Escaping pitfalls through prudence

The World Trade Organisation (WTO), in its latest Global Trade Outlook and Statistics, April 2024, has made a guardedly optimistic forecast for the current and next year. The report says:

· The world merchandise trade volume is expected to grow 2.6 per cent in 2024 and 3.3 per cent in 2025 as demand for traded goods rebounds following a contraction in 2023. Trade volume was down 1.2 per cent in 2023 after recording 3.0 per cent expansion in 2022 despite the outbreak of war in Ukraine. However, there is a high degree of uncertainty associated with the current forecast due to the large number of risk factors present in the global economy, including regional conflicts, geopolitical tensions, and rising protectionism.

· World trade has been remarkably resilient in recent years despite the presence of several major economic shocks. By the end of 2023, merchandise trade volume was up 6.3 per cent compared to 2019. Commercial services also increased, with annual USD values up 21 per cent between 2019 and 2023.

· The current US dollar value of world merchandise trade (as measured by the average of exports and imports) was down 5 per cent in 2023 to USD 24.01 trillion. The decline on the export side was led by the Russian Federation, whose exports plunged 28 per cent, as well as by manufacturing-oriented Asian economies, including China (-5 per cent), Japan (-4 per cent) and the Republic of Korea (-8 per cent).

· Other major economies saw smaller declines or even modest increases, including the United States (-2 per cent), Germany (+1 per cent), and Mexico (+3 per cent). Taken as a whole, the European Union’s exports to the rest of the world were up 2 per cent while intra-EU trade was down 1 per cent, leaving total exports flat in US dollar terms.

· In contrast to merchandise trade, the US dollar value of world trade in commercial services was up 9 per cent in 2023 to USD 7.54 trillion as spending on travel and other services continued to recover from the COVID-19 pandemic. The increase in services trade offset the contraction of goods trade in 2023, leaving world goods and commercial services exports on a balance of payments basis down in 2023 at USD 30.8 trillion.

· World real GDP growth at market exchange rates slowed from 3.1 per cent in 2022 to 2.7 per cent in 2023 but is expected to remain mostly stable over the next two years at 2.6 per cent in 2024 and 2.7 per cent in 2025.

· In 2024 and 2025, inflation is expected to gradually abate, allowing real incomes to grow again in advanced economies, boosting consumption of manufactured goods.

In this piece we shall restrict our discussion on the following three issues:

(i) Review of India’s current trade data;

(ii) Brief review of FTA-centric foreign trade policies the government of India has pursued during the last two decades;

(iii) Review of the major issues and challenges of the proposed India-UK FTA in the light of two new governments elected to power—a new Labour government in the UK and a coalition government in India.

Review of India’s trade data

Against this global scenario, in FY 2023, India exported USD 776.68 bn and imported USD 854.80 bn, resulting in a trade balance of USD -78.12 bn. Compared to the previous year 2022-23, the trade balance has reduced. Merchandise export has also declined though service export has increased marginally. See table 1 for details. Though total trade figures remained same in 2023-24 and the previous year, in 2023-24 imports have declined, resulting in a reduction in trade deficit.

The top 15 trading partners (in terms of value) of India are: China (1st), the USA (2nd), the UAE (3rd), Russia (4th), Saudi Arabia (5th), Singapore (6th), Iraq (7th), Indonesia (8th), Hong Kong (9th), the Republic of Korea (10th), the Netherlands (11th) Germany (12th), Australia (13th), Switzerland (14th), and Japan (15th)

Trade data published by the Department of Commerce, Ministry of Commerce and Industries, indicate that in 2023-24, out of the top 15 trading partners of India, India enjoyed trade surplus with only one country—the USA. With the rest of the 14, India ended up with a trade deficit—negative balance of trade.

China has emerged as India's largest trading partner with USD 118.4 billion of two-way commerce in 2023-24, edging past the US. The bilateral trade between India and the US stood at USD 118.28 billion in 2023-24. The USA was the top trading partner of New Delhi during 2021-22 and 2022-23.

India had a trade surplus of USD 36.74 billion with the US in 2023-24—the only country in the list of top 15 trade partners. India also has a trade surplus with minor trade partners—the UK, Belgium, Italy, France and Bangladesh. In 2023-24, the trade deficit with China rose to USD 85 billion, Russia to USD 57.2 billion, Korea to USD 14.71 billion and Hong Kong to USD 12.2 billion against USD 83.2 billion, USD 43 billion, USD 14.57 billion and USD 8.38 billion, respectively, in 2022-23.

