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Working Paper No. 2019-05
India's Trade Agreements and the Future of Indian Trade Policy
Pravin KrishnaJohns Hopkins University
NBER
Draft
India’sTradeAgreementsandthe
FutureofIndianTradePolicy*
PravinKrishnaJohnsHopkinsUniversity
NBER
* Paper prepared for presentation at Columbia Summit on the Indian Economy, Nov 1-2, 2019, at Columbia University, New York. I am grateful to Professors Jagdish Bhagwati and Arvind Panagariya for their comments and for numerous conversations over the years on several of the issues discussed in this paper.
India’sTradeAgreementsandtheFutureofIndianTradePolicy
I.IntroductionThe Indianeconomyhascomea longway fromthedepthsof the1970s,whenanextremely
repressivetraderegimehadrenderedIndiaanearautarky,whentradeingoodshaddroppedto
lessthan10percentofGDPandthestrangleholdofthestateovereconomicactivityhadplunged
growthratestoverylowlevels,averagingjustover3percentintheyears1965-1980(Panagariya,
2003). With subsequent domestic and external reforms, the most dramatic of which were
initiatedintheearly1990s,andwhichhavecontinuednearlymonotonicallyeversince,theIndian
economy tookoff,withgrowth rates rising rapidlyand reachingahighofovereightpercent
duringthe2000sandaveragingaroundsevenpercentinrecentyears. Indiaisnowthethird-
largesteconomyintheworld.
I.1Background:TradeandIndia’sDevelopmentTrajectory
Despitetheseimpressiveachievementsoftheprecedingdecades,India'sdevelopmenttrajectory
now faces significant pressures. India possesses an abundance of low-skill workers, a large
fractionofwhichisemployedinagriculture.Agricultureisarelativelyunproductivesector:while
roughlyhalfofIndia'sworkforceisemployedintheagriculture,thesectorgeneratesonlyaround
fifteen percent of Indian output. Further, in the coming decades, about 8 to 10million new
workersarepredictedtojointhelaborforceeachyear.Ensuringemploymentfortheseworkers
isatoppolicypriority.TheexpectedtrajectoryfortheevolutionoftheIndianeconomyinvolved
the steady movement of rural workers out of the agricultural sector and into low-skill
manufacturing and perhaps later into economic activity higher up the value chain. This was
indeedthepathtakenbymanylow-skilllabor-abundantcountriesalongtheirgrowthpath,China
being the most notable recent example. The Indian economy has not followed this path,
however. The Indianmanufacturing sectorhasnotgrown -- ithas stagnatedatabout fifteen
percent of GDP for the last couple of decades; the economy has experienced instead an
expansionoftheservicessector,includingthat,somewhatsurprisingly,ofhigh-techservicesand
hightechexports.
Therapidgrowth in ITexports,ratherthanmanufacturingexports,reflectsan importantself-
contradiction,inamannerofspeaking:WhilewewouldexpectIndia'sproductionpatternsand
exportstoreflect itsrelativeabundanceof low-skill labor,asisthecaseforinstanceinChina,
IndianexportgrowthhasbeenstrongestintheITsector,whichrequiresrelativelyscarehigh-skill
workers instead (reflecting the disconnect between India's production patters and its
comparativeadvantage).Whiletheimpressivegrowthofthehigh-techservicessectorinIndia
hasbeenjustlycelebrated,theexpansionofservices,especiallyhigh-techservices,doesnot,in
itself, doesoffer a sustainable path forward. The vastmajority ofworkers in the agricultural
sectordonothavetheskillsnecessaryforemploymentinthehigh-techservicessector.Theywill
needtotransitionintolow-skilljobsinmanufacturing.
AnyreasonablegrowthstrategyforIndiamustthereforetakeintoaccountthelargenumbersof
low-skillworkersinthelaborforceandtheneedtoincreasinglyemploytheminsectorsother
than low-productivity agriculture over time. A large global market that demands low skill
manufacturesoffersonesolutiontothisproblem.Largemarketsallowproductionatscaleand
thuslowercostandgreatercompetitiveness.India’spenetrationofglobalmarketsisstillquite
small,eveninsectorsoftraditionalstrength.Thus,whileglobalexportsofclothingarecloseto
500billionUSDin2018,Indiaexportedlessthan20billion.Overall,Indiaaccountforlessthan2
percentofglobalexportsandhostsonlya littleover1percentof thestockofglobalForeign
DirectInvestment(FDI)(OECD,2019)implyingthatthereisverysubstantialscopeforIndiato
followanexportandFDI-ledgrowthstrategy.
Againstthisbackdrop,thereareanumberofsignificantissuesthatconfrontIndianpolicymakers
inthedesignoftradepolicy.Thefirstissueconcernsthefailuresofthemultilateralsystem(WTO)
tobringtoasuccessfulconclusiontheDohadevelopmentroundoftradenegotiations.Thisround
wastohaveloweredagriculturalsubsidiesinthewestandimprovedaccesstotheiragricultural
markets,raisingthepricesofagriculturaloutputgloballyandthustheearningsofIndianfarmers.
ThisfailureoftheroundbodespoorlyforIndiaandforotherdevelopingcountriesthatrelyupon
negotiationsuccessattheWTOtoimprovetheiraccesstomarketsworldwide.
A second of issues concerns developments that are external to India, but that nevertheless
impactitseconomyanditstrade.Amongthemostpressingistherapidexpansionofpreferential
tradeagreementsbycountries,*exclusionfromwhicheffectivelylowersIndia’saccesstothose
countries’markets.Ofparticularconcernarethe“mega-regional”agreements,suchastheTrans-
Pacific Partnership (TPP – a large grouping that includes theUnited States and a number of
Pacific-rimcountriesincludingJapanandAustraliaaltogetherincludingover40percentofworld
output)thatarecurrentlyundernegotiation.†Thesecoverlargefractionsofworldoutputand,
thus,havethepotentialtosignificantlyaltertheglobaltradelandscapeandIndia’splaceinit.
Indiatoohasnegotiateditsowntradeagreements,butthisfar,theseaccountforasmallshare
ofitstradeandhavehadalimitedimpact,aswewilldiscussbelow.
AfinalissueconcernsIndia’sunilateraltradepolicychoicesthemselves.Despitetheimpressive
externalliberalizationundertakenbyIndiaintheperiod1991-2008,withaveragetariffsdropping
from150percentto12percentinmanufacturesandthedramaticincreasesingrowthratesand
povertyreductionthatfollowed,Indianliberalizationhasstalledandarguablypartiallyreversed
itself,withanincreasedandexcessiveuseofnon-traditionalinstrumentsoftradepolicysuchas
antidumpingdutieson imports. Agriculturalprotectionremainsatextraordinarilyhigh levels.
Additionalliberalizationoftrade(evenifchallenging,givendomesticpoliticaleconomyfactors)
andimprovementintradeinfrastructurewillbothbeessentialforIndiatoexpanditstradeand
participatemoreeffectivelyinglobalproductionnetworks,whichhaverecentlyproventobevery
* Forcomprehensivediscussionsontheeconomicsandpoliticsofpreferentialtrade,seeBhagwati(1993),Bhagwati,KrishnaandPanagariya(1999),Krishna(2014)andPanagariya(2000).†ThewithdrawalfromtheTPPbytheUS,underthedirectionofPresidentDonaldTrump,hasexcludedtheUSfromthisagreementfornow.However,aslightlymodifiedagreementcalledComprehensiveandProgressiveAgreementforTrans-PacificPartnership(CPTPP)wassignedbytheremainingcountriesin2018,withtheUSleavingopenthepossibilitythatitmightjointoformthepreviouslynegotiatedTPPeventually.
important forrealizingproductionefficiencyand increasingemploymentgrowth,especially in
Asia.
Taken together, theglobaleconomicenvironmentoffers significant challengesbutalso some
opportunitiesforIndianpolicymakingintheareaofinternationaltradeandinvestmentinthe
comingyears.
InSectionIIofthispaper,wediscussmorespecificallyIndia’sengagementwiththeworldtrade
system,payingparticularemphasistothe lackof liberalizationmomentumatthemultilateral
(WTO) level and the global drift towards bilateralism (in the form of preferential trade
agreements).Indiatoohassignedanumberofbilateralandplurilateraltradeagreementsofits
own.InSectionIII,wediscusstradeoutcomesunderIndia’sownpreferentialtradeagreements,
notingthattheseagreementshavenotdeliveredsignificanttradeoutcomes–theevolutionof
importsandexportswithin India’s free tradeagreements is rathersimilar to theevolutionof
importsandexportsoutsideoftheseagreements.InSectionIV,wediscusspossiblefuturetrade
agreementsthatIndiamayenterintosuchastheRegionalComprehensiveEconomicPartnership
(RCEP) involving China (which is currently under negotiation) and also more comprehensive
agreements involvingnegotiationoveranumberofnon-tradeissuessuchastheTransPacific
Partnership.Wediscussthereaswell thepotential forsuchregionalagreements(and indeed
evenunilateralliberalization)toenhanceIndia'sparticipationinglobalvaluechains.Finally,in
SectionV,wediscussfactorsthatlimitIndia’scompetitivenessanddomesticpolicyreformsas
wellthatwillbenecessarytoimprovetradeandjobcreationforIndia.
