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TII SPECIAL
Global Trade & Economic Growth Lose Speed in RTAs Maze
By Naresh Minocha
Nov 19, 2019

Naresh Minocha, a veteran journalist, specializes in governance, polity, macro-economic issues, telecom, energy, chemicals and agriculture. He has been working as Consulting Editor with taxindiaonline.com since 2004. He writes and speaks with authority on any issue he picks up. In-depth research is his passion. In his over 37-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations. He continues to enjoy endless, learning journey that he started during his university days in the seventies. He believes his quest to be a ‘Know-All' is boundless.

INDIA'S decision to not join the Regional Comprehensive Economic Partnership (RCEP) is generating sound and fury. This should lead to a holistic study of the net global benefits, if any, of thickening jungle of regional trade/free trade/preferential trade agreements (RTAs/FTAs/PTAs).

The total number of RTAs signed during 1948-2018 stand at staggering 681. Of these, 301 are active. Had each bilateral or regional RTA led to rise in respective global trade, the global trade would have soared to dizzy height. The situation is actually depressing.

According to WTO release dated 1 October 2019,". Escalating trade tensions and a slowing global economy have led WTO economists to sharply downgrade their forecasts for trade growth in 2019 and 2020".

World merchandise trade volumes are now expected to rise by only 1.2% in 2019, substantially slower than the 2.6% growth forecast in April. The projected increase in 2020 is now 2.7%, down from 3.0% previously, it notes.

This issue also finds mention in United Nations Conference on Trade and Development (UNCTAD) report titled 'Review of Maritime Transport 2019'.

Released on 30th October 2019, the Report points out that world maritime trade lost momentum in 2018, with volumes expanding at 2.7 per cent, below the historical averages of 3.0 per cent and 4.1 per cent recorded in 2017.

With these chilling facts in view, we thus need to put common-sensical questions on: (1) Correlation between surging RTAs and global slowdown in both trade and economic growth; (2) Hype over RTAs as womb of global value chains (GVCs) and (3) Factors that negate the potential benefits of RTAs.

Such issues need to be analysed thoroughly to ask whether RTAs are collectively constraining world trade? Are they are collectively aiding the non-discriminatory / Most Favoured Nation (MFN) trade guaranteed by World Trade Organization (WTO)? If so, how? Why so much trumpeting of RTAs when they don't kill a non-participant 's right to trade as MFN partner under WTO?

Before dissecting the issues, feel first the intensity of concern over India having missed RCEP bus. The concern is palpable in a sample of headlines:". India makes historic blunder in abandoning RCEP trade deal".". Arvind Panagariya: RCEP in our interest, no MNC will come if we sit outside".". How India loses by not joining RCEP". .

Sense now the jubilation over India shunning RCEP. The Swadeshi Jagran Manch (SJM), an influential economic nationalism entity, congratulated Prime Minister Narendra Modi for his". bold move". to miss RCEP bandwagon. More than half a dozen cabinet ministers heaped praise on Mr. Modi for being tough negotiator, for decisive leadership and for safeguarding Indian interests. Mr. Modi's most trusted lieutenant, Home Minister Amit Shah, penned an article in Economic Times lauding PM's stance on RCEP.

As put by Mr. Shah,". November 4, 2019 shall go down as an historic milestone for India's bold decision to stay away from the Regional Comprehensive Economic Partnership (RCEP). The decision also cements India's growing stature as a country that is rock solid in its resolve to not only protect its own interests, but also to boldly ward off any attempts to being arm-twisted. Under Prime Minister Narendra Modi's leadership, New India reflects a new self-confidence". . Mark his words -". arm-twisted". .

The stay-away decision was obviously influenced by street protests with a farmers' group burning effigy of Government, ministers and RCEP. The objections from diverse stakeholders also unnerved the Government. The main Opposition Party, Congress, took pot-shots at the Government. Congress likened government dealing with RCEP to a". compounder operating on a patient". in absence of a registered doctor.

The joint statement issued by RCEP Summit on 4th November recorded the country's decision as:". India has significant outstanding issues, which remain unresolved. All RCEP Participating Countries will work together to resolve these outstanding issues in a mutually satisfactory way. India's final decision will depend on satisfactory resolution of these issues". .

