India’s Tryst with Trade Agreements

Globalization has seen the world become a neighborhood, impacting businesses in myriad ways. It allows easy access to goods and services from the best source, keeping costs down, and providing freer and cheaper access to consumers, trade and industry. 

With the world having shrunk, there is global competition. The consumer has a wide variety of choices. This drives the final price of the product to be pegged at reasonable levels. Access to cutting edge technologies has brought the best of products to every corner of the globe.

A combination of all these has translated into cozier and increasingly better standards of living in most communities across the globe.

Trade Agreements between countries have been massive enablers for globalization. 

Free Trade agreements are contracts between countries to allow easy access to their markets to the exclusion of countries that are not part of the agreement. New markets are opened up and the best of goods and services are freely exchanged. So, Free Trade Agreements confer a huge advantage for trade and commerce in the respective bloc of countries.

Local industries will have to get their act together or risk losing business to nimble outsiders. This will make them more competitive and not look to the government for subsidies and handouts. The issues of level playing or give and take are normally sorted out thoroughly when these agreements are made.

A combination of all these will see a rapid rise in the Gross Domestic Product of countries. Fresh local and foreign investors would flock to capitalize on the opportunities that open up.

However, on the flip side, Free Trade Agreements could see hard-nosed business entities ruthlessly exploit natural resources, laying bare the place to nature’s wrath. Hi-tech industries, as a part of FTAs, could drive local traditional forms or livelihood into obviation. Traditionally made products may not be able to compete against machine made products where mass products with low costs enable them to be sold cheaply. This could also create local unemployment.

While embarking on FTAs, governments should be mindful of the consequences. There is a thin line which the government would have to balance itself on, if it has to ensure there is overall benefit, while not harming the traditional domestic enterprises. FTAs tend to lead to introduction of mass-produced global products and this can surely sound the death-knell of traditional cottage industries and handicrafts.

Free Trade Agreements don’t just eliminate or rationalize tariff barriers, they also address non-tariff barriers that impede the flow of goods and services between parties, encourage investment, enhance cooperation, and can address other issues such as intellectual property, e-commerce and government procurement.

To be part of the comity of nations, India has been signatory to several Free Trade Agreements.

SAARC PREFRENTIAL TRADING ARRANGEMENT (SAPTA) TO SOUTH ASIAN FREE TRADE ARRANGEMENT (SAFTA)

SAPTA was signed in Dhaka in 1993. This was motivated by a desire to have economic cooperation amongst the SAARC network for trade and development. The aim was the mutual benefit of people in each country in the spirit of mutual accommodation. However, full respect for the principles of sovereign equality, independence and territorial integrity of all States was to be maintained.

The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian Association for Regional Cooperation (SAARC). The agreement came into force in 2006, succeeding the 1993 SAARC Preferential Trading Arrangement. The countries who are part of SAFTA are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

In its preamble, SAFTA has made provisions to recognize the need for special and differential treatment for Least Developed Countries (LDCs). Due to this, some of the least developed countries benefit from smaller sensitive lists whereby they have Duty Free Quota Free (DFQF) access to a larger pool of products, coupled with less stringent rules of origin, clear definitions for the goods produced indigenously and for the goods imported by these countries for the purpose to re-export. Concessional rates of tariff are also provided to these set of countries.

When member countries change the duty structure, the trade volume also change, sometimes dramatically and these agreements normally have redressal procedures laid down.

This has resulted in exports from these Least Developed Countries, to the other SAFTA group of countries, doubling since entry into force of the Agreement in 2006.

Under the South Asian Free Trade Area, India allowed duty-free import of edible oils from member nations – Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka–provided they complied with the norm of at least 30% value addition. The definition of value addition includes the profit margins and hence diluting the requirement of value addition. The duty differential was wide enough for traders to earn substantial margins by buying edible oils from the Least Developed SAFTA countries under the free trade pact. This route for imports became even more attractive after India substantially increased import duties on edible oils. While governments take a broad view, sector wise these provisions become irksome and contentious. Hence, there must be an innovative way to handle these bilateral trades.

