India's Trade Agreements and the - Columbia …...India’s Trade Agreements and the Future of...

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Working Paper No. 2019-05 India's Trade Agreements and the Future of Indian Trade Policy Pravin Kri shna Johns Hopkins University NBER

Transcript of India's Trade Agreements and the - Columbia …...India’s Trade Agreements and the Future of...

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Working Paper No. 2019-05

India's Trade Agreements and the Future of Indian Trade Policy

Pravin KrishnaJohns Hopkins University

NBER

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Draft

India’sTradeAgreementsandthe

FutureofIndianTradePolicy*

PravinKrishnaJohnsHopkinsUniversity

NBER

* Paper prepared for presentation at Columbia Summit on the Indian Economy, Nov 1-2, 2019, at Columbia University, New York. I am grateful to Professors Jagdish Bhagwati and Arvind Panagariya for their comments and for numerous conversations over the years on several of the issues discussed in this paper.

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India’sTradeAgreementsandtheFutureofIndianTradePolicy

I.IntroductionThe Indianeconomyhascomea longway fromthedepthsof the1970s,whenanextremely

repressivetraderegimehadrenderedIndiaanearautarky,whentradeingoodshaddroppedto

lessthan10percentofGDPandthestrangleholdofthestateovereconomicactivityhadplunged

growthratestoverylowlevels,averagingjustover3percentintheyears1965-1980(Panagariya,

2003). With subsequent domestic and external reforms, the most dramatic of which were

initiatedintheearly1990s,andwhichhavecontinuednearlymonotonicallyeversince,theIndian

economy tookoff,withgrowth rates rising rapidlyand reachingahighofovereightpercent

duringthe2000sandaveragingaroundsevenpercentinrecentyears. Indiaisnowthethird-

largesteconomyintheworld.

I.1Background:TradeandIndia’sDevelopmentTrajectory

Despitetheseimpressiveachievementsoftheprecedingdecades,India'sdevelopmenttrajectory

now faces significant pressures. India possesses an abundance of low-skill workers, a large

fractionofwhichisemployedinagriculture.Agricultureisarelativelyunproductivesector:while

roughlyhalfofIndia'sworkforceisemployedintheagriculture,thesectorgeneratesonlyaround

fifteen percent of Indian output. Further, in the coming decades, about 8 to 10million new

workersarepredictedtojointhelaborforceeachyear.Ensuringemploymentfortheseworkers

isatoppolicypriority.TheexpectedtrajectoryfortheevolutionoftheIndianeconomyinvolved

the steady movement of rural workers out of the agricultural sector and into low-skill

manufacturing and perhaps later into economic activity higher up the value chain. This was

indeedthepathtakenbymanylow-skilllabor-abundantcountriesalongtheirgrowthpath,China

being the most notable recent example. The Indian economy has not followed this path,

however. The Indianmanufacturing sectorhasnotgrown -- ithas stagnatedatabout fifteen

percent of GDP for the last couple of decades; the economy has experienced instead an

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expansionoftheservicessector,includingthat,somewhatsurprisingly,ofhigh-techservicesand

hightechexports.

Therapidgrowth in ITexports,ratherthanmanufacturingexports,reflectsan importantself-

contradiction,inamannerofspeaking:WhilewewouldexpectIndia'sproductionpatternsand

exportstoreflect itsrelativeabundanceof low-skill labor,asisthecaseforinstanceinChina,

IndianexportgrowthhasbeenstrongestintheITsector,whichrequiresrelativelyscarehigh-skill

workers instead (reflecting the disconnect between India's production patters and its

comparativeadvantage).Whiletheimpressivegrowthofthehigh-techservicessectorinIndia

hasbeenjustlycelebrated,theexpansionofservices,especiallyhigh-techservices,doesnot,in

itself, doesoffer a sustainable path forward. The vastmajority ofworkers in the agricultural

sectordonothavetheskillsnecessaryforemploymentinthehigh-techservicessector.Theywill

needtotransitionintolow-skilljobsinmanufacturing.

AnyreasonablegrowthstrategyforIndiamustthereforetakeintoaccountthelargenumbersof

low-skillworkersinthelaborforceandtheneedtoincreasinglyemploytheminsectorsother

than low-productivity agriculture over time. A large global market that demands low skill

manufacturesoffersonesolutiontothisproblem.Largemarketsallowproductionatscaleand

thuslowercostandgreatercompetitiveness.India’spenetrationofglobalmarketsisstillquite

small,eveninsectorsoftraditionalstrength.Thus,whileglobalexportsofclothingarecloseto

500billionUSDin2018,Indiaexportedlessthan20billion.Overall,Indiaaccountforlessthan2

percentofglobalexportsandhostsonlya littleover1percentof thestockofglobalForeign

DirectInvestment(FDI)(OECD,2019)implyingthatthereisverysubstantialscopeforIndiato

followanexportandFDI-ledgrowthstrategy.

Againstthisbackdrop,thereareanumberofsignificantissuesthatconfrontIndianpolicymakers

inthedesignoftradepolicy.Thefirstissueconcernsthefailuresofthemultilateralsystem(WTO)

tobringtoasuccessfulconclusiontheDohadevelopmentroundoftradenegotiations.Thisround

wastohaveloweredagriculturalsubsidiesinthewestandimprovedaccesstotheiragricultural

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markets,raisingthepricesofagriculturaloutputgloballyandthustheearningsofIndianfarmers.

ThisfailureoftheroundbodespoorlyforIndiaandforotherdevelopingcountriesthatrelyupon

negotiationsuccessattheWTOtoimprovetheiraccesstomarketsworldwide.

A second of issues concerns developments that are external to India, but that nevertheless

impactitseconomyanditstrade.Amongthemostpressingistherapidexpansionofpreferential

tradeagreementsbycountries,*exclusionfromwhicheffectivelylowersIndia’saccesstothose

countries’markets.Ofparticularconcernarethe“mega-regional”agreements,suchastheTrans-

Pacific Partnership (TPP – a large grouping that includes theUnited States and a number of

Pacific-rimcountriesincludingJapanandAustraliaaltogetherincludingover40percentofworld

output)thatarecurrentlyundernegotiation.†Thesecoverlargefractionsofworldoutputand,

thus,havethepotentialtosignificantlyaltertheglobaltradelandscapeandIndia’splaceinit.

Indiatoohasnegotiateditsowntradeagreements,butthisfar,theseaccountforasmallshare

ofitstradeandhavehadalimitedimpact,aswewilldiscussbelow.

AfinalissueconcernsIndia’sunilateraltradepolicychoicesthemselves.Despitetheimpressive

externalliberalizationundertakenbyIndiaintheperiod1991-2008,withaveragetariffsdropping

from150percentto12percentinmanufacturesandthedramaticincreasesingrowthratesand

povertyreductionthatfollowed,Indianliberalizationhasstalledandarguablypartiallyreversed

itself,withanincreasedandexcessiveuseofnon-traditionalinstrumentsoftradepolicysuchas

antidumpingdutieson imports. Agriculturalprotectionremainsatextraordinarilyhigh levels.

Additionalliberalizationoftrade(evenifchallenging,givendomesticpoliticaleconomyfactors)

andimprovementintradeinfrastructurewillbothbeessentialforIndiatoexpanditstradeand

participatemoreeffectivelyinglobalproductionnetworks,whichhaverecentlyproventobevery

* Forcomprehensivediscussionsontheeconomicsandpoliticsofpreferentialtrade,seeBhagwati(1993),Bhagwati,KrishnaandPanagariya(1999),Krishna(2014)andPanagariya(2000).†ThewithdrawalfromtheTPPbytheUS,underthedirectionofPresidentDonaldTrump,hasexcludedtheUSfromthisagreementfornow.However,aslightlymodifiedagreementcalledComprehensiveandProgressiveAgreementforTrans-PacificPartnership(CPTPP)wassignedbytheremainingcountriesin2018,withtheUSleavingopenthepossibilitythatitmightjointoformthepreviouslynegotiatedTPPeventually.

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important forrealizingproductionefficiencyand increasingemploymentgrowth,especially in

Asia.

Taken together, theglobaleconomicenvironmentoffers significant challengesbutalso some

opportunitiesforIndianpolicymakingintheareaofinternationaltradeandinvestmentinthe

comingyears.

