Regional trade agreements (RTAs) have become increasingly prevalent since the early 1990s. RTAs cover more than half of international trade and operate alongside global multilateral agreements under the World Trade Organization (WTO). The first eleven years (1995-2005) of the WTO were paralleled by a tripling of RTAs from 58 to 188. Currently, 455 RTAs are in force globally. 14 RTAs are in force in India with a dozen more under negotiation. Regional Trade Agreements today go beyond tariff cuts in trade in goods and incorporate various other components like liberalization in services, investment etc. The first RTA of which India became a member was the Bangkok Agreement in 1975. In 2005, this regional initiative between developing economies was re-incarnated as Asia Pacific Trade Agreement (APTA). India’s first bilateral FTA with Sri Lanka (ISFTA) came into effect in March 2000.

In the past decade India’s trade policy has seen a marked shift towards regionalism. Overlapping RTAs are a consequence of their proliferation. For example, India has an RTA with Malaysia and Singapore separately while they are also a member of India ASEAN CECA. Another interesting example is Sri Lanka wherein an Indian trader can use either of the four RTAs for trading with Sri Lanka. The multiplicity of RTA’s may lead to inconsistencies.

Before we delve into tariff modalities of some key FTAs and impact on specific sectors some key macro takeaways from India’s experience with respect to some comprehensive agreements that India has signed in the past decade, here are some stylized facts about India’s exports story.
• India’s exports to FTA countries has not outperformed overall export growth or exports to rest of the world
• FTAs have led to increased imports and exports, although the former has been greater
• India’s trade deficit with ASEAN, Korea and Japan has widened post-FTAs
• According to Economic Survey 2016-17, FTAs have had a bigger impact on metals on the importing side and textiles on the exporting side.
• A 10% percent reduction in FTA tariffs for metals increases imports by 1.4 %
• India’s exports are much more responsive to income changes as compared to price changes and thus a tariff reduction/elimination does not boost exports significantly
• Utilisation rate of RTAs by exporters in India is very low (between 5 and 25%)

We analysed the growth rate of India’s exports to countries and trade blocs with whom India has a trade agreement and also with rest of the world with which India does not have a trade agreement. Since 2006 (India has signed most of its RTAs after 2006), India’s exports to RTA partners increased by 13% y-o-y. The trend to non-partner countries was no different with exports increasing at the same pace (chart below). Thus, export to RTA countries has not outperformed overall export growth, in fact, export to RTA countries parallels the trend growth as with other exports. Thus, India’s export surge could be attributed more to diversification of India’s export basket both in terms of destination and commodities and favourable global conditions and less to RTAs. As data on actual trade flows through the preferential route is not available, we cannot bifurcate this data into preferential (FTA route) and Most favoured Nation route.

However, the utilization rate of India’s FTAs is very low. Most estimates put it at less than 25%. Lack of information on FTAs, low margins of preference, delays and administrative costs associated with rules of origin, non-tariff measures, are major reasons for underutilization.

ASEAN, Japan and Korea FTAs- assessment

We analyze four key FTAs India has signed, with ASEAN, Korea, Sri Lanka and Japan (as they are the most comprehensive ones). Some stylized facts are:
(a) Bilateral trade increased increase post signing of all the above FTAs

(b) Imports from these FTA partners into India increased more than India’s exports to partner countries post signing of FTAs

(c) As imports from Korea, Japan and ASEAN have shot up after the respective agreements came into force, India’s trade deficit with these countries has increased since then. Only exports to Sri Lanka have increased much more than imports into India from Sri Lanka.

(d) Overall trade deficit with ASEAN, Korea and Japan doubled to USD 24bn in FY17 from USD 15bn in FY’11(signing of the respective FTAs) and USD 5bn in FY’06. Trade deficit with Korea grew from USD 5bn in FY’10 to USD 8bn currently. With Japan, deficit grew from USD 3bn in FY10 to USD 6bn currently and with ASEAN deficit doubled to USD 10bn from USD 75bn in FY11.

That said, the ASEAN FTA does seem to have the biggest trade impact, which makes sense, since this arrangement saw the greatest reduction in Indian import tariffs. Liberalization under the India-ASEAN FTA covers 75% of the two-way trade. India offered around 9000 products (at the HS 8-digit level) for tariff elimination (NT-1, NT-2) out of about 12000 tariff lines, 1800 lines in sensitive track and almost 1300 lines in exclusion. Thus India kept around 10% of their tariff lines in exclusion, Thailand, Philippines, Myanmar, Brunei and Vietnam kept more number of tariff lines under exclusion compared to India. Motor vehicles, textiles, petroleum products, sugar, wheat, vegetable oil dairy products and other food products were under exclusion/sensitive track in India’s list
Given higher margin of preference (MFN-preferential duty) offered by India under the FTAs the surge in imports is much higher compared to surge in exports for India. As per Economic Survey FY’16, average effect of an FTA is to increase overall trade by about 50 percent over roughly four years. The survey also finds out that bigger impact on metals on the importing side and textiles on the exporting side. It analyses FTA tariff reduction in four major sectors: textiles, metals, automobiles and machinery. The comparator group in this section consists of both non-FTA countries and all sectors other than the four major ones listed above. On the import side, a ten percent reduction in FTA tariffs for metals and machinery increases imports by 1.4 per cent and 2.1 per cent respectively, compared to other products from FTA or all products from Non-FTA countries (note this is the marginal effect of importing metals and machines from FTA countries relative to all products from Non FTA countries). However, the effect on auto imports is not significantly different from the comparator group. This is also because the auto sector is highly protected in India with most of tariff lines under exclusion criteria under different FTAs. On similar lines, textile exports to FTA countries increase by 2 per cent relative to comparator group for 10 per cent decrease in tariffs.

