Free trade does little to boost India’s exports

Free trade agreements are supposed to be a two-way street. But opening a market for imports will not necessarily improve exports

Service cuts providing a welcome reduction in supply

ON NOVEMBER 4, India decided to withdraw from the Regional Comprehensive Economic Partnership, a mega-regional trade agreement that aimed to bring together almost half of the global population and to account for nearly 28% of the world trade.

The Indian decision was influenced by a multitude of stakeholders including farmers’ organisations, trade unions and industry associations who expressed their concerns about how this agreement would have affected domestic manufacturing.

India has three free trade agreements with the members of Association of Southeast Asian Nations, South Korea and Japan, all parties of the RCEP negotiations. These FTAs were expected to boost Indian exports. This expectation did not materialise. On the contrary, imports from these countries grew, thereby negatively affecting Indian manufacturing.

By joining the RCEP, India would have had to offer preferential duties to China, the largest trade partner and the largest source of imports for India. This was not appealing to India’s manufacturing sector.

Looking at the latest trends concerning the trade relationship between India and the existing FTA partners among the RPCs (ASEAN, South Korea and Japan), the gap between imports and exports has not improved since the agreements were undertaken, as shown in the following figure.

This gap is significant because it has contributed to the overall deficit for India. These results indicate India’s inability to capitalise on the increased market access opportunities that should have been gained from the lower tariffs offered by the partner countries. The reason why the government has not succeeded in reverting the trends is beyond the scope of this analysis.

China has gradually increased its penetration in the Indian market. At the beginning of 2000, the Indian deficit with China equated to $300m. This has risen to $57bn in 2018, with imports increasing from $3bn in 2000 to nearly $76bn in 2018 and exports increased from $3bn to $19bn during the same period.

Although it is impossible to establish with certainty what India could have gained from the RCEP, this analysis shows that India has been unable to exploit the market access opportunities derived from the FTAs suggesting that India needs to address the reasons why the FTAs have not been successful before it can convince the country’s stakeholders to sign for new FTA.

First published on Lloyd's List website December 2019