One of the activities that the Commerce Minister and some of the officials in his Ministry keep busy with is the negotiation of free, preferential, bilateral or regional trade agreements. Apparently, the main objective of the agreements is trade creation i.e. increase in imports and exports. A close second is progressive liberalisation and greater integration with global economy. However, whether these agreements have actually contributed to increased trade is far from clear.
To be fair, many of the older agreements are with countries that are small poorly developed economies.
The more recent agreements with developing economies that envisage tariff reductions over a period of time are yet to fully play out. The negotiations with developed economies like European Union, Australia etc. are yet to conclude. So, there is a case to wait for some more time before evaluating the full impact of the trade agreements.
Moreover, even in the existing agreements, major import items like fuel and fertilizers and sensitive items like farm produce have been kept out.
The tariff rates for capital goods and a plethora of exemptions do not make it worthwhile for an importer to look at trade agreements to save on costs. Besides, duty credit scrips that exporters earn under various reward schemes give a ready route to avoid duty payments. So, a case can be made out that it is unfair to expect the trade agreements to make significant impact.
However, a recent report of the World Trade Organisation says that accumulated trade opening — at the multilateral, regional and unilateral level — has reduced the scope for offering preferential tariffs under various trade agreements.
As a result, only a small fraction of global merchandise trade receives preferences, and preferential tariffs are becoming less important in trade agreements.
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In other words, as import duty rates get slashed, preferences through trade agreements get eroded. Also, in sectors where tariffs are higher than the average, PTAs have for the most part failed to do a better job of reducing them, says the report.
The report reveals that more and more trade agreements are going beyond preferential tariffs, with numerous non-tariff areas of a regulatory nature being included in the agreements.
More and more agreements are about production sharing, investments, competition policy, intellectual property, dispute resolution etc., that are important to today's firms engaged in international commerce.
Production sharing arrangements require stronger protection for investors and for intellectual property, better infrastructural services to lower the cost of trading or expedite shipments, and safeguards against anti-competitive behaviour, says the report. Global production networks may be prompting the emergence of these “deep” trade agreements as good governance on a range of regulatory areas is far more important to these networks than further reductions in already low tariffs. Econometric evidence and case studies support this link between production networks and deep trade agreements.
Increasingly, trade agreements involve deep rather than shallow integration. The steady reduction of tariff barriers has generated pressure on countries to align divergent national non-tariff policies, says the report. The trends revealed in the report deserve to be taken note of by the Indian producers as well as the officialdom.
The policy makers, negotiators and the businesses that get affected by the trade agreements should meaningfully interact and find the ways to take forward the trade negotiations with developed countries.
email: tncr@sify.com