InSectionIIofthispaper,wediscussmorespecificallyIndia’sengagementwiththeworldtrade

system,payingparticularemphasistothe lackof liberalizationmomentumatthemultilateral

(WTO) level and the global drift towards bilateralism (in the form of preferential trade

agreements).Indiatoohassignedanumberofbilateralandplurilateraltradeagreementsofits

own.InSectionIII,wediscusstradeoutcomesunderIndia’sownpreferentialtradeagreements,

notingthattheseagreementshavenotdeliveredsignificanttradeoutcomes–theevolutionof

importsandexportswithin India’s free tradeagreements is rathersimilar to theevolutionof

importsandexportsoutsideoftheseagreements.InSectionIV,wediscusspossiblefuturetrade

agreementsthatIndiamayenterintosuchastheRegionalComprehensiveEconomicPartnership

(RCEP) involving China (which is currently under negotiation) and also more comprehensive

agreements involvingnegotiationoveranumberofnon-tradeissuessuchastheTransPacific

Partnership.Wediscussthereaswell thepotential forsuchregionalagreements(and indeed

evenunilateralliberalization)toenhanceIndia'sparticipationinglobalvaluechains.Finally,in

SectionV,wediscussfactorsthatlimitIndia’scompetitivenessanddomesticpolicyreformsas

wellthatwillbenecessarytoimprovetradeandjobcreationforIndia.

II.IndiaandtheGlobalTradeSystem

India'sengagementwiththeworldtradesystemhasbeenasomewhatasynchronousone.After

theendofWorldWar II, theBrettonWoods institutions– theWorldBank, the International

Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT) provided the

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necessary underpinning for the global economic system. The largely even-handed and

multilateral architecture of theGATT,whichmandated non-discrimination in trade relations,

provided member countries an even playing field in which to work out their trade and

developmentstrategies.Developingcountries,throughasetofexceptions,broadlyreferredto

as“specialanddifferential treatment”wereallowed tobe less than fullobligationmembers,

whereby they could benefit from the liberalization of others without being called upon to

liberalizetheirexternalregimethemselves. India,afoundingmemberoftheGATT,startedits

post-independenceyearswitharelativelyopenregime.But,bythelate1960s,asthegripofthe

state over economic activity significantly strengthened, India took advantage of these GATT

protectionsanderectedegregiouslyhightradebarriers,reducingtheeconomytoanearautarky.

Ironically,thesepre-1990years,inwhichIndiawasthemostclosed,weretheyearsinwhichthe

worldtradesystem,inasense,wasthemostopenandshowedthegreatestmomentumtowards

further liberalization. Successive round of trade negotiations, driven by the enthusiastic

participationofthemajorpowers,succeededinbringingtheirtradebarriersonmanufacturesto

nearlyzero.Thisbenefittedthosedevelopingcountries thathadsought to integratewith the

worldeconomyandusethedemandfromglobalmarketstopropeltheirowngrowth,butnot

India,whichwasclosedinstead.

Unfortunately,bythelate1980s,justasIndiawasrealizingtheenormouscostsofprotectionand

hadbeguntakingmajorstepstowardsintegratingwiththemultilateralsystem,enthusiasmfor

themultilateralprocesswasdiminishingintherestoftheworld.TheUnitedStates,forinstance,

had begun to perceive that the multilateral process was yielding diminishing returns:

Liberalizationoflargeindustrializedcountrieshasalreadybeensubstantiallyachieved,andthe

largeandcomplexmembershipoftheGATTimpliedslowerfutureprocess.Manycountriesfelt

thatthatbilateralnegotiationsmayyieldsuperioroutcomes.Thediminishedenthusiasmforthe

multilateralsystemhadtwoimmediateconsequences.First,themultilateralDoharoundoftrade

negotiations, that began in the year 2001, stalled. Second, themomentum towards bilateral

agreementsgrewrapidly.BothofthesedevelopmentshavehadimportantimplicationsforIndia.

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II.1MultilateralNegotiations

ThemultilateralDohaRoundoftradenegotiations,alsocalledtheDohaDevelopmentAgenda,

becauseofitsfocusontheimprovementofthetradingprospectsfordevelopingcountries,was

launched intheyear2001.TheDoha“ministerialdeclaration”gavethisround itsmandateto

negotiateliberalizationinagriculture,industryandservices,andintellectualpropertyrights.To

date,despiteseveralattemptstoadvancethenegotiations,thisroundhasnotbeensuccessfully

closed,althoughapreliminaryagreementonlesscontentiousissuessuchastradefacilitationand

removaloftradebarriersagainstexportsfromtheleastdevelopedcountrieswasatlastachieved

attheDecember2013WTOministerialmeetingsinBali.Havingbeenlabeledthe‘development

round,’theexpectationsofdevelopingcountriesfortheroundwereatleastpartlybasedonthe

idea that agricultural protection is largely a developed country problem. Itwas argued that:

developed-countrysubsidiesandprotectionshurtthepoorestdevelopingcountriesthemost,it

waswrong to ask poor countries to liberalizewhen rich countries heavily protect their own

markets, and agricultural subsidies and protection in the rich countries reflect the double

standards and hypocrisy on the part of rich countries. The effect of these assertionswas to

considerablyhardenthestanceofthedevelopingcountriesandtogivethemthefalsehopethat

theymightgetone-wayconcessionsfromthedevelopedcountries,especiallyinagriculture.

Further,whiletheinitialgoalofmanyfood-exportingdevelopingcountrieswasthereductionof

developedcountryproductionandexportsubsidies(sothatthepriceoftheirexports–food–

wouldrise), the2007-2008foodpricecrisis,whenshortagesofparticularcommodities ledto

sharpincreasesinfoodprices,ledtheexportingcountriestore-evaluatethisposition.Increases

infoodpriceswouldperhapsbenefitfarmersandtheruralpoor,butcouldhurttheurbanpoor

(andnon-farmruralpoor)considerably–asignificanteconomicandpoliticalrisk inacountry

with large numbers of people living at subsistence level. Being a net exporter of agricultural

output,Indiastandstogainonnet(andespeciallyintheruralsector)fromareductionofglobal

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agriculturalsubsidies.Whether India’s institutionswillbeabletomanagetheshockofhigher

globalfoodprices--withitsobviousadverseconsequencesforfoodconsumers,especiallythe

poor,throughoutthecountry,isanothermatter.ThisperhapsdroveIndia’sambivalencetowards

rationalizationofagriculturalpolicythroughDohaandforIndiatoperhapsseeDohaaslessofa

priority.Intheevent,IndiawasanimportantplayerintheDohaRound,butwasseenasbeing

rigidlydefensiveinagricultureand(toalesserextent)alsoinliberalizationonindustrialgoods.It

wasstronglyopposedtotheinclusionofmostofthe“Singapore”issues(concerninginvestment,

transparency in government procurement, competition policy and trade facilitation), and

remainedinfavorofastrongspecialanddifferentialtreatmentfordevelopingcountries.*

RegardlessoftheapproachtakenbyIndiaorothercountriesduringtheDoharound,theWTO

system,inrecentyearsappearstohavebeenovertakenbyunexpectedexternaldrivers.Tothe

stagnationoftheWTO,theTrumpadministrationhasaddedconsiderablechallengebytaking

aggressive andunusual stances: imposing tariffs onpartnerson contrived “national security”

grounds,backingoutofsomenearlycompletednegotiations(TPP),demandingre-negotiationof

existingagreements(NAFTA),andthreateningoutrightexitfromtheWTOitselfifitsdemands

are not met with acquiescence. These belligerent assertions of US power have upended

traditional mechanisms for negotiation and exchange in the system, raising fundamental

questionsaboutthefutureoftheglobalorderandthenecessarystepsforprogresswithin it.

Mostrecently,theUnitedStates’impositionoftariffsonsteelandaluminumimportsfromIndia

(andmanyothercountries)hasprovokedretaliationfromIndiaandothercountriesonarange

oftheirimportsfromtheUS--takingtheworldtradesystemdownanunchartedanddangerous

path.Howthesematterswilleventuallyberesolvedisyettobeseen.Recoveryofmultilateral

momentumis,however,unlikelyintheveryshortrun.

*WhateverthemeritsofIndia’spositions,itwasseenandportrayedasobstructiveatDohaandasonlyshowingsomeinitiativeinservices,whereithasdiscovereditsstrengthsinlightofthesuccessesoftheITservicessectorathome.Thiswascertainlyunfair–alotoftheblameforthefailuresatDohasurelyrestswithUnitedStatesandtheEUandtheirlukewarminterestintheround

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III.India’sPreferentialTradeAgreements

The slowdownof themultilateral process, as reflectedby the failureof theDoha roundand

negotiationdifficultiesfacedintheUruguayround,hasbeenmatchedbyadeclininginterestin

theWTO’snon-discriminatoryarchitecture.Eversincethelate1980s,whentheUSabandoned

itsownprincipledoppositiontopreferentialtradeagreementsbysigningtheCanada-USFree

Trade agreement and theNorthAmerican Free TradeAgreement (by subsequently including

Mexico),manycountrieshavefounditmoreattractivetonegotiatetradetreatiesbilaterally,with

individualorsmallgroupscountries,ratherthansubstantiallyengagingthemultilateralprocess.

