Not so free

Free trade agreements (FTAs) may be a preferred way to boost trade with other countries, circumventing the multilateral trade negotiations under the aegis of the World Trade Organisation (WTO), but they do run the risk of turning prejudicial to the interests of some domestic sectors. This is borne out by the experience of implementing the FTAs that India has entered into with its neighbouring and other trading partners in the past few years. As much has now been reaffirmed by a post-Budget survey carried out by the Federation of Indian Chambers of Commerce and Industry (Ficci). Though the finance minister has trimmed the so-called "peak" Customs duty for non-agricultural goods to 10 per cent, market-distorting mismatches in duty levels have not been eliminated. The Ficci survey has come across at least 20 key industrial products that face unfair competition from Thai imports under the bilateral FTA, notwithstanding the changes mooted in the Budget. The FTAs with some other countries too pose similar problems for several products.

The problem stems largely from the inverted import duty structure, which is a long-standing issue for many industries, with duties being lower on the finished products than on the raw material and intermediaries that go into their production. Examples abound, from electronics, electrical and auto equipment to copper, paper and ceramic tiles in the manufacturing sector, and from vanaspati to rice-milling machinery in the agro-processing sector. The rubber-based industry too is affected, because the import duty on natural rubber has been kept unchanged at 20 per cent while rubber-based products like tyres can be imported duty-free under the India-Sri Lanka FTA.

The short solution to the problem is to avoid a "spaghetti-bowl" (to use Jagdish Bhagwati's imagery) of FTAs and have, uniform multilateral rules for all, and with a low tariff structure that does not give negative protection to any industry. For a variety of reasons, this seems to be beyond the ability of policy-makers to deliver. The question to focus on, therefore, is how such anomalies have been allowed to stay in the FTAs, most of which have negative or sensitive items' lists tagged on to them, as also why, after being noticed, the lists have not been modified through subsequent negotiations. What goes beyond the inverted and, in some cases, misconceived tariff structure is the insufficiency of the provisions regarding country-of-origin and minimum value addition laid down in some of the FTAs. These stipulations are, obviously, ineffective in preventing third-country products from landing in India via FTA partners, either in their original form or after minor value addition. A case in point could be the reported import of copper from Sri Lanka, which hardly produces any copper. Some Chinese goods are said to be in India via third-country routes. Nearly half of India's vanaspati plants have closed down because of duty-free vanaspati imports from Nepal and Sri Lanka. This apart, there are situations where domestic players find themselves disadvantaged because of higher costs of inputs even if sourced locally. It is imperative that such issues are looked into with the seriousness they merit. Also, procedural safeguards need to be examined afresh so that these mistakes do not recur in the FTAs now being negotiated with several countries and trading blocs.