Think first, ink later: How India should approach trade deals

At a time when the export engine has become critical to drive India’s growth, India has begun to show some interest in inking trade deals with partner countries. At present, India is intensifying its efforts to fast track its FTA negotiations with the USA, EU, UK, UAE and Australia.

The recent moves follow a withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2019 after seven years of arduous negotiations, because of fears that it would widen trade deficits, and give the China-dominated bloc strategic leverage over the Indian economy. With the EU, six years of trade negotiations came to a halt in 2013 before resuming again in 2021. There’s a similar history of failed negotiations with Australia as well.

The renewed enthusiasm to engage in trade negotiations to expand market access is welcome. However, the start-stop nature of India’s engagement with trade partners suggests the need for a coherent approach towards FTAs that sets clear goals and helps India effectively negotiate, implement, and evaluate trade deals. It will also prevent trade deals from being pushed, hijacked, or junked, simply because of pressures from lobby groups representing sectional interests. In my view, three main parameters should inform an evaluation of FTAs: the opportunity to expand value-added exports, room for market expansion, and scope for creating high-quality jobs.

As is evident from India’s trade negotiations in the past few years, India’s trade balance with partner countries has had a significant bearing on India’s decision to forge bilateral trade relationships. However, the trade-deficit figure says nothing about the value-add in supply chains. Over the last couple of decades, global trade has mostly been along global value chains (GVCs), i.e., countries simultaneously import and export in the same industry, by adding value to the imports. Participation in GVCs is associated with higher productivity of the export sector and, consequently, expansion and diversification of exports. A country may run trade deficits and yet have high GVC engagement, thereby boosting productivity and generating high-quality jobs in the domestic economy. Thus, FTAs should be weighed against the scope they provide for Indian firms to integrate into GVCs.

Secondly, focusing only on merchandise trade excludes services, where India has a comparative advantage. It is difficult for India to get an independent services trade deal. Hence, rather than pushing for just a services deal, we must acknowledge that exports of services and goods are interlinked. Accordingly, India should negotiate FTAs such that new opportunities arise in services, tied to value-chain production. For instance, India could leverage its software prowess to create value-add in the electronics goods supply chain, even if that means importing electronic components in the early stages.

Finally, it is pertinent to evaluate the performance of FTAs with regards to its impact on employment and wages. The opposition to trade deals often draws on public fears around job losses in domestic industries. In this context, an examination of the sectors that will directly be impacted by FTAs will be useful to evaluate welfare gains or losses. If an FTA helps drive labour-intensive exports, it will aid job creation. Moreover, imports of capital goods and technology will increase the productive capacity of export-sectors. Such trade-induced productivity can have a positive effect on both employment and wages over the long run.

If the above parameters are reasonable benchmarks to start assessing FTAs, they can also help us take stock of India’s ongoing trade negotiations. India has indicated its intention to expedite the conclusion of trade negotiations by stepping up its efforts to conclude an early harvest trade (EHT) deal with the UK, Australia, and UAE featuring tariff liberalization for select commodities. As Amita Batra of Jawaharlal Nehru University argues, an EHT deal is not a full fledged FTA and doesn't boost value chain engagement. FTAs with the EU, UK and Australia will not offer India the opportunity to integrate with value chains in the labour-intensive sectors. Moreover, EHT deals go against the spirit of new generation deep trade agreements that have the potential to enhance gains from trade and are easier to negotiate between similar countries. India’s FTA negotiations with the US are yet to begin and that with the EU will require reaching mutual consensus on issues such as labour and environmental standards, IPR rules, and market access.

FTAs with the EU, UK, Australia or the US cannot be a substitute for engaging with Asian partners. To boost exports and export-oriented employment, India has to integrate with Asian economies that are hubs of regional value chains. In a recent research paper, I provided evidence that suggests that India’s labour-intensive imports from ASEAN, especially in food products, beverages and tobacco industry, have been inputs to production of exports, and have, therefore, contributed to India’s exports and export-oriented employment. However, the growth in such exports has been slow. Another study by Sunitha Raju and Raveendra Saradhi of Indian Institute of Foreign Trade suggests that imports of intermediate and capital goods from China have led to improved efficiency and productivity of the Indian manufacturing sector.

To conclude, India should shed its obsession over trade deficit as the sole metric to gauge the potential of trade deals. It should also avoid getting into trade deals just for the sake of having a deal. India should aim to forge deeper trade agreements that encourage GVC-related trade, amplify services trade, and have the potential to create high-quality jobs in the country.