Preferential agreements are notified to the GATT, under its Article XXIV, which permits the

formationoffreetradeagreementsandcustomsunions,providedtheseagreementsresult in

comprehensive liberalization of ‘substantially’ all trade between the member countries, or

through its “Enabling Clause”which permitted developing countries to enter into “arbitrary”

agreements(notrequiringthecomprehensiveliberalizationmandatedbyArticleXXIV)witheach

other.

Such preferential agreements are now in vogue, with hundreds of GATT/WTO-sanctioned

agreementshavingbeennegotiatedduringthisperiodandwithnearlyeverymembercountryof

theWTO belonging to at least one PTA (and the averagemember belonging to over seven

agreements).AmongthemoreprominentPTAscurrentlyinexistencearetheNorthAmerican

FreeTradeAgreement(NAFTA)andtheEuropeanEconomicCommunity(EEC),theMERCOSUR

(theCUbetweentheArgentineRepublic,Brazil,Paraguay,andUruguay).

Over the years, India toohasnegotiated a numberof preferential trade agreements. Table I

providesalistofIndia’sbilateraltradeagreements,signedwithindividualpartnercountries,as

alsoplurilateralagreementssignedwithmultiplecountries.India’sbilateralagreementsarewith

Afghanistan, Bhutan, Chile, Japan, Malaysia, Nepal, Singapore, Sri Lanka, Thailand and the

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RepublicofKorea.AsTableIindicates,Indiahasalsoenteredintoplurilateralagreementswith

theAssociationof South-EastAsianNations (the India-ASEANFree tradeagreement)and the

MERCOSURcountries(theMERCOSUR-Indiatradeagreement)andisamemberoftheAsiaPacific

TradeAgreement(involvingBangladesh;SriLanka;China;India;Korea,Republicof;LaoPeople's

Democratic Republic) and the South Asia Free Trade Agreement (Afghanistan; Bangladesh;

Bhutan;SriLanka;India;Maldives;Nepal;Pakistan)

Theimpactofthesetradeagreementsontradeoutcomesforthebalanceoftradehasbeenof

significant interest in trade policy circles in India. What are the trends under the different

agreement undertaken by India? Have trade balances improved or worsened under the

agreements?

TableIIprovidesstatisticsontheimportandexportsharesofIndiawithitspartnercountries–

looking in particular at comparison between the years 2007 and 2017. Specifically, Table II

provides data on India’s trade with the individual countries with which it has bilateral

agreements.ThesearealsoaggregatedintoanIndia-Bilateralcategory).TableIIalsoprovides

information on trade trends under India’s plurilateral agreements: ASEAN, APTA, SAFTA and

MERCOSUR.*Finally,forcomparisonpurposes,TableIIprovidesdataontradebetweenIndiaand

theUnitedStates,theEuropeanUnionandChina.

Itshouldbereadilyevident,fromTableII,thattradebetweenIndiaandmostofthesepartner

countrieshasstayedverysteadyoverthepastmanyyears.ConsiderfirsttradebetweenIndia

anditsbilateralagreementpartners.Overallimportswiththesecountriesstoodat13.3percent

oftotalimportsin2007andmovedto11.8percentby2017.Exportstothesecountriesstoodat

13.7percentin2007andmovedto14percentby2017.TradebetweenIndiaanditsbilateral

partnershas,thussimplykeptupwithitsglobaltradepatterns.Tradewiththelargercountries

in this grouping -- Korea, Japan, Malaysia and Singapore -- also looks remarkably steady,

* WeshouldnotethatmanycountrieshaveindividualagreementswithIndiaandarealsopartofaseparateplurilateralagreementThus,SingaporehasitsowntradeagreementwithIndiaandisalsopartoftheIndia-ASEANfreetradeagreement.Goodsarefreetobeimportedorexportedunderwhicheveragreementgivesthema“better”treatment.

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especiallyintheaggregate.:theslightincreaseinimportsharefromKoreaappearstobeoffset

byreductionsinimportsharefromJapan,MalaysiaandSingapore.

India’stradeunderplurilateralagreements–notablyIndia-ASEANandIndia-MERCOSURlooks

mostly steady aswell. Tradewith ASEAN countries rose slightly (import share rose from 9.6

percent to 10.2 percent and the export share rose from 9.5 percent to 12 percent). India-

MERCOSOURtradeslightlyaswell.MERCOSUR’simportsharerosefrom0.7to1.7percentand

theexportsharedroppedslightlyfrom1.5to1.3percentofoverallexports.Theconclusionhere

isastraightforwardone.India’stradesharewithitsbilateralandplurilateralpartnersdidnotrise

significantlyovertheyears2007-2017.

OneconcernthatisfrequentlyexpressedinIndiaconcernsthebalanceoftradebetweenIndia

anditsPTApartners–specificallythatIndia’stradeagreementshaveledtoanexpansionofits

tradedeficits.However,thedataindicateotherwise.TradedeficitswithIndia’sbilateralpartners

accountedfor12.6percentoftheoveralltradedeficitintheyear2007.In2017,theyaccounted

for a considerably smaller 7.5 percent. Similarly, India’s trade with ASEAN and MERCOSUR

accountedfor9.1percentofthetotaltradedeficitin2007andaccountedfor9.2percentofthe

overalldeficitin2017.Thus,whileIndia’stradedeficitswidenedovertheyearsinnominaldollar

terms,itsPTAsdonotaccountforanappreciablylargerfractionofitstradedeficitthantheydid

before.

While trade shares within India’s agreements seem relatively steady over time, there is a

questionofwhatthislookslikeatasectorallevel.Forinstance,aretherespecificdis-aggregated

sectorswherethegrowthoftradewithinagreementsissignificantlygreaterthangrowthoutside

ofIndia’stradeagreements?MightspecificsectorsinIndiahavesufferedduetoasurgeinimport

fromitspartnercountries?

Anexaminationofdisaggregated3-digittradedatafrom2007-2017helpstoidentifysectorsin

whichtradegrowthwasfasterwithintradeagreementsthanoutsideofit.Thedataindicatethat

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sectorsinwhichtradegrewfasterthan25percentwithinIndia’sbilateralagreementsthantrade

withtheworldamountedtoabout18billiondollarsofimportsand10.2billiondollarsofexports

in2017.ForASEAN, thecorresponding figuresare15billiondollarsof importsand26billion

worth of exports. For sectors inwhich tradewithin bilateral agreementsmore thandoubled

relativetotradewiththeworld,thevolumeoftradeamountedto4.8billiondollars’worthof

imports and3billionof exports. ForASEAN, the corresponding figures are7billionworthof

importsand10billionofexportsin2017.Takentogether,thisamountsto12billionofimports

and13billionofexportsin2017.Fromthiswecanconcludethatsectoralimport“surges”donot

exceed export “surges” and also that these surges are quantitatively small compared to the

overallvolumeoftrade(amountingto6.5percentofoveralltradeand12billionor3.5percent

ofoverallimports).

Theprecedingdiscussion suggests that India’s tradeagreementsdidnot significantly alter its

tradepatterns,i.e.,thattradeunderIndia’stradeagreementsnotgrowanyfasterthanIndia’s

tradeoutsideitsagreements.Whyisthisthecase?

OneexplanationforthishastodowiththefactthatIndia’sagreementswererelativelyshallow

–thattheyhaveentailedlessliberalization,thusfar,thanonemighthaveimaginedinthefirst

instance.AsindicatedinTableI,mostofIndia’sagreements–withtheexceptionofagreements

withJapanandSingapore-werenotifiedtotheWTOundertheEnablingClause.Thisimpliesthat

unlike Article XXIV agreements which require liberalization on “substantially all trade,” the

enabling-clause-notifiedagreementsundertakenbyIndiawereofgenerallyofa“partialscope”

nature with varying, but often only a limited amount of liberalization undertaken. The

agreements have also involved a range of implementation schedules, with liberalization

undertakenbothbyIndiaanditspartnerscommittedtobephasedoveranumberofyearsafter

theagreementswerefirstnotifiedtotheGATT.Thus,forinstance,whileliberalizationunderthe

India-Japantradeagreementbeganintheyear2011,implementationiscompleteforonlyabout

23percentof thetariff lines.For63percentof thegoods, tariff liberalizationby India isonly

expectedtobeundertakenbytheyear2021.Another14percentofgoodsexcludedfromthe

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agreementaltogether.Similarly,undertheIndia-Koreaagreement,signedin2010,onlyabout8

percentoftarifflineshadbeenfullyeliminatedpriorto2017.Over60percentofthetarifflines

weretobeliberalizedbyIndiaonlyby2017andabout20percentoftarifflineswereexcluded

from elimination altogether. Equally, the India-ASEAN free trade agreement, which began

liberalizationin2010,undertookeliminationof9000tarifflines,butfullyonlybytheyear2016.