India is already signatory to 16 RTAs. These have not helped reduce its total trade deficit (TD) and current account deficit (CAD). India's muted response to impact of RTAs is in sharp contrast to Trump Administration's categorial stance against RTAs.

It is here apt to cite Congressional Research Service's report captioned 'U.S. Trade with Free Trade Agreement (FTA) Partners' issued in April 2018. It says:". President Trump has addressed trade broadly and trade agreements more directly through an assertive trade enforcement agenda and vocal skepticism of past U.S. trade agreements and the potential benefits of trade".

The Report adds:". For the Trump Administration, the U.S. trade deficit often serves as a proxy for evaluating the success or failure of U.S. trade policy and is viewed as the source of a number of ills afflicting the U.S. economy, including the rate of unemployment, slow gains in wages, and income inequality".

Successive Indian regimes have kept under carpet, studies on impact of RTAs on domestic industries that it got commissioned from different entities such as Tariff Commission over the years.

Compare this with disclosures by other RCEP participants notably New Zealand and Australia. It was easier to know how stakeholders in these countries view Indian apprehensions and how they would benefit if India signed RCEP.

In April 2013, Australian subsidiary of Yum! Restaurants International (YRI), for instance, pitched for 3% import duty on sausages, potato chips etc. that it supplies to its KFC, Pizza Hut and Taco Bell Quick Service Restaurant chains in countries participating in RCEP talks.

In its submission to Department of Foreign Affairs and Trade, YRI tabulated existing level of customs duty on food items in Asian countries. The table, for instance, mentioned high import tariff such as 100% on sausages levied by India. Such submissions lend transparency to RTA negotiations.

New Zealand even published 249-pages 'National Interest Analysis' of

Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Notwithstanding Indian Government's aversion to transparency, one indisputable fact is that the country has not been able to improve its cost competitiveness in most sectors. It also lacks capability to generate large export surpluses in sectors such as mining and agriculture.

Indian manufacturing sector has been declining for several years, barring exceptions such as automobiles, refining and chemicals sectors. One can write dozens of theses on factors that constrain India from becoming competitive and trade surplus country like Germany and China.

In this inequitable world, some countries are better placed than others on global trade. The trade flows are marred by imbalanced flow of all factors of production especially labour under Mode 4 of general agreement of trade in services (GATS). The rules regulating flow of all factors of production, goods and services are becoming more varied and complex under regional and multilateral trade. The collective name for all this is protectionism.

And India is a victim of protectionism in service trade & non-tariff barriers in merchandise trade. Unfortunately, successive regimes have failed to articulate the need for developed countries to allow free movement of natural persons to provide services in other countries. This is called Mode 4 of General Agreement on Trade in Services (GATS).

The Government has never pitched the fact that India is saddled with surplus labour that has to be exported as highly skilled and low-skilled workers. Why can't Indian workers be allowed to provide plumbing, automobile repair, driving, sanitation, facial make-up and other services in the West?

It is pertinent to cite WTO's World Trade Report (WTR) 2019 with sub-title 'The future of services trade'. It says:". The presence of natural persons (mode 4) is highly restricted - relative to the other modes - in all the professions covered by the STRI (Services Trade Restrictions Index), most notably in the case of legal services".

According to WTR, only US$ 0.4 trillion, or 2.9 per cent, of services are traded worldwide through the presence of persons abroad (mode 4), but this share may vary for individual economies or sectors.

Put simply, India can't gain much from RTAs until and unless they provide for liberal ecosystem for service companies to hire Indian labour under Mode 4 to provide all kind of services.

In the absence of truly fair trade in merchandise and services, RTAs are nothing but window of opportunity to cash in on the weakness of trading partners. This is buttressed by misuse of hard-to-administer rules of origin of exported goods & erection of non-tariff barriers after signing of RTAs.

The urge to open a new ' cheating ' window is prime mover of planning and negotiation of new RTAs. If the countries that craft RTAs are so confident of benefits of zero-duty imports, why can't they then unilaterally open duty-free window to India?

