[Answered]“Free Trade Agreements with other countries do not guarantee economic growth or boost exports to other countries.” Critically examine.

Demand of the question

Introduction. Contextual Introduction.

Body. Show FTAs doesn’t guarantee economic growth. Reasons behind failure of FTAs in boosting Indian economic growth.

Conclusion. Way forward.

FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between them. The last two decades have witnessed a spurt in Free Trade Agreements (FTAs) around the world. India has been no exception to this trend.As of 2019, India had 16 such agreements in force. Various studies have convincingly illustrated that from a market access perspective, India has not gained from its FTAs. Although India’s overall trade in goods has grown with FTA partner countries, the increase in imports has outweighed that in exports, causing the bilateral trade balance to deteriorate with FTA partners.

 Free Trade Agreements- not a guarantee of economic growth:

  1. India’s exports to FTA countries has not outperformed overall export growth or exports to rest of the world.
  2. FTAs have led to increased imports and exports, although the former has been greater.
  3. FTAs have had a bigger impact on metals on the importing side and textiles on the exporting side.Utilisation rate of FTAs by exporters in India is very low (between 5 and 25%).
  4. Diversification of India’s export basket is more responsible for India’s export surge than RTAs.
  5. Bilateral trade increased post signing of all the above FTAs
  6. As imports from Korea, Japan and ASEAN have shot up after the respective agreements came into force, India’s trade deficit with these countries has increased since then. Only exports to Sri Lanka have increased much more than imports into India from Sri Lanka.
  7. Overall trade deficit with ASEAN, Korea and Japan doubled.Quality of trade has also deteriorated under India ASEAN FTA.

Reasons for FTA not leading to economic growth in India:

  1. India’s market share has remained relatively low and stagnant and has even declined in some cases, suggesting that these FTAs have been of limited use. These FTAs are not sufficient in themselves to deliver market access gains.
  2. The one factor is the design and implementation of the agreements. Utilisation rates for India’s FTAs are low, due to a failure to disseminate information especially to MSMEs, low preference margins for high export potential goods, placement of export potential items under the sensitive list, and high compliance costs, all of which undermine the value of the FTAs.
  3. The more important reason is India’s own supply side constraints and bottlenecks, i.e., its difficult regulatory environment, poor logistics quality, inadequate and inefficient trade infrastructure, and high transactions costs, among others, all of which hurt export competitiveness.

What should be done?

  1. If benefits are to be realised, India need to negotiate new FTAs and renegotiate existing FTAs with a focus on extending preference margins and securing market access in tariff lines with high export potential, on opening up markets for high value-added manufacturing, lowering compliance burden, and increasing regulatory cooperation with its partners.
  2. Alongside, itmust complement its FTAs with trade policy reforms and measures which help diversify its export basket, reduce transactions costs, improve logistics and develop its export capacity and quality.
  3. It is important to reduce compliance cost and administrative delays is extremely critical to increase utilisation rate of FTAs.
  4. Proper safety and quality standards should be set to avoid dumping of lower quality hazardous goods into the Indian market. Circumvention of rules of origin should be strictly dealt with by the authorities.
  5. RCEP negotiations especially with China need to be properly pondered upon and planned.

FTAs can impact a signatory country in many ways, depending on the scope of the agreements, the depth and breadth of the commitments undertaken and domestic preparedness and capacity.An FTA’s possible impact on the economy or exports is subject to many caveats. The FTAs can ensure market access to only the right quality products made at competitive prices. Improvement in firm-level competitiveness is a must. The government can help by ensuring lower duties on raw materials and intermediates than on the concerned finished products. It can set up an elaborate quality and standards infrastructure for essential products. Most countries regulate imports through such requirements and not through tariffs.

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