fta: A preferential route: Effectiveness of FTAs ​​on Indian exports

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The ongoing COVID-19 pandemic is having devastating health and economic consequences, with unprecedented disruption to people’s lives, the global economy and global trade. The impact of the pandemic was contrary to the norms that govern the free trade agreement. On the one hand, the FTA operates on the principles of open and integrated economies and on the other hand, the pandemic has prompted nations to strictly close their borders. Despite this, with the changing global landscape as an offshoot of the ongoing pandemic, the FTA remains an essential tool to facilitate and reshape global trade. This represents an opportunity for India to orient the Indian economy towards exports through active bilateral and multilateral FTAs ​​and RTAs. Recently, the Government of India signed the Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates and the Economic and Trade Cooperation Agreement between Australia and India aimed at boosting bilateral trade and increasing exports in the years to come. Moreover, India has shown enthusiasm and is actively negotiating free trade agreements with countries like Canada, Israel, the United Kingdom and the European Union. FTAs are typically agreements that often include clauses on trade facilitation and rule-making on investment, intellectual property, government procurement, technical standards, and sanitary and phytosanitary issues and offer countries the opportunity to improve trade and exports, access to new markets, business risk diversification, enhanced innovation and competition, better market integration and facilitation of skills and technology transfer . However, the feasibility of FTAs ​​for India’s bilateral trade and exports still remains uncertain.

India has seen some notable bright spots from FTAs ​​in the recent past, as data shows a significant increase in exports to certain countries. According to data provided by the General Directorate of Trade Intelligence and Statistics, India’s merchandise exports to countries/regions with which India shares trade agreements such as FTAs ​​recorded a growth of 20.75% over the past five years. Moreover, India’s exports to ASEAN have seen an increase from $25.13 billion in 2015-16 to $31.49 billion in 2020-21. The same trend is also continuing with other countries/regions as India’s exports to SAFTA countries increased from $18.60 billion in 2015-2016 to $22.08 billion in 2020-21 and that exports to South Korea increased from $3.52 in 2015-2016 to $4.68 billion. in 2020-21. More importantly, data provided by the Department of Promotion of Industry and Internal Trade suggests that the cumulative investment received from countries that India shares FTAs ​​over the past five years stands at 89.46 billion. of dollars.

One of India’s concerns remains the negative trade balance with countries like ASEAN and Japan despite increasing exports. India recorded a trade deficit of $15.95 billion in 2020-21 with ASEAN countries. Meanwhile, the trade deficit with Japan remained at $6.49 billion in 20-21. On the other hand, India realized an increase in exports to the United States and China despite the absence of an FTA with these two countries. The rise in exports is part of India’s focus on creating an export-driven economy, with India achieving the highest ever exports of US$37 billion in December 2021, which is 37% more than in December 2020. More importantly, India saw a slight improvement. trade deficit with China from $52.67 billion in 2015-2016 to $44.02 billion in 2020-21, despite the absence of an FTA with China. Thus, the data indicates that while FTAs/RTAs provide better access to new markets and facilitate exports, there is an urgent need to address key issues such as reducing the trade deficit to make these FTAs/RTAs more effective. .

In the past, India has raised several issues regarding FTAs ​​and their implications on local markets. Many of these issues were flagged during India’s negotiations and then eventually withdrew from the Regional Comprehensive Economic Partnership (RCEP). One of the main concerns highlighted by the Indian government is the impact of FTAs ​​on local supply chains. Moreover, as the data suggests, FTAs ​​have not served the Indian economy and have not built capacity as expected. Thus, the challenge for India remains to maintain a balance between global economic integration and building the capacity of local markets to serve as a global exporter. Furthermore, through FTAs ​​with countries such as Australia and the United Arab Emirates, India aims to improve the trade balance between the countries. Hence, significant steps have been taken by the Indian government to address the shortcomings that India has faced in the past in FTAs. However, as the data show, FTAs ​​are not a panacea for all economic and trade ills. Thus, by making notable changes to overcome the limitations of FTAs ​​and making them adaptable to an economy like India, these agreements can become a robust solution to the economic challenges facing India and the world.

Amit Kapoor is President of the Institute for Competitiveness, India; Visiting Scholar and Lecturer, Stanford University. Akshay Bhambri is Research Director, Institute for Competitiveness, India.

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