afghanistan) have
been extended 0% duty. Similarly, India’s preferential tariff for Srilanka is 0%, SAFTA 8%, SAPTA 50% and SAPTA LDCs 40%. Imports are mainly from Srilanka and Indonesia though there are reports of
informal or illegal imports from Myanamar. The DGFT, on July 03, 2023, made an
amendment to the Import Policy allowing the import of 17,000 metric tonnes of fresh (green) Arecanuts
from Bhutan without the requirement of a Minimum Import Price condition.
Furthermore, the import can be facilitated through LCS Chamurchi . This has led to
anxiety among growers as already there were reports of illegal imports of Arecanut from Myanmar and arecanut
prices witnessed a slight fall.
Since
Arecanut imports affect the livelihood of many people
in many parts of South India and Assam, there is no need to include Arecanut in any future FTAs.
Part
3: India’s FTAs: Scope for further negotiations and fair treatment
There
are some areas where there is scope for India to negotiate further with its FTA
partners Here the following 2 issues are examined.
1)Some
sectors/areas where there is scope for India to negotiate further with its FTA
partners
Some
examples are given below.
In the case of the leather and footwear
sector, while under India-Japan CEPA, Japan
has agreed to eliminate tariffs for most of the items in Chapter 41 (finished
leather) and Chapter 42 (Leather goods) by 2021-22, for footwear, duty concession
to India has been given only for some categories and most items have MFN duties
as high as 27%-30%. Japan
is not a major manufacturer of footwear and India needs to renegotiate with
Japan to include all types of footwear under HS 6401 to 6405 for duty
concessions on a reciprocal basis.
In the case of Marine products,
India’s present FTAs have not helped much compared to EU-Vietnam and EU-Ecuador
FTAs where Vietnam and Ecuador have greatly benefitted. Despite having a CEPA
with Japan, farmed shrimp exports are subject to 100% sampling of Vannamei and 30% sampling of farmed Black Tiger Shrimp from
India for antibiotic residue (AOZ). While India needs to have better SPS
standards, fair treatment should also be given for imports from India by
India’s FTA partners.
India can negotiate with Japan on these
issues during the proposed Review of the India -Japan FTA.
2) Sectors/Areas where India
can negotiate with FTA partners for fair Treatment
Another
related issue is India getting less favorable treatment from India’s FTA
partners compared to the higher tariff concessions given by them to India’s
competitors. In the Agricultural sector, higher
concessions are given by India’s FTA partners like Japan, South Korea, China
and the Philippines to other countries compared to India with respect to
Coffee. Other markets like the EU, Russia and Turkey also give higher
concessions to other competitors of India. There is scope to negotiate with
these countries, though political factors will also be important as in the case
of Turkey.
So,
any tariff rationalization policy with respect to FTAs should also consider
whether fair treatment is extended to India by its FTA partner and negotiate
for the same.
Part
4: India’s FTAs/CECAs: Some Strategies and Policies
Some
strategies and policies in the context of India’s FTAs/CECAs are as follows.
It
may be beneficial for India to have some useful FTAs
with the strategic developed countries and blocks instead of its competitors or
other developing countries, political considerations apart. Studies by Dr H A C Prasad in
collaboration with India Exim Bank1 have also indicated the above
while suggesting that the strategic regional forum of
India with QUAD countries could be taken forward to the level of some form of
economic and trade grouping.
While
it may be difficult for India to be a partner of any FTA in the near future
where China is the major player as decisions on FTAs cannot be separated from
geopolitical considerations, FTAs/CECAs with some
advanced countries like US, UK, EU could be beneficial for India and its FTA
partners. There are indications of Trade diversion from China to India
by these countries. India needs to quickly utilize the opportunity to see that
Trade diversion to India coupled with Investment diversion to India becomes a
reality as many foreign investors are planning to move lock, stock and barrel
from China.
Already
India has concluded CECA with Australia and CEPA with UAE. Services sector has
also been included in both. While negotiations on India-UK FTA is progressing
and India-EU FTA restarted, India-US FTA negotiations seem to be stalled due to
the US policy, though trade negotiations on many fronts are progressing with
the US. Reviews are taking place in the case of India – Sri lanka
FTA and a few others. There is now a realisation that past FTAs were flawed. So,
a careful but quick review of existing FTAs on the lines of zero-budgeting
along with concluding new useful FTAs with major trading partners of India is
important. Negotiations in Indo-UK and Indo-EU FTAs should be brought to a
logical conclusion at the earliest. If necessary, India should not hesitate to
terminate some less useful FTAs or make them more useful for India atleast at the time of renewal.
Since,
some countries are in multiple FTAs and the same
commodities are included in tariff concessions in different FTAs, there should
be some uniformity. The tariff concession for a tariff line by
India should be the same for all FTAs. This will help
in avoiding an FTA partner trying to use or misuse the best concessions in the
FTA which has relatively lower preferential tariffs. This will also help in
removing the confusion to domestic producers and make actions of a multiple FTA
partner predictable.
Many
FTAs of India to developing countries have resulted in mainly giving tariff
concessions. So, a
proper evaluation of the less developed and developing countries needs to be
done to see whether they have graduated to a level where tariff concessions may
not be needed for some items or whether the same countries are competing
against India, using the tariff concessions. With US withdrawing GSP benefits
to India but not to some developing FTA partners of India, India will be more
open to competition in the US market from its FTA/RTA partners. These countries get tariff concessions in India’s FTAs,
some as LDC partners. These very countries which continue to enjoy US GSP
benefits, compete against India in the very same commodities for which GSP has
been withdrawn for India, particularly Bangladesh, which is also mulling to
join China-dominated Regional Comprehensive and Economic Partnership (RCEP). Vietnam,
which is a part of India -ASEAN FTA is also very competitive in some products
like textiles. These issues need to be addressed by introducing graduation and sun-set
clauses in India’s FTAs, particularly earlier FTAs at the time of review, which
should be a total review.
FTAs
should be based primarily on economic gains resulting in tariff liberalization
on both sides without affecting sensitive sectors particularly agricultural
sector. Political, Strategic or other gains should be only secondary. During negotiations for new FTAs in the future, if the MFN
tariffs of the partner countries are already zero, near-zero or low, India
should try to get maximum gains in areas other than tariffs as the preference
margins for India would be low.
Recent
FTAs like the India-Australia ECTA and India-UAE CEPA also include Services
sector. But inclusion of Services for liberalization
in FTAs should not just be based on a Request-Offer approach, but should also
be based on a common template for India’s services sector.
1
a) "Impact of Covid-19 on India's International Trade: Strategies and
Policy Perspective", (In collaboration with India EXIM Bank), Special
publications, India EXIM Bank, February 2021
b)
“Relooking India's Tariff Policy Framework”, (In collaboration with India
EXIM Bank), Special publications, India EXIM Bank, March 2020