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Miniature Trade Deals Won’t Serve India’s Interests

India’s free trade agreement aspirations remain insufficiently ambitious, writes Raj Bhala.

<div class="paragraphs"><p>Prime Minister Narendra Modi inaugurates a Samsung mobile phone plant in Noida, Uttar Pradesh, on July 9, 2018. (Photograph: PIB)</p></div>
Prime Minister Narendra Modi inaugurates a Samsung mobile phone plant in Noida, Uttar Pradesh, on July 9, 2018. (Photograph: PIB)

India’s free trade agreement aspirations remain insufficiently ambitious. That’s because they don’t align practice with sound economic or national security theory.

Miniature Trade Deals Won’t Serve India’s Interests

That the administration of Prime Minister Narendra Modi is warming to free trade agreements is welcome news, right?

After all, it is prioritising ‘early harvest’ bilateral deals with 20 countries, including three sizable trading powers, Australia, Britain, and Canada, and fast-tracking six of them (Australia by Christmas and Britain by March). It’s hoping to increase the composition of international trade in India’s gross domestic product to 30-40% by 2028.

So, after decades of post-independence protectionism, stalled 1991 reforms, and zero World Trade Organization solutions (the Doha Round is long dead, and it’s unlikely the upcoming Ministerial Conference will produce any dramatic plurilateral agreements), is India’s shift to free trade agreements the long-awaited revolution in its trade policy? Will more FTAs stimulate India’s GDP growth rate, by incentivising efficiency gains among Indian producers amidst fresh overseas competition, prying open new foreign markets for exporters, attracting foreign direct investors to ‘Make in India’? Will they integrate India politically and militarily with friends across the Indo-Pacific region?

No, not so fast.

The change is minimalist. Notice immediately the low GDP composition target: India’s ratio of total exports plus imports of goods to GDP is 27.8% as of FY20, after hitting 38.2% in FY15. In contrast, trade represents 76.7% of South Korea’s GDP, as of FY20. Now, that’s impressive.

More profoundly, the shift does not properly align practice with theory.

The proposed FTAs lack ambition. They don’t restrain protectionist domestic economic constituencies or synthesise with India’s national security interests.

Yet, it’s hard to nail down how much promise they show in matching would-be provisions with theory, because the Government of India flunks the transparency test: detailed information about its bilateral FTA negotiations is not publicly available. So, based on known knowns, let’s look at advice from two areas of theory, and then check if the Modi administration is following that counsel.

1. Economic Theory

What’s the theory?

It’s called the Stolper-Samuelson Theorem, a brilliant, intuitive account of vested interests that will support and oppose trade liberalisation. Recall there are five factors of production: labour, land, physical capital, human capital, and technology. Each can be disaggregated into more refined categories. For instance, labour consists of unskilled, semi-skilled, skilled, and professional. Land parcels into arable and non-arable.

An FTA will find opposition from a factor in which India is less well-endowed to make a product in India, in comparison with that of a would-be FTA partner.

Take land-intensive agricultural products. Indian farmers may fear they are at a disadvantage planting, growing, and harvesting wheat against larger tracts of irrigated farmland in Australia, Britain, and Canada. If India signs an FTA with those countries, then the demand for Indian farmers’ wheat could decline, as Indian consumers gobble up the cheaper Aussie, British, and Canadian bushels.

There are two obvious solutions: First, phase out trade barriers over time, so Indian farmers and retailers aren’t immediately whacked with foreign competition (e.g., give them a 5- or 10-year adjustment period before pure free trade commences). Second, compensate the disfavoured factor interests with assistance (especially to retool to face that competition, or shift to a different line of work).

<div class="paragraphs"><p>Farm workers harvest wheat at a farm near Sonipat, Haryana. (Photographer: Pankaj Nangia/Bloomberg)</p></div>

Farm workers harvest wheat at a farm near Sonipat, Haryana. (Photographer: Pankaj Nangia/Bloomberg)

What’s India’s practice?

India does neither.