II.IndiaandtheGlobalTradeSystem
India'sengagementwiththeworldtradesystemhasbeenasomewhatasynchronousone.After
theendofWorldWar II, theBrettonWoods institutions– theWorldBank, the International
Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT) provided the
necessary underpinning for the global economic system. The largely even-handed and
multilateral architecture of theGATT,whichmandated non-discrimination in trade relations,
provided member countries an even playing field in which to work out their trade and
developmentstrategies.Developingcountries,throughasetofexceptions,broadlyreferredto
as“specialanddifferential treatment”wereallowed tobe less than fullobligationmembers,
whereby they could benefit from the liberalization of others without being called upon to
liberalizetheirexternalregimethemselves. India,afoundingmemberoftheGATT,startedits
post-independenceyearswitharelativelyopenregime.But,bythelate1960s,asthegripofthe
state over economic activity significantly strengthened, India took advantage of these GATT
protectionsanderectedegregiouslyhightradebarriers,reducingtheeconomytoanearautarky.
Ironically,thesepre-1990years,inwhichIndiawasthemostclosed,weretheyearsinwhichthe
worldtradesystem,inasense,wasthemostopenandshowedthegreatestmomentumtowards
further liberalization. Successive round of trade negotiations, driven by the enthusiastic
participationofthemajorpowers,succeededinbringingtheirtradebarriersonmanufacturesto
nearlyzero.Thisbenefittedthosedevelopingcountries thathadsought to integratewith the
worldeconomyandusethedemandfromglobalmarketstopropeltheirowngrowth,butnot
India,whichwasclosedinstead.
Unfortunately,bythelate1980s,justasIndiawasrealizingtheenormouscostsofprotectionand
hadbeguntakingmajorstepstowardsintegratingwiththemultilateralsystem,enthusiasmfor
themultilateralprocesswasdiminishingintherestoftheworld.TheUnitedStates,forinstance,
had begun to perceive that the multilateral process was yielding diminishing returns:
Liberalizationoflargeindustrializedcountrieshasalreadybeensubstantiallyachieved,andthe
largeandcomplexmembershipoftheGATTimpliedslowerfutureprocess.Manycountriesfelt
thatthatbilateralnegotiationsmayyieldsuperioroutcomes.Thediminishedenthusiasmforthe
multilateralsystemhadtwoimmediateconsequences.First,themultilateralDoharoundoftrade
negotiations, that began in the year 2001, stalled. Second, themomentum towards bilateral
agreementsgrewrapidly.BothofthesedevelopmentshavehadimportantimplicationsforIndia.
II.1MultilateralNegotiations
ThemultilateralDohaRoundoftradenegotiations,alsocalledtheDohaDevelopmentAgenda,
becauseofitsfocusontheimprovementofthetradingprospectsfordevelopingcountries,was
launched intheyear2001.TheDoha“ministerialdeclaration”gavethisround itsmandateto
negotiateliberalizationinagriculture,industryandservices,andintellectualpropertyrights.To
date,despiteseveralattemptstoadvancethenegotiations,thisroundhasnotbeensuccessfully
closed,althoughapreliminaryagreementonlesscontentiousissuessuchastradefacilitationand
removaloftradebarriersagainstexportsfromtheleastdevelopedcountrieswasatlastachieved
attheDecember2013WTOministerialmeetingsinBali.Havingbeenlabeledthe‘development
round,’theexpectationsofdevelopingcountriesfortheroundwereatleastpartlybasedonthe
idea that agricultural protection is largely a developed country problem. Itwas argued that:
developed-countrysubsidiesandprotectionshurtthepoorestdevelopingcountriesthemost,it
waswrong to ask poor countries to liberalizewhen rich countries heavily protect their own
markets, and agricultural subsidies and protection in the rich countries reflect the double
standards and hypocrisy on the part of rich countries. The effect of these assertionswas to
considerablyhardenthestanceofthedevelopingcountriesandtogivethemthefalsehopethat
theymightgetone-wayconcessionsfromthedevelopedcountries,especiallyinagriculture.
Further,whiletheinitialgoalofmanyfood-exportingdevelopingcountrieswasthereductionof
developedcountryproductionandexportsubsidies(sothatthepriceoftheirexports–food–
wouldrise), the2007-2008foodpricecrisis,whenshortagesofparticularcommodities ledto
sharpincreasesinfoodprices,ledtheexportingcountriestore-evaluatethisposition.Increases
infoodpriceswouldperhapsbenefitfarmersandtheruralpoor,butcouldhurttheurbanpoor
(andnon-farmruralpoor)considerably–asignificanteconomicandpoliticalrisk inacountry
with large numbers of people living at subsistence level. Being a net exporter of agricultural
output,Indiastandstogainonnet(andespeciallyintheruralsector)fromareductionofglobal
agriculturalsubsidies.Whether India’s institutionswillbeabletomanagetheshockofhigher
globalfoodprices--withitsobviousadverseconsequencesforfoodconsumers,especiallythe
poor,throughoutthecountry,isanothermatter.ThisperhapsdroveIndia’sambivalencetowards
rationalizationofagriculturalpolicythroughDohaandforIndiatoperhapsseeDohaaslessofa
priority.Intheevent,IndiawasanimportantplayerintheDohaRound,butwasseenasbeing
rigidlydefensiveinagricultureand(toalesserextent)alsoinliberalizationonindustrialgoods.It
wasstronglyopposedtotheinclusionofmostofthe“Singapore”issues(concerninginvestment,
transparency in government procurement, competition policy and trade facilitation), and
remainedinfavorofastrongspecialanddifferentialtreatmentfordevelopingcountries.*
RegardlessoftheapproachtakenbyIndiaorothercountriesduringtheDoharound,theWTO
system,inrecentyearsappearstohavebeenovertakenbyunexpectedexternaldrivers.Tothe
stagnationoftheWTO,theTrumpadministrationhasaddedconsiderablechallengebytaking
aggressive andunusual stances: imposing tariffs onpartnerson contrived “national security”
grounds,backingoutofsomenearlycompletednegotiations(TPP),demandingre-negotiationof
existingagreements(NAFTA),andthreateningoutrightexitfromtheWTOitselfifitsdemands
are not met with acquiescence. These belligerent assertions of US power have upended
traditional mechanisms for negotiation and exchange in the system, raising fundamental
questionsaboutthefutureoftheglobalorderandthenecessarystepsforprogresswithin it.
Mostrecently,theUnitedStates’impositionoftariffsonsteelandaluminumimportsfromIndia
(andmanyothercountries)hasprovokedretaliationfromIndiaandothercountriesonarange
oftheirimportsfromtheUS--takingtheworldtradesystemdownanunchartedanddangerous
path.Howthesematterswilleventuallyberesolvedisyettobeseen.Recoveryofmultilateral
momentumis,however,unlikelyintheveryshortrun.
*WhateverthemeritsofIndia’spositions,itwasseenandportrayedasobstructiveatDohaandasonlyshowingsomeinitiativeinservices,whereithasdiscovereditsstrengthsinlightofthesuccessesoftheITservicessectorathome.Thiswascertainlyunfair–alotoftheblameforthefailuresatDohasurelyrestswithUnitedStatesandtheEUandtheirlukewarminterestintheround
III.India’sPreferentialTradeAgreements
The slowdownof themultilateral process, as reflectedby the failureof theDoha roundand
negotiationdifficultiesfacedintheUruguayround,hasbeenmatchedbyadeclininginterestin
theWTO’snon-discriminatoryarchitecture.Eversincethelate1980s,whentheUSabandoned
itsownprincipledoppositiontopreferentialtradeagreementsbysigningtheCanada-USFree
Trade agreement and theNorthAmerican Free TradeAgreement (by subsequently including
Mexico),manycountrieshavefounditmoreattractivetonegotiatetradetreatiesbilaterally,with
individualorsmallgroupscountries,ratherthansubstantiallyengagingthemultilateralprocess.
Preferential agreements are notified to the GATT, under its Article XXIV, which permits the
formationoffreetradeagreementsandcustomsunions,providedtheseagreementsresult in
comprehensive liberalization of ‘substantially’ all trade between the member countries, or
through its “Enabling Clause”which permitted developing countries to enter into “arbitrary”
agreements(notrequiringthecomprehensiveliberalizationmandatedbyArticleXXIV)witheach
other.
