The formal signing of the India-UK Comprehensive Economic and Trade Agreement (CETA) headlined Prime Minister Narendra Modi’s visit to the UK. Since leaving the EU, “Global” Britain has been on a spree to conclude or join FTAs. After a period of FTA pause, India, too, is on an accelerated pursuit of trade agreements. Though neither is the other’s major trading partner, the salience of CETA lies in the symbolism and substance, the future potential, the many tangible and intangible dimensions of this partnership, and the infusion of strength into a relationship that faces challenges not from customary colonial memories, but from contemporary challenges to India’s security and integrity.
CETA’s significance also derives from its ambition. FTAs either cover areas that fall within the mandate of the WTO or go deeper in covering commitments and harmonisation on a range of national economic policy issues to facilitate stronger economic partnership among signatories. CETA embodies the latter. The two governments have hailed CETA as a landmark agreement because of the balance of openings and protections, coverage and scope and also because, from India’s standpoint, it is the first comprehensive one with a major Western partner that defines the template for others, including with the EU.
CETA is historic for another reason. It is an important milestone in India’s — as in the world’s — growing reliance on bilateralism and regionalism at a time when the multilateral trade regime is eroding as its architect, which is still the world’s most powerful economy, turns its back on it. President Donald Trump has abandoned the foundational principle of the global trade regime. As in other domains, the US no longer finds the system it created useful or attractive. Trump has accelerated a longer-term trend in the US since the Global Financial Crisis (GFC) of 2008 towards trade hesitancy, if not hostility, and protectionism, through the successive tenures of presidents Barack Obama, Trump and Joe Biden. There is a bipartisan consensus that the US will not surrender its sovereignty to the binding rule-making role of the WTO. The current sentiments will continue to shape the US political economy.
For the US and the West broadly, the problem has deeper structural roots in the consequences of the recent wave of globalisation that began in the 1970s and peaked by the time of the GFC. The first wave of globalisation from 1870 to 1914 led to the concentration of prosperity and power in the industrialising West and America’s rise as a major power. By contrast, the recent phase triggered Asia’s rise, China’s emergence as a major power and the West’s relative decline with disruptive political consequences in the advanced countries. In particular, it has resulted in China’s extraordinary accumulation of industrial and technological power and dominance in key industries and supply chains in a fundamentally different political and economic system, incongruous with a transparent trade regime. The concentration risk was laid bare by the Covid pandemic. Further, the sharpening geopolitical competition has manifested in trade and technology. The war in Ukraine deepened shifts and uncertainty. Together, these factors have put globalism and its scaffolding under extreme stress.
Calls for reshoring and industrial sovereignty face limitations of lost capabilities, and deeply entrenched Global Value Chains (GVCs) that various estimates put at 50-70 per cent of global trade. Trade remains essential for all nations. But as nations seek to derisk, diversify and rebalance trade relations in a world in flux, they seek long-term commitment, trust, assurance and resilience through bilateral and regional agreements. The number of such agreements, although within the WTO framework, has risen rapidly in the past two decades, with an increase in momentum after the GFC and the Covid pandemic.
Trump’s strategy will accelerate the trend. For one, despite his impetuosity, the legislative uncertainty of his authority and questionable enforceability of the “deals”, countries are seeking exclusive and competitive bilateral agreements with the US. At the same time, hedging strategies, against both US unpredictability and China’s dominance, will trigger new bilateral or regional agreements, as well as expansion, restructuring and interlocking of existing regional agreements: The Trans Pacific Partnership was resuscitated as the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) after the US’s exit.
India’s preferred path is more manageable bilateral agreements with countries or groupings rather than participation in regional agreements. India signed a spate of agreements during the UPA era, mostly in Asia. However, not all of them were with competitors like ASEAN, but also with complementary economies like Japan and Korea. That these agreements had disappointing outcomes was as much due to their terms as to our lack of competitiveness. Their lessons are shaping the choice of partners and the terms of the agreements, and alignment with domestic policies and incentives.
Nonetheless, global trends point to an enhanced need for comprehensive FTAs. With the atrophying of the predictable, non-discriminatory global trade regime, FTAs will become determinants of competitiveness. These have become essential for creating opportunities for our services sector and mobility of our professionals, and for access to critical minerals, technology, innovation and energy.
Above all, there is a strong correlation between high-quality FTAs and the GVCs.
Assured integration into GVCs will serve our twin objectives of rapid industrialisation and export growth at scale. It is even more critical now as various studies estimate the share of potential bottleneck products in global trade to have doubled since 2000 to around 20 per cent, with almost 66 per cent of the share of the global export value in these products now coming from East Asia-Pacific. This also means that, besides the new FTA with Australia, we must revisit the CEPA/CECA with Japan, Korea and Singapore, not just to improve their terms but also for assured access to critical inputs to fully exploit the potential of FTAs with Western partners. This will also require finding a modus vivendi with China.
As India pursues its national transformation at a time of global disorder, shaping our external economic engagement strategically is both a geopolitical necessity and an economic imperative.
The writer is a retired ambassador
