India’s Strategic Pause in Trade Agreements to Address Widening Deficit

 What’s in today’s article?

• Why in News?
• Widening Trade Deficit with FTA Countries
• Strategies employed by India to address the issue
• Challenges faced by India in trade negotiation

Why in News?

India is adopting a more cautious strategy in its trade negotiations, halting talks for free trade agreements (FTAs) with smaller countries like Oman and Peru. This shift is due to concerns that past FTAs have disproportionately benefitted partner countries. 

The pause in negotiations comes not only due to the widening trade gap but also concerns over the outflow of investment from the country. 

Widening Trade Deficit with FTA Countries

• Background
  • India’s trade agreements with countries like the UAE and ASEAN have resulted in surging imports, widening the trade deficit.
  • Deficit with ASEAN
  • ASEAN remains a crucial trading partner for India, accounting for 11 percent of its global trade, with bilateral trade reaching US$ 122.67 billion during 2023-24.
  • India’s trade with ASEAN experienced astounding growth after signing the ASEAN-India Trade in Goods Agreement (AITIGA). 
  • However, the trade disproportionately benefits the ASEAN region. 
    • Between FY 2009 and FY 2023, imports from ASEAN to India grew by 234.4 percent while exports from India rose only by 130.4 percent.
    • As a result, India’s trade deficit expanded from US$ 7.5 billion annually when the agreement was enacted in 2011 to approximately US$ 44 billion in 2023.
• Deficit with UAE
  • India's trade deficit with the United Arab Emirates (UAE) widened after the signing of the Comprehensive Economic Partnership Agreement (CEPA) in May 2022.
  • Within eight months of the CEPA coming into effect, India's trade gap with the UAE widened by more than $5 billion.
  • India's exports to the UAE grew by 11% to $20.25 billion, while imports climbed 24.4% to $36.23 billion.

Strategies employed by India to address the issue

• Development of a New Standard Operating Procedure (SOP)
  • The Commerce Ministry is drafting a fresh Standard Operating Procedure (SOP) to streamline future trade negotiations. 
  • The SOP will include modern chapters on labor, environment, and trade-offs, with a clear focus on human resource mobilisation and the hierarchy of negotiating teams. 
  • The draft also includes input from the Ministry of External Affairs (MEA) and the Department of Economic Affairs (DEA), referencing consultancy private group.
• Shift in Focus to Larger Markets and Geopolitically Important Countries
  • India is now focusing on trade deals with larger markets such as the European Union and the UK, and countries of geopolitical importance like the Maldives. 
  • Negotiations with smaller countries are paused, as India feels it has not received commensurate returns in past agreements.
    • India opens a large market for the partner country, but there is a sense that it is not receiving commensurate returns.
• Reviewing Past FTAs and Tariff Asymmetry
  • India is reviewing the ASEAN trade agreement, which has led to significant trade deficits post-Covid. 
  • The review is expected to be completed by next year, focusing on resolving tariff asymmetry, which has disadvantaged India in these deals.
• Stringent norms for Rule of origin and imposition of anti-dumping duties
  • The rising influx of Chinese investments and goods into ASEAN has sparked concerns over the rerouting of Chinese products into India through the region. 
  • The Economic Survey highlighted that Chinese firms are increasingly rerouting supply chains through countries like Mexico and Vietnam.
  • In response, India's Ministry of Commerce and Industry launched an anti-dumping investigation on various goods imported.
  • India is also taking a tough stand on the issue of rule of origin while negotiating with other countries.

Challenges faced by India in trade negotiation

• Current Negotiating Capabilities
  • One of the main challenges for India is the lack of subject matter expertise and institutional memory in trade negotiations.
  •  In contrast, foreign negotiators tend to have more experience, putting India at a disadvantage.
    • Foreign negotiators are battle-hardened with years of expertise in negotiations, unlike in India where officials are rotated periodically.
• Exit from RCEP and Concerns over Rising Imports from China
  • India exited the China-led Regional Comprehensive Economic Partnership (RCEP) negotiations due to concerns over rising imports from China. 
  • Meanwhile, trade between China and ASEAN grew after RCEP came into effect in 2022, increasing competition for India in the region.
• Other challenges
  • Global economic slowdown, the rise of tariffs and non-tariff barriers, and new trade policies such as the EU’s Carbon Border Adjustment Mechanism and Deforestation Rules as major challenges.

Q.1. Why has India paused trade negotiations with smaller countries like Oman and Peru?

India has paused negotiations due to concerns that past trade agreements have disproportionately benefited partner countries, leading to a widening trade deficit and outflow of investments.

Q.2. What strategies is India employing to improve future trade negotiations?

India is drafting a new Standard Operating Procedure (SOP) to streamline negotiations, focusing on labor, environment, and trade-offs while emphasizing human resource mobilisation and resolving tariff asymmetries.

News: As trade gap with UAE, ASEAN widens, India pauses talks with others | ORF | Indian Express