Such preferential agreements are now in vogue, with hundreds of GATT/WTO-sanctioned
agreementshavingbeennegotiatedduringthisperiodandwithnearlyeverymembercountryof
theWTO belonging to at least one PTA (and the averagemember belonging to over seven
agreements).AmongthemoreprominentPTAscurrentlyinexistencearetheNorthAmerican
FreeTradeAgreement(NAFTA)andtheEuropeanEconomicCommunity(EEC),theMERCOSUR
(theCUbetweentheArgentineRepublic,Brazil,Paraguay,andUruguay).
Over the years, India toohasnegotiated a numberof preferential trade agreements. Table I
providesalistofIndia’sbilateraltradeagreements,signedwithindividualpartnercountries,as
alsoplurilateralagreementssignedwithmultiplecountries.India’sbilateralagreementsarewith
Afghanistan, Bhutan, Chile, Japan, Malaysia, Nepal, Singapore, Sri Lanka, Thailand and the
RepublicofKorea.AsTableIindicates,Indiahasalsoenteredintoplurilateralagreementswith
theAssociationof South-EastAsianNations (the India-ASEANFree tradeagreement)and the
MERCOSURcountries(theMERCOSUR-Indiatradeagreement)andisamemberoftheAsiaPacific
TradeAgreement(involvingBangladesh;SriLanka;China;India;Korea,Republicof;LaoPeople's
Democratic Republic) and the South Asia Free Trade Agreement (Afghanistan; Bangladesh;
Bhutan;SriLanka;India;Maldives;Nepal;Pakistan)
Theimpactofthesetradeagreementsontradeoutcomesforthebalanceoftradehasbeenof
significant interest in trade policy circles in India. What are the trends under the different
agreement undertaken by India? Have trade balances improved or worsened under the
agreements?
TableIIprovidesstatisticsontheimportandexportsharesofIndiawithitspartnercountries–
looking in particular at comparison between the years 2007 and 2017. Specifically, Table II
provides data on India’s trade with the individual countries with which it has bilateral
agreements.ThesearealsoaggregatedintoanIndia-Bilateralcategory).TableIIalsoprovides
information on trade trends under India’s plurilateral agreements: ASEAN, APTA, SAFTA and
MERCOSUR.*Finally,forcomparisonpurposes,TableIIprovidesdataontradebetweenIndiaand
theUnitedStates,theEuropeanUnionandChina.
Itshouldbereadilyevident,fromTableII,thattradebetweenIndiaandmostofthesepartner
countrieshasstayedverysteadyoverthepastmanyyears.ConsiderfirsttradebetweenIndia
anditsbilateralagreementpartners.Overallimportswiththesecountriesstoodat13.3percent
oftotalimportsin2007andmovedto11.8percentby2017.Exportstothesecountriesstoodat
13.7percentin2007andmovedto14percentby2017.TradebetweenIndiaanditsbilateral
partnershas,thussimplykeptupwithitsglobaltradepatterns.Tradewiththelargercountries
in this grouping -- Korea, Japan, Malaysia and Singapore -- also looks remarkably steady,
* WeshouldnotethatmanycountrieshaveindividualagreementswithIndiaandarealsopartofaseparateplurilateralagreementThus,SingaporehasitsowntradeagreementwithIndiaandisalsopartoftheIndia-ASEANfreetradeagreement.Goodsarefreetobeimportedorexportedunderwhicheveragreementgivesthema“better”treatment.
especiallyintheaggregate.:theslightincreaseinimportsharefromKoreaappearstobeoffset
byreductionsinimportsharefromJapan,MalaysiaandSingapore.
India’stradeunderplurilateralagreements–notablyIndia-ASEANandIndia-MERCOSURlooks
mostly steady aswell. Tradewith ASEAN countries rose slightly (import share rose from 9.6
percent to 10.2 percent and the export share rose from 9.5 percent to 12 percent). India-
MERCOSOURtradeslightlyaswell.MERCOSUR’simportsharerosefrom0.7to1.7percentand
theexportsharedroppedslightlyfrom1.5to1.3percentofoverallexports.Theconclusionhere
isastraightforwardone.India’stradesharewithitsbilateralandplurilateralpartnersdidnotrise
significantlyovertheyears2007-2017.
OneconcernthatisfrequentlyexpressedinIndiaconcernsthebalanceoftradebetweenIndia
anditsPTApartners–specificallythatIndia’stradeagreementshaveledtoanexpansionofits
tradedeficits.However,thedataindicateotherwise.TradedeficitswithIndia’sbilateralpartners
accountedfor12.6percentoftheoveralltradedeficitintheyear2007.In2017,theyaccounted
for a considerably smaller 7.5 percent. Similarly, India’s trade with ASEAN and MERCOSUR
accountedfor9.1percentofthetotaltradedeficitin2007andaccountedfor9.2percentofthe
overalldeficitin2017.Thus,whileIndia’stradedeficitswidenedovertheyearsinnominaldollar
terms,itsPTAsdonotaccountforanappreciablylargerfractionofitstradedeficitthantheydid
before.
While trade shares within India’s agreements seem relatively steady over time, there is a
questionofwhatthislookslikeatasectorallevel.Forinstance,aretherespecificdis-aggregated
sectorswherethegrowthoftradewithinagreementsissignificantlygreaterthangrowthoutside
ofIndia’stradeagreements?MightspecificsectorsinIndiahavesufferedduetoasurgeinimport
fromitspartnercountries?
Anexaminationofdisaggregated3-digittradedatafrom2007-2017helpstoidentifysectorsin
whichtradegrowthwasfasterwithintradeagreementsthanoutsideofit.Thedataindicatethat
sectorsinwhichtradegrewfasterthan25percentwithinIndia’sbilateralagreementsthantrade
withtheworldamountedtoabout18billiondollarsofimportsand10.2billiondollarsofexports
in2017.ForASEAN, thecorresponding figuresare15billiondollarsof importsand26billion
worth of exports. For sectors inwhich tradewithin bilateral agreementsmore thandoubled
relativetotradewiththeworld,thevolumeoftradeamountedto4.8billiondollars’worthof
imports and3billionof exports. ForASEAN, the corresponding figures are7billionworthof
importsand10billionofexportsin2017.Takentogether,thisamountsto12billionofimports
and13billionofexportsin2017.Fromthiswecanconcludethatsectoralimport“surges”donot
exceed export “surges” and also that these surges are quantitatively small compared to the
overallvolumeoftrade(amountingto6.5percentofoveralltradeand12billionor3.5percent
ofoverallimports).
Theprecedingdiscussion suggests that India’s tradeagreementsdidnot significantly alter its
tradepatterns,i.e.,thattradeunderIndia’stradeagreementsnotgrowanyfasterthanIndia’s
tradeoutsideitsagreements.Whyisthisthecase?
OneexplanationforthishastodowiththefactthatIndia’sagreementswererelativelyshallow
–thattheyhaveentailedlessliberalization,thusfar,thanonemighthaveimaginedinthefirst
instance.AsindicatedinTableI,mostofIndia’sagreements–withtheexceptionofagreements
withJapanandSingapore-werenotifiedtotheWTOundertheEnablingClause.Thisimpliesthat
unlike Article XXIV agreements which require liberalization on “substantially all trade,” the
enabling-clause-notifiedagreementsundertakenbyIndiawereofgenerallyofa“partialscope”
nature with varying, but often only a limited amount of liberalization undertaken. The
agreements have also involved a range of implementation schedules, with liberalization
undertakenbothbyIndiaanditspartnerscommittedtobephasedoveranumberofyearsafter
theagreementswerefirstnotifiedtotheGATT.Thus,forinstance,whileliberalizationunderthe
India-Japantradeagreementbeganintheyear2011,implementationiscompleteforonlyabout
23percentof thetariff lines.For63percentof thegoods, tariff liberalizationby India isonly
expectedtobeundertakenbytheyear2021.Another14percentofgoodsexcludedfromthe
agreementaltogether.Similarly,undertheIndia-Koreaagreement,signedin2010,onlyabout8
percentoftarifflineshadbeenfullyeliminatedpriorto2017.Over60percentofthetarifflines
weretobeliberalizedbyIndiaonlyby2017andabout20percentoftarifflineswereexcluded
from elimination altogether. Equally, the India-ASEAN free trade agreement, which began
liberalizationin2010,undertookeliminationof9000tarifflines,butfullyonlybytheyear2016.
