FTAs & the race to the bottom

The NDA government may well use the new environment provided by the pandemic and the accompanying economic crisis to accelerate negotiations with the E.U. and arrive at a free trade deal as some of India’s Asian trade competitors have done.

Published : Jul 07, 2020 07:00 IST

A worker  at a factory in Nam Dinh province, Vietnam, where sports apparel is manufactured, a file photograph. Apparel, footwear and seafood are Vietnam’s leading exports.

A worker at a factory in Nam Dinh province, Vietnam, where sports apparel is manufactured, a file photograph. Apparel, footwear and seafood are Vietnam’s leading exports.

The competition among Asian count- ries to win a slice of the export markets China currently controls is intensifying. In a recent development, Vietnam finally ratified a free trade agreement (FTA) with the European Union, under which more than 70 per cent of Vietnam’s exports to the E.U. and 65 per cent of the E.U.’s exports to Vietnam will be rendered duty free as of August when the agreement takes effect. Of the remaining goods, tariffs on items that would add up to 99 per cent of the two-way trade will be phased out by the E.U. over seven years and by Vietnam over 10 years.

Coming at a time when the moves against China’s alleged big power ambitions have triggered the imposition of tariffs and non-tariff barriers across the globe on imports from that country, the E.U.-Vietnam FTA is seen as likely to help Vietnam displace China in some sections of the European market. The only other Asian countries that have similar FTAs with the E.U. are Japan and Singapore. But they do not compete with Vietnam in areas such apparel, footwear and seafood, which are its leading exports. Although not huge, at $42 billion in 2019, Vietnam’s exports to the E.U. amount to around 15 per cent of its total exports and far exceed its imports from the E.U. ($15 billion). That benefit will only grow as a result of the FTA, with official Vietnamese estimates projecting that exports will be higher by more than 40 per cent in 2025 compared with a scenario without an agreement.

Moreover, foreign investors in China are looking for an alternative site to locate production capacities, given rising costs in that country and pressure on firms from developed country governments, especially the United States government, to disengage from China. The preferential access that Vietnam’s exports would receive in the E.U. and the market-friendly environment created after economic reforms privileged growth above social objectives make that country an increasingly attractive location for foreign investors competing for international markets. Foreign investment in Vietnam was already at a record high of $38 billion in 2019. The FTA with the E.U. is expected to further increase foreign investment geared to linking Vietnam to global production chains.

Vietnam has on its part had to accept a range of demands from the E.U. as part of the trade deal. Besides opening up its services sectors, such as banking and shipping, Vietnam has ratified an investment treaty that protects intellectual property rights, geographical indications (champagne and feta cheese, for example) and investor interests and promises equal treatment to E.U. firms in public procurement in Vietnam. Many of these are World Trade Organisation-plus measures that go beyond even the controversial requirements set by the Uruguay Round agreements.

Given the level of Vietnam’s development and the government’s economic growth aspirations, officials clearly see these as a small cost to pay compared with the expected gains. But for developing countries as a group, trade is currently a zero-sum game. Coming at a time when world trade has contracted, the projected expansion of Vietnamese exports to the E.U. after the FTA, if it materialises, will adversely affect other countries. This is strengthening the hands of sections within other developing countries, including in Asia, who want their governments to sign similar FTAs and bilateral investment treaties, which would involve making significant concessions in areas that would undermine their own efforts to industrialise without excessive dependence on and subordination to foreign capital.

India is a typical case where such pressures are visible. Exports in four areas are expected to be affected adversely: footwear, garments, marine products and furniture. In the case of marine products and apparel, India and Vietnam currently export goods of similar value ($1 billion and $7 billion). India is reported to have exported $900 million worth of seafood to the E.U. in 2018-19 and is its third largest foreign supplier after the U.S. and Japan. But while imposts on imports from Vietnam will fall to zero, those on imports from India will remain at 9 per cent in the case of apparel and in the 4 to 18.5 per cent range in the case of marine products, which would make it extremely difficult for India to compete with Vietnam. Ajay Sahai, from the Federation of Indian Export Organisations, is quoted in BusinessLine as saying: “In footwear, where Vietnam exports $7.5 billion worth of items compared to India’s $1.6 billion, the advantage will be enhanced once E.U. reduced tariffs for Vietnam to zero from 8 per cent. Similarly, in furniture, where India had started making inroads into the E.U. with imports of over $900 million, Vietnam’s share of $1.5 billion is likely to increase several-fold when the import duty of 6 per cent is eliminated.” Exporters argue that the only way this issue can be resolved is by speedily concluding the negotiations on an E.U.-India FTA, which began in 2007, were halted in 2013 and revived only in 2018.

Disagreement between the two sides persists on a host of issues, besides the incorporation of social and environmental clauses in a trade agreement. Important among these are India’s reluctance to accept strong investor protection provisions, including clauses for investor-state dispute settlement abroad, which India has sought to drop even from bilateral investment treaties. There are also disagreements, reportedly, on rules that would apply to drug patents, tariffs on second-hand cars, agriculture, services, and the list of sensitive items that would be provided special protection. The majority view is that the E.U.’s template for these FTAs requires concessions from India that are detrimental to India’s development.

The avowedly “reformist” Narendra Modi government, whose inclinations are to sign bilateral trade and investment treaties, has faced difficulties in pushing this agenda because of criticism from within its own political base, besides from the opposition. Moreover, the evidence is that India has been adversely impacted by the FTAs it has signed with the Association of Southeast Asian Nations (ASEAN), Japan and Korea. India’s trade deficit with ASEAN rose from $5 billion in 2010-11 to $22 billion in 2018-19, that with Japan from $3.5 billion to $8 billion, and that with Korea from around $7 billion to $12 billion.

RCEP fiasco

The pressure this put on the National Democratic Alliance (NDA) government became clear when it withdrew at the last moment from the Regional Comprehensive Economic Partnership (RCEP) involving 16 Asia-Pacific partners after having more or less committed to joining it. Besides small producers and peasants who would have been adversely affected by the regional liberalisation, business too was opposed to the agreement. Industry leaders in sectors such as iron and steel, dairy, marine products, electronic products, chemicals and pharmaceuticals and textiles expressed concerns that the significant tariff reduction the RCEP implied would lead to a surge in imports into India, with damaging effects on domestic production.

All this, however, was clear well before the government and official negotiators sent out signals that India would finally join the agreement, with a few minor modifications. The only reasonable explanation for that stance is that the government was being led by its unthinking adherence to and fascination with a neoliberal agenda that gives a “liberal” veneer to its deeply conservative social and political positions. This paves the way for continuous trade and foreign investment liberalisation, which is easier done as part of a multilateral agreement rather than as stand-alone national policy because a multi-country arrangement appears to be one in which sacrifices are made in some areas for gains in others. Perhaps, the NDA government hoped that, despite apprehensions at home, it could find a place in the RCEP by persuading its partners to limit the ambition of the agreement. Finally, that strategy did not work.

Some of India’s Asian trade competitors signing FTAs with the E.U. provides the NDA government another opportunity to push its trade liberalisation agenda since the intensified competition ramps up business support for an E.U.-India FTA. This occurs at a time when the government, faced with a pandemic and the accompanying economic crisis, has decided to implement a slew of pro-business reforms of labour laws, agricultural trade rules, mining laws and much else. It may well use the new environment to accelerate negotiations with the E.U. and arrive at a free trade deal. But that depends on how it will manoeuvre past its own constituencies that may oppose the deal, especially since enhancing domestic production and making India “self-reliant” seems to be the rhetoric it has recently adopted.

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