ThetradeoutcomesunderIndia’spreferentialtradeagreementsaremirrored,tosomeextent,

inoutcomesunderpreferentialagreementsintherestoftheworld(seeKrishna,2014).Thus,the

WorldTradeReport2011(henceforthWTR)arguesthatwhiletherehasindeedbeenasignificant

increaseinthevalueoftradetakingplacebetweenPTAmembersovertime,muchofthistrade

isnottakingplaceonapreferentialbasis.Considertradein1990betweenPTApartners–this

trademadeuparound18percentofworldtradeandroseto35percentby2008(inbothcases,

thefiguresindicatedexcludeintra-EUtrade).WhentheEuropeanUnionisincluded,intra-PTA

traderosefromabout28percent in1990toa littleover50percentofworldtrade. Indollar

terms,thevalueofintra-PTAtrade,excludingtheEUcountries,rosefrom537billionUSDin1990

to4trillionUSDby2008andfrom966billiontonearly8trilliononcetheEUisincluded.This

mightsuggestthatbynowalargeshareofworldtradeistakingplacebetweenPTAmembers.

However, as theWTR importantly points out, these statistics vastly overstate the extent of

preferentialtradeliberalizationandthustheextentofpreferentialtradethatistakingplace.This

issobecausemuchofthetradebetweenPTAmembersisingoodsonwhichtheyimposeMFN

tariffsofzerointhefirstplace.AndgoodswhicharesubjecttohighMFNtariffsarealsooften

subjecttoexemptionsfromliberalizationunderPTAs,sothatthevolumeoftradethatbenefits

frompreferencesis,onaverage,quitelow.

Specifically,WTRcalculations(seeTableIII)indicatethatdespitetherecentexplosioninPTAs,

onlyabout16percentofworldtradetakesplaceonapreferentialbasis(thefigurerisesto30

percentwhenintra-EUtradeisincludedinthecalculations).Furthermore,lessthan2percentof

trade(4percentwhentheEUisincluded)takesplaceingoodswhichreceiveatariffpreference

thatisgreaterthan10percent.Forinstance,wellover50percentofKoreanimportsenterwith

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zeroMFNtariffsappliedtothem.Koreaofferspreferencestoabout10percentofitsimports,

butapreferencemargingreaterthan10percentonvirtuallynoneofitsimports.Asimilarpicture

emergesontheexportingside.OneofthecountriesthathasactivelynegotiatedPTAsisChile

and95percentofChileanexportsgotocountriesthatithasaPTAwith.However,only27percent

ofChileanexportsareeligibleforpreferentialtreatmentandonly3percentofitsexportsbenefit

frompreferencemarginsgreaterthan10percent.TableIIIprovidesanadditionalbreakdownof

thevolumesoftradethatenteronapreferentialandonanMFNbasisforanumberofsample

PTAs.ClearlyformostPTAsthemajorityoftheirtradetakesplaceunderzeroMFNtariffs.Itis

onlyasmallfractionoftradethatentersonapreferentialbasis,especiallyoutsideoftheEUand

NAFTA.Takentogether,theprecedingstatisticssuggestthattheextentoftrade liberalization

undertakenthroughPTAshasbeenquitemodest,despitethelargenumberofPTAsthathavein

fact been negotiated (see also Table IV) – a picture that is not altogether from that of

liberalizationundertakeninIndianPTAs.

Someofthisshouldnotperhapsbetoosurprising.Itiswidelyunderstoodthatamajorfactor

workingagainsttradeliberalizationisthepoliticaloppositionoftheimportcompetinglobbies.If

thisisthecase,itisunclearwhylobbiesthatopposetradeliberalizationatthemultilateralor

unilaterallevelwouldeasilysupportliberalizationundertakenonapreferentialbasis.Weshould

thereforeexpectthatpoliticallobbieswouldmostlyonlypermitpreferentialagreementsinwhich

theirrentswereprotected,eitherthroughaccesstopartnercountrymarkets,or,moresimply,

throughanexemptionofliberalizationonimportsofthosegoodsthatcompetewiththeirown

production,suggestingcomplementaritiesbetweenMFNandPTAtariffs.*Thisissimilartothe

Indiancontext,where,aswehaveargued,liberalizationwithinIndia’sagreementshasbeenquite

limited and where exclusions and sensitive goods categories are maintained in each trade

negotiation.

*ToexplorethequestionofwhetherMFNtariffsandPTAtariffsareindeedcomplements,BaldwinandSeghezza(2010)examinedcorrelationsbetweenMFNandPTAtariffsatthe10-digitlevelofdisaggregationfor23ofthetopexportingcountrieswithintheWTO (forwhichdatawasavailable).Consistentwith theprecedingdiscussion, they find thatMFN tariffsandPTA tariffsarecomplements, since themargin of preferences tends to be low or zero for products where nations apply high tariffs. Theimplicationisthatweshouldnotexpectliberalizationthatisdifficultatthemultilaterallevel,tonecessarilyproceedeasilyatthebilaterallevel.

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Finally,utilizationoftradepreferencesinthecontextoftradeagreementshasbeenarguedtobe

cumbersome foranumberof reasons.A recent reportbySaraswat,PriyaandGhosh (2017),

suggeststhatpreferenceutilizationunderIndia’sPTAsisonlyabout25percent,duetoalackof

information about preferences, low margins of preference, delays and administrative costs

associatedwith rulesoforigin and impediments causedbynon-tariff barriers.Whiledataon

preference utilization is quite hard to comeby, several surveys of trading firms suggest that

preference utilization by exporting firms in Asian FTAs is not high, in general – the Indian

experienceisnotunusual.Thus,forthesampleof841firmsinEastAsia,astudybyKawaiand

Wignaraja (2011) shows that only around 28 per cent of exporting firms currently use PTA

preferences.36percentofreportingfirmsintheRepublicofKoreaand14percentinChinacited

“havinghadnosubstantialtariffpreferenceorhavinghadnoactualbenefitsfromsuch”asthe

majorreasonfornotutilizingthePTApreferentialtariffs.FirmsinthePhilippinesandSingapore

attributedtheirlowpreferenceutilizationtothecountries'overwhelming“exportconcentration

inelectronics”,whichischaracterizedby“lowMFNtariffrates”.

Preference utilization is also limited by “rules of origin” (RoOs)which are formulated in the

contextofPTAagreementstoprevent“tradedeflection”(i.e., toensurethatgoodsthatpass

dutyfreewithintheunionareactuallywithin-uniongoodsandnotproducedoutside).Thisis

particularly important in the context of global production networks,which, through trade in

intermediategoods,involvetwoormorecountriesintheproductionofasinglefinalgood.Often

RoOsresultinfarlesstradeliberalizationthanisimpliedbythepreferencesnegotiatedwithinan

agreementasRoOsmayraisetransactioncostsforfirmstoadegreethatmakesutilizationofFTA

preferencesuneconomical.Thisisespeciallylikelywhenmarginsofpreferencedescribedabove.

Furthermore, as the number of concluded agreements increases, different RoOs inmultiple,

overlappingPTAscanposeanadditionalburdenonfirms.

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III.1FutureTradeAgreements

Looming over the horizon are the “mega-regional” agreements, such as the Regional

ComprehensiveEconomicPartnership(RCEP),whichisafreetradeagreementthatwaslaunched

in2011andiscurrentlybeingnegotiatedbetweenASEANnationsandASEAN'sFTApartners.The

RCEPincludes16countries,whichinclude:Australia,Brunei,Cambodia,China,India,Indonesia,

Japan, Laos, Korea, Malaysia, Myanmar, New Zealand, Philippines, Singapore, Thailand, and

Vietnam–agroupingthatconstitutesaboutathirdoftheworld'stradewithapopulationof3

billionandagrossdomesticproduct(GDP)ofabout20trillionUSD.

The fundamentals of the negotiating agenda of the RCEP cover trade in goods and services,

investment,economicandtechnicalcooperation,intellectualproperty,competitionpolicy,and

disputesettlement.However,sinceRCEP'sprimaryfocusseemstobeontradeitselfratherthan

onrulesconcerningtheproductionoftradedgoods(suchaslabororenvironmentalstandards),

it isanticipatedthatagreementoverRCEPwillbeeasiertoreach.Itwillnotengagedomestic

political considerations beyond those that are generally involved with trade liberalization.

Needlesstosay,thepoliticsoftradeliberalizationingoods(i.e.,disregardingotherissues)may

becomplicatedenoughtoscuttletheagreementaltogether. Indeed, India'sownpositionhas

beenanapparentlyhesitantoneforsomeeasilyunderstoodreasons.Indiasuffersacomparative

disadvantage in manufacturing as compared to other RCEP members. This has put Indian

manufacturingindustryinfearoftherushofimportsthatwillcomeacrosstheborder,especially

frommanufacturingpowerhouseslikeChina.Ontheotherside,Indiahasestablishedstrengthin

services.Thus,India’sinterestslieintheexportofserviceswhichitcansupplyusingitsskilled

and semi-skilled labor (for instance, thepotentialmarket inChina foroutsourcing services in

InformationTechnology(I.T.)wasestimatedat140billionUSDin2020,ofwhichthedemand

fromdomesticChinesefirmswouldbeapproximately70billionUSD).Thechallengesfacedby

Indianfirmsincludequalifyingcertifications(forexample,SystemsIntegrationsCertificate),non-

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recognitionof international standards (likePMI), licenses (forBPOoperations), and language

constraints. Indiahas reportedlyalreadybeenaggressivelynegotiating the freemovementof

professionalsaspartoftheagreement.Italsoperceivescompetitivestrengthinpharmaceuticals

andtextilesandhassoughtliberalizationintheseareasaswell.