ThetradeoutcomesunderIndia’spreferentialtradeagreementsaremirrored,tosomeextent,
inoutcomesunderpreferentialagreementsintherestoftheworld(seeKrishna,2014).Thus,the
WorldTradeReport2011(henceforthWTR)arguesthatwhiletherehasindeedbeenasignificant
increaseinthevalueoftradetakingplacebetweenPTAmembersovertime,muchofthistrade
isnottakingplaceonapreferentialbasis.Considertradein1990betweenPTApartners–this
trademadeuparound18percentofworldtradeandroseto35percentby2008(inbothcases,
thefiguresindicatedexcludeintra-EUtrade).WhentheEuropeanUnionisincluded,intra-PTA
traderosefromabout28percent in1990toa littleover50percentofworldtrade. Indollar
terms,thevalueofintra-PTAtrade,excludingtheEUcountries,rosefrom537billionUSDin1990
to4trillionUSDby2008andfrom966billiontonearly8trilliononcetheEUisincluded.This
mightsuggestthatbynowalargeshareofworldtradeistakingplacebetweenPTAmembers.
However, as theWTR importantly points out, these statistics vastly overstate the extent of
preferentialtradeliberalizationandthustheextentofpreferentialtradethatistakingplace.This
issobecausemuchofthetradebetweenPTAmembersisingoodsonwhichtheyimposeMFN
tariffsofzerointhefirstplace.AndgoodswhicharesubjecttohighMFNtariffsarealsooften
subjecttoexemptionsfromliberalizationunderPTAs,sothatthevolumeoftradethatbenefits
frompreferencesis,onaverage,quitelow.
Specifically,WTRcalculations(seeTableIII)indicatethatdespitetherecentexplosioninPTAs,
onlyabout16percentofworldtradetakesplaceonapreferentialbasis(thefigurerisesto30
percentwhenintra-EUtradeisincludedinthecalculations).Furthermore,lessthan2percentof
trade(4percentwhentheEUisincluded)takesplaceingoodswhichreceiveatariffpreference
thatisgreaterthan10percent.Forinstance,wellover50percentofKoreanimportsenterwith
zeroMFNtariffsappliedtothem.Koreaofferspreferencestoabout10percentofitsimports,
butapreferencemargingreaterthan10percentonvirtuallynoneofitsimports.Asimilarpicture
emergesontheexportingside.OneofthecountriesthathasactivelynegotiatedPTAsisChile
and95percentofChileanexportsgotocountriesthatithasaPTAwith.However,only27percent
ofChileanexportsareeligibleforpreferentialtreatmentandonly3percentofitsexportsbenefit
frompreferencemarginsgreaterthan10percent.TableIIIprovidesanadditionalbreakdownof
thevolumesoftradethatenteronapreferentialandonanMFNbasisforanumberofsample
PTAs.ClearlyformostPTAsthemajorityoftheirtradetakesplaceunderzeroMFNtariffs.Itis
onlyasmallfractionoftradethatentersonapreferentialbasis,especiallyoutsideoftheEUand
NAFTA.Takentogether,theprecedingstatisticssuggestthattheextentoftrade liberalization
undertakenthroughPTAshasbeenquitemodest,despitethelargenumberofPTAsthathavein
fact been negotiated (see also Table IV) – a picture that is not altogether from that of
liberalizationundertakeninIndianPTAs.
Someofthisshouldnotperhapsbetoosurprising.Itiswidelyunderstoodthatamajorfactor
workingagainsttradeliberalizationisthepoliticaloppositionoftheimportcompetinglobbies.If
thisisthecase,itisunclearwhylobbiesthatopposetradeliberalizationatthemultilateralor
unilaterallevelwouldeasilysupportliberalizationundertakenonapreferentialbasis.Weshould
thereforeexpectthatpoliticallobbieswouldmostlyonlypermitpreferentialagreementsinwhich
theirrentswereprotected,eitherthroughaccesstopartnercountrymarkets,or,moresimply,
throughanexemptionofliberalizationonimportsofthosegoodsthatcompetewiththeirown
production,suggestingcomplementaritiesbetweenMFNandPTAtariffs.*Thisissimilartothe
Indiancontext,where,aswehaveargued,liberalizationwithinIndia’sagreementshasbeenquite
limited and where exclusions and sensitive goods categories are maintained in each trade
negotiation.
*ToexplorethequestionofwhetherMFNtariffsandPTAtariffsareindeedcomplements,BaldwinandSeghezza(2010)examinedcorrelationsbetweenMFNandPTAtariffsatthe10-digitlevelofdisaggregationfor23ofthetopexportingcountrieswithintheWTO (forwhichdatawasavailable).Consistentwith theprecedingdiscussion, they find thatMFN tariffsandPTA tariffsarecomplements, since themargin of preferences tends to be low or zero for products where nations apply high tariffs. Theimplicationisthatweshouldnotexpectliberalizationthatisdifficultatthemultilaterallevel,tonecessarilyproceedeasilyatthebilaterallevel.
Finally,utilizationoftradepreferencesinthecontextoftradeagreementshasbeenarguedtobe
cumbersome foranumberof reasons.A recent reportbySaraswat,PriyaandGhosh (2017),
suggeststhatpreferenceutilizationunderIndia’sPTAsisonlyabout25percent,duetoalackof
information about preferences, low margins of preference, delays and administrative costs
associatedwith rulesoforigin and impediments causedbynon-tariff barriers.Whiledataon
preference utilization is quite hard to comeby, several surveys of trading firms suggest that
preference utilization by exporting firms in Asian FTAs is not high, in general – the Indian
experienceisnotunusual.Thus,forthesampleof841firmsinEastAsia,astudybyKawaiand
Wignaraja (2011) shows that only around 28 per cent of exporting firms currently use PTA
preferences.36percentofreportingfirmsintheRepublicofKoreaand14percentinChinacited
“havinghadnosubstantialtariffpreferenceorhavinghadnoactualbenefitsfromsuch”asthe
majorreasonfornotutilizingthePTApreferentialtariffs.FirmsinthePhilippinesandSingapore
attributedtheirlowpreferenceutilizationtothecountries'overwhelming“exportconcentration
inelectronics”,whichischaracterizedby“lowMFNtariffrates”.
Preference utilization is also limited by “rules of origin” (RoOs)which are formulated in the
contextofPTAagreementstoprevent“tradedeflection”(i.e., toensurethatgoodsthatpass
dutyfreewithintheunionareactuallywithin-uniongoodsandnotproducedoutside).Thisis
particularly important in the context of global production networks,which, through trade in
intermediategoods,involvetwoormorecountriesintheproductionofasinglefinalgood.Often
RoOsresultinfarlesstradeliberalizationthanisimpliedbythepreferencesnegotiatedwithinan
agreementasRoOsmayraisetransactioncostsforfirmstoadegreethatmakesutilizationofFTA
preferencesuneconomical.Thisisespeciallylikelywhenmarginsofpreferencedescribedabove.
Furthermore, as the number of concluded agreements increases, different RoOs inmultiple,
overlappingPTAscanposeanadditionalburdenonfirms.
III.1FutureTradeAgreements
Looming over the horizon are the “mega-regional” agreements, such as the Regional
ComprehensiveEconomicPartnership(RCEP),whichisafreetradeagreementthatwaslaunched
in2011andiscurrentlybeingnegotiatedbetweenASEANnationsandASEAN'sFTApartners.The
RCEPincludes16countries,whichinclude:Australia,Brunei,Cambodia,China,India,Indonesia,
Japan, Laos, Korea, Malaysia, Myanmar, New Zealand, Philippines, Singapore, Thailand, and
Vietnam–agroupingthatconstitutesaboutathirdoftheworld'stradewithapopulationof3
billionandagrossdomesticproduct(GDP)ofabout20trillionUSD.
The fundamentals of the negotiating agenda of the RCEP cover trade in goods and services,
investment,economicandtechnicalcooperation,intellectualproperty,competitionpolicy,and
disputesettlement.However,sinceRCEP'sprimaryfocusseemstobeontradeitselfratherthan
onrulesconcerningtheproductionoftradedgoods(suchaslabororenvironmentalstandards),
it isanticipatedthatagreementoverRCEPwillbeeasiertoreach.Itwillnotengagedomestic
political considerations beyond those that are generally involved with trade liberalization.
Needlesstosay,thepoliticsoftradeliberalizationingoods(i.e.,disregardingotherissues)may
becomplicatedenoughtoscuttletheagreementaltogether. Indeed, India'sownpositionhas
beenanapparentlyhesitantoneforsomeeasilyunderstoodreasons.Indiasuffersacomparative
disadvantage in manufacturing as compared to other RCEP members. This has put Indian
manufacturingindustryinfearoftherushofimportsthatwillcomeacrosstheborder,especially
frommanufacturingpowerhouseslikeChina.Ontheotherside,Indiahasestablishedstrengthin
services.Thus,India’sinterestslieintheexportofserviceswhichitcansupplyusingitsskilled
and semi-skilled labor (for instance, thepotentialmarket inChina foroutsourcing services in
InformationTechnology(I.T.)wasestimatedat140billionUSDin2020,ofwhichthedemand
fromdomesticChinesefirmswouldbeapproximately70billionUSD).Thechallengesfacedby
Indianfirmsincludequalifyingcertifications(forexample,SystemsIntegrationsCertificate),non-
recognitionof international standards (likePMI), licenses (forBPOoperations), and language
constraints. Indiahas reportedlyalreadybeenaggressivelynegotiating the freemovementof
professionalsaspartoftheagreement.Italsoperceivescompetitivestrengthinpharmaceuticals
andtextilesandhassoughtliberalizationintheseareasaswell.