This brings us to the issue of impact of RTAs. Several simulation/modeling studies are available that estimate the likely benefit of X country joining an RTA. Models have their limitations as they turn blind eye to ground realities such as mining policy at national or sub-national level that stipulates or tempts location of a project in province/country where mineral rights are granted. These include exploration and production licences for oil and gas.

Overlooking of similar restrictive policies can constrain setting up of GVCs, the deemed outcomes of deep RTAs. There might also be a situation where regulatory or judicial authorities deny or cancel approvals in mining domain.

Take the case of French cement giant Lafarge (now Lafarge Holcim). It operates cement plants in Bangladesh that get limestone from India through a 17-Km conveyor belt. This bilateral project had to suspend limestone mining in 2010 due to environmental litigation in India's Supreme Court.

Similarly, the court's different orders banning iron ore mining in Goa and Karnataka disrupted operation of steel plants abroad. Suspension of operation of manufacturing plants of all sorts is common at the directive of pollution control boards, National Green Tribunal and the judiciary.

A McKinsey study in January 2019 identified five structural shifts after analysing 25 value chains spanning 43 countries. The five trends are: 1) Goods-producing value chains have grown less trade-intensive; 2) Services play a growing and undervalued role in global value chains; 3) Trade based on labour-cost arbitrage is declining in some value chains; 4) Global value chains are growing more knowledge-intensive and 5) Value chains are becoming more regional and less global.

Is there any study that maps risks GVCs face due to factors including mob violence as happened against Chinese factories in Vietnam in 2014? Does change in auto emission specifications & regulations impact production and export of components to countries that have not changed over to new norms? What about impact of Base Erosion and Profit Shifting's (BEPS') provisions to counter profit-splitting on GVCs?

The complex interplay of factors that impact GVCs with the ones that facilitate them under RTAs has to be studied. There is, in fact, no categorial study on net impact of all RTAs on global economic growth and trade.

This, in spite of WTO's Nairobi Ministerial Declaration 19 May 2015. It stated:". We reaffirm the need to ensure that Regional Trade Agreements (RTAs) remain complementary to, not a substitute for, the multilateral trading system. In this regard, we instruct the Committee on Regional Trade Agreements (CRTA) to discuss the systemic implications of RTAs for the multilateral trading system and their relationship with WTO rules".

CRTA referred to this declaration in its annual report for 2016. As put by the Report,". The United States reiterated its longstanding concerns regarding the lack of full transparency available to the Committee on all RTAs currently in force and the significant challenges created by this deficit for any discussion on systemic implications of RTAs. The Chairman is continuing his consultations with Members on both issues. Members expressed different views on whether parameters for such a discussion needed to be defined. Some Members felt that the CRTA should not venture into recommendations for multilateral rule making".

CRTA last year dropped the idea of pursuing further the subject of systemic implications of RTA as it did not receive any concrete proposals from members.

CRTA annual report for 2018 says:". In the absence of such proposals, the item would be removed from the agenda, bearing in mind that issues relating to the systemic relationship between RTAs and the WTO as well as the proper functioning of the Committee were being discussed under other agenda items".

One thing that is certain: RTAs have increased uncertainty in global trade. Exporters have to spend more time and effort to select the best window of export from varied opportunities offered by RTAs. This might have raised operational cost for exporters.

Similarly, manufacturers have to be more vigilant against surge in imports that might result from exploitation of some RTA by clever exporters. Put simply, RTAs have enhanced the complexity and cost of doing business across the world.

Similarly, the Customs officials' task of monitoring imports especially relating to rules of origin has increased.

The task of all stakeholders in foreign trade is becoming dynamic as RTAs are rolled out in phases and are subject to period reviews.

Take the case of the Economic Partnership Agreement between the European Union and Japan that was signed in July 2018. It came into force in February 2019 and would by fully implemented by April 2038. It is EU's 43 RTAs and Japan's 17th RTAs as notified to the WTO.

This brings us to core issue: How much more RTAs are needed to make the world realize that excessive regionalism and bilateralism is bad.

As put by WTO Deputy Director-General Alan Wolff in May 2018,". Bilateral and regional arrangements pose risks as well as benefits. They must not divide the multilateral trading system into mega-regional units, making the sum of the parts less than the whole". .

 
 
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