What should India make of Asian free-trade pacts?

The United States is deeply concerned about the effect of the China-ASEAN free-trade agreement (FTA), nursing justified fears that it would adversely affect American economic interests in Asia. China, on the other hand, was the primary beneficiary of the FTA, giving itself preferential access to South East Asian markets — initially to the six (richer) ‘old’ ASEAN countries, and subsequently the remaining four.

The eventual plan is for South Korea, Japan and India to join the club leading to the establishment of an ‘East Asian Community’.

The Indian Express argues that the free-trade hoopla with ASEAN is quite alright from a political perspective — giving India a ringside seat in a regional club — but does not quite bring significant economic benefits.

The fact is that the benefit to India from entering an RTA is limited when it is dealing with a zone that includes countries that are already free-trading. The benefits would be much higher if we were dealing with countries with high levels of tariffs, because then we would not have to face those tariffs after the agreement. In contrast, it is in their interest that India lowers tariff barriers for them. Since India is a high tariff economy, an RTA gives members a clear benefit, but if the partner already has zero tariffs, Indian exporters do not stand to gain. The RTA does not give Indian exporters additional market access. [IE]

This argument rests on the mistaken reasoning that tariff barriers are somehow good for the Indian economy. Tariffs have the effect of shielding domestic manufacturers from competition at the cost of consumers, who end up paying more for usually substandard products.

Moreover the prevailing political dynamics in India make it extremely difficult for an enlightened government — even if it is led by a reformist-economist —- to cut tariffs on its own. Yet, unless these tariffs are cut, not only will Indian consumers continue get a raw deal, Indian manufacturers too will find it difficult to penetrate foreign markets. This is not because they lack market access opportunities, but because they are not competitive enough.

Regional free-trade agreements would set the pace for lowering tariff barriers and compel India to synchronise its reform clock with its regional counterparts. For this reason alone, it makes plenty of sense for India to sign the dotted line.

While the jury is still out whether India would be able to unshackle its manufacturing sector in time, India needs to ensure that its knowledge industries are not shackled by new forms of trade barriers — for example, protectionist data security/privacy laws designed to block outsourcing. These are the areas where Indian trade negotiators need to go on the offensive and prevent countries or communities from weaving the knowledge-economy’s version of ‘spagetti bowl’ regulations and political preferences.

3 thoughts on “What should India make of Asian free-trade pacts?”

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  2. I couldn’t agree more with your point about the harmful effects of tariffs. What’s unfortunate is how widespread the “tariffs are good” mentality is even among people supporting economic liberalization, such as the IE’s editors. On a similar vein, I had a discussion with a cousin living in India in which he voiced his support for things like privatization and foreign investment, and called Nehru “a fool for India”, but still thought that tariffs were useful in helping Indian manufacturers. On the bright side, there have been remarks as of late from the government about gradually bringing India’s tariff structure in line with regional levels.

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