WhetherliberalizationofserviceswithinRCEPwillbesufficienttoinduceIndianparticipationor
not,thisnarrowcalculationofIndianinterests(manufacturingimportsversusservicesexports)
missesafewimportantfeaturesoftheglobaleconomyandthetrendsinglobalproductionand
trade.Notably, it ignores the fact that theRCEPcanprovide thebenefitof linkageeffectsof
regionalandglobalvaluechainsinmanufacturingandinservices.ForIndia,suchanarrangement
isparticularlyrelevantforanumberof importantreasons.Therehasbeenarapidincreasein
global production fragmentation, leading to production via what is popularly referred to as
‘global value chains,’ wherein final goods are produced with inputsmade inmany different
nationsandwhere intermediate inputsmaycrossnumerous internationalborderswithvalue
beingaddedateachstagebeforebeingassembledintoafinalproduct.Theforeigncontentof
exportshasbeenrisingacrossarangeofcountries.Forinstance,inChinadomesticvalueadded
inexportsdroppedfromanaverageofaround90percentin1995toaround65percentin2010.
InIndiaaswell,thedomesticvalueaddedinexportsfellfromaround90percentin1995to78
percentin2010.Nevertheless,aswehavenotedearlier,India’sparticipationinsectorsthathave
beenorganizedasglobalproductionchainsisstrikinglysmall.Forinstance,inelectronics,India’s
export share in theworld is less than 0.5 percent.While a number of factors play a role in
determining successfulparticipation inglobal valuechains,high tariffs inhibit theuseofhigh
quality imported intermediates which are essential for cost effectiveness and quality
improvements.Reducing importbarriersonmanufacturingwithinRCEPmaywellprovide the
necessary incentives for India to integratemore fully intoglobalmanufacturingplatforms (or
globalvaluechains–GVCs,astheyarepopularlyknown)
Asageneralmatter,ithasbynowbeenquitewellestablishedthatthepaceandscaleofGVC
expansionisassociatedwithareductionoftradecosts(OECD,2013),whichincludetradepolicy
barriers such as tariff and non-tariff restrictions. Efficient international un-bundling of the
productionprocessrequirestradecostsmustbelowenoughtoenablefirmstoutilizelocation
advantages of countries arising from factor-price differences and economies-of-scale. With
production fragmentation, intermediate inputs may be sourced from different countries,
partially assembled in stages and then shipped to another destination for final assembly,
Importantly,aportionoftradecosts-includingtariffs-areincurredeachtimeagood-in-process
crossesaborder.
TheregionalnatureofGVCsisalsorelatedtotheroleplayedbytradecosts.Otherthingsbeing
equal, countries appear to source intermediates fromnearby countries in order tominimize
transportationcosts.Regional integrationagreementsmaypartlyreducetradecostsbetween
countrieswithinarespectiveregion,especiallyifsuchagreementsprovidefordeepintegration
beyondmarket access. In other words, integration agreements that include liberalization of
services trade, investment provisions, intellectual property rights protection, and the
harmonizationofstandardsandregulationswillmakecross-borderproductionmoreefficient.
The empirical literature is richwith evidence pointing to a positive association between the
regional trade agreements and existence of regional value chains (regional production
fragmentation--see,forexample,JohnstonandNoguera(2012).Itappearsthatthesetwoforces
aremutually supporting; comprehensive trade integration agreements go hand-in-handwith
moreexpansiveproductionsharingacrossbordersintheregion.RegionalintegrationacrossAsia
hasopenedopportunities for firms spreadproduction stages acrossAsia and thePacific. For
example, technology-intensivepartsandcomponentsofelectronicsproductsareproduced in
relativelyadvancedindustrialcountriesoftheregion,suchasJapan,andtheRepublicofKorea,
whiletheassemblingofdifferentintermediatesintofinishedproductsistakingplaceelsewhere
intheregion,suchasinChinaandVietnam.FromIndia’sperspective,reducingimportbarriers
onmanufacturingwithinRCEPmaywellprovidethenecessaryincentivesforIndiansuppliersto
integratemorefullyintoglobalmanufacturingplatforms.
Trans-PacificPartnership
Prior to the unceremonious exit of theUnited States from the TPP following the election of
DonaldTrumpasPresident,theTPPwasnegotiatedasatradeagreementamong12countries:
Australia, Brunei, Chile, Canada, Japan,Malaysia,Mexico,New Zealand, Peru, Singapore, the
UnitedStates,andVietnam–aneconomicallysignificantgrouprepresentingabout40percentof
globaloutputmakingitperhapsthelargesteconomicarrangementofitskind.FromanIndian
perspective,TPPnegotiationswereinstructivesince,inadditiontotheliberalizationoftradein
goods,TPPalsoincludednewdisciplinesonpoliciesthataffecttradeandinvestmentingoods
and services. TheTPPalso goeswell beyondwhathas typicallybeen included inother trade
agreements,especiallyinAsia.
TPPmemberswereexpectedtoeventuallyeliminatenearlyalloftheirtarifflinesandalsoreform
avarietyofnon-tariffbarriers(especiallyonlocalcontentrequirementsandrulesoforiginfor
autosandpartsaswellasfortextilesandapparel).Inadditiontomarketaccessreformsfortrade
ingoods,however,theTPPincludedbroadrangingdisciplinesinanumberofareasmanyofwhich
wouldhavebeenofsignificantconcerntoIndia.SincetheTPPnegotiationsapparentlyproceeded
as per the United States’ "negotiation template", its structure provided an opportunity to
understandtheUS'snegotiationapproachanditsrelevanceforIndia.Themostsignificantnon-
trade issues in the TPP included labor regulations, environmental regulations, rules on
intellectualpropertyprotection,andprovisionsonthefunctioningofstate-ownedenterprises
(SOEs).
Eachofthenon-tradeissuesinTPPare,inprinciple,ofconcerntoIndia,asthesameissuesare
likelytoariseinanyfuturenegotiationswiththeUnitedStatesorthemembersoftheEuropean
Union.
LaborRegulations
TPPrulesonlabor,asarticulatedinitslabor"chapter,”requiresthatTPPmembersensurethat
theirnationallaborlawsconformtothecoreprinciplesoftheInternationalLaborOrganization
(ILO)Declaration on Fundamental Rights atWork,which include freedomof association and
recognition of the right to collective bargaining, elimination of all forms of forced labor, the
abolitionofchildlabor,andtheeliminationofdiscriminationwithrespecttoemploymentand
occupation.
ItisnoteworthythatdespitetheclearreferencetotheILOdeclaration,theTPPdidnotgofurther
inaskingforcountriestoconformtotheeightformalconventionsthatcorrespondtothelatter.
ThiswasnotsurprisingsinceeventheUnitedStateshasonlysignedtwooftheeightconventions.
Becausecountriesarelegallyonlyrequiredtocomplywithratifiedconventions,thisambiguous
positioningof theTPPon labor issues caused considerableanxiety inboth the rich countries
withintheTPP(whoselaborunionswouldlikegreaterenforceability)andindevelopingcountries
(which sometimes see even the inclusion of labor standards as an attempt to dilute their
comparativeadvantagebasedonlaborabundance).
Primafacie,theUSreticenceinpursuingmorestringentrulesonpaperandgreaterreticenceon
pursuingabusesoflaborlawsinpartnercountriesinpreviousagreementsindicated,onbalance,
that labor standards would not be a significant deterrent to Indian interest in joining an
agreement. But whether powerful lobbies such as the American Federation of Labor and
CongressofIndustrialOrganizations(AFL-CIO)willallowtheUSindifferencetosustainoncethe
USstartsincludinglargelaborabundantcountriesIndiaintheTPPisanothermatter.
EnvironmentalRegulations
Dashing thehopesof thosewho soughtmore stringent environmental rules via the TPP and
allayingthefearsofthosewhoworriedthatsignificantenvironmentalregulationsinTPPwould
weakenthemotivationofcountriestoparticipateintheagreement,theTPPdoesnotgomuch
furtherthanexistingarrangements.Itmostlyinsistedthatcountriesdomoretoimplementand
enforce their obligationsunder themultilateral environmental agreements already signedby
them(participationinwhichvarieswidelyamongeventheTPPmembercountries).
