Good deals take homework

Domestic policy inevitably spills over into trade talk

Updated: May 4, 2014 11:31 pm
Domestic regulations have also become critical for implementing the ASEAN-India services FTA. Domestic regulations have also become critical for implementing the ASEAN-India services FTA.

By: Amitendu Palit

Domestic policy inevitably spills over into trade talk

India is negotiating several free trade agreements (FTAs). Some of these, such as the India-EU FTA, have been negotiated for several years. India is also negotiating a trade in services agreement with the ASEAN for some time now. Recently, India began negotiating the Regional Comprehensive Economic Partnership (RCEP) with the 10-member ASEAN group, Australia, China, Japan, Korea and New Zealand. It is also at a fairly advanced stage in negotiating bilateral FTAs with Australia and Canada. It also needs to prepare for negotiations at the WTO for implementing the Bali Package and for the consideration of more issues from the Doha Development Agenda (DDA).

Despite being discussed for seven years, the India-EU FTA could not be finalised due to a lack of consensus on some key issues. The EU has been demanding greater relaxation of foreign investment ceilings in insurance and banking, stronger protection of intellectual property, the opening up of public procurement markets, and lower import duties on passenger cars. India wants greater access for pharmaceuticals in the European market, along with more liberal visa norms for its professionals. Satisfying some of the EU’s demands would require changing domestic policy regulations in banking, insurance, intellectual property and public procurement. Unless these regulations change, the FTA is unlikely to move.

Domestic regulations have also become critical for implementing the ASEAN-India services FTA. Indonesia and Thailand are unlikely to ratify the deal unless foreign retailers are allowed unconditional access to India’s domestic retail trade. The Philippines has not ratified the deal either, as it wants greater protection for its domestic IT services and occupations. If these demands have come up on the ASEAN-India FTA, they are also likely to be raised on the RCEP. Indeed, negotiations for the RCEP, which aim at securing comprehensive market access in goods and services over and above what is currently available in the various bilateral FTAs of the ASEAN, could see India facing some of the market access demands it has faced in negotiations with the EU.

The pending and ongoing FTA negotiations are unlikely to mature unless India commits to some essential domestic reforms. Trade negotiations are no longer confined to talking tariffs; they now involve extensive discussions on “behind the border” issues impacting domestic regulations. This complicates India’s ongoing negotiations. It might also result in some negotiations remaining fruitless, as India may not be able to commit decisively on certain domestic reforms.

Retail, for example, can hold back the India-ASEAN FTA in services. There is little possibility of India allowing foreign investors greater access in retail in the near future. The BJP has emphatically ruled out FDI in multibrand retail. Indeed, there could actually be a rollback of the current policy, allowing 51 per cent FDI in multi-brand retail, if the BJP comes to power after the elections and sticks to its manifesto. But while the BJP might be stubborn on retail, it might be proactive in allowing greater foreign investment in other sectors, including insurance. This might boost the chances of concluding the India-EU FTA.

Foreign investment apart, India’s FTA negotiations would increasingly encounter issues that it has traditionally avoided in trade talks. Intellectual property is going to be one of these, as will government procurement. Developing an intellectual property regime consistent with national interests and imbibing OECD characteristics is not going to be easy. Matters are not going to be helped by the US’s increasing irritation over India’s patent laws. India’s reputation as a country with weak enforcement of intellectual property laws has spread far. Such impressions, unfortunately, influence negotiator mindsets, particularly in the case of OECD countries.

Similarly, on opening up public procurement markets to foreign investors, little action is expected even after the passage of the public procurement bill. Interestingly, China has submitted offers at the WTO with commitments to open up both its central and provincial procurement markets, and it should soon be a part of the multilateral government procurement agreement.

More vexing issues connected to domestic policies will surface in India’s trade agenda in the coming months. The new government will have to explain to the rest of the WTO the rationale for continuing with more than the sanctioned volume of public stockholding of foodgrain. No party, though, is expected to scrap the Food Security Act, which requires such holding. Nor is the WTO expected to convert the interim relief granted to India at Bali into a permanent measure.

For the new government, it is important to set the trade agenda with the fundamental realisation that trade policy cannot be exclusive of domestic policy. Making the two exclusive would be counterproductive. Both India and its negotiating partners would waste precious time and resources in FTA talks. FTAs would be either stalled or enacted as shallow frameworks with limited coverage and insignificant benefits. And India would continue to consolidate its global image as a difficult and obstructive trade partner.
The writer, formerly with the Union finance ministry, is head (partnership and programme) and senior research fellow at the Institute of South Asian Studies in the National University of Singapore. Views are personal

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