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March 1, 2010

A strategic approach to trade agreements

India has traditionally been a strong supporter of multilateral trading arrangements. But for a variety of practical and strategic reasons, including limited progress in the Doha Round primarily due to the lack of engagement by the United States, it has been pursuing an ambitious agenda of the Preferential Trade Agreements (PTAs) with economic partners around the world. There are reportedly around twenty countries with which India is considering PTAs. In 2010, India is expected to move forward on PTAs with Israel, New Zealand, the European Union, Japan, and Canada.

While most agreements are confined to merchandise trade, India has strong interest in trade in services, investment flows, movement of natural persons, and in addressing non-tariff barriers of the trading partners.

Since such negotiations are quite expertise-intensive, and once entered into, difficult to change, India must ensure that the large number of PTAs with diverse countries fit into its strategic vision. All stakeholders involved in negotiating, implementing and evaluating the PTAs must work in close co-ordination. In this context, the existing and proposed PTAs must be integrated with India’s Foreign Trade Policy (FTP).

Those given the responsibility to implement PTAs—the Customs and Exercise Department—should be involved from the earliest stages to ensure smooth implementation consistent with India’s economic and strategic interests. Given the importance of sanitary and phytosanitary measures under the WTO, and the implications of the Stockholm Convention ostensibly dealing with environmental issues, Ministry of Environment and Forests should also be a part of the core group involved in the PTAs. India must be more tactical in using such measures and Conventions to safeguard its legitimate economic interests.

Why PTAs?

There are several reasons for India to strategically engage in PTAs and in economic agreements. First, India’s economic rise has led to its growing integration with the world economy. Barring unforeseen circumstances, India’s $1.2 trillion economy is projected to approach $5 trillion by 2022, just 12 years away. Its total international trade in goods and services was $660 billion in 2008, could approach $1.5 trillion within a decade. Even then, India’s share of the global GDP at around 5 percent and trade at around 2 percent is far short of India’s share of the global population at around 17 percent, so much more progress is needed.

Among other indicators of India’s integration are its annual remittance inflows which exceed $50 billion; and its diaspora of 25 million which is growing both in numbers and in economic strength. India’s stock of inward FDI exceeds $100 billion, and the prospects for its further rapid rise are positive. Similarly, India’s outward FDI is also increasing rapidly and could approach $100 billion in next several years.

Second, PTAs strengthen key bilateral economic and strategic relations. Examples include agreements with United States, Japan, Brazil, South Africa, Association of Southeast Asian Nation (ASEAN), Gulf Cooperation Council (GCC), and the European Union. As a rising power, India’s strategic concerns have become much broader. In particular, maritime security and developing a globally competitive and technologically advanced defense sector have become important priorities.

Third, PTAs cultivate a closer relationship and provide a stake to the economic partner in India’s rise. The examples include agreements with Sri Lanka, Bhutan, Myanmar, Malaysia, Singapore, Kazakhstan, and Mauritius.

Fourth, such agreements facilitate diversification of sources of energy and natural resources. One of the examples is India’s 2007 Techno-Economic Approach for Africa India Movement, or TEAM-9 initiative, involving some of the energy and resource rich West African countries. India should show flexibility and undertake similar partnerships with countries in Latin America and elsewhere.

Fifth, India needs to improve agriculture productivity substantially to address food security challenges and diversify its export basket. India’s agriculture sector is expected to contract by 0.2 percent in 2009-10; but the Prime Minister’s Economic Advisory Council (EAC) has pinned high economic growth rates in 2010-11 and in 2011-12 on strong agricultural growth of around 4 to 5 percent. This target will not be easy to achieve unless major restructuring of agricultural subsidies, investments, and farm practices applying knowledge-economy concepts much more effectively and extensively are undertaken. Some of its PTA partners such as Israel and New Zealand have capabilities in these areas which could be more effectively harnessed through the PTAs.

Challenges

PTAs are complex and lengthy legal documents. It is essential that customs officials and others responsible for implementation are aware of the nuances of the various clauses in the agreement, and of the specific ways counterparts could engage in undermining the spirit of the agreement, particularly with respect to rules of origin.

