Framework for analysis of regional trading agreements

Abstract

From 2002, Indian has been taking a proactive and aggressive approach to negotiating and entering into Regional Trading Agreements (RTAs). The reasons for entering into RTAs could be economic, strategic or political. However, RTAs are long term commitments, involving a part surrender of 'sovereign' power, made on behalf of the entire country. Hence it is essential that the economic implications of entering into RTA are carefully studied and both the offensive and defensive interest of the country are identified before proceeding with the negotiations. Thus economic modelling and analysis become essential inputs for determination and negotiation of the actual lines to be considered for tariff reduction. Common techniques for empirical analysis of RTAs are simulation using the Computable General Equilibrium (CGE) or the gravity models. However, negotiations are live real-time exercises where full-scale modelling or computer simulation and analysis may not be possible. The basic hypothesis for analysis in this dissertation is that a country would seek greater market access for those commodities in which it has inherent domestic strength and competitiveness and vice versa. There are different frameworks available for analysis and measurement of the domestic strength and competitiveness of one economy vis-a-vis another. Competitive strength (which could be measured for example through the Revealed Comparative Advantage or RCA) coupled with inherent strength of the domestic industry would make a commodity a candidate for tariff reduction. Thus a country would have a high degree of offensive interest in tariff reduction on commodities where it enjoys advantages in both cases and vice versa. In India, policy decisions on entering into Free Trade Agreements (FTAs) as well as the negotiation agenda are driven essentially by political and strategic considerations rather than economic considerations. For example, even though a study was commissioned by the Joint Working Group set up for studying the feasibility of an India-Thailand FTA the specific results of the study appear to have been ignored by the negotiators while selecting the tariff lines on which an 'early harvest' (Le.items on which an accelerated tariff reduction would be granted) was being considered. The study by Das (2002) using CGE models and sector analysis, predicted that India would be at a disadvantage in case of specified industries such as electronics and auto components. Under the Early Harvest Scheme (EHS) of the India-Thailand Framework Agreement, tariff concessions have been granted on mutual basis in respect of 82 items. Tariff on these items were reduced by 50% (of the MFN tariff as on 1.1.2004) by 1.9.2004, by 75% by 1.9.2005 and fully eliminated(100%) by 1.9.2006.A further study conducted by UNCT AD also using CGE model, also shows that there would only be marginal changes in aggregate welfare level for both countries. Moreover, the optimum tariff for India occurs with a 60% tariff cut and not on complete tariff elimination. In any case, the global gains would be higher for -Thailand on an aggregate than they would be for India. The gains would also be higher for Thailand with deeper tariff cuts. Analysis of data available so far validates the sector specific predictions of the economic analysis by Das (2002) and UNCTAD. India has moved from a trade surplus to a trade deficit country vis-a-vis Thailand. There has also been a surge in imports in sectors such as colour televisions, auto components, etc. which appears to validate the results of the studies conducted by Das (2002) and UNCTAD. This surgein imports has, in tum, led to Indian industry clamouring for Government action/intervention in the form of removal of inverted customs duty structure, improvement of infrastructure, reduction in interest cost, etc. However" the Government stand has been that the agreement itself provides for taking defensive measures such as levy of anti-dumping and safeguard duties. The Government's position is also that the FTA envisages agreements also in investment and services and the overall impact taking into account the investment services components is likely to be positive. Moreover, the situation arising out of the EHS may look serious only when seen in isolation. Various surveys/studies indicate that there is a huge manufacturing potential otherwise being thrown up in sectors such as electronics, textiles, auto components, pharmaceuticals, etc. on account of the reforms and liberalization measures undertaken by the Government, and hence the impact of the FTA on the Indian industry may not at all be significant if we take into account. In the light of these observations, the dissertation recommends that economists and industry representatives should invariably be associated with the negotiation process as mere inter-Ministerial and industry consultations prior to the actual negotiations do not appear to be enough to protect or take care of the interests of the domestic industry. The dissertation also highlights the essential fact that entering into, an agreement say only for political or strategic reasons without support from the economic angle may actually create a situation where specific (sometimes politically sensitive) sectors of the Indian industry would be affected and these sectors need to be perpetually propped up by crutches (in the form of subsidy, etc.) by the Government. A deliberate/considered decision by the Government would be essential in such cases, after necessary economic studies on the costs/benefits of propping up such sectors.