Recently, Indian industry associations also lobbied to curb import of Blended Edible Vegetable Oil (BEVO) under SAFTA without AGMARK Certification. Acting on it, The Food Safety Standards Authority of India (FSSAI) issued an ADVISORY to plug the imports of BEVO from SAFTA countries.

This resulted in imports of refined products duty free, especially from Bangladesh and Nepal, being restricted. However, the matter has been put to rest for the time being because of the removal of RBD palm products from general list to restricted list. Subsequent to the hue and cry made by the industry, earlier in the current year the GOI has also suspended the special licenses issued for import of refined vegetable oils, both from SAFTA and other countries.

INDIA – SRI LANKA FTA (ISFTA)

The Indo-Sri Lanka Free Trade Agreement (ISFTA), signed on 28th December 1998, became effective from 1st March 2000. This provided duty-free concessions to a wide range of products traded between Sri Lanka and India. Sri Lanka’s final tariff liberalization commitment under ISFTA came into effect from November 2008.  With this, the ISFTA had been fully implemented.  A point to be noted is that Sri Lanka has had a fully duty-free access to the vast Indian market under the ISFTA since March 2003.

This was a boon for the development of the vegetable oils processing units in Sri Lanka when direct import duties in India on vegetable oils were quite high. The Duty-free imports of vanaspati from the island surged in 2005 compared to the previous year.

This rise in exports of vanaspati was not due to any distinct comparative advantage that Sri Lanka held, but rather due to short-term duty arbitrage by Indian manufacturers investing in Sri Lanka. The vanaspati industry was only viable as long as there was a difference between the direct Indian import duties and Sri Lanka duties on palm oil imports, the main input for vanaspati. Sri Lanka has a duty-free import facility for palm oil for industries. While Sri Lanka enjoyed a duty-free export facility to India, the direct import duties in India were significantly higher, close to 60%.  In response to the increase in global commodity prices in 2007/2008, India cut import tariffs on various food imports including palm oil, making vanaspati exports from Sri Lanka unviable. Vanaspati exports in 2008 fell 72% from 2007. By 2008, such vanaspati exports completely disappeared. What repeated requests and representations from Indian industry and associations failed to do for the domestic vanaspati industry, the tide of rising international prices did and provided solace.

The cut in customs duty on Crude Palm Oil (CPO), vanaspati’s main raw material, from 45 per cent to 0% brought the duty-free vanaspati import from Sri Lanka and Nepal to an end.

The 1998 Free Trade Agreement with India had allowed Sri Lanka to export 250,000 MT of vanaspati to India without paying any duty. For Nepal, duty free export of 100,000 MT was allowed. Vanaspati producers in these two countries enjoyed a massive advantage over their Indian counterparts as they could import CPO sans any duty while Indian units were saddled with high duty rates.

The Malaysia-India Comprehensive Economic Cooperation Agreement (MICECA)

MICECA was signed on 18 February 2011 and came into force on 1 July 2011.

MICECA is a comprehensive agreement that covers trade in goods, services, investments. It adds value to the benefits shared from ASEAN-India Trade in Goods Agreement (AITIG). It was expected to further facilitate and enhance two-way trade, services, investment and economic relations in general.

Under the AIFTA, the import duty on RBD Products (RBDP) was capped at maximum of 50% whereas under the MICECA, Malaysian RBDP had a maximum duty levy of 45%, for 2019. This created a severe anomaly upon implementation of the MICECA wef 1st January 2019, with Indian markets being flooded with RBDP from Malaysia. This resulted in a major upheaval, with Indian processors of palm oil suffering. They made representations and after several hearings, in which even Malaysian exporters were given an opportunity to present their case, GOI imposed a safeguard duty of 5% on Malaysian RBDP. This brought the duty on RBDP under both agreements at par at 50%. This was imposed on 4th September, 2019 and resulted in a significant slowdown of RBDP imports from Malaysia.

