India, Get Your FTA in the Door

Context:  Finding Free Trade Agreement (FTA) partners in large western markets will certainly be a shot in the arm for India’s manufacturing industry, inducing many more to set up factories.

Overhaul of India’s FTA strategy: It comprises of the following:

• Forging enhanced trade alliances with the EU, Britain, the US and Australia.
• Being more affirmative to bounded trade deals with these countries and others like Canada, with cautious optimism.

Benefits of FTA

• Positive relationship with FDI:  Preferential access to large developed markets increases FDI in manufacturing.
• Traditional wisdom states that FDI in manufacturing is attracted to protected markets where it is cheaper to set up a unit rather than pay the tariffs required to serve them through exports.
• World Bank report cites studies that confirm that high tariff rates on imported goods induced FDI inflows into Britain, Canada and Australia, at that point in time.
• The size of the market is a decisive factor in the choice of the FDI recipient country. So, to the extent that an FTA creates an extended market by including access to the FTA partner country’s market.
• Helps firms to grow beyond national boundaries: Due to tariff eliminations, the markets of FTA partner countries can be served from a single unified location.
• This allows some firms to grow beyond what they would have been able to achieve in the national market of a single country.
• For E.g., Vietnam has successfully leveraged its preferential tariff access to western and Asian nations and supported diversification in the light of adoption of “China plus one” strategy adopted by the MNCs.

Relationship between trade pacts and investments

• Trade pacts and investments are complementary when the partner countries differ in relative endowments and are at different stages of development. 
• For e.g. Japan and South Korea (being developed countries with relatively low natural resources) have leveraged from India’s FTA and complemented it by manufacturing support in India.
• Trade pacts and investments could be substitutes when partner countries are similarly endowed and competing for the same FDI.
• Investments from ASEAN have been substantially more elusive, as they have used FTAs to enable large MNCs to set up bases in the ASEAN and gain concessional access to the Indian market.

Conclusion

• A country with a modest market size but FTA access to large markets is likely to score over a large country with a big stand-alone market, especially if the former can offer other incentives and create a more conducive environment.
• Bangladesh, with duty-free access to the EU, Britain and Canada in textiles under their Generalised System of Preferences (GSP) for ‘least developed countries (LDC), is a prime example.
• Given India’s stage of development, it would only be prudent to seek parity in tariff concessions in these large markets through FTAs.