India’s Rising Trade Imbalance

The Free Trade Agreement (FTA) refer to the cooperation between at least two countries to reduce trade barriers like import quotas and tariffs to increase trade of goods and services with each other.

How does FTA’s work?

The free-trade agreement aims at reducing barriers to exchange so that trade can grow as a result of specialisation, division of labour, and most importantly via comparative advantage. The components of the free trade agreement are:

  • Unlike a customs union the members of a free trade area do not have a common external tariff, which means they have different quotas and customs taxes, as well as other policies with respect to non-members.
  • To avoid tariff evasion through re-exports, the countries use the system of certification of origin most commonly called rules of origin.
  • Under the rules of origin there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods.
  • Only goods that meet these minimum requirements criterion are entitled to the special treatment envisioned by the free trade area agreement.

India’s FTAs are widening its trade deficit: Study

A study by the think-tank Third World Network has found that India’s three free trade agreements with the ASEAN, Japan and South Korea have not turned out to be favourable for the country as these agreements have resulted in growing deficits in merchandise trade. The findings of the study are:

  • The analysis of the three existing Comprehensive Economic Partnership Agreements (CEPA) shows that the balance sheet is heavily loaded against India. The study also cautions against the Regional Comprehensive Economic Partnership (RCEP) which includes 16 countries would be no different.
  • India’s trade imbalance vis-à-vis its existing CEPA partners has steadily increased and the trade imbalances saw a sizeable increase immediately after the three CEPAs with the ASEAN, Japan and Korea came into effect.
  • Trade deficit with the ASEAN, Japan and Korea stood at $4.5 billion in 2004 and $16.4 billion in 2010, shot up to $29.7 billion in 2015 before cooling down a bit to $26.6 billion in 2016.
  • India’s exports lagged behind at a time even when its CEPA partners have been providing additional market access. It is an additional cause of concern for India.
  • The CEPAs together with rising imports have also resulted in progressive slowdown of exports. This was due to the fact that India’s FTA/CEPA partners were well positioned to take advantage of an open Indian economy and the Indian entities were unable to exploit the market access opportunities offered by the partner countries.
  • The above trends in both exports and imports point to a hollowing out of the manufacturing base. This has prompted the government to initiate measures for the revival of the manufacturing sector.

Study of SIAM on FTAs

The White paper of the Society of Indian Automobile Manufacturers (SIAM) stated that the negative fallout of the pacts would seriously compromise investments, manufacturing value add and employment at no obvious gain in trade or economic expansion.

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