Video Summary

[RSTV The Big Picture] Reciprocal Trade Policy

The Commerce minister’s recent statement that non-tariff barriers such as reciprocal access should be cut down and should be made easy for Indian companies to operate elsewhere, makes absolutely pragmatic sense.
By IT's Video Summary Team
December 31, 2019

Contents

  • Introduction
  • What is Reciprocal trade agreement?
  • About Reciprocal Trade Policy
  • Fall of World Trade Organization’s Appellate tribunal
  • India’s Trade Imbalance
  • Trade barriers
  • India’s strength of rejecting unfair trade negations
  • India needs to take balanced approach
  • Way Forward

Reciprocal Trade Policy

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Introduction

  • Highlighting the principle of reciprocal access to global market, Commerce and Industry Minister has said that if Indian companies are not allowed to participate in businesses emerging in any country then India will also not allow those countries to participate in India.
  • He also made a statement on India’s decision to not join RCEP and said India has not benefited to its expected potential from some of the Free Trade Agreements.

What is Reciprocal trade agreement?

  • Reciprocal trade agreement is an agreement between two countries which provide for the exchange of goods between them at lower tariffs and better terms than that exist between one of the countries and other countries. Such agreements usually refer to treaties that deal with tariffs.

About Reciprocal Trade Policy

  • Reciprocal trade policy is the heart and soul of any trade policy.
  • World Trading Organization (WTO) is also based on the principle of reciprocal gestures in a sense that if one country allows certain countries to export a certain number of goods at same duty, a similar arrangement is expected from the country that is getting that facility.
  • However, in recent past, due to rising tariffs and creation of non-tariff barriers by several countries as well as trade war between the US and China, reciprocal trade policy has now come under closer scrutiny.

Fall of World Trade Organization’s Appellate tribunal

  • Recently, the World Trade Organization’s Appellate tribunal was diluted as it didn’t had enough members left to rule on trade disputes between countries.
  • The dispute settlement mechanism of WTO requires at least three members to function. However, United States has blocked the appointments of new members and the reappointments of members who had completed their four-year tenures. The US believes the WTO is biased against US, and has criticized it for being unfair.
  • Now, if a country wants to complain against other countries for unfair trade practices or dumping of goods at lower tariffs, it does not have a facility to do so in WTO.

India’s Trade Imbalance

  • Trade imbalance between India and the FTA (Free Trade Agreement) partners has risen over a period of time.
  • Between India and ASEAN (Association of Southeast Asian Nations), it has risen by around four times in the last 6-7 years and with almost all RCEP (Regional Comprehensive Economic Partnership) nations, almost more than a dozens of them it has risen by around 9 times.

Trade barriers

  • There are two types of trade barriers: Tariff and Non-tariff barriers. Both tariff and non-tariff barriers prevent countries to take comparative advantage of other countries.
  • Tariff barriers can include a customs levy or tariff on goods entering a country and are imposed by a government.
  • For example, In the beginning of the trade war between US-China, US imposed 25 % tariff on a Chinese steel and 10 % on aluminum. On the other hand, Chinese imposed 25% tariff on pork and soya beans coming from the US.

Non-tariff barriers can of three types:

  1. i) Protectionist barrier: Local industry is protected at the cost of competing with international companies.
  2. ii) Assistive barrier: Local companies are subsidized (A trade subsidy to a domestic manufacturer reduces the domestic cost and limits imports)

iii) Non- Protectionist barrier: For example, pork from Africa is not imported by china due to fear of diseases spreading.

  • The non-tariff barriers can be imposed through many ways. For example, a particular country could force another country to buy certain amount of goods from the local manufacturers or forced to share the intellectual property with local companies. In China, one cannot engage in a procurement process without partnering with a chinese company. (Example of Non-tariff barrier).

Non-tariff barriers do not allow a country’s comparative advantage to be expressed.

India’s strength of rejecting unfair trade negations

  • In 2010 and 2011, when FTAs were getting signed, it was thought that these FTAs would help in maintaining India’s trade balance with other countries. However, these FTAs have ended up hurting India’s business domestic business and increased trade imbalances.
  • However, India’s strength in the global power dynamics has increased considerably in last 5-6 years in terms of trade bargaining with other countries. This is reflected in India’s decision of not joining RCEP. It also shows that India comes from the positon of strength (has courage to say ‘No’ to RCEP).
  • Hence, whatever trade negotiations that India would do in future, would be seen in this perspective that ‘Are regional trade negotiations benefiting India or not’.
  • Moreover, India did not sign the RCEP because India believed that, through RCEP, it will not be able to protect the interest of other RCEP countries. Thus, India is advocating that ‘reciprocity is the principle on which it would be indulging into trade negotiations’.
  • This stance of India also shows that there is a need for an inclusive trade agreement where interest of all participating countries are protected.

Counter argument:

  • India’s pull out from RCEP is the result of negligence to manufacturing industries by government. In the absence of a strong manufacturing sector and not making sure that whether the factors of production which is land, labor and capital are competitive on a global scale, the trade facilitation with other countries is impossible.
  • India cannot expect to withstand competition from other powerful countries if it does not take care of these issues.
  • In addition, advocating reciprocal trade policy and not joining RCEP results in restricted choice for domestic consumer as they won’t be able to choose those imported products.
  • Hence, one cannot truly say that India’s decision of not joining RCEP is whether based on its strength or is it based on its recognition that current competitiveness in regional market is not good enough to sign RCEP.

India needs to take balanced approach

  • India imports around 59 billion dollars’ worth of goods and exports around 38 billion dollars’ worth of work. However, when it comes to services, India exports 24 billion and imports only 21 billion worth of services.
  • Hence, India’s major strength is its services and not in manufacturing sector which is still evolving. One of the reason why India did not sign RCEP was that the services were not included in the RCEP.
  • If India wants to sign trade negotiations such as RCEP in which India’s companies are restricted in taking part in foreign projects, India could also prepare similar mechanism in which foreign companies are restricted to take part in India’s projects.
  • Having signed such trade negotiations, Indian companies can learn new technologies, access new markets and can expand further. However, If India imposes various restrictions on foreign companies which are participating in India’s public procurement, India could lose new technology, capital, efficient process. Hence, India should make balance between pros and cons of a trade agreement while signing it.

Way Forward

  • When whole global trade dynamics is going through a transitory phase and given the weakening of the WTO, countries are looking for alternative methods which includes FTAs, Bilateral or Regional Trade agreement.
  • In June 2018, Indian Prime Minister set a goal of increasing India’s share in world exports to 3.4 % from 1.6 % and reducing the dependence on imports by at least 10 % to create more jobs and increase the per capita income. In fact, India’s trade with ASEAN is going to be doubled from 142 billion to 300 billion by 2025.
  • Given such scenario, India has to protect its trade interests till it develops it competitive advantage in manufacturing sector and gain enough leverage in exporting products.
  • However, while introducing reciprocal trade policy, it is important to keep in mind the interest of domestic consumers and make sure that domestic industry remains competitive. These two issues could be an area of concern, if not implemented with fairness.

Conclusion

When multilateral institution like WTO is getting weakened, India needs to ensure that its national interests are protected. To do this, there is need for a balanced market access outcome across all pillars of negotiations, fair trade practices, open market based operations and transparency.

 

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