Recently the European Anti-Fraud Office (Olaf) found that millions of euros worth of China-made goods are being fraudulently passed off as Malaysian by re-exporting Chinese goods using the invoice of a Malaysian company. This illustrates the types of challenges faced by the Indian customs. Possibilities of such fraudulent practices exist in all trans-shipment hubs such as Colombo, Dubai and Singapore.

As India has many sea ports, air cargo complexes and border trade stations, customs rules, the capabilities of customs officials and the resources provided to them need to be upgraded to ensure that PTAs are implemented with requisite professionalism.

PTAs and economic agreements must be coordinated with other international agreements which may impact on India. The EU, for instance, has been using its leverage in UN regimes such as the Stockholm Convention to undermine its competitors, including India, in trade in chemicals.  Issues such as this, along with facilitating greater access to India’s professional and skilled manpower, should be be addressed in economic agreements with the EU.

Aggressive pursuit of PTAs and economic agreements is a new development in India’s economic and strategic diplomacy and the country is in early stages of the learning curve in this area. To benefit from the learning curve, a “truthful organisation” is essential. An organisation where defensive behaviour is the norm cannot take full advantage of the benefits arising from the learning curve.

The ministries involved in PTAs and economic agreements would need to examine ways to cultivate the requisite characteristics of a truthful organisation if they are to become more proficient in this area.

Establishing a group of core officials from relevant ministries and government agencies who are specialised in PTAs, economic agreements, and in WTO affairs could assist in inter-ministerial coordination, in generating core competencies, and facilitate institutional memory. In addition to Ministry of External Affairs, Ministry of Commerce, Ministry of Finance (particularly Income Tax and Customs and Excise Departments), and Ministry of Environment and Forests should also be included.

As India’s integration with the rest of the world deepens, there is a strong case for re-examining the current strength of India’s foreign and commerce ministry officials, the nature and functioning of its missions abroad, and the method used to evaluate performance. There is a strong case for including the extent to which India’s economic and strategic space has been enhanced as criteria in evaluating the performance of India’s diplomats and foreign service officers.

In a recent interview in Financial Times, Rahul Khullar, India’s commerce secretary expressed frustration that the professional staff at his ministry is grossly insufficient to pursue the ambitious PTA agenda. There is a question of both the quantity and the quality of human resources needed in economic ministries to meet the challenges of the PTA agenda. This limitation must be addressed urgently.

The negotiating ministries and their officials also must be much more proficient in undertaking background analytical and strategic research relating to the negotiating partners; in seeking advantage in negotiations, and in implementation of the agreements. The ministries also need to have robust capabilities in evaluating the impact of the individual agreements, and how the combination of these agreements affects India’s interests.

India’s geo-economic and geo-strategic interests are increasingly intertwined. The research and policy communities must reflect this to a far greater extent than is the case currently. There is a strong case for establishing a well-resourced, relatively independent-minded research centre to strengthen commercial intelligence and other analytical capabilities for negotiating, monitoring, and evaluation of PTAs and economic agreements.

Any PTA will have gainers and losers domestically. The impact will also be different in the short run as compared to the long run. Thus balancing of these conflicting interests among the domestic stakeholders will be essential. One of the options is to keep some of the sensitive clauses of PTAs flexible and set up arrangements with stakeholders, particularly the industry groups.

Industry groups, however, do not always appreciate India’s larger strategic interests, so communication strategies involving broader stakeholders are necessary. There is also a need for better-informed and more mature policy debates.

Increasingly, trade conflicts are likely to resemble “guerilla war”. Thus implementation integrity and trust among the two parties will take on even greater significance. It will therefore be easier for India to negotiate agreements with partners with similar strategic interests and values (such as Japan) than with others.

Multilateralism is in India’s interest. So while there is a case for the PTAs, they should not undermine achieving greater competency in using the WTO processes and rules to secure advantage or avoid harm to India’s interests. There is a need for a well-resourced, relatively independent WTO Centre, staffed by experts in various complementary areas. The Centre should be the focal point for high-quality public policy debates, and provide institutional memory.

Clearly, PTAs should not be viewed in isolation, but as part of geo-economic and geo-strategic interests.


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