Trade experts view that a deficit is not always bad if a country is importing raw materials or intermediary products to boost manufacturing and exports. Economic think tank Global Trade Research Initiative (GTRI) said that a bilateral trade deficit with a country isn't a major issue unless it makes us overly reliant on that country's critical supplies. However, one of the latest UNCTAD studies suggests that India’s trade dependence on the EU and China increased 1 per cent and 1.2 per cent, respectively, while that on Saudi Arabia fell 0.5 per cent in the 1st quarter of 2024.

India’s trade configurations with China and the USA

The dependence on China for various raw materials (APIs, basic chemicals, agro-intermediates) and crucial components (auto, durables, capital goods) is disproportionate. According to import-export data, China accounts for 20 per cent of car parts and 70 per cent of electrical components imported. Similarly, 45 per cent of consumer durables, 70 per cent of APIs, and 40 per cent of leather items are imported from China to India. It may be noted that India’s exports to China include iron ore, cotton yarn/fabrics/made-up, handloom products, spices, fruits and vegetables, as well as plastic and linoleum. Meanwhile, imports from China include high-tech gear like telecom and smartphone parts, laptop and PCs, as well as industrial inputs such as plastic, iron and steel, and chemicals. It is feared that India may become a dumping ground for Chinese products such as Electric Vehicles (EVs), batteries and other new technology items with the US raising tariffs on these imports from Beijing.

US goods exports to India in 2022 were at USD 47.2 billion, up 17.9 per cent (USD 7.2 billion) from 2021 and up 113 per cent from 2012. US goods imports from India totalled USD 85.5 billion in 2022, up 16.7 per cent (USD 12.2 billion) from 2021, and up 111 per cent from 2012. US exports to India account for 2.3 per cent of overall US exports in 2022. The US goods trade deficit with India was USD 38.4 billion in 2022, a 15.2 per cent increase (USD 5.1 billion) over 2021.

US exports of services to India were an estimated USD 25.9 billion in 2022, 40.0 per cent (USD 7.4 billion) more than 2021, and 131 per cent greater than 2012 levels. US imports of services from India were an estimated USD 33.2 billion in 2022, 14.6 per cent (USD 4.2 billion) more than 2021, and 77 per cent greater than 2012 levels. Leading services exports from the US to India were in the travel, intellectual property, and financial services sectors. The United States had a services trade deficit of an estimated USD 7.4 billion with India in 2022, down 30.0 per cent from 2021.

FTA-centric foreign trade policy

Trade experts believe that an important task of the new government in New Delhi is the need to review India’s approach to negotiations for free trade agreements (FTAs), particularly those with the developed countries. Non-tariff barriers are more effective than tariffs in regulating trade. Although the government is considering more free trade agreements that address tariff walls, the post-pandemic proliferation of non-tariff barriers (NTBs) are threatening to undo the trade liberalisation plans. Reports suggest that the key Indian exports that routinely face high NTBs are chillies, tea, basmati rice, milk, poultry, bovine meat, fish, chemical products to the EU; sesame seed, shrimps, medicines, apparels to Japan; food, meat, fish, dairy and industrial products to China. According to an assessment, 80 per cent of India’s trade is subject to some or the other non-tariff barrier.

Study reveals that India’s foreign trade policy lacks any clear direction (D Dey, Madhyam Briefing Paper #56, November 23, 2022). The confused stands India has taken while negotiating the Regional Comprehensive Economic Partnership (RCEP), India-Australia Comprehensive Economic Cooperation Agreement (CECA), Indo-Pacific Economic Framework (IPEE), India-EU Broad Based Trade and Investment Agreement (BTIA), are cases in point.

India has signed 13 FTAs and six preferential agreements; all of these differ in scope and nature. However, their experiences with the existing FTAs are not rewarding. According to Global Trade Research Initiative (GTRI), during 2019-24 fiscal years, India's imports from free trade agreement (FTA) partners went up from 38 per cent to USD 187.92 billion. And the country's exports to the FTA partners rose by 14.48 per cent to USD 122.72 billion in 2023-24, from USD 107.20 billion in 2018-19. High import dependence of India has adversely affected the manufacturing sector. The World Bank’s National Accounts data on manufacturing, for India, China, and the World between 2005 and 2022, reveals that India’s share of manufacturing value added as a percentage of GDP was 16 per cent in 2005 which declined to 13 per cent in 2022. Since 2013, India’s share has remained below the global average. But during this period, China remained far ahead of India with a share of 32 per cent in 2005 and 28 per cent in 2022.