Instead, it bows to FTA-fearing factors. That’s apparent from two data points.

First, “Ashwani Mahajan, the co-convener of the Swadeshi Jagran Manch, a group aligned with Modi’s party that commands influence among traders and had backed the decision to step out of the Regional Comprehensive Economic Partnership in 2019,” said:

“We are nowhere opposed to bilateral trade deals.” But, “[h]aving said that, we believe strategic relations cannot be at the cost of national interest.”

The second sentence undercuts the first and veils parochial factor interests behind the Tiranga (Tricolour).

An authentic ‘national interest’ calculation would include Indian producer-exporters that use intensively factors with which India is relatively well endowed.

They would gain from an FTA because their merchandise would be in demand, given their cost advantage derived from employing the better-endowed factor. Think of auto parts companies, which maximise semi-skilled labor and can beat competitors in, say, the United Arab Emirates, which has little of such labor. A true calculation also would account for Indian consumers: they’d gain from an FTA from a greater diversity of products at cheaper prices, again because of production specialisation based on comparative advantages arising from differential cross-border factor endowments.

<div class="paragraphs"><p>A Mahindra tractor sits on display in Auburn Hills, Michigan. (Photographer: Laura McDermott/Bloomberg)</p></div>

A Mahindra tractor sits on display in Auburn Hills, Michigan. (Photographer: Laura McDermott/Bloomberg)

The second data point is the woeful product coverage list in India’s FTA talks. With the United Kingdom, India is “negotiating tariff cuts and market access for around 600 products,” including “Indian textile products, leather, footwear and chemicals….” But there are approximately 10,000 product categories spread across the Harmonized Tariff System.

In essence, India appears willing to open its market only to merchandise approved by the Swadeshi Jagran Manch.

Leaving thousands of products ineligible for duty-free, quota-free (DFQF) treatment isn’t an FTA. It’s a trade deal so tiny it’s commercially meaningless. Only if an FTA is broad in covering the vast majority of HTS product categories, and if it lowers applied tariff rates to naught and binds them at zero, is it likely to generate production and consumption gains.

Take an extreme example. Suppose in an FTA with the UAE, India concedes DFQF treatment for Christmas Nativity scenes. (The Swadeshi Jagran Manch doesn’t care, as nobody in the movement makes them.) Sounds good, right? Alas, the UAE probably doesn’t export, and India probably doesn’t import, large values or volumes of that stuff.

And, by the way, tiny FTAs are legally dubious. They may violate Article XXIV:8 of the General Agreement on Tariffs and Trade, and Article V:1(a) of the General Agreement on Trade in Services, which mandate coverage of “substantially all” trade in goods and “substantial sectoral coverage” of services, respectively.

<div class="paragraphs"><p>India's Commerce Minister Piyush Goyal and UAE Minister of State for Trade Thani Ahmed Al-Zeyoudi launch Comprehensive Economic Partnership Agreement negotiations. (Photograph: Piyush Goyal/Twitter)</p></div>

India's Commerce Minister Piyush Goyal and UAE Minister of State for Trade Thani Ahmed Al-Zeyoudi launch Comprehensive Economic Partnership Agreement negotiations. (Photograph: Piyush Goyal/Twitter)

2. National Security Theory

What’s the theory?

Let’s loosely call it “connection.” Trade ought to integrate into a country’s overall foreign and defence architecture to maximise hard and soft power. That’s because the strength of a country is sourced not merely in military prowess or diplomatic skill, but also in economic health. Boasting only the first two, the Soviet Union collapsed in part owing to an anaemic economy (arguably rendered so by its 1979-89 Afghanistan folly). Armed with this historical example, that’s why the Chinese Communist Party does all it can to prop up the Mainland’s economy.

Integration means officials from all key ministries responsible for interacting with the world must be actively engaged with one another. The Prime Minister must be the focal point for minimising assertions of traditional turf-like thinking. The trade ministry shouldn’t mollycoddle favoured domestic interests. The foreign ministry shouldn’t be neurotic about stroking overseas relationships. ‘Yes’ isn’t the right answer to every item in the defence ministry’s budget request. Rather, the Prime Minister must be The Thought Leader linking portfolios to forge an optimal synthesis of ideas.