TheTPPincludedcommitmentstopromotesustainablefisheriesmanagement;topromotethe
long-term conservation of species at risk such as sharks, sea turtles, seabirds and marine
mammals; and to combat illegal fishing, including implementing port state measures and
supporting increased monitoring and surveillance. Specifically, the TPP did not include any
disciplinesconcerningglobalwarmingorpoliciesthatreducedistortionswithrespecttodemand
forfossilfuelsandrenewableenergysupplies.Thesecommitmentsareinlinewithcommitments
thatIndiahasalreadyundertaken,butagainthesecommitmentsmaychangewereIndiatojoin
theTPPandbecomeamember.
IntellectualPropertyProtection
Atitscore,theTPPestablishedrulesonintellectualpropertyprotectionthatareconsistentwith
internationalnormsdrawnfromtheWTOAgreementonTrade-RelatedAspectsofIntellectual
Property Rights (TRIPS). India is a signatory of the TRIPS agreement. The TPP did, however,
establishnewrulesonthepatentingonpharmaceuticals–coveringbothpatenttermextensions
andcopyrightprotectionsandmorecontroversially,ondataprotectionanddataexclusivityfor
patented drugs (including biologics derived from genetic material, cells and other biological
sources).While the pharmaceutical industry sought protections for a period of 12 years and
advocatesfrompoorercountrieswantedtoreducethisdurationto5years,theagreementfinally
provided8yearsofprotection.Onthemargin,thelongevityofprotectionwouldadverselyaffect
producersofgenericsorbiosimilardrugsandwouldthereforeadverselyimpactIndia.
IndiaandtheUShavelockedhornsmultipletimesontheissueofintellectualpropertyrightsand
the right to protect access to inexpensive life-savingmedicines. Further, the US and the EU
appearconcernedaboutIndianruleswhichallowtheIndianPatentsControllertodenypatents
on items that are not significantly different from their older versions. This prevents
pharmaceutical companies from getting fresh patents onmedicineswith expired patents, by
making small and largely cosmetic changes in its formulation. India's dominance in the
pharmaceuticalsectormayinducepartnercountriestoseekmorestringentIntellectualProperty
Rights (IPR) protections in the context of trade agreements with India. IPR negotiations will
clearly be an important and challenging component of any trade deals between India and
partnerssuchastheUSortheEU.
OperationofStateOwnedEnterprises
Perhaps the most challenging rules concerning the potential membership of India in mega-
regional trade agreements such as the TPP has to do with the operation of state owned
enterprises. While international trade rules under the WTO have sought to discipline the
behaviorofstateownedenterprises,theyhaveonlyhadlimitedsuccess.TheTPPwasmuchmore
ambitious.ItsoughttoensurethatthecommercialactivitiesofSOEs(purchasesandsales)are
donewith only commercial considerations inmind,without discriminating against other TPP
firms.ItalsoprohibitedtheuseofsubsidiestosupportSOEs.Itrequiredjudicialjurisdictionover
relateddisputes concerning theoperationof SOEs and administrativemechanisms to ensure
implementationandcompliancewithanyjudicialrulings.
TheTPPposesfundamentalchallengestocountrieslikeChinaandIndiaonthematterofSOE
regulations.ChinahasthelargestSOEsectorintheworld,withover100,000SOEs(whichhas
beenthebasisofmuchanti-ChineserhetoricintheUnitedStatesandelsewhereovertheyears).
SOEsownedbythecenterearnedoverthreetrillionUSDin2015withsub-centralSOEsearning
alower,butnearlyequalfigureaccordingtoavailableestimates,addinguptoatotalof6trillion
USD in annual earnings. While smaller, India too has a significant state-owned sector, with
turnoverofaround150billionUSD.ItislikelythattheTPPmemberswillpushforstricterrules
andincreasedtransparencyofSOEoperationsinChinaandIndiashouldtheyseekentryintothe
TPP.OneimportantexceptiontotheTPPrulescomesthroughitsallowanceforservicessupplied
byastate-ownedenterpriseofaParty“withinthatParty’sterritory”(USTR,2016)suchservices
aredeemednottocauseadverseeffectsonrivalfirmsandarepermittedtoreceivesubsidies
fromtheirgovernments.
Inacertainsense,thediscussionaboutIndiajoiningtheTPPismoot.LeavingasideIndia’sown
lackofinterestatthepresentmoment,theUnitedStates,underPresidentTrumphaspulleditself
outoftheTPP,whileleavingopenthepossibilitythattheUSmightcomebacktotheagreement
atsomefuturedate.Inthemeantime,theremainingmembershavereachedanagreement(the
Comprehensive and Progressive TPP – CPTPP) under rules largely similar to those previously
negotiated, but excluding issues that the US had previously insisted on having to do with
governmentprocurement,intellectualpropertyprotectionandinvestment.ShouldtheUSreturn
toTPP,theseissueswillundoubtedlybebroughtbackin.ItisvirtuallycertainthenthatforIndia
tojoinsuchanagreement,itwillhavetocontendthesevariousnon-directly-traderelatedissues,
which could present insuperable challenges for India, given its own economic and political
constraints–includingthosefromitsownstateownedenterprises.
IV.UnilateralLiberalization
Historically,muchofIndia’stradeliberalizationhascomeaboutthroughunilateralmeasures(as
opposed to reforms negotiated at the WTO or through bilateral trade agreements). This
happenedmostlyintwowaves:firstin1991-94andthenin1998-2007,withpausesin1995-97
andafter2007.Averagetariffscamedownfrommorethan150%in1991toabout12%in2007.
Thelarge-scaleliberalizationundertakenbyIndia,might,inthefirstinstance,suggestthatthe
taskoftradeliberalizationisnowcomplete.However,thisisnotthecase.India’stariffregime
ischaracterizedbypronounceddisparitiesbetweenboundrates(i.e.,theratesthatunder
WTOrulesgenerallycannotbeexceeded)andthemostfavorednation(MFN)appliedrates
chargedattheborder.India’saverageboundtariffrateisaround50percent,whileitssimple
MFNaverageappliedtariffisaround13percent.Giventhislargedisparitybetweenbound
andappliedrates,exporterstofaceuncertaintybecauseIndiamaintainsflexibilitytochange
tariffratesatanytime.Forexample, in January2013, India issuedacustomsnotification
announcinganimmediatedoublingofthetariffonimportsofcrudeedibleoils.Whilethisis
notatypicaloccurrenceandwhiletariffratesarequitestableoverall,longterminvestments
bytradingpartners(inthecontextofglobalvaluechains,say)requireregulatorycertainty,
whichcanbeachievedbyloweringboundratestobringthemclosertoappliedrates.
Further,manyofIndia’sboundtariffratesonagriculturalproductsareamongthehighestinthe
world, ranging from100percent to 300percent. India’s averagebound tariff for agricultural
productsis118.3percent.Whilemanyappliedtariffratesarelower(averaging33.5percenton
agriculturalgoodsin2013),theystillpresentasignificantbarriertotradeinagriculturalgoods
andprocessed foods (e.g.,potatoes,apples,grapes, cannedpeaches, chocolate, cookies,and
frozenFrenchfriesandotherpreparedfoodsusedinquick-servicerestaurants).Thelargegap
betweenboundandappliedtariffratesintheagriculturesectorallowsIndiatousetariffpolicy
tomakefrequentadjustmentstothelevelofprotectionprovidedtodomesticproducers,again
creatinguncertaintyfortraders.
Indiaalsomaintainsveryhightariffpeaksonanumberofgoods,includingflowers(60percent),
naturalrubber(70percent),automobilesandmotorcycles(60percentto75percent),raisinsand
coffee (100 percent), alcoholic beverages (150 percent), and textiles (some ad valorem
equivalentratesexceed300percent).Further,whileIndiahasboundallagriculturaltarifflines
intheWTO,over30percentofIndia’snon-agriculturaltariffsremainunbound,(i.e.,thereisno
WTOceilingontherate).Overall,ratherthanundertakesimpleliberalization,Indiahasoperated
anumberofcomplicatedschemes includingdutydrawbacks,anddutyremissionschemesfor
imports.Thisappearstobeanunnecessarilycomplicatedadministrativestructurethatcanbe
considerablysimplifiedbyunilateralliberalization.
Despite the immense success of the reforms in taking the economy forward, external
liberalizationstalledbetween2004and2014undertheCongress-ledgovernment.Despite its
stated goal of moving toward Association of Southeast Asian Nations (ASEAN) tariff rates
(approximately5percentonaverage), Indiahasnot systematically reduced itsbasic customs
dutiesinthepastfiveyears.
