Date: 05/01/2023

Relevance: GS-2: India and its neighborhood- relations; bilateral, regional, and global groupings and agreements involving India and/or affecting India’s interests.

Key Phrases: Global Trade Order, New Global Alliances, India’s FTA Architecture, Production Linked Incentive (PLI), Preferential Market Access, India-UAE Comprehensive Partnership Agreement.

Why in News?

• The global trade order is undergoing a substantial shift exacerbated by recent geopolitical events and most of the ideas which shaped the world after WWII are being rewritten, and new global alliances are emerging.

Key Highlights:

• Following the two world wars, the focus of policymakers across the world shifted towards increasing international economic cooperation since more trade raises the cost of future wars, so it was viewed as a means to achieve global peace.
• While this philosophy resulted in continuous reductions in global tariffs and increased international trade, recent geopolitical events have reversed this trend.
• Nations are weaponizing trade, which is leading to the formation of new economic blocs around the world.
• This opens the door for India to integrate into the new global supply chains although India has already begun to reap the benefits of the new global order.For example, India was an importer of mobile phones until recently.Today, all of Apple’s contract manufacturers (Foxconn, Wistron, Pegatron), Samsung, and others have established manufacturing facilities in India, transforming the country into a major mobile phone export hub.
• While domestic policy reforms such as the Production Linked Incentive (PLI) have significantly aided in developing this domestic manufacturing capability, long-term export growth will depend on India’s exporters gaining preferential market access.

Free Trade Agreement(FTA):

• It is a pact between two or more countries, where the objective is to remove trade barriers between imports and exports and ensure hassle-free trade relations as far as possible.
• Under a free trade agreement, countries offer preferential trade terms and tariff concessions to each other.

FTAs with India:

• India has so far signed 13 FTAs, which include the FTAs with Japan, Korea and ASEAN. Agreements with Mauritius, the UAE and Australia have been concluded recently namely:
  • India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA)
  • India-UAE Comprehensive Partnership Agreement (CEPA)
  • India-Australia Economic Cooperation and Trade Agreement (IndAus ECTA)

Primary reasons why India needs to negotiate and sign trade agreements:

• The PLI industrial policy has increased domestic manufacturing capacity.
• Historically, labour-intensive industries such as textiles and leather are unable to compete in global markets.
• To encourage investment from countries decoupling from China.
• To expand India’s import base
• To integrate into the new global supply chain order that is emerging.

How Can FTAs Help India In Integrating With The Global Supply Chain?

1. Preferential market access for its manufacturing output:
   • The government launched the ambitious PLI scheme in November 2020 to boost the country’s manufacturing sector which targeted 14 key sectors and implemented a $27-billion incentive scheme to help the country build a solid manufacturing base.
   • According to reports, the scheme will generate $520 billion in manufacturing output over the next five years.
   • To channel this production into exports, the government should give its manufacturers preferential market access.
2. Revitalisation of Labour-intensive sectors:
   • As a lower-middle-income country, India benefits from significant labour cost arbitrage compared to other countries. However, due to increased competition from countries such as Bangladesh and Vietnam, its exports of labour-intensive products have suffered.
   • Furthermore, Bangladesh and Vietnam benefit from preferential tariff rates of nearly 10 percent lower than Indian exports to the most lucrative markets, such as Europe and thus, significantly impacting the growth of these sectors resulting in an outflow of investments from India.
   • An FTA with partners such as the EU can quickly revitalise these labour-intensive sectors and result in massive job creation in the country.
3. Invite investments:
   • The Covid-19 outbreak and subsequent lockdowns imposed in countries to protect public health priorities exposed the risks associated with global supply chains.
   • Over-reliance on single geography for manufacturing resulted in supply chain shocks that took months to resolve. For example, according to reports, iPhone maker Apple lost $8 billion in revenue due to supply chain constraints.
   • This has resulted in the China+1 strategy being implemented in all boardrooms worldwide.
   • Signing FTAs will not only provide the partner countries and firms with a stable trade regime but will also signal to the rest of the world that India means business.
   • In the long run, this will bring in investments that could leave China and help strengthen India’s domestic manufacturing sector.
4. Diversification of India’s imports:
   • From a macroeconomic standpoint, India has consistently run a current account deficit.
   • Furthermore, India’s CAD is expected to worsen this year, possibly reaching -3.0 percent and a significant portion of which is due to a trade imbalance with China.
   • While there are no quick fixes for this long-term structural problem, an FTA with like-minded countries will redirect India’s imports of certain products away from China and toward more friendly nations.
   • While this may not reduce the overall trade deficit, it could reduce India’s reliance on some critical Chinese products and protect it from future Chinese import shocks.
5. Integration with the existing and emerging supply chains:
   • The US is attempting to re-establish critical supply chain components within its borders.
   • Europe is developing new energy sources and markets to reduce its reliance on Russian energy.
   • Moreover, the supply chains of developed Asian countries are decoupling from those of China.
   • All of these factors will rewrite the future of supply chains for many existing and emerging sectors worldwide.
   • Most importantly, this will allow India to integrate into these supply chains through customised mutually beneficial FTAs with friendly nations.

How much India is prepared for the structural domestic reforms needed for FTA implementation?

• The signing of FTAs should be complementary and be accompanied by proper implementation of structural domestic reforms.
• The previous round of FTAs was not accompanied by such reforms. However, the political vision for FTAs is not only clear this time, but the necessary domestic reforms have already been laid out in the form of PLI, labour code reforms, logistics policy, etc.
• As a result, India is extremely well prepared to capitalise on this window of opportunity in both the international and domestic segments.
• The signing of FTAs with the United Arab Emirates and Australia demonstrates the government’s determination to capitalise on emerging global trends, while also safeguarding domestic interests.
• Similarly, the other major trade negotiations must also be completed in a timely fashion to signal to the rest of the world that India is a serious global trade player.

Conclusion:

• Based on past learnings and changing dynamics of global trade, India’s FTA architecture has changed.
• While the earlier FTAs focused on eastern countries under the ‘Look East’ policy, the recent FTAs are more focused on Western geographies such as the US, the UK, the EU, and Eurasia.
• The bulwark of this shift is India’s need to look for supply chain partners that are credible and resilient while offering investment and access to technology.
• Given the strong political will and diplomatic ties with these regions, such a change may be a win-win.

Source: Hindu BL

Mains Question:

Q. FTAs may be a good way for India to build bridges to reach out to developed economy markets. Analyse. (150 words).