India’s previous FTAs were primarily with Asian countries, but recent deals demonstrate India’s ambition to be more global. India’s new FTA strategy is partly guided by the need to have reliable and sustainable supply chain allies that align with the Indian government’s priority to build resilient supply chains and integrate firms into production while playing a strategic role in the region. At present, Indian suppliers account for a mere 1.3 per cent of the world’s GVC exports. Indian policymakers believe that the changing geo-strategic and political dynamics present an opportunity for India to partner with countries, such as the United States (US), the United Kingdom (UK), EU, and Canada, and ease their supply-chain vulnerabilities, especially post-Covid. Against this background the proposed India-UK FTA should be analysed.

Proposed India-UK FTA

It is reported that Britain's Prime Minister Keir Starmer and India's Prime Minister Narendra Modi have agreed to push for an early conclusion of the India-UK FTA. Key issues include market access for Indian professionals and goods, and tariff reductions on UK exports like scotch whiskey and electric vehicles. The discussions also cover a bilateral investment treaty and other trade-related topics. Since January 2022, India and the United Kingdom (UK) have undergone 14 rounds of negotiations with a target to significantly enhance bilateral trading partnership between the two Commonwealth member nations.

The bilateral trade between India and the UK increased to USD 21.34 billion in 2023-24, from 20.36 billion in 2022-23. Estimates show that securing a free trade agreement with India could almost double UK exports to India. It will boost Britain’s total trade by as much as £28 billion a year by 2035 and increase wages across the UK regions by £3 billion. It is expected that under the proposed free trade agreement between the two countries, India's high quality labour-intensive goods such as apparel, footwear, carpets and cars will benefit from the removal of import duties by the UK.

However, a study by Global Trade Research Institute (GTRI) reveals that the India-UK free trade agreement (FTA) would not yield any substantial benefits for India, as many of its exports to the UK already enjoy low or zero tariffs. On the contrary, the UK is likely to gain more as UK exports face stiff tariffs in India, particularly on items like cars, scotch whisky and wines. GTRI study has also flagged few other important issues and advised Indian negotiators to be wary of those moves like proposed carbon tax, non-trade issues such as labour standard, environment, gender, and digital trade. They have also advised not to agree to free cross-border data flows since ownership of national data is crucial for developing public services.

The most controversial issue in the current FTA negotiation is the protection of Intellectual Property Rights (IPR). Bloomberg has reported that leaked documents from negotiations showed that the UK wants India to tighten its IP laws in the free trade agreement under negotiation. This would give patent protection to medications for longer than they currently get in South Asian countries. The Rules of Origin is another sticky issue. India fears that Chinese goods could be routed through the UK, as Chinese companies are gradually increasing their presence in the UK industry. The proposed FTA may also introduce non-tariff barriers aimed at promoting sustainability. Sustainability is a critical concern for India, and its impact on the garment sector must be thoroughly analysed. It is feared that this issue may lead to challenges in meeting stringent sustainability criteria, potentially affecting India’s market access under the FTA.

Observations

It is expected that the Labour government in London would like to conclude the India-UK free trade agreement (FTA) at the earliest, as the UK would be the net gainer. The electoral promises of the Prime Minister Keir Starmer during the poll campaign gave a clear indication to it. He talked about deepening cooperation with India in areas like “security, education, technology and climate change.”

Indian negotiators should be extra vigilant while dealing with contentious issues like the Carbon Border Adjustment Mechanism (CBAM), Intellectual Property Rights (IPR), Rules of Origin, non-tariff barriers like sanitary and phyto sanitary measures, and sustainability and labour standards.

After losing their most lucrative colony in America, the British colonial power made the Indian subcontinent as their main colony for economic plunder. Now the UK’s economy is in crisis again as it has officially entered into recession; its GDP contracted by 0.3 per cent in the fourth quarter of 2023. It is very likely that the UK will again rely on India to get out of its crisis. India should negotiate carefully.

Views expressed are personal