WhetherliberalizationofserviceswithinRCEPwillbesufficienttoinduceIndianparticipationor

not,thisnarrowcalculationofIndianinterests(manufacturingimportsversusservicesexports)

missesafewimportantfeaturesoftheglobaleconomyandthetrendsinglobalproductionand

trade.Notably, it ignores the fact that theRCEPcanprovide thebenefitof linkageeffectsof

regionalandglobalvaluechainsinmanufacturingandinservices.ForIndia,suchanarrangement

isparticularlyrelevantforanumberof importantreasons.Therehasbeenarapidincreasein

global production fragmentation, leading to production via what is popularly referred to as

‘global value chains,’ wherein final goods are produced with inputsmade inmany different

nationsandwhere intermediate inputsmaycrossnumerous internationalborderswithvalue

beingaddedateachstagebeforebeingassembledintoafinalproduct.Theforeigncontentof

exportshasbeenrisingacrossarangeofcountries.Forinstance,inChinadomesticvalueadded

inexportsdroppedfromanaverageofaround90percentin1995toaround65percentin2010.

InIndiaaswell,thedomesticvalueaddedinexportsfellfromaround90percentin1995to78

percentin2010.Nevertheless,aswehavenotedearlier,India’sparticipationinsectorsthathave

beenorganizedasglobalproductionchainsisstrikinglysmall.Forinstance,inelectronics,India’s

export share in theworld is less than 0.5 percent.While a number of factors play a role in

determining successfulparticipation inglobal valuechains,high tariffs inhibit theuseofhigh

quality imported intermediates which are essential for cost effectiveness and quality

improvements.Reducing importbarriersonmanufacturingwithinRCEPmaywellprovide the

necessary incentives for India to integratemore fully intoglobalmanufacturingplatforms (or

globalvaluechains–GVCs,astheyarepopularlyknown)

Asageneralmatter,ithasbynowbeenquitewellestablishedthatthepaceandscaleofGVC

expansionisassociatedwithareductionoftradecosts(OECD,2013),whichincludetradepolicy

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barriers such as tariff and non-tariff restrictions. Efficient international un-bundling of the

productionprocessrequirestradecostsmustbelowenoughtoenablefirmstoutilizelocation

advantages of countries arising from factor-price differences and economies-of-scale. With

production fragmentation, intermediate inputs may be sourced from different countries,

partially assembled in stages and then shipped to another destination for final assembly,

Importantly,aportionoftradecosts-includingtariffs-areincurredeachtimeagood-in-process

crossesaborder.

TheregionalnatureofGVCsisalsorelatedtotheroleplayedbytradecosts.Otherthingsbeing

equal, countries appear to source intermediates fromnearby countries in order tominimize

transportationcosts.Regional integrationagreementsmaypartlyreducetradecostsbetween

countrieswithinarespectiveregion,especiallyifsuchagreementsprovidefordeepintegration

beyondmarket access. In other words, integration agreements that include liberalization of

services trade, investment provisions, intellectual property rights protection, and the

harmonizationofstandardsandregulationswillmakecross-borderproductionmoreefficient.

The empirical literature is richwith evidence pointing to a positive association between the

regional trade agreements and existence of regional value chains (regional production

fragmentation--see,forexample,JohnstonandNoguera(2012).Itappearsthatthesetwoforces

aremutually supporting; comprehensive trade integration agreements go hand-in-handwith

moreexpansiveproductionsharingacrossbordersintheregion.RegionalintegrationacrossAsia

hasopenedopportunities for firms spreadproduction stages acrossAsia and thePacific. For

example, technology-intensivepartsandcomponentsofelectronicsproductsareproduced in

relativelyadvancedindustrialcountriesoftheregion,suchasJapan,andtheRepublicofKorea,

whiletheassemblingofdifferentintermediatesintofinishedproductsistakingplaceelsewhere

intheregion,suchasinChinaandVietnam.FromIndia’sperspective,reducingimportbarriers

onmanufacturingwithinRCEPmaywellprovidethenecessaryincentivesforIndiansuppliersto

integratemorefullyintoglobalmanufacturingplatforms.

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Trans-PacificPartnership

Prior to the unceremonious exit of theUnited States from the TPP following the election of

DonaldTrumpasPresident,theTPPwasnegotiatedasatradeagreementamong12countries:

Australia, Brunei, Chile, Canada, Japan,Malaysia,Mexico,New Zealand, Peru, Singapore, the

UnitedStates,andVietnam–aneconomicallysignificantgrouprepresentingabout40percentof

globaloutputmakingitperhapsthelargesteconomicarrangementofitskind.FromanIndian

perspective,TPPnegotiationswereinstructivesince,inadditiontotheliberalizationoftradein

goods,TPPalsoincludednewdisciplinesonpoliciesthataffecttradeandinvestmentingoods

and services. TheTPPalso goeswell beyondwhathas typicallybeen included inother trade

agreements,especiallyinAsia.

TPPmemberswereexpectedtoeventuallyeliminatenearlyalloftheirtarifflinesandalsoreform

avarietyofnon-tariffbarriers(especiallyonlocalcontentrequirementsandrulesoforiginfor

autosandpartsaswellasfortextilesandapparel).Inadditiontomarketaccessreformsfortrade

ingoods,however,theTPPincludedbroadrangingdisciplinesinanumberofareasmanyofwhich

wouldhavebeenofsignificantconcerntoIndia.SincetheTPPnegotiationsapparentlyproceeded

as per the United States’ "negotiation template", its structure provided an opportunity to

understandtheUS'snegotiationapproachanditsrelevanceforIndia.Themostsignificantnon-

trade issues in the TPP included labor regulations, environmental regulations, rules on

intellectualpropertyprotection,andprovisionsonthefunctioningofstate-ownedenterprises

(SOEs).

Eachofthenon-tradeissuesinTPPare,inprinciple,ofconcerntoIndia,asthesameissuesare

likelytoariseinanyfuturenegotiationswiththeUnitedStatesorthemembersoftheEuropean

Union.

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LaborRegulations

TPPrulesonlabor,asarticulatedinitslabor"chapter,”requiresthatTPPmembersensurethat

theirnationallaborlawsconformtothecoreprinciplesoftheInternationalLaborOrganization

(ILO)Declaration on Fundamental Rights atWork,which include freedomof association and

recognition of the right to collective bargaining, elimination of all forms of forced labor, the

abolitionofchildlabor,andtheeliminationofdiscriminationwithrespecttoemploymentand

occupation.

ItisnoteworthythatdespitetheclearreferencetotheILOdeclaration,theTPPdidnotgofurther

inaskingforcountriestoconformtotheeightformalconventionsthatcorrespondtothelatter.

ThiswasnotsurprisingsinceeventheUnitedStateshasonlysignedtwooftheeightconventions.

Becausecountriesarelegallyonlyrequiredtocomplywithratifiedconventions,thisambiguous

positioningof theTPPon labor issues caused considerableanxiety inboth the rich countries

withintheTPP(whoselaborunionswouldlikegreaterenforceability)andindevelopingcountries

(which sometimes see even the inclusion of labor standards as an attempt to dilute their

comparativeadvantagebasedonlaborabundance).

Primafacie,theUSreticenceinpursuingmorestringentrulesonpaperandgreaterreticenceon

pursuingabusesoflaborlawsinpartnercountriesinpreviousagreementsindicated,onbalance,

that labor standards would not be a significant deterrent to Indian interest in joining an

agreement. But whether powerful lobbies such as the American Federation of Labor and

CongressofIndustrialOrganizations(AFL-CIO)willallowtheUSindifferencetosustainoncethe

USstartsincludinglargelaborabundantcountriesIndiaintheTPPisanothermatter.

EnvironmentalRegulations

Dashing thehopesof thosewho soughtmore stringent environmental rules via the TPP and

allayingthefearsofthosewhoworriedthatsignificantenvironmentalregulationsinTPPwould

weakenthemotivationofcountriestoparticipateintheagreement,theTPPdoesnotgomuch

furtherthanexistingarrangements.Itmostlyinsistedthatcountriesdomoretoimplementand

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enforce their obligationsunder themultilateral environmental agreements already signedby

them(participationinwhichvarieswidelyamongeventheTPPmembercountries).

