Ad hoc trade policy

There are reasons for Indians to prefer spaghetti, but the present spaghetti bowl in India's trade policy seems to have no obvious rationale. This plethora of free trade agreements (FTAs) and comprehensive economic partnership agreements (CEPAs) isn't new. It originated with the Vajpayee government. But it may be recalled that the Congress was critical about the arbitrary way in which FTAs were then being pushed, often by External Affairs rather than Commerce.

Notwithstanding the sanction of the Trade and Economic Relations Committee, the present phenomenon seems no less arbitrary, with some switch from FTAs to CEPAs. There are signed FTAs or preferential trade agreements (PTAs) with Sri Lanka, Thailand, Bhutan, Mercosur, Afghanistan, SAFTA and the Bay of Bengal Initiative (formerly BIMSTEC), apart from the Bangkok Agreement, and those with Bangladesh, Asean and the South African Customs Union are under negotiation.

China and Australia remain on the cards. There is a CEPA with Singapore; Sri Lanka and Mauritius are in advanced stages, and Japan, Pakistan, Malaysia, Indonesia, Israel, Chile, South Korea and Australia are possible.

To the extent that these initiatives represent liberalisation, they are welcome. However, multilateral liberalisation is preferable to discretionary regional liberalisation, even if negotiating the latter is easier.

FTAs, which cover manufactured products and generally exclude agriculture and services, illustrate the point. There are already distortions in import duties. By incorporating negative and early harvest lists, further distortions are created, leading to warped effective rates of protection (ERPs).

Add to that complicated negotiations and norms on rules of origin and value addition (local content), which negate the spirit of liberalisation. Apart from protectionist sentiments, industry also has the legitimate complaint that, since the domestic indirect tax structure is non-transparent, countervailing duties equivalent to domestic indirect taxes cannot be levied.

The WTO ministerial in Hong Kong is round the corner and the Doha development agenda should witness significant reduction in import duties on manufactured products, irrespective of what happens to agriculture.

Given that, and unilateral reduction in import duties, do these traditional FTAs have any relevance? Is that the reason the UPA government has switched to CEPAs, since multilateral liberalisation in services is at best incomplete?

If so, the decision should be clearly articulated, even if these agreements are evaluated in non-economic or strategic terms, including the decision to cement the G-20 as a negotiating force at the WTO.

There can also be the motive of using external liberalisation as a trigger for domestic reforms, more convincing for services than manufacturing.

In any event, a cost-benefit exercise of these assorted regional agreements is in order, with the prospect of China obtaining observer status at Saarc a real one, not to speak of the somewhat less likely possibility of Pakistan becoming a member of the Bay of Bengal initiative.

Admittedly, such regional agreements are signed only after joint study groups have estimated welfare gains. But that's neither here nor there, since overall welfare gains are inevitable if there is some liberalisation.

None of these reports offers answers as to why Australia rather than the United States is being singled out for a CEPA. The overall strategic vision, which ought to drive external economic policy and trade policy, is still missing.

Having accused the previous government of being ad hoc and arbitrary, the UPA is behaving no differently, straining commerce ministry resources on the nitty-gritty of negotiations. The response that ad hocism in FTAs has been replaced by ad hocism in CEPAs will hardly do.