SeveralrelatedobservationsonIndianunilateraltradepolicychoicesmaybemade:
First,appliedtariffsfarbelowtheirboundlevelssuggeststhatpolicyis,unusually,moreliberalin
practicethanitisinprinciple.Thereasonsforthisgapareunclear(atleasttothisauthor)but
mayhavetodowithdifferentpoliticalforcesthatareengagedinunilateraldecisionmakingas
comparedtothoseengaged inmultilateralnegotiationsorpotentiallyduethestrategicvalue
thathighboundtariffshaveasbargainingchipsinfuturemultilateralnegotiations.Beallthisas
itmay,Indiamaydowelltoloweritsboundtariffstobringthemclosertoappliedlevels,either
unilaterallyoraspartofamultilateralnegotiation.
Second,acasetobemadeforrevenueneutral liberalizationandrationalizationofthetariffs.
Figure1belowshowsthetariff levelsandtherevenueobtainedatthose levelsfor India.The
highesttarifflevelsthatcontributesubstantialrevenueare150and100.Beverages/Spiritsare
charged at 150 percent and contribute 2 percent of tariff revenues, while crude palm oil is
chargedat100percent and contributes16percent to import revenue.Beveragesand spirits
make up 0.1 percent of all imports and crude palm oil accounts for 1.4 percent. The other
substantialspikesinimportrevenueoccurat10percentand7.5percent,whichconsistofvarious
dutiablegoods.Onepossiblerationalizationtoconsiderwouldbetoharmonizeallratesaround
thetradeweightedaverageofsay7percent (withsomeexceptions forsensitivegoods).This
rationalizationwould correctdistortionswhere inputs to industriesare chargedhigher tariffs
(tariffinversion)whilealsobringingadditionalpoliticaleconomybenefitsassociatedwithhaving
uniformtariffs.
Third,alongsidetheliberalizationundertakeninthelasttwodecades,Indiahasbecomeoneof
theworld’sleadingusersofanti-dumpingduties,filing20-25percentoftheglobalanti-dumping
cases(vastlydisproportionatelytoitsshareofglobalimports).Whilemostofthesedutieshave
been ina single sector (chemicals) anddonot seem tohavegreatly affected Indian imports,
flexibleuseofanti-dumpingdutiesagainstglobalcompetitorsraisesfearaboutIndia’swillingness
tobendtodomesticpoliticaleconomypressurestousesuchpolicies inothersectorsaswell.
Greaterself-restraintintheuseofantidumpingdutieswillsignalamorestabletraderegime.
Fourth,aswehaveobservedearlier,Indianparticipationinglobalproductionnetworksisrather
limited, especially inmanufactures.While a number of factors drive this outcome (including
relativelypoortransportinfrastructureandtradefacilitation)highandpotentiallyvariabletariffs
aresurelyalsotoblame.
V.DomesticReforms
In addition to trade reforms and market access, improving India’s trade and effective
participation inglobalproductionnetworkswill requireanumberofdomestic improvements.
These include improvements indomestic transportand trade infrastructureand reforms that
increasetheproductivityofitsstagnatingmanufacturingsector.
The relatively weak performance of the manufacturing sector and the reasons for its low
productivity aremany (and are generallywell understood): Land acquisition for projects is a
majorhurdle.Theregulatoryframeworkthatneedstobeengagedinordertoinstallcapitaland
beginproductioniscumbersome--gettingthenecessarypermitsfromthevariousministriesis
highlychallenging.Taxesrelatingtodomesticandforeigninvestorshavebeenvariable,generate
unnecessary uncertainty for investors. Indian infrastructure clearly needs dramatic
improvement. Thetransportationnetworkremainsweak.Thequalityandcoverageof Indian
roadslagsfarbehindcountrieslikeChina,asdoIndia'sportfacilities.Energysupply,anecessary
input for production, remains low and variable. The need for infrastructural investments to
supporteconomicactivity isobvious.Overall, theeaseofstartinganddoingbusiness in India
remainslow,despiterecentimprovements.
Anadditional factor, thathasbeenwidelyrecognizedasan impedimenttothegrowthofthe
manufacturingsectoristhehighlyrestrictivesetoflaborlawsthatgovernemploymentinIndia.
TheIndustrialDisputesActrequiresfirmsemployingmorethan50–100workerstoobtainthe
permissionofthegovernmentinordertoretrenchorlayoffworkers.Sincethispermissionisnot
easilyforthcoming,itraisestheeffectivecostoflaborusageinproductionandinducesdistortions
inlaborhiring.TheIndustrialEmploymentActregulatesthetermsandconditionsofworkand
appliestomanufacturingfirmsemployingover10workers.Whilenoonewouldarguethatwe
donotneedtohaveworkerprotectionsinthelaw,itseemsclearthatIndianlaborregulations,
astheystand,oftenworkagainsttheinterestsoflaboritself.Makingitdifficultorimpossibleto
fireworkersmakesfirmsreluctanttohireworkers,especiallyintoformaljobs.Thisimpliesthat
wehavealargerpoolofinformal“contract”workerswhodon’tenjoythelegalprotectionsand
jobsecuritythatthelawintendedfortheminthefirstplace.Restrictivelaborregulationscan
alsoinducefirmstooperatelessthanoptimally,forexample,byhiringfewerworkersthanthey
ideallyneedorbyshiftingtocapitalintensivemanufacturingtechniques,evenifthisiscostlyto
do.
Takentogether,thesefactorshaveconspiredtoensurethatIndianmanufacturinghasremained
both small in scale and (correspondingly) inefficient: nearly three-quarters of Indian
manufacturingworkers are employed in small firms (with less than 20workers each) which
collectively produce less than one quarter of Indianmanufacturing output. Reducingworker
"protections" in order to improve outcomes for workers and the promotion of scale in
manufacturingactivity(evenifitappearsbiasedagainstsmallenterprises)togainproductivity
areamongthenecessarychangesforIndianmanufacturingproductivitytorise.
The apparent lack of genuine interest in tackling these issues is an indicator of the political
difficulty inherent in bringing about the necessary changes. It also reflects a related and
significant ideationalchallenge:Havingput in labor regulations to reduceworkerexploitation
(itselfwidelyprevalent),howcanonenowrationalize their removal?Havingsupportedsmall
scale economic activity (including through the very restrictive small scale reservations policy
whichpermittedarangeofgoodstoonlybeproducedbysmallscalefirms)howcanonenow
promotelargescaleactivitiesinstead?Withoutsomehowpledgingimprovedoutcomesforevery
individualworker,howcanonegetdemocraticsupportforthesechanges?Thesequestionsneed
tobetackledeffectivelyandsoon.RisingprotectionismintheadvancedcountriesandIndia’s
owndemographicpressuresdonotleavemuchroomfordelay.
Conclusions
Followingglobaltrends,Indiahassignedanumberofpreferentialtradeagreements.Ouranalysis
oftheIndia’stradeoutcomesundertheagreementssuggests,however,thatthetradesharesof
India’stradepartners(onboththeimportsandtheexportsside)havenotchangedmuchover
the last decade. This is primarily because India’s agreements, havehad gradual liberalization
schedules, so that implementation in many agreements was only recently completed and
implementationinyetothers isslatedtocompletedonlyyears later. India’sagreementshave
alsoinvolvedasignificantnumberofexclusions,sothatgoodswithlargemultilateraltariffshave
beenshieldedfromimportprotectioninbilateralsettingsaswell.Ontheonehand,thisanalysis
oftradeoutcomesrejectsalarmistclaimsconcerningimports,undertheseagreements,having
haddevastatingeffectsondomesticindustry.Ontheotherhand,thelackofasignificantimpact
ontradesharesmayleadtoaquestioningoftherelevanceofagreements.Regardlessofpast
outcomes,itisclearthat,goingforward,Indianeedstouseglobalmarketstopropelitseconomy.
Marketaccessisimportant,butdomesticproductivityandcompetitivenessisalsocrucial.How
Indiamanagesboth these issueswill crucially determine its development trajectoryover the
comingyears.
ReferencesBhagwati,J.,1993,“RegionalismandMultilateralism:AnOverview,”InJaimedeMeloandArvindPanagariya,eds.,NewDimensionsinRegionalIntegration,CambridgeUniversityPress.Bhagwati, J., Krishna, P. and Panagariya, A., 1999, Trading Blocs: Alternative Approaches toAnalyzingPreferentialTradeAgreements,MITPress.
Robert,J.,andNoguera,G.,2012,Proximityandproductionfragmentation.AmericanEconomicReview,vol.102,No.3,pp.407-411.
