Dr R Balashankar
ALL countries, including India, are signing the FTAs so as to get a competitive edge over other countries. However, with the increase in the number of FTAs that are globally operative, the preference margin that India can get from its FTAs will be eroding. This phenomenon is referred to as “preference erosion”. At the moment there are 356 regional trade agreements (including customs unions) that are notified to the WTO globally and hundreds more are being negotiated. So for example, if India signs an FTA with the EU and the EU signs another FTA next year with China, India’s preference margin will automatically disappear in products where China is more competitive. With what is called the “spaghetti Bowl” of FTAs, most countries are already facing significant preference erosion. Experts predict that very soon, FTAs will cease to deliver any benefits in terms of market access.
Discriminatory to developing countries
The North-South FTAs contain many provisions which are taking away the policy space of developing countries. The North South FTAs are getting into areas of strict investor protection, intellectual property rights (IPR) commitments that go way beyond the TRIPS Agreement, government procurement and competition policy. These have been acknowledged even at the WTO as being very sensitive areas for developing countries. The foray of FTAs into these areas especially threaten many instruments which a developing country like India can use to address development needs of its people, e.g. cheap medicines, special government market for disadvantaged groups and MSMEs, access to essential services at cheap rates. The restrictions imposed by these North South FTAs on these instruments and policy space will continue to stay and tie the hands not only of the government but of the legislature and the judiciary as well.
Therefore it is not surprising that the UNCTAD Trade and Investment Report (2007) points out (speaking on North South FTAs) “the gains for developing countries from improved market access through FTAs are not guaranteed, and may be short-lived, but the loss of policy space is certain”(p 59).
Agriculture. dangerous impact
The negotiations on agriculture and related products is turning out to be asymmetric in several ways. India’s current agricultural trade is low and accounts for only 2.9 per cent of its imports. But that is also because India still imposes quite a high applied tariff (duty) at a simple average of 31.8 per cent (2009) on agricultural products while its notified bound or maximum duty is 113.1 per cent. Indian products already face a much lower duty of 13.8 per cent in EU markets of agricultural products. Again, India offers duty free access only in fruits, vegetables and plants (21.7%) and vegetable oils (72.9%) while 60 per cent of India’s agricultural products can already technically enter EU duty-free. So how much additional market access will India gain?
Even though the EU has low tariffs, it gives high subsidies to its agricultural producers which work both as a protective instrument in its domestic market, as well as a competitiveness enhancer for EU’s exporters. Under the Common Agricultural Policy (CAP) which still takes up 40 per cent of EU budget, EU still gives huge amounts of subsidy to its farmers on dairy, poultry, cereals. Enough literature exists (for example UNCTAD 2007) to show that domestic subsidies are very much trade distorting and affects global prices thus reducing competitiveness of smaller producers in developing countries. Indian products also face high non-tariff barriers (NTBs) like food and other standards as well as technical barriers in EU, making exports difficult. On the other hand, NTBs are lower in India.
Given the tariff and NTB structures in the two countries, the EU obviously has much more to gain in terms of tariff reduction while India’s gains lie in getting NTBs reduced, simplified and harmonised and in the removal of EU subsidies, a much discussed issue in the trade talks even at the WTO.
Under the FTA, India is committing to removing duties on at least 90 per cent of its tariff lines. But removal of EU’s agricultural subsidies is not possible under FTA as it is a multilateral issue and can, therefore, be negotiated, only at the WTO level. Non tariff barriers in the form of standards, sanitary and phyto sanitary measures and technical barriers (TBTs) are also being discussed. However most of EU FTAs show that affirmation of at least WTO standards has not been followed. The high EU standards themselves are unlikely to come down though India may be able to get some simplification of procedures but which by themselves will not ensure additional market access.
Therefore the EU-India FTA in agriculture harps on the reduction of tariffs but is silent or hazy on the removal of non tariff measures like subsidies, standards and TBTs. This makes this segment asymmetric and unfair to Indian farmers and agro processors.
Impact assessment studies suggest very little gain for India in commodity trade, especially in agriculture. Trade surplus in agriculture will turn into a trade deficit and a long run fall in agricultural employment is predicted. A small increase in agricultural exports will be countered by a larger increase in agricultural imports, these studies show. While India’s share in EU’s markets in cereals, other crops, agro-food and products from animal origin will remain constant (at 1.2, 0.6, 1.1/1.3 and 0.1% respectively), EU will increase its share in all these markets. For example, in primary products EU’s share increases from 4.9% to 16.7% by 2020, and from 17.6% to 23.5% in cereals. In products of animal origin, EU’s share is projected to increase from 7.5% to 10.4% by 2020 and from 2.9 to 5.3% in agro-food. Another study points out that in both agricultural trade as well as trade in agro processed products, India will see a deficit increase as imports will outstrip exports..
Once protections are removed, EU products are likely to flood Indian markets. European exports can also destroy value added agro processing in India, as well as basic crops by destroying the linkage with local processing industry. Dairy and poultry are key areas of concern, along with cereals. Even in fisheries, if European large fishing trawlers are allowed to fish in Indian waters (under investment provisions) and then sell the catch in Indian markets it will threaten livelihoods of not only Indian fishermen but local retailers, a large number of whom are women.
It is obvious that India will not gain much from commodity trade. The MSMEs in general, apart from the garments sector and perhaps leather, are likely to lose out more as they have to compete with big industries from the EU. While they may be quite competitive in terms of prices, they may lose out even in the domestic market due to quality problems. Studies have shown that, MSMEs feel they are not given a ‘level playing field’ in competing with developed countries. Since infrastructure in India including that of marketing, storage and transportation are weak, entrepreneurs feel their competitors in the developed countries have huge advantage in terms of basic facilities. In addition they get significant support from the government. The UK government recently released a new document in support of their SMEs. In India, while certain policies are supposed to encourage MSME exports and production, the entrepreneurs feel that they remain mostly on paper. They are already facing rising costs of production. If export taxes are removed on minerals, raw leather then even industries which are currently doing well could be hurt. For example, the Indian saddlery industry has benefitted from export taxes on vegetable tanned leather. If these are removed under the EU-India FTA, the cost competitiveness could be affected.
In fact, export taxes combined with investors’ rights can lead to drainage of India’s raw material. EU’s Raw Material Initiative clearly outlines EU’s interest in procuring raw material from the developing world including rare earth minerals through all instruments at its disposals including FTAs. If a European company sets up presence in India, extracts raw material and is allowed to export these out freely (if export taxes are removed) then India will have very little policy space at its disposal to control such outflow.
Public Procurement: MSMEs enjoy some preferential access to public procurement in Central and state level purchases. Earlier they enjoyed 15 per cent difference in tender fees, now they can be given a contract on a preferential basis if they can match the lowest bid. In addition, certain items can be reserved for exclusive production by MSMEs, village enterprises, women’s groups. For example, many MSMEs including leather, plastic industries sell to the Indian railways. If India gives market access in public procurement (subject to certain threshold levels) to the EU under the FTA, these preferential treatments may be considered discrimination. While EU companies can replace Indian producers in railways, energy, construction and many other segments, Indian companies will not have similar access to EU’s procurement markets mainly because of NTBs. There are language problems and information asymmetry on government tenders. Even member countries find it difficult to access other member countries’ procurement markets within the EU.