Not Fearing to Negotiate

Context: Signing or opting out of Regional Trade Agreements (RTA) in light of recent reports of India to review its RTA should consider its economic rationale and fallouts. 

Regional Trade Agreements (RTAs) 

• Multi-factor dependence of RTAs: All RTAs may not always lead to trade-investment creation. It is dependent on the following factors like 
• How substantial is the trade agreement?
• Coverage of trade agreement
• Are large chunks of the trade basket left out because of negative list
• Are the economies complementary
• RTAs do not lead to violation of Most Favoured Nation (MFN) principles, as Article 24 of General Agreement of Tariff and Trade (GATT) stipulates substantial trade coverage.
• RTA covers services by Article 5 of the General Agreement on Trade in Services (GATS) also requiring substantial sectoral coverage.
• The false binary between Regionalism and Multilateralism: Regionalism and Multilateralism are often considered antagonistic to each other, which is a flawed argument.
• Whenever multilateralism stagnates, RTAs surface. 
• Some RTAs are World Trade Organization (WTO) plus i.e. they extend beyond what WTO agreements cover. 

India’s RTAs

1. Asia-Pacific Trade Agreement (APTA: goods, 1976, services, 2013)
2. South Asian Association for Regional Cooperation
3. Preferential Trading Arrangement (SAPTA: goods, 1995), Sri Lanka (goods, 2000), Singapore (goods and services, 2005), 
4. South Asian Free Trade Area (SAFTA: goods, 2006), Bhutan (goods, 2006), Chile (goods, 2007).
5. MERCOSUR (goods, 2009), South Korea (goods and services, 2010), Nepal (goods, 2009).
6. Association of Southeast Asian Nations (ASEAN: goods, 2010, services, 2015), Malaysia (goods and services, 2011), Japan (goods and services, 2011) and Thailand (goods, 2004).
7. Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC)

• European Free Trade Association (EFTA)

1. European Union (EU) 
2. Southern African Customs Union (SAFCU) to WTO, though these haven’t entered into force. 

Issues with India’s RTAs

• India can have significant negative lists and non-substantial coverage, nullifying a prerequisite for the RTA to be successful. 

• India’s RTAs are not under GATT's Article 24 and are covered under the 1979 enabling clause for developing countries and LDCs.

• Limited geographical coverage with an inordinate focus on South America, and northern parts of Africa and Asia
• North America, Western and Eastern Europe (including Russia), West Asia and Australia aren’t covered.
• Limited capacity and lack of prioritisation with respect to negotiation and enforcement element of RTAs.
• India’s manufactured tariffs (bound and applied) are higher than those in most trading partners.
• India grants market access in manufacturing, while obtains access in services.
• India’s inability to obtain expected market access in services (cross-border labour issues, reciprocity) or even manufacturing (standards, other non-tariff barriers).
• Missing standard WTO template on Rules of Origin.

• RTAs compound the issue of inverted duties.
• Ideally, duties should be lowest for raw materials, higher for intermediates and highest for finished goods, with a complication of figuring out which item is what.

Way Forward

• There should be stocktaking or reviewing of preceding RTAs with the same country in order to eliminate redundant RTAs.
• India’s trade agreement with APTA members (barring China) reduces the relevance of APTA, which is just a PTA.
• Reduce or eliminate MFN tariffs on raw materials and intermediates if RTA reduces or eliminates duties on finished goods to prevent duty inversion.