Laissez Unfaire

In the recent past, Prime Minister Atal Behari Vajpayee and his foreign minister Yashwant Sinha have projected themselves as suave and far-sighted trade negotiators. They contend they have moved ahead on several free trade agreements (FTAS), which are being negotiated bilaterally and regionally. But suddenly, there is an obstacle. Industry has put its foot down saying, "Free is not necessarily fair". And aggressive lobbying has ensured India is unable to finalise any of the agreements, except the one with Sri Lanka.

Ever since the government stepped on the gas to sign FTAS with countries like Singapore, ASEAN and Thailand, business houses have been crying hoarse about unequal competition. While the agreements will open the markets to foreign goods (as import tariffs will be dramatically reduced to zero per cent over time), India will not gain much. Says T.K. Bhaumik, a trade expert with cii: "There is a general apprehension that FTA means liberalisation of import tariffs which may hurt the industry." Adds Vishnu Mathur, executive director, Auto Components Manufacturers Association (ACMA): "We are opening up our market but industry is not getting an equal access to the markets of other countries."

One of India Inc's primary concern is, imports will become cheaper than 'Made in India' products. This will happen, Mathur explains, as the finished products from FTA countries can be imported at zero per cent duty. But Indian competitors will be at a disadvantage because they will still need to import raw materials (say steel in the case of auto components) at fairly high duties. In fact, the auto components sector is likely to be one of the worst hit as Southeast Asia is a huge manufacturing and export base for these products.

Yet another sector that's rattled by the prospect of free trade and no import barriers is consumer electronics. Explains Suresh Khanna, secretary general, Consumer Electronics and TV Manufacturers Association (CETMA): "TVs, refrigerators and ACs have been put in the early list in the proposed FTA with Thailand for progressive duty reductions. These are cheaper in Thailand and costlier in India because of duties on inputs. The government has to take a fresh look at the duty structure if it wants industry to survive."

India Inc is also troubled by the fact that a number of countries with whom India proposes to sign the FTAS have surplus capacity. So, they have an economic reason to sell products at cheaper prices. Industry sources say Brazil makes 40 million compressors a year, of which domestic demand accounts for just 40 per cent of the production. Since the Indian market is for four million units, and the domestic capacity is seven million, the FTA will wipe out the local anufacturers. Batteries fall into a similar category. Says S.B. Ganguly, CMD, Exide Industries: "The FTAS, specially the ones with Thailand and ASEAN, are a big threat to our survival. Thailand has a 40 per cent surplus in batteries which can be dumped in India."

Obviously, the makers of these products want India to keep certain sectors out of the purview of the FTAS. Or include the items at a much later date. This has become critical because countries like Singapore and the Mercosur regional group have given huge lists of products where duties need to be removed. While Thailand has submitted an initial list of 84 products, Mercosur and Singapore have indicated they wish to include 1,500 products each. Says a Delhi-based industry lobbyist, "Everyone's fighting to see that their products are not included at all."

The problem doesn't lie only in the competitiveness of the nation or the region with whom FTAS are being inked. It is also related to what is called the Rules of Origin. Such rules ensure that goods manufactured in neighbouring countries, say China and Korea in the case of ASEAN, do not enter India by using Thailand or Singapore as a base merely to benefit from concessional duties.Logically, Chinese or Korean firms can open up offices in Thailand, take advantage of the Sino-Thai or Korea-Thai FTAS to export there, and then use the Indo-Thai FTA to route the products to India.

That's where local value addition comes into play. Which implies, goods exported from a certain destination must have a minimum value addition in the country of origin. In case of Thailand, Indian policymakers are keen on value addition of at least 40 per cent to minimise the Chinese and Korean threat. But Thailand is reportedly talking of 25 per cent which the industry feels is too low and inadequate to protect its interests.

The finance ministry, which has been forced to reassess the duty structure, is thus in a fix and has itself raised issues relating to possible revenue losses because of the FTAS. The agreements would lead to a number of tariff anomalies that will force India to further reduce duties on several items.

In fact, the government is caught in a classic Catch 22 situation. It cannot sign these agreements in haste because of the various concerns. But it has to move fast along the FTA route since India is being isolated in a world that is getting grouped into regional and cross-continent trading blocs. At present, there are some 250 FTAS globally and this is expected to cross the 350 mark by next year. More than 60 per cent of world trade is done on a preferential basis through FTAS. There is another reason too. With multilateral negotiations under wto hitting a deadlock, the world is opting for bilateral arrangements. Says a cautious Rahul Bajaj, chairman, Bajaj Group: "We don't really need FTAS but in the absence of multilateral arrangements, we need something to hold on to."

But the speed at which the government is trying to forge these alliances has attracted brickbats. Says Bajaj: "FTAS require a lot of time to look into the country's industrial needs. India should not rush into it at the cost of domestic industry." Agrees Bhaumik: "FTAS are all about negotiations to address all concerns and this can't be done in a hurry." NAFTA negotiations between the US and Mexico, signed in 1996, are still on and the US-Israel FTA took over 18 years to fructify.

Fortunately, the lobbying seems to be working. It seems the government is moving a bit slowly on preferential agreements. For example, the Indo-Thai FTA, which was to be finalised this March, has been shifted to July and may be delayed further. But industry is still keeping its fingers crossed and hoping that the FTAS don't turn into UTAS (Unfair Trade Agreements).