From 1st January 2020, the import duty on RBDP under the AIFTA was reduced to a maximum of 45%, irrespective of country of origin. Although technically, duty under MICECA remained at 50%, Malaysia could still export to India under the AIFTA at 45%.

The safeguard duty of 5% on Malaysian RBDP was to expire on 4thMarch, 2020. The   GOI had announced it had no intention of extending it. Even if they extended it, it would not affect Malaysia as Malaysian RBDP could be imported at the lower duty under AIFTA. Besides, if it were to be extended, the GOI departments would have to labour over undertaking several time-consuming steps. In knowledgeable circles it is perceived that extension was not considered for these reasons.

MICECA PREFRENTIAL DUTIES
  1-Jul-11 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-16 30-Jun-16 1-Jan-17 1-Jan-18 1-Jan-19 4-Sep-19 1-Jan-20 3-Mar-20
CPO 72% 68% 64% 60% 56% 52% 48% 44% 40% 40% 37.5% 37.5%
Oelin 82% 78% 74% 70% 66% 62% 58% 54% 45% 45% 45% 45%
                  +safeguard 5% +safeguard 5%  
                         
*Without Surcharge

Suspension of Indian Import Licenses for RBD Palm products:

Prior to January 2020, all palm oil and other vegetable oils imports were under the Free List category, i.e. imports did not require any license or permits. At the same time, the duty-free status accorded to RBDPOP imports from Nepal/Bangladesh under the South Asian FTA (SAFTA), resulted in large duty-free inflows. This further eroded the competitiveness of the domestic industry. To counter these hardships, trade associations and individual industry players made strong appeals to the Government of India. This disadvantage changed on 8th January 2020 when RBD palm oil products, including RBD Olein (RBDPOP) were removed from the free list, necessitating the obtaining of import licenses for import of RBDPOP.

However, several importers managed to obtain import licenses for RBDPOP from SAFTA countries and from the Far East. In an interaction between the Commerce Ministry and Indian trade bodies, the issuance of such licenses was brought up, resulting in the suspension of 39 licenses for approx. 450,000 MT of RBDPOP. 150,000MT was for import from Indonesia and the rest from SAFTA countries.

The present COVID related issues have worsened the pitch for the industry. Capacity utilization fell. This forced the GOI to take such corrective measures.

Some of the factors that may have been taken into consideration in reaching this decision of suspending the import licenses could have included:

  • Indian dependence on imported edible oil has been a bane for policy makers for long.
  • Importing RBDPOP, rather than CPO, due to its price competitiveness, added to the woes of the domestic processors.
  • Indian refiners were against imports of RBDPOP from SAFTA countries as they could not compete on prices owing to the significant duty disadvantage.

All the above reason made for a strong case to restrict RBDPOP imports and also suspend licenses that were previously issued, contrary to the objectives of the SAFTA.

Impact of license suspension on Malaysian Palm oil

This action is not expected to have any significant direct impact on Malaysian RBD imports as no licenses had been issued for imports of RBDPOP from Malaysia. However, there could be an indirect impact in terms of supply to SAFTA countries. If Nepal/Bangladesh had been importing palm oil from Malaysia for re-export to India under SAFTA, such imports could definitely be affected. This may be negated by increased imports of CPO directly into India. If the SAFTA countries can meet the RoO requirements, then there should not be any issue.

In the longer term though, imports of RBDPOP from any origin will definitely be affected. Greater transparency in issuance of import licenses and enforcement of the RoO will be the order of the day.

The ASEAN–India Free Trade Area (AIFTA) is a free trade area among the ten member states of the Association of Southeast Asian Nations (ASEAN) and India. The initial framework agreement was signed on 8 October 2003 in Bali, Indonesia and the final agreement was on 13 August 2009. The free trade area came into effect on 1 January 2010.

  AIFTA PREFERENTIAL TARIFFS
  2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CPO 76% 72% 68% 64% 60% 56% 52% 48% 44% 40% 37.5%
Olein 86% 82% 78% 74% 70% 66% 62% 58% 54% 50% 45%
Without Surcharge

REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP)

After the collapse of Trans Pacific Partnership, world’s most ambitious free trade deal, Regional Comprehensive Economic Partnership (RCEP) had received a great momentum and negotiations between the 10 member nations of ASEAN were in full swing.

