Thoughts from Thailand

Prime Minister Manmohan Singh8217;s present sojourn to Thailand puts the focus once again on the Free Trade Agreements FTAs that India has signed. The prime minister has stated that he would like to take a 8220;hard look8221; at them. Under the NDA government, FTAs were signed with Asian neighbours like Sri Lanka and Singapore. Steps are to be taken for the creation of free trading areas within South Asia and among the members of the ASEAN. The purpose of FTAs is to eliminate tariffs against FTA members while retaining them on non-members. Economists have criticised FTAs, which may promote better political ties with neighbouring countries, but are not based on sound economic principles. For starters, FTAs lead to trade diversion, rather than trade creation. So, for example, instead of importing steel from Europe, a producer would import it from Singapore. This does not help the Indian economy. Moreover, as long as Singapore does not satisfy the entire Indian demand for imported steel, the price of steel in India does not fall. 8216;Rules of origin8217; on which FTAs are based mean that only steel produced in Singapore can be imported under preferential tariffs 8212; there will be zero tariff only when there is a minimum percentage of value added in Singapore.

The benefit to India from entering an FTA is limited when India is dealing with a free-trading country. Since India is a high tariff economy, an FTA gives the partner a clear benefit, but if the partner already has zero tariffs, Indian exporters do not stand to gain. The FTA does not give Indian exporters additional market access. While India has an average custom to total import ratio of around 20 per cent, Singapore is a zero tariff zone, Sri Lanka8217;s is much lower at 5 per cent and Thailand 8212; with whom the next FTA is proposed to be signed 8212; has custom collections at 3.8 per cent of total imports. Indian exporters gain little by getting preferential tariffs in these countries. It is their exporters who stand to gain. India loses the custom duties that would have been collected on their exports. Indeed, there is a further huge cost to India. This is in terms of creating a whole bureaucracy which sits at custom points and checks whether goods coming from FTA partners satisfy 8216;Rules of origin8217;. Documentation would be provided to them which would need to show the percentage of value addition in Thailand for something being imported from Thailand. This could provide scope for corruption.

On a global scale, too, India8217;s interests are better served if there are less RTAs and there is greater multilateral tariff reduction. India already faces discrimination in the US and Europe because of numerous FTAs that already exist. India8217;s interest, therefore, lies in the multilateral route through the WTO. The trend towards regional agreements is against Indian interests.