TheTPPincludedcommitmentstopromotesustainablefisheriesmanagement;topromotethe

long-term conservation of species at risk such as sharks, sea turtles, seabirds and marine

mammals; and to combat illegal fishing, including implementing port state measures and

supporting increased monitoring and surveillance. Specifically, the TPP did not include any

disciplinesconcerningglobalwarmingorpoliciesthatreducedistortionswithrespecttodemand

forfossilfuelsandrenewableenergysupplies.Thesecommitmentsareinlinewithcommitments

thatIndiahasalreadyundertaken,butagainthesecommitmentsmaychangewereIndiatojoin

theTPPandbecomeamember.

IntellectualPropertyProtection

Atitscore,theTPPestablishedrulesonintellectualpropertyprotectionthatareconsistentwith

internationalnormsdrawnfromtheWTOAgreementonTrade-RelatedAspectsofIntellectual

Property Rights (TRIPS). India is a signatory of the TRIPS agreement. The TPP did, however,

establishnewrulesonthepatentingonpharmaceuticals–coveringbothpatenttermextensions

andcopyrightprotectionsandmorecontroversially,ondataprotectionanddataexclusivityfor

patented drugs (including biologics derived from genetic material, cells and other biological

sources).While the pharmaceutical industry sought protections for a period of 12 years and

advocatesfrompoorercountrieswantedtoreducethisdurationto5years,theagreementfinally

provided8yearsofprotection.Onthemargin,thelongevityofprotectionwouldadverselyaffect

producersofgenericsorbiosimilardrugsandwouldthereforeadverselyimpactIndia.

IndiaandtheUShavelockedhornsmultipletimesontheissueofintellectualpropertyrightsand

the right to protect access to inexpensive life-savingmedicines. Further, the US and the EU

appearconcernedaboutIndianruleswhichallowtheIndianPatentsControllertodenypatents

on items that are not significantly different from their older versions. This prevents

pharmaceutical companies from getting fresh patents onmedicineswith expired patents, by

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making small and largely cosmetic changes in its formulation. India's dominance in the

pharmaceuticalsectormayinducepartnercountriestoseekmorestringentIntellectualProperty

Rights (IPR) protections in the context of trade agreements with India. IPR negotiations will

clearly be an important and challenging component of any trade deals between India and

partnerssuchastheUSortheEU.

OperationofStateOwnedEnterprises

Perhaps the most challenging rules concerning the potential membership of India in mega-

regional trade agreements such as the TPP has to do with the operation of state owned

enterprises. While international trade rules under the WTO have sought to discipline the

behaviorofstateownedenterprises,theyhaveonlyhadlimitedsuccess.TheTPPwasmuchmore

ambitious.ItsoughttoensurethatthecommercialactivitiesofSOEs(purchasesandsales)are

donewith only commercial considerations inmind,without discriminating against other TPP

firms.ItalsoprohibitedtheuseofsubsidiestosupportSOEs.Itrequiredjudicialjurisdictionover

relateddisputes concerning theoperationof SOEs and administrativemechanisms to ensure

implementationandcompliancewithanyjudicialrulings.

TheTPPposesfundamentalchallengestocountrieslikeChinaandIndiaonthematterofSOE

regulations.ChinahasthelargestSOEsectorintheworld,withover100,000SOEs(whichhas

beenthebasisofmuchanti-ChineserhetoricintheUnitedStatesandelsewhereovertheyears).

SOEsownedbythecenterearnedoverthreetrillionUSDin2015withsub-centralSOEsearning

alower,butnearlyequalfigureaccordingtoavailableestimates,addinguptoatotalof6trillion

USD in annual earnings. While smaller, India too has a significant state-owned sector, with

turnoverofaround150billionUSD.ItislikelythattheTPPmemberswillpushforstricterrules

andincreasedtransparencyofSOEoperationsinChinaandIndiashouldtheyseekentryintothe

TPP.OneimportantexceptiontotheTPPrulescomesthroughitsallowanceforservicessupplied

byastate-ownedenterpriseofaParty“withinthatParty’sterritory”(USTR,2016)suchservices

aredeemednottocauseadverseeffectsonrivalfirmsandarepermittedtoreceivesubsidies

fromtheirgovernments.

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Inacertainsense,thediscussionaboutIndiajoiningtheTPPismoot.LeavingasideIndia’sown

lackofinterestatthepresentmoment,theUnitedStates,underPresidentTrumphaspulleditself

outoftheTPP,whileleavingopenthepossibilitythattheUSmightcomebacktotheagreement

atsomefuturedate.Inthemeantime,theremainingmembershavereachedanagreement(the

Comprehensive and Progressive TPP – CPTPP) under rules largely similar to those previously

negotiated, but excluding issues that the US had previously insisted on having to do with

governmentprocurement,intellectualpropertyprotectionandinvestment.ShouldtheUSreturn

toTPP,theseissueswillundoubtedlybebroughtbackin.ItisvirtuallycertainthenthatforIndia

tojoinsuchanagreement,itwillhavetocontendthesevariousnon-directly-traderelatedissues,

which could present insuperable challenges for India, given its own economic and political

constraints–includingthosefromitsownstateownedenterprises.

IV.UnilateralLiberalization

Historically,muchofIndia’stradeliberalizationhascomeaboutthroughunilateralmeasures(as

opposed to reforms negotiated at the WTO or through bilateral trade agreements). This

happenedmostlyintwowaves:firstin1991-94andthenin1998-2007,withpausesin1995-97

andafter2007.Averagetariffscamedownfrommorethan150%in1991toabout12%in2007.

Thelarge-scaleliberalizationundertakenbyIndia,might,inthefirstinstance,suggestthatthe

taskoftradeliberalizationisnowcomplete.However,thisisnotthecase.India’stariffregime

ischaracterizedbypronounceddisparitiesbetweenboundrates(i.e.,theratesthatunder

WTOrulesgenerallycannotbeexceeded)andthemostfavorednation(MFN)appliedrates

chargedattheborder.India’saverageboundtariffrateisaround50percent,whileitssimple

MFNaverageappliedtariffisaround13percent.Giventhislargedisparitybetweenbound

andappliedrates,exporterstofaceuncertaintybecauseIndiamaintainsflexibilitytochange

tariffratesatanytime.Forexample, in January2013, India issuedacustomsnotification

announcinganimmediatedoublingofthetariffonimportsofcrudeedibleoils.Whilethisis

notatypicaloccurrenceandwhiletariffratesarequitestableoverall,longterminvestments

bytradingpartners(inthecontextofglobalvaluechains,say)requireregulatorycertainty,

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whichcanbeachievedbyloweringboundratestobringthemclosertoappliedrates.

Further,manyofIndia’sboundtariffratesonagriculturalproductsareamongthehighestinthe

world, ranging from100percent to 300percent. India’s averagebound tariff for agricultural

productsis118.3percent.Whilemanyappliedtariffratesarelower(averaging33.5percenton

agriculturalgoodsin2013),theystillpresentasignificantbarriertotradeinagriculturalgoods

andprocessed foods (e.g.,potatoes,apples,grapes, cannedpeaches, chocolate, cookies,and

frozenFrenchfriesandotherpreparedfoodsusedinquick-servicerestaurants).Thelargegap

betweenboundandappliedtariffratesintheagriculturesectorallowsIndiatousetariffpolicy

tomakefrequentadjustmentstothelevelofprotectionprovidedtodomesticproducers,again

creatinguncertaintyfortraders.

Indiaalsomaintainsveryhightariffpeaksonanumberofgoods,includingflowers(60percent),

naturalrubber(70percent),automobilesandmotorcycles(60percentto75percent),raisinsand

coffee (100 percent), alcoholic beverages (150 percent), and textiles (some ad valorem

equivalentratesexceed300percent).Further,whileIndiahasboundallagriculturaltarifflines

intheWTO,over30percentofIndia’snon-agriculturaltariffsremainunbound,(i.e.,thereisno

WTOceilingontherate).Overall,ratherthanundertakesimpleliberalization,Indiahasoperated

anumberofcomplicatedschemes includingdutydrawbacks,anddutyremissionschemesfor

imports.Thisappearstobeanunnecessarilycomplicatedadministrativestructurethatcanbe

considerablysimplifiedbyunilateralliberalization.

Despite the immense success of the reforms in taking the economy forward, external

liberalizationstalledbetween2004and2014undertheCongress-ledgovernment.Despite its

stated goal of moving toward Association of Southeast Asian Nations (ASEAN) tariff rates

(approximately5percentonaverage), Indiahasnot systematically reduced itsbasic customs

dutiesinthepastfiveyears.