RCEP was envisaged as a Free Trade Agreement (FTA) involving 10 ASEAN member states and six FTA partners including India. It covered close to 40% of the entire global trade spread over a geographical area that contributes more than one third of global GDP.

In November 2019, India took the momentous decision to back out of the negotiations for this multinational trade agreement on the plea that its concerns were not adequately addressed. India had raised concerns with regards to sensitive sectors, the liberalization of the services sector and movement of professionals. The belief within India was that this free trade agreement (FTA) could nullify all the gains made by its Goods and Services Tax (GST). India has a trade deficit with 11 of the 16 countries in the proposed RCEP. Amongst these countries, India is running a $50 billion trade deficit with China alone.

India opted out to review its position and re-negotiate. It was all about who needed whom more and what the long-term strategy should be to strike a right balance between imports on the one hand and Make-in-India on the other. The competitive strengths and weaknesses in producing the goods locally were also to be assessed.

Why did India hanker after Free Trade Agreements? It was hoped that in the same way as foreigners exploited the preferential access to India’s markets, Indian exporters could do the same. But it has not unraveled the way Indian policy makers envisioned. India’s mammoth domestic market is a magnet for attraction of other States.

The ongoing trade war between USA and China can also have great ramifications for India. Today, Chinese goods swamp Indian markets. These Chinese goods easily outprice locally made products. Indian consumers used to cheap Chinese goods would be loathe to pay a higher price for the more expensive made-in India products. If the trade war with USA gets bad for China, they will need a country to open markets to their products to keep the furnaces at home burning. India is the only country big enough to absorb a large quantity of goods getting shipped from China. But the chances of that happening is now dim owing to China’s misadventure on the Indo-China border. This was not just a stray incident but a bigger one as significant loss of lives on both sides have been recorded.

India is very strong on the ‘Services’ front. On this front, not much progress has been made. A concerted effort needs to be made for export of services which could help tilt the balance of payment deficit.

India is planning to undertake a review of all its FTAs, including with ASEAN and the one with neighboring countries, the SAFTA. The key thread here is going to be the cost benefit analysis out of the arrangement, to India. The regional powers understand the levers that India holds in the regional balance of trade power. It is with this in mind that member nations invited India for discussions. If anything, the Covid-19 experience, and the experience of countries that have been overly dependent on imports from China or from just one country, would have reinforced and revalidated the decision to stay out of RCEP.

The winds of change are sweeping across the continent. It is hoped that India weathers the storm and regional co-operation with mutual benefits for all is the new order.

The contours of the world are changing rapidly. The global co-operation and coming together seen in the later part of the last century is now showing signs of distress. Globalization and peaceful co-existence, which was the hallmark of that period, is now fast being replaced by protectionism and patriotic jingoism. Pandering to the basic instincts of the marginalized and under-privileged, in the guise of nationalism, seems to be getting favoured over globalisation. This will surely polarize the world and force more and more nations to look inwards, to the exclusion of a world order.

Post Second World War, the United States had taken over the leadership role of the world. It was the pivot around which the globalization mantra revolved. But, sadly, in the last few years we have seen the United States in a new role of being the cause of volatility in the world economic order.

Moving away from financial globalization, the world is rapidly embracing digitalization. In this space China seems to be controlling a huge chunk of the digital space. Allowing China to corner a disproportionate percentage of the global digital footprint does not augur well for the world. To shake off some of the web the dragon kingdom has woven, the Indian government recently banned over 50 social media apps of Chinese origin. With China wanting to have a greater say in world affairs and the United States unwilling to relinquish its leadership role, the world is in the midst of volatility and instability from which a new world order should emerge. More nations may opt for domestic progress, as opposed to globalisation, putting a question mark on the future of FTAs.

Prepared by Bhavna Shah

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