Kawai,M.andWignaraja,G.,2011,Asia'sFreeTradeAgreements:HowisBusinessResponding?,Cheltenham(UK),EdwardElgar
Krishna.P.,“PreferentialTradeAgreementsandtheWorldTradeSystem:AMultilateralistView”,inFeenstraandTayloreditors,GlobalizationinanAgeofCrisis,NBER,UniversityofChicagoPress,2014
OECD,2019,FDIStocks,https://data.oecd.org/fdi/fdi-stocks.htm,AccessedJune1,2019.Panagariya, A., 2000, “Preferential Trade Liberalization: The Traditional Theory and NewDevelopments,”JournalofEconomicLiteratureSaraswat,V.K., Priya, P., andGhosh,G., 2017 , “ANoteonFreeTradeAgreements and theirCosts,”NITIAayog,NewDelhi.WorldTradeReport,2011,“TheWTOandPreferentialTradeAgreements,”WTO,GenevaWTO, 2019a, Article XXIV of the GATT, https://www.wto.org/english/tratop_e/region_e/region_art24_e.htm,AccessedJune1,2019WTO, 2019b, Special and Differential Provisions, https://www.wto.org/english/tratop_e/devel_e/dev_special_differential_provisions_e.htm,AccessedJune12019
FigureI
Source:ConstructedfromIndianBudgetdocumentsanddatafromExport-Importbank
0% 5%
10% 15% 20% 25% 30% 35% 40% 45%
1 2 34.2
5.6
6.7
7.2
7.9
8.1
8.3
8.8
9.2 10
13.5
16.7 20 25
26.4
29.2
32.5 35
41.3 45 50 60
65.6
71.7
78.8
150
AverageMFNappliedtariffatHS6digitlevel
Percentagerevenuefromdifferenttarifflevels- India
Percentagerevenueatdifferenttarifflevels
TabeI:India'sTradeAgreements
TradeAgreement Coverage Type Notification Dateofentryintoforce Signatories
India-Afghanistan Goods PSA EnablingClause 13-May-03 Afghanistan;IndiaIndia-Bhutan Goods FTA EnablingClause 29-Jul-06 Bhutan;IndiaIndia-Chile Goods PSA EnablingClause 17-Aug-07 Chile;IndiaIndia-Japan Goods&Services FTA&EIA GATTArt.XXIV&GATSArt.V 1-Aug-11 India;JapanIndia-Malaysia Goods&Services FTA&EIA EnablingClause&GATSArt.V 1-Jul-11 India;MalaysiaIndia-Nepal Goods PSA EnablingClause 27-Oct-09 India;NepalIndia-Singapore Goods&Services FTA&EIA GATTArt.XXIV&GATSArt.V 1-Aug-05 India;SingaporeIndia-SriLanka Goods FTA EnablingClause 15-Dec-01 SriLanka;IndiaIndia-Thailand Goods PSA EnablingClause 1-Sep-04 India;ThailandIndia-RepublicofKorea Goods&Services FTA&EIA 1-Jan-10 India;Korea,Republicof
India-ASEAN Goods&Services FTA&EIA EnablingClause&GATSArt.V 1-Jan-10 India;BruneiDarussalam;Myanmar;Cambodia;Indonesia;LaoPeople'sDemocraticRepublic;Malaysia;Philippines;Singapore;VietNam;ThailandAsiaPacificTradeAgreement(APTA) Goods&Services PSA&EIA EnablingClause&GATSArt.V 17-Jun-76 Bangladesh;SriLanka;China;India;Korea,Republicof;LaoPeople'sDemocraticRepublicSouthAsianFreeTradeAgreement(SAFTA) Goods FTA EnablingClause 1-Jan-06 Afghanistan;Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthAsianPreferentialTradeArrangement(SAPTA) Goods PSA EnablingClause 7-Dec-95 Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthernCommonMarket(MERCOSUR)-India Goods PSA EnablingClause 1-Jun-09 India;Argentina;Brazil;Paraguay;Uruguay
TradeAgreement Signatories
India-Afghanistan Afghanistan;IndiaIndia-Bhutan Bhutan;IndiaIndia-Chile Chile;IndiaIndia-Japan India;JapanIndia-Malaysia India;MalaysiaIndia-Nepal India;NepalIndia-Singapore India;SingaporeIndia-SriLanka SriLanka;IndiaIndia-Thailand India;ThailandIndia-RepublicofKorea India;Korea,Republicof
India-ASEAN India;BruneiDarussalam;Myanmar;Cambodia;Indonesia;LaoPeople'sDemocraticRepublic;Malaysia;Philippines;Singapore;VietNam;ThailandAsiaPacificTradeAgreement(APTA) Bangladesh;SriLanka;China;India;Korea,Republicof;LaoPeople'sDemocraticRepublicSouthAsianFreeTradeAgreement(SAFTA) Afghanistan;Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthAsianPreferentialTradeArrangement(SAPTA) Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthernCommonMarket(MERCOSUR)-India India;Argentina;Brazil;Paraguay;Uruguay
TableII:TradeShares
2007 2017
ImportShare ExportShare TradeBalanceShare ImportShare ExportShare TradeBalanceShare
India-Bilateral 13.3 13.7 12.6 11.8 14 7.5
India-Afghanistan 0.3 0.1 -0.19 0.09 0.21 -0.15India-Bhutan 0.09 0.04 0.18 0.05 0.13 -0.13India-Chile 0.86 0.15 2.27 0.25 0.25 0.63India-Japan 2.7 2.2 3.5 2.3 1.52 3.9India-Malaysia 2.6 1.27 5.3 2 1.8 2.2India-Nepal 0.2 0.8 -1 0.09 1.8 -3.4India-Singapore 3.1 4.3 0.7 1.6 3.9 -2.9India-SriLanka 0.2 1.7 -3 0.15 0.15 -2.5India-Thailand 1 1.1 0.7 1.4 1.2 1.9India-RepublicofKorea 2.5 1.7 4 3.6 1.5 7.8
India-ASEAN 9.6 9.5 9.9 10.2 12 6.6AsiaPacificTradeAgreement(APTA) 2.7 4.8 -1.39 3.9 5.4 10SouthAsianFreeTradeAgreement(SAFTA) 0.7 5.2 -8.2 0.5 6.6 -11.5India-SouthernCommonMarket(MERCOSUR) 0.7 1.5 -0.8 1.7 1.3 2.6
India-China 11.2 6.5 20.7 16.1 4.2 39.7India-USA 6.4 13.7 -8.1 5.4 15.6 -14.6India-EU 14.8 21.7 1 9.9 17 -4.65
Table III: Trade Under Preferences (2008)
Regime MFN=0 Trade
Total PM > 10% PM < 10% Total MFN > 10% MFN< 10% Billions (USD)
MFN 0 0 0 44.8 4.9 40 53.9 4874
EU-intra 63.7 9.4 54.3 0 0 0 34.4 3807 Reciprocal Regimes 43.7 5.8 37.9 7.6 1 6.6 47 2803
NAFTA 60.9 6.3 54.7 0.1 0 0 38.2 912
EU - Switzerland 56.9 3.9 53 1.3 0.5 0.8 41 261 ASEAN* 20.1 4 16 3.6 0.3 3.3 72.9 141
EU-Turkey 78.4 15.2 63.2 0.9 0.5 0.4 20 141
EU-Mexico 51.2 13.5 37.7 0.9 0.6 0.3 43.2 58 Non-Reciprocal Regimes 17.6 1 16.6 26.3 5.4 21 55.6 2067
EU-GSP 13.3 0.1 13.2 23 5.7 17.3 63.4 1012
US-GSP 8.3 0.2 8.1 62.4 5.6 56.8 28.8 258
US-AGOA 90.1 1.5 88.6 0.1 0 0 9.9 84
Source;WorldTradeReview2011
Preferential Trade Non-Preferential Trade
Preferential Trade Agreement
Export Import Export Import Export Import
ANDEAN Community 94 93 7 8 93 92
ASEAN Free Trade Area (AFTA) 966 929 25 24 75 76
Asia Pacific Trade Agreement (APTA) 2043 1897 11 19 89 81
Caribbean Community and Common Market (CARICOM) 26 29 16 12 84 88
Central American Common Market (CACM) 25 44 24 11 76 89
Common Market for Eastern and Southern Africa (COMESA) 57 115 10 5 90 95
Commonwealth of Independent States (CIS) 693 456 18 27 82 73
Economic Community of West African States (ECOWAS) 71 58 8 9 92 91
European Free Trade Association (EFTA) 374 279 1 1 99 99
European Union (27) 5806 6083 67 60 33 40
Global System of Trade Preferences (GSTP) 1437 1486 19 22 81 78
Gulf Cooperation Council 704 366 2 7 98 93
Latin American Integration Association 814 760 16 18 84 82
North American Free Trade Agreement (NAFTA) 2047 2882 49 33 51 67
Pan-Arab Free Trade Area (PAFTA) 892 607 6 11 94 89
South Asian Free Trade Agreement (SAFTA) 211 374 6 2 94 98
Southern Common Market (MERCOSUR) 278 249 17 18 83 82
Source:WorldTradeReview2011
Table IV: Intra-PTA and Extra-PTA Trade (2008)
World (Billions USD) Intra-PTA Share Extra-PTA Share