SeveralrelatedobservationsonIndianunilateraltradepolicychoicesmaybemade:

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First,appliedtariffsfarbelowtheirboundlevelssuggeststhatpolicyis,unusually,moreliberalin

practicethanitisinprinciple.Thereasonsforthisgapareunclear(atleasttothisauthor)but

mayhavetodowithdifferentpoliticalforcesthatareengagedinunilateraldecisionmakingas

comparedtothoseengaged inmultilateralnegotiationsorpotentiallyduethestrategicvalue

thathighboundtariffshaveasbargainingchipsinfuturemultilateralnegotiations.Beallthisas

itmay,Indiamaydowelltoloweritsboundtariffstobringthemclosertoappliedlevels,either

unilaterallyoraspartofamultilateralnegotiation.

Second,acasetobemadeforrevenueneutral liberalizationandrationalizationofthetariffs.

Figure1belowshowsthetariff levelsandtherevenueobtainedatthose levelsfor India.The

highesttarifflevelsthatcontributesubstantialrevenueare150and100.Beverages/Spiritsare

charged at 150 percent and contribute 2 percent of tariff revenues, while crude palm oil is

chargedat100percent and contributes16percent to import revenue.Beveragesand spirits

make up 0.1 percent of all imports and crude palm oil accounts for 1.4 percent. The other

substantialspikesinimportrevenueoccurat10percentand7.5percent,whichconsistofvarious

dutiablegoods.Onepossiblerationalizationtoconsiderwouldbetoharmonizeallratesaround

thetradeweightedaverageofsay7percent (withsomeexceptions forsensitivegoods).This

rationalizationwould correctdistortionswhere inputs to industriesare chargedhigher tariffs

(tariffinversion)whilealsobringingadditionalpoliticaleconomybenefitsassociatedwithhaving

uniformtariffs.

Third,alongsidetheliberalizationundertakeninthelasttwodecades,Indiahasbecomeoneof

theworld’sleadingusersofanti-dumpingduties,filing20-25percentoftheglobalanti-dumping

cases(vastlydisproportionatelytoitsshareofglobalimports).Whilemostofthesedutieshave

been ina single sector (chemicals) anddonot seem tohavegreatly affected Indian imports,

flexibleuseofanti-dumpingdutiesagainstglobalcompetitorsraisesfearaboutIndia’swillingness

tobendtodomesticpoliticaleconomypressurestousesuchpolicies inothersectorsaswell.

Greaterself-restraintintheuseofantidumpingdutieswillsignalamorestabletraderegime.

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Fourth,aswehaveobservedearlier,Indianparticipationinglobalproductionnetworksisrather

limited, especially inmanufactures.While a number of factors drive this outcome (including

relativelypoortransportinfrastructureandtradefacilitation)highandpotentiallyvariabletariffs

aresurelyalsotoblame.

V.DomesticReforms

In addition to trade reforms and market access, improving India’s trade and effective

participation inglobalproductionnetworkswill requireanumberofdomestic improvements.

These include improvements indomestic transportand trade infrastructureand reforms that

increasetheproductivityofitsstagnatingmanufacturingsector.

The relatively weak performance of the manufacturing sector and the reasons for its low

productivity aremany (and are generallywell understood): Land acquisition for projects is a

majorhurdle.Theregulatoryframeworkthatneedstobeengagedinordertoinstallcapitaland

beginproductioniscumbersome--gettingthenecessarypermitsfromthevariousministriesis

highlychallenging.Taxesrelatingtodomesticandforeigninvestorshavebeenvariable,generate

unnecessary uncertainty for investors. Indian infrastructure clearly needs dramatic

improvement. Thetransportationnetworkremainsweak.Thequalityandcoverageof Indian

roadslagsfarbehindcountrieslikeChina,asdoIndia'sportfacilities.Energysupply,anecessary

input for production, remains low and variable. The need for infrastructural investments to

supporteconomicactivity isobvious.Overall, theeaseofstartinganddoingbusiness in India

remainslow,despiterecentimprovements.

Anadditional factor, thathasbeenwidelyrecognizedasan impedimenttothegrowthofthe

manufacturingsectoristhehighlyrestrictivesetoflaborlawsthatgovernemploymentinIndia.

TheIndustrialDisputesActrequiresfirmsemployingmorethan50–100workerstoobtainthe

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permissionofthegovernmentinordertoretrenchorlayoffworkers.Sincethispermissionisnot

easilyforthcoming,itraisestheeffectivecostoflaborusageinproductionandinducesdistortions

inlaborhiring.TheIndustrialEmploymentActregulatesthetermsandconditionsofworkand

appliestomanufacturingfirmsemployingover10workers.Whilenoonewouldarguethatwe

donotneedtohaveworkerprotectionsinthelaw,itseemsclearthatIndianlaborregulations,

astheystand,oftenworkagainsttheinterestsoflaboritself.Makingitdifficultorimpossibleto

fireworkersmakesfirmsreluctanttohireworkers,especiallyintoformaljobs.Thisimpliesthat

wehavealargerpoolofinformal“contract”workerswhodon’tenjoythelegalprotectionsand

jobsecuritythatthelawintendedfortheminthefirstplace.Restrictivelaborregulationscan

alsoinducefirmstooperatelessthanoptimally,forexample,byhiringfewerworkersthanthey

ideallyneedorbyshiftingtocapitalintensivemanufacturingtechniques,evenifthisiscostlyto

do.

Takentogether,thesefactorshaveconspiredtoensurethatIndianmanufacturinghasremained

both small in scale and (correspondingly) inefficient: nearly three-quarters of Indian

manufacturingworkers are employed in small firms (with less than 20workers each) which

collectively produce less than one quarter of Indianmanufacturing output. Reducingworker

"protections" in order to improve outcomes for workers and the promotion of scale in

manufacturingactivity(evenifitappearsbiasedagainstsmallenterprises)togainproductivity

areamongthenecessarychangesforIndianmanufacturingproductivitytorise.

The apparent lack of genuine interest in tackling these issues is an indicator of the political

difficulty inherent in bringing about the necessary changes. It also reflects a related and

significant ideationalchallenge:Havingput in labor regulations to reduceworkerexploitation

(itselfwidelyprevalent),howcanonenowrationalize their removal?Havingsupportedsmall

scale economic activity (including through the very restrictive small scale reservations policy

whichpermittedarangeofgoodstoonlybeproducedbysmallscalefirms)howcanonenow

promotelargescaleactivitiesinstead?Withoutsomehowpledgingimprovedoutcomesforevery

individualworker,howcanonegetdemocraticsupportforthesechanges?Thesequestionsneed

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tobetackledeffectivelyandsoon.RisingprotectionismintheadvancedcountriesandIndia’s

owndemographicpressuresdonotleavemuchroomfordelay.

Conclusions

Followingglobaltrends,Indiahassignedanumberofpreferentialtradeagreements.Ouranalysis

oftheIndia’stradeoutcomesundertheagreementssuggests,however,thatthetradesharesof

India’stradepartners(onboththeimportsandtheexportsside)havenotchangedmuchover

the last decade. This is primarily because India’s agreements, havehad gradual liberalization

schedules, so that implementation in many agreements was only recently completed and

implementationinyetothers isslatedtocompletedonlyyears later. India’sagreementshave

alsoinvolvedasignificantnumberofexclusions,sothatgoodswithlargemultilateraltariffshave

beenshieldedfromimportprotectioninbilateralsettingsaswell.Ontheonehand,thisanalysis

oftradeoutcomesrejectsalarmistclaimsconcerningimports,undertheseagreements,having

haddevastatingeffectsondomesticindustry.Ontheotherhand,thelackofasignificantimpact

ontradesharesmayleadtoaquestioningoftherelevanceofagreements.Regardlessofpast

outcomes,itisclearthat,goingforward,Indianeedstouseglobalmarketstopropelitseconomy.

Marketaccessisimportant,butdomesticproductivityandcompetitivenessisalsocrucial.How

Indiamanagesboth these issueswill crucially determine its development trajectoryover the

comingyears.

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ReferencesBhagwati,J.,1993,“RegionalismandMultilateralism:AnOverview,”InJaimedeMeloandArvindPanagariya,eds.,NewDimensionsinRegionalIntegration,CambridgeUniversityPress.Bhagwati, J., Krishna, P. and Panagariya, A., 1999, Trading Blocs: Alternative Approaches toAnalyzingPreferentialTradeAgreements,MITPress.

Robert,J.,andNoguera,G.,2012,Proximityandproductionfragmentation.AmericanEconomicReview,vol.102,No.3,pp.407-411.