Sector-wise impact of FTAs
Quality of trade has also deteriorated under India ASEAN FTA. Apart from the surge in total trade deficit due to tariff cuts, a close look at the sector wise trade flows also paints a grim picture. As per the UN’s Harmonised system of product classification, products can be grouped into 99 chapters and further into 21 sections like textiles, chemicals, vegetable products, base metals, gems and jewelry etc (similar to sector classification). The analysis shows that trade balance has worsened (deficit increased or surplus reduced) for 13 out of 21 sectors. This also includes value added sectors like - chemicals and allied, plastics and rubber, minerals, leather, textiles, gems and jewellery, metals, vehicles, medical instruments and miscellaneous manufactured items. Sectors where trade balance has improved include animal products, animal and vegetable fat, wood and articles, paper and paperboard, cement and ceramic, arms and ammunitions. Sectors where trade deficit has worsened account for approximately 75% of India’s exports to ASEAN. Trade surplus sectors have also shown only marginal improvement. Overall it can be concluded that India’s quality of trade has not improved under AIFTA. India’s tariff rates declined for Japan-FTA from 11.4% to 7.5% and for Korean-FTA decline from 11.1% to 8.3%. This had implications for the domestic industry.

What are we trying to achieve out of RCEP?
Regional comprehensive Partnership Agreement (RCEP) is a proposed free trade agreement (FTA) between 10 ASEAN countries and their six FTA partners, namely Australia, China, India, Japan, Korea and New Zealand. It accounts for 25% of global GDP, 30% of global trade, 26% of FDI flows and 45% of the total population. From India’s point of view RCEP is critical. RCEP countries account for almost 27% of India’s total trade. Exports to RCEP account for about 15% of India’s total exports and imports from RCEP comprise 35% of India’s total imports. India runs a trade deficit with ASEAN as well as the partner countries of RCEP. India’s trade deficit with the bloc has risen from $9 billion in FY05 to $83 billion in FY17, of which China alone accounts for over 60% of the deficit. India already has bilateral FTAs with ASEAN, Korea and Japan and negotiations are underway with Australia and New Zealand. There is also termendous pressure on India to complete negotiations on time and offer tariff eliminations on majority of the tariff lines (more than what was negotiated under AIFTA). Most RCEP contries see India has a huge potwntial market for their exports.
Given India’s inability to negotiate a good services deal in the past, RCEP negotiations especially with China need a second thought. Indian industry will have more to lose than gain if it agrees to a liberal tariff elimination schedule specially w.r.t China.A separate tariff schedule for different partner countries has already been rejected by member countries. At a time of growing protectionism and US’s stance towards China opening our market to China can be prove to be disastrous given proper standards and processes are not in place in India. Trade agreements are a means to promote bilateral trade, with both parties benefitting as a result of tade complementarities. With China, India’s trade seem to be very skewed and China’s capcity overhang in most sectors may lead to a surge of imports into India with very limited access for Indian exports into the chinese market.

While RCEP negotiations at the current stage need a careful thought, India’s current trade pacts also need a rejig. India seems to have underutilised its existing FTAs. The percentage of India’s international trade routed through the preferential route/FTAs is very low. According to the Asian Development Bank, the utilisation rate of India’s FTAs varies between 5% and 25%, which is one of the lowest in Asia. Moreover, exports to FTA partner countries and non-partner countries have grown at the same pace. Complex rules of origin criteria, lack of information on FTAs, higher compliance costs and administrative delays dissuade exporters from using preferential routes. The compliance cost of availing benefits under these FTAs is so high that exporters prefer using the normal route. India has actively pursued FTAs with several major trading partners in the past without benefitting much.

Before getting into any multilateral trade deal india should firstly, review and assess its existing FTAs in terms of benefits to various stakeholders like industry and consumers, trade complementarities and changing trade patterns in the past decade. Second, negotiating bilateral FTAs with countries where trade complementarities and margin of prefeence is high may benefit India in the long run. Third, higher complicance costs nullify the benfits of margin of preference, thus reducing compliance cost and administrative delays is extremely critical to increase utilisation rate of FTAs. Fourth, proper safety and quality standrads should be set to avoid dumping of lower quality hazardous goods into the Indian market. Fifth, circumvention of rules of origin should be strictly dealt with by the authorities. In case of India- SriLanka FTA, Srilanka had started exporting copper to India by under invoicing of imported scrap to in order to show higher value addition for qualifying for preferential rates under the FTA. Thus, Rules of Origin (ROO) norms can easily be circumvented by simple accounting manipulation to flood Indian markets. The over-arching conclusion is that FTAs have to be signed keeping two things in mind, mutually reciprocal terms and focusing on products and services with maximum export potential.