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Free Trade Agreements: ‘If inefficient local players lose to cheap foreign goods, it’s good for consumers’

In June this year, India reviewed its FTA with South Korea, with which it had a trade deficit of around $10 billion in 2015-16.

Written by Pranav Mukul | New Delhi |
October 17, 2016 1:04:11 am

At a time when the centre is carrying out a review of major trade pacts on concerns voiced by the industry over the negative balance of trade with respect to a majority of free trade agreements (FTAs) signed by India, a key policymaker in the government has said that one of the compelling views that needs to be kept in mind is that if cheaper foreign goods were to weed out inefficient local producers, the price competitiveness does prove to be beneficial for the consumer. If, however, trade diversion happens when tariff preferences offered under an FTA causes a shift of imports from firms in non FTA member countries to less efficient firms within the free trade bloc, which now become competitive purely due to tariff reliefs, that could be a cause of concern, he added.

“In my opinion, we should rollback all our tariffs at 5 per cent. Right now because of the high tariffs, we feel cheated. We feel that we’re giving so much of preference and not getting anything in return. The trick in this whole game is just knock it (tariffs) out. Our complaints generally are that they benefitted more than we did,” a senior NDA government official told The Indian Express.

“This is where the economics clashes with politics. If their exports to us expanded more than our exports to them expanded, we think that it is a loss for us,” the official added.

At an event in the capital in September, a top commerce ministry representative had also said that the Centre was reviewing trade pacts with its partners on concerns voiced by the industry, suggesting that one of the reasons for the review was that Indian exporters have not had the opportunity to fully exploit the FTAs to their favour.

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“Economists look at it differently, if their goods came in and that improves my efficiency, because some of my inefficient producers lost out, my buyers get a lower price. That’s a benefit not a cost,” said the aforementioned government official.

In June this year, India reviewed its FTA with South Korea, with which it had a trade deficit of around $10 billion in 2015-16. Even at that time the domestic steel firms wanted its products to be out of the scope of FTA with South Korea as well as Japan following a surge in cheaper steel imports hurting local industry. One of the key reasons for the imported steel items being cheaper compared with the locally produced goods was the tariff advantages these countries had on account of the FTAs signed with India, which provided for duty concessions on these products.

Last month, industry body Indian Primary Copper Producers Association had also approached Cabinet Secretary PK Sinha requesting him to consider reviewing the FTAs with Japan and ASEAN countries, among other measures, to protect the local manufacturers from imports of the metal that are to the tune of $1 billion a year.

“If there’s no trade diversion from someone else, and those imports still continue, and the imports from my trade partner expanded at the expanded at the expense of my domestic producer, obviously he was inefficient. So then the price will drop, and the gains will go to my consumers. Politically, the moment you say the displacement of my domestic producer is a good thing, people will question it,” the official said.

Trade diversion happens when tariff preferences offered under an FTA causes a shift of imports from firms in non FTA member countries to less efficient firms within the trade bloc, which now become competitive due to tariff reliefs.

The World Economic Forum’s Global Competitiveness Report 2016-17 said that benefits of “openness” in trading economies, which “generates incentives and to innovate and invest in new technologies because firms are exposed to competition and new ideas and can benefit from the technology transfer that comes from imports and foreign investment” were also at risk. This was mainly because of protectionist measures being taken by countries, especially non-tariff barriers.

According to the said report, while India ranked 47th in the world according to prevalence of non-tariff trade barriers, it stood 123rd out of 138 countries ranked according to weighted average tariff rate, indicating a high tariff regime in the country.

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