Kawai,M.andWignaraja,G.,2011,Asia'sFreeTradeAgreements:HowisBusinessResponding?,Cheltenham(UK),EdwardElgar

Krishna.P.,“PreferentialTradeAgreementsandtheWorldTradeSystem:AMultilateralistView”,inFeenstraandTayloreditors,GlobalizationinanAgeofCrisis,NBER,UniversityofChicagoPress,2014

OECD,2019,FDIStocks,https://data.oecd.org/fdi/fdi-stocks.htm,AccessedJune1,2019.Panagariya, A., 2000, “Preferential Trade Liberalization: The Traditional Theory and NewDevelopments,”JournalofEconomicLiteratureSaraswat,V.K., Priya, P., andGhosh,G., 2017 , “ANoteonFreeTradeAgreements and theirCosts,”NITIAayog,NewDelhi.WorldTradeReport,2011,“TheWTOandPreferentialTradeAgreements,”WTO,GenevaWTO, 2019a, Article XXIV of the GATT, https://www.wto.org/english/tratop_e/region_e/region_art24_e.htm,AccessedJune1,2019WTO, 2019b, Special and Differential Provisions, https://www.wto.org/english/tratop_e/devel_e/dev_special_differential_provisions_e.htm,AccessedJune12019

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FigureI

Source:ConstructedfromIndianBudgetdocumentsanddatafromExport-Importbank

0% 5%

10% 15% 20% 25% 30% 35% 40% 45%

1 2 34.2

5.6

6.7

7.2

7.9

8.1

8.3

8.8

9.2 10

13.5

16.7 20 25

26.4

29.2

32.5 35

41.3 45 50 60

65.6

71.7

78.8

150

AverageMFNappliedtariffatHS6digitlevel

Percentagerevenuefromdifferenttarifflevels- India

Percentagerevenueatdifferenttarifflevels

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TabeI:India'sTradeAgreements

TradeAgreement Coverage Type Notification Dateofentryintoforce Signatories

India-Afghanistan Goods PSA EnablingClause 13-May-03 Afghanistan;IndiaIndia-Bhutan Goods FTA EnablingClause 29-Jul-06 Bhutan;IndiaIndia-Chile Goods PSA EnablingClause 17-Aug-07 Chile;IndiaIndia-Japan Goods&Services FTA&EIA GATTArt.XXIV&GATSArt.V 1-Aug-11 India;JapanIndia-Malaysia Goods&Services FTA&EIA EnablingClause&GATSArt.V 1-Jul-11 India;MalaysiaIndia-Nepal Goods PSA EnablingClause 27-Oct-09 India;NepalIndia-Singapore Goods&Services FTA&EIA GATTArt.XXIV&GATSArt.V 1-Aug-05 India;SingaporeIndia-SriLanka Goods FTA EnablingClause 15-Dec-01 SriLanka;IndiaIndia-Thailand Goods PSA EnablingClause 1-Sep-04 India;ThailandIndia-RepublicofKorea Goods&Services FTA&EIA 1-Jan-10 India;Korea,Republicof

India-ASEAN Goods&Services FTA&EIA EnablingClause&GATSArt.V 1-Jan-10 India;BruneiDarussalam;Myanmar;Cambodia;Indonesia;LaoPeople'sDemocraticRepublic;Malaysia;Philippines;Singapore;VietNam;ThailandAsiaPacificTradeAgreement(APTA) Goods&Services PSA&EIA EnablingClause&GATSArt.V 17-Jun-76 Bangladesh;SriLanka;China;India;Korea,Republicof;LaoPeople'sDemocraticRepublicSouthAsianFreeTradeAgreement(SAFTA) Goods FTA EnablingClause 1-Jan-06 Afghanistan;Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthAsianPreferentialTradeArrangement(SAPTA) Goods PSA EnablingClause 7-Dec-95 Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthernCommonMarket(MERCOSUR)-India Goods PSA EnablingClause 1-Jun-09 India;Argentina;Brazil;Paraguay;Uruguay

TradeAgreement Signatories

India-Afghanistan Afghanistan;IndiaIndia-Bhutan Bhutan;IndiaIndia-Chile Chile;IndiaIndia-Japan India;JapanIndia-Malaysia India;MalaysiaIndia-Nepal India;NepalIndia-Singapore India;SingaporeIndia-SriLanka SriLanka;IndiaIndia-Thailand India;ThailandIndia-RepublicofKorea India;Korea,Republicof

India-ASEAN India;BruneiDarussalam;Myanmar;Cambodia;Indonesia;LaoPeople'sDemocraticRepublic;Malaysia;Philippines;Singapore;VietNam;ThailandAsiaPacificTradeAgreement(APTA) Bangladesh;SriLanka;China;India;Korea,Republicof;LaoPeople'sDemocraticRepublicSouthAsianFreeTradeAgreement(SAFTA) Afghanistan;Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthAsianPreferentialTradeArrangement(SAPTA) Bangladesh;Bhutan;SriLanka;India;Maldives;Nepal;PakistanSouthernCommonMarket(MERCOSUR)-India India;Argentina;Brazil;Paraguay;Uruguay

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TableII:TradeShares

2007 2017

ImportShare ExportShare TradeBalanceShare ImportShare ExportShare TradeBalanceShare

India-Bilateral 13.3 13.7 12.6 11.8 14 7.5

India-Afghanistan 0.3 0.1 -0.19 0.09 0.21 -0.15India-Bhutan 0.09 0.04 0.18 0.05 0.13 -0.13India-Chile 0.86 0.15 2.27 0.25 0.25 0.63India-Japan 2.7 2.2 3.5 2.3 1.52 3.9India-Malaysia 2.6 1.27 5.3 2 1.8 2.2India-Nepal 0.2 0.8 -1 0.09 1.8 -3.4India-Singapore 3.1 4.3 0.7 1.6 3.9 -2.9India-SriLanka 0.2 1.7 -3 0.15 0.15 -2.5India-Thailand 1 1.1 0.7 1.4 1.2 1.9India-RepublicofKorea 2.5 1.7 4 3.6 1.5 7.8

India-ASEAN 9.6 9.5 9.9 10.2 12 6.6AsiaPacificTradeAgreement(APTA) 2.7 4.8 -1.39 3.9 5.4 10SouthAsianFreeTradeAgreement(SAFTA) 0.7 5.2 -8.2 0.5 6.6 -11.5India-SouthernCommonMarket(MERCOSUR) 0.7 1.5 -0.8 1.7 1.3 2.6

India-China 11.2 6.5 20.7 16.1 4.2 39.7India-USA 6.4 13.7 -8.1 5.4 15.6 -14.6India-EU 14.8 21.7 1 9.9 17 -4.65

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Table III: Trade Under Preferences (2008)

Regime MFN=0 Trade

Total PM > 10% PM < 10% Total MFN > 10% MFN< 10% Billions (USD)

MFN 0 0 0 44.8 4.9 40 53.9 4874

EU-intra 63.7 9.4 54.3 0 0 0 34.4 3807 Reciprocal Regimes 43.7 5.8 37.9 7.6 1 6.6 47 2803

NAFTA 60.9 6.3 54.7 0.1 0 0 38.2 912

EU - Switzerland 56.9 3.9 53 1.3 0.5 0.8 41 261 ASEAN* 20.1 4 16 3.6 0.3 3.3 72.9 141

EU-Turkey 78.4 15.2 63.2 0.9 0.5 0.4 20 141

EU-Mexico 51.2 13.5 37.7 0.9 0.6 0.3 43.2 58 Non-Reciprocal Regimes 17.6 1 16.6 26.3 5.4 21 55.6 2067

EU-GSP 13.3 0.1 13.2 23 5.7 17.3 63.4 1012

US-GSP 8.3 0.2 8.1 62.4 5.6 56.8 28.8 258

US-AGOA 90.1 1.5 88.6 0.1 0 0 9.9 84

Source;WorldTradeReview2011

Preferential Trade Non-Preferential Trade

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Preferential Trade Agreement

Export Import Export Import Export Import

ANDEAN Community 94 93 7 8 93 92

ASEAN Free Trade Area (AFTA) 966 929 25 24 75 76

Asia Pacific Trade Agreement (APTA) 2043 1897 11 19 89 81

Caribbean Community and Common Market (CARICOM) 26 29 16 12 84 88

Central American Common Market (CACM) 25 44 24 11 76 89

Common Market for Eastern and Southern Africa (COMESA) 57 115 10 5 90 95

Commonwealth of Independent States (CIS) 693 456 18 27 82 73

Economic Community of West African States (ECOWAS) 71 58 8 9 92 91

European Free Trade Association (EFTA) 374 279 1 1 99 99

European Union (27) 5806 6083 67 60 33 40

Global System of Trade Preferences (GSTP) 1437 1486 19 22 81 78

Gulf Cooperation Council 704 366 2 7 98 93

Latin American Integration Association 814 760 16 18 84 82

North American Free Trade Agreement (NAFTA) 2047 2882 49 33 51 67

Pan-Arab Free Trade Area (PAFTA) 892 607 6 11 94 89

South Asian Free Trade Agreement (SAFTA) 211 374 6 2 94 98

Southern Common Market (MERCOSUR) 278 249 17 18 83 82

Source:WorldTradeReview2011

Table IV: Intra-PTA and Extra-PTA Trade (2008)

World (Billions USD) Intra-PTA Share Extra-PTA Share