<div class="paragraphs"><p>Prime Minister Narendra Modi at L&amp;T’s Armoured Systems Complex in Hazira, Gujarat, on Jan. 19, 2019. (Photograph: PIB)</p></div>

Prime Minister Narendra Modi at L&T’s Armoured Systems Complex in Hazira, Gujarat, on Jan. 19, 2019. (Photograph: PIB)

What’s India’s practice?

Disappointing. That’s clear from another three data points.

First, the Modi Administration has produced no master strategic document about India’s role in the world. Absent a White Paper, Ministries ejaculate a series of uncoordinated actions.

For instance, on Oct. 14, U.S. Chief of Naval Operations Admiral Mike Gilday hosted 12 senior Indian Navy officers aboard the aircraft carrier USS Carl Vinson, including Indian Chief of Naval Staff Admiral Karambir Singh and Vice Admiral AB Singh, Commander in Chief of the Eastern Naval Command. Admiral Gilday explained the purpose: “to see first-hand the integration between our two navies at-sea…. By our navies continuing to exercise together, … our partnership will only continue to grow. Cooperation, when applied with naval power, promotes freedom and peace, and prevents coercion, intimidation and aggression.”

True, but is the Indian Defence Ministry collaborating with its peers on the following lines:

Miniature Trade Deals Won’t Serve India’s Interests

Second, the Modi Administration hasn’t lodged an application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. CPTPP remains the single best FTA to manage Indo-Pacific tensions associated with China’s rise. Its 21st century, WTO-plus chapters on state-owned enterprise disciplines and intellectual property protection are crafted with China in mind. Now, China (ironically) and Taiwan have applied to join.

They’ve outflanked India.

Okay, negotiating FTA deals with fellow Quad members Australia and Britain suggests some coordination between India’s Commerce and Defence Ministries. It also suggests clumsiness: Australia and Canada are founding CPTPP parties, and Britain lodged its application before China and Taiwan.

So, Indian producer-exporters may face a competitive disadvantage in any CPTPP party vis-à-vis Aussie, Canadian, or British products where India lacks an FTA (like Malaysia and Vietnam). Why not just join the mega-regional deal?

Third, there’s no record of India arguing that cancelling Generalized System of Preferences benefits, as America did in March 2019, is not in the national security interests of either country. Marginalised communities are breeding grounds for extremist ideological recruitment from among impoverished farmers and unemployed youth. The histories of Kashmir, Punjab, and Assam are cases in point, with renewed fears of an increase in cross-border Islamist extremism exported from Taliban territory following America’s Afghanistan exit.

Why not integrate trade into the counterterrorism arsenal? GSP benefits can promote inclusive, sustainable development. Likewise, FTA provisions cutting tariffs and non-tariff barriers, disciplining trade remedies, and supporting intellectual property and FDI can synthesise poverty alleviation, foreign policy, and defence goals.

Hypothetical Roundtable At South Block

Imagine sitting in South Block at a hypothetical roundtable of senior officials from across the union government.

<div class="paragraphs"><p>The Prime Minister and top union ministers, at the Prime Minister's office in South Block, New Delhi, on May 31, 2019. (Photograph: PIB)</p></div>

The Prime Minister and top union ministers, at the Prime Minister's office in South Block, New Delhi, on May 31, 2019. (Photograph: PIB)

Here’s the question they should ask of any proposed FTA: how does each provision in the deal foster development across India so as to strengthen its economy in the world trading system and thereby bolster its diplomatic and military capabilities across the Indo-Pacific region? To ask that question would be to start India’s FTA revolution.

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, Senior Advisor to Dentons U.S. LLP, and Member of the U.S. Department of State Speaker Program. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, Dentons or any of its clients, or the U.S. government, and do not constitute legal advice.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.