By Gopal Krishna Agarwal,

With the emergence of new geopolitical realities arising out of the unilateral announcement of reciprocal tariffs by President Donald Trump, the US cannot be considered a very reliable trade partner. And, even if a bilateral trade agreement with the US is concluded, uncertainty about the country’s future actions remains. 

Trump had announced a 90-day window for tariff negotiations, which ended on 9 July. He later extended the deadline to 1 August and sent letters to 14 countries informing them about new tariff rates. 

India and the US are currently holding talks over a trade agreement, with the sixth round expected to be held in August, when American trade officials will visit India. This shows India’s importance as a trading partner for the US. 

There are other ambiguities around Trump’s administrative actions, and no one is sure of the outcome of US courts’ and the Senate’s interventions. Therefore, prudence demands that we go slow and wait for countries such as China, Japan, and Vietnam to negotiate with the US. India, meanwhile, can build strategic partnerships with other countries and blocs to prevent overdependence on the US market. The EU is expected to be stable and predictable in its approach, but India has to deftly negotiate the bloc’s impulse to impose non-tariff barriers under the garb of human and labour rights, environment, climate change etc. 

The World Trade Organization is virtually defunct and rule–based trading order looks like a thing of the past. Every country, including India, is negotiating Free Trade Agreements (FTAs) with multiple other nations to protect its export market. In May, India concluded FTA negotiations with the United Kingdom, while talks with the EU and the US are in advanced stages. However, our approach to FTAs cannot be a simple replication of the old template and must be influenced by outcomes of the not-so-successful past trade agreements, such as the ASEAN-India FTA and the Regional Comprehensive Economic Partnership (RCEP) negotiations. 

Past mistakes

The global trade and financial architecture that emerged in the post-World War 2 period supported a rule-based trading system. It allowed several poor countries to overcome the limitations of a small economy and tap into the export market. As a result, these countries — like South Korea, Taiwan, and China — were able to experience above–average growth rates for a long period of time. We missed riding the bus of free trade due to earlier policy misadventures like quota, license raj of Congress–led governments. Now our government is committed to make India a manufacturing powerhouse, but the bus of free trade has hit major road bumps. 

India is focusing on ensuring competitiveness of domestic industry right now, as there is absolutely no substitute for building the manufacturing sector. Past FTAs failed to yield much benefit because they exposed domestic industries to global competition without strengthening the manufacturing ecosystem through infrastructure development, availability of land and power, and ease of compliances. India needs structural reforms to reduce input costs. The Modi government’s focus is on slashing costs of land, power, logistics, compliances, and raw material to enhance global competitiveness of our manufacturers. Several steps have been taken in the last 11 years by the Centre, but a lot remains to be done at the state–level, as most of these areas are basically dependent on state policies. 

Micro, small, and medium enterprises (MSMEs) is an important sector for employment generation and integrating our manufacturing into global and regional supply chains. Therefore, before entering into any agreement, the government is ensuring full support to MSMEs. The MSMEs also have a lot to do at their end, since they face difficulty meeting international standards, which limits their competitiveness. It is important for this sector to build institutional capacity and technical know-how to follow global trade standards. Quality Control Order (QCO) was brought with this intention, but it has emerged as another challenge for Indian industries. QCOs hinder the import of raw materials and intermediate products required for manufacturing, creating a negative impact on the domestic production of goods, and reducing India’s export competitiveness. Therefore, there is a need for a more sector-specific approach to QCOs.

Our recent experiences with custom duties have shown that there is a conflict between imposition of countervailing duties and the interests of MSMEs. Such duties tend to favour big domestic producer industries at the cost of MSMEs which are the users of products that are subject to countervailing duties. So FTAs provide an opportunity for strategic tariff reduction on intermediate goods for the betterment of Indian industries. India will take a data-driven approach in determining tariffs to ensure that they don’t disrupt supply chains or discourage innovation and investment.

Agriculture sector protection, intellectual property rights, and public procurement are critical and form an important part of tariff negotiation. Hence, their interest is non-negotiable. Any concession given in these areas will be carefully evaluated and bargain precisely measured. We know that if India gives concession to one country or region, others would demand similar treatment and privileges. India should not bend over backward to seek concessions for movement of its citizens across borders as service providers. The negotiating countries use this demand to get concessions from India. Indian talent is in huge demand globally and other countries would anyway need Indian expertise. Otherwise, India can harness its human resources and potential to its own advantage.

An opportunity 

Major economic decisions are not made in the fog of uncertainty. Global economic uncertainties are not fully comprehensible and controllable, therefore India’s focus is on reducing domestic policy uncertainties. It will surely boost private capital formation. India also has to attract massive foreign capital in export-oriented sectors. But this is easier said than done. The country’s image as a destination for foreign capital faces challenges due to certain decisions of the past government, especially the Vodafone tax dispute. India still has significant work to do in areas like judicial reforms for contract enforcement.

Trade considerations cannot be fully separated from strategic considerations. The China+1 and risk diversion strategy of global manufacturers are an opportunity for India to benefit from current geopolitical challenges, and therefore the country’s focus in FTA negotiations is to counter China. Since China is a major challenge for India in multiple spheres, teaming up with countries at the receiving end of China’s irredentist and mercantilist policies is a viable option. This also means that India should still work for multilateral trade deals because third-world countries get a level playing field as well as some preferential treatment under multilateral trade platforms such as WTO.

Gopal Krishna Agarwal, National Spokesperson of BJP for Economic Affairs