Financial Daily from THE HINDU group of publications
Friday, Dec 03, 2004
South-South trade co-operation India must further bloc ambitions
This is mainly because, despite the free trade and trade liberalisation advocated by the World Trade Organisation, exporters from developing countries are finding it difficult to break new ground as they face both tariff and non-tariff barriers in developed markets.
For example, a variety of non-trade barriers, such as regional and preferential trade agreements, unilateral shifts in the definition of rules of origin, and discrimination on the basis of non-trade issues such as environment safeguards and labour standards all pose problems to exporters from developing countries.
Developed countries influence decisions at world bodies such as the WTO and create uncertain conditions. For example, the US is said to be trying for a postponement beyond January 2005 of the dismantling of the textile quota regime. And the Regional and Preferential Trade Agreements that the US has with Canada/Mexico, Sub-Saharan Africa and the Caribbean are affecting the trading opportunities of developing countries such as India, which are not part of any trade bloc. Statistics from Africa show that trade has increased in the ECOWAS and SADC bloc, thanks to regional trade agreements. Even the AGOWA trade agreement with the US is helping Sub-Saharan Africa.
Besides, regional trade co-operation leads to the expansion of a country's trade portfolio and makes it independent of a small group of influential trade partners. Interestingly, China exports 45 per cent of its products to Japan, Hong Kong and non-quota countries which, however, are not the mainstay of the Indian manufacturers. This shows how well spread China's export portfolio is. Owing to the enhanced concentration on the east, East Asia now accounts for nearly 25 per cent of India's trade.
To achieve China-like export growth, India must adopt the former's model of concentrating on Regional Trade Agreements, paving the way for South-South trade cooperation through a Global System of Trade Preferences (GSTP).
A recent Unctad study appreciates the fact that the Regional RTAs help the integration of developing economies into the global economy. It further reveals that a 30 per cent reduction in tariffs among GSTP members would increase trade volumes by $8.5 billion. Regional Trade will offer India at least a level playing field as it is trade-creative.
Again, in global trade the concept of single-roof manufacturing is coming to an end. Job specialisations are the order of the day, as is obvious from the fairly new concept of outsourcing. At every stage of manufacturing, outsourcing vis-à-vis in-house manufacturing will be weighed on cost basis, and tariff agreements provide the impetus for this.
Against this background, India is now concentrating on establishing Preferential Trade Agreements and Free Trade Agreements and signed on August 2004 the protocol with Thailand to implement a bilateral trade agreement known as "Early Harvest Scheme" under the Framework Agreement on Free Trade.
The early harvest scheme includes a list of 82 goods for which duties are to be brought down to zero by March 2006. Products not included under the EHS will be categorised under "normal track" (consisting of two sets of items) and "sensitive track", the former achieving tariff concessions in a scaled manner by 2010. But this agreement is subject to the condition that Thailand must ensure a value addition of 40 per cent. It should be noted that the signing of this agreement was delayed as the two countries could not agree on the rules of origin.
To ensure that Thailand does not become the conduit for dumping into India, especially for the automobile industry, the Government is taking steps to remove State-level mandi and octroi duties. However, this trade agreement needs a close study for its economic impact on both countries.
India already has an FTA in operation with Sri Lanka and recently signed one with Afghanistan. Thanks to the trade agreement, Indian exports to Sri Lanka rose from $500 million in 2000 to $1.3billion in 2003-04. Similar trade agreements are likely to be entered into with Singapore, Malaysia, Indonesia, South Africa, the CIS, and Egypt as also a Comprehensive Economic Co-Operation Agreement with China.
The FTA agreement with Mercosur is progressing well. However, the Comprehensive Economic Co-operation Agreement between India and Singapore is under review as negotiations are taking place on account of three essential rules of origin criteria, which India insists should be applied simultaneously due to Singapore's transit trade. But Singapore feels otherwise and the signing of the agreement is expected to be delayed beyond December, the original deadline.
Is mere signing of FTAs the solution? Whether these trade agreements would produce a win-win situation needs to be monitored. Will these FTAs and CECAs take us near the target of 1.5 per cent of global trade?
First, their success would depend on how well we manage our rupee parity with other major currencies. This would call for timely and effective fiscal and monitory policies. A stable currency enhances trade dealings.
Second, it would depend on how we monitor and introduce an effective mechanism against escalating crude prices?
Third, how we create the infrastructure framework.
Fourth, how well we manage the domestic investment climate so that entrepreneurs can cash in on new markets.
And, fifth, sufficient machinery needs to be set up to monitor trade diversions, and this requires clear and well-defined rules of origin with well-laid-out value-addition requirements.
Infrastructure investment calls for increased handling at ports especially of containers with the Railways providing a back-up. Often there are reports of port congestion and this adds to the costs of importers and exporters. Port management needs constant attention.
Air cargo and the road network are the other areas requiring attention.
Besides thinking of using a part of the huge forex reserves to build infrastructure, the Government should also provide enough tax sops to infrastructure companies to attract further investments from the private sector.
Tax reforms must also mean uniform State-level levies. Harmonisation of State level taxes is required. Perhaps the FTAs between State governments can be encouraged to reduce the scope of State-level taxes from cutting into the export effort. This should be supplemented by a product-by-product study, and an analysis of the tax rules applicable in FTA countries before reforming the tax structure. A strong domestic policy providing a healthy investment climate is a sine qua non of the success of FTAs.
Finally, it must be remembered that countries with complementary resources and capabilities do well in FTAs, which is why India should look for ideal partners. A trade agreement with ECOWAS would enable our textile exports to look up further.
The just-concluded third ASEAN-India summit at Laos should convince India to be part of a regional grouping that would encompass also Japan, China, and Korea to become a bloc rivalling the European Union.
(The author is a Chennai-based chartered accountant.)
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