December 5, 2022
Good morning. In today’s either/view, we discuss whether Free Trade Agreements (FTAs) are good for a developing country. We also look at the reward offered to Panchayat officials in Haryana, among other news.
📰 FEATURE STORY
Free Trade Agreements (FTAs) – Are they good for a developing country?
Former US Secretary of Defence James Forrestal said the only way durable peace can be created is through worldwide economic activity and international trade. When a large ship got stuck in the Suez canal last year, we saw a ripple effect of what happens when large amounts of cargo don’t reach their destination on time. Then there’s trade between countries. Having agreements between two countries is one of the tenets of bilateral relations and diplomacy.
Of late, India has been on something of an FTA spree with several countries. This wasn’t always the case. There was a period when India was sceptical. Now, the FTAs cover several products, from textiles to automobiles and pharmaceutical products. But are FTAs beneficial for developing countries? Or do they only help developed and rich countries leaving developing countries with the scraps?
Since Adam Smith talked about the virtues of the division of labour and David Ricardo about the advantage of trading with other countries, the global economy is more integrated than ever. Over the past century, trade relations have greatly increased, with more countries participating. The thought process is greater openness and liberalised trade. That’s not always been the case, with many bumps on the road.
From the 16th to the 18th century, mercantilism dominated the trade policies of Europe. It was defined as obtaining a favourable trade balance, with the value of exports not exceeding imports. It discouraged trade policies between countries since governments would impose tariffs and quotas on imports. When the world fell into depression in the 1870s, there was pressure for domestic protection.
Fast forward to the aftermath of World War II. The US and Britain emerged as economic powerhouses. They wanted to create a more open and comprehensive trade system. One of the outcomes of the 1944 Bretton Woods Agreement was the International Trade Organisation (ITO). However, that was short-lived, and the General Agreement on Trade and Tariffs (GATT) took over in 1947. When the WTO succeeded GATT in 1995, it went further than its predecessor and included policies on services, IP, and investment.
As far as India and FTAs are concerned, the past decade was marked by hesitation and scepticism. Discussions with the EU, Australia, and Canada were on hold. One notable event was India withdrawing from the Regional Comprehensive Economic Partnership (RCEP) in 2019. Since then, there’s been a change of heart. The pandemic certainly spurred things as India realised the necessity of diversifying its supply chains. The US-China trade conflict also made India nudge toward that direction.
With the talk of FTAs, do they help developing economies? Is there some validity in being sceptical about the unbalanced nature of global trade? Or are the fears misplaced?
VIEW: It’s a win-win
While India realised the importance of reliable supply chains during the pandemic, that was true for many countries. It’s also necessary, given India’s ambitious goals in trade. In FY2021, it reached an export target of $400 billion, which prompted Prime Minister Narendra Modi to congratulate manufacturers and farmers. Trade goals aside, there’s also the geopolitical aspect.
India recognised the inevitability of economic engagement through FTAs as a cornerstone of bilateral relations. Take the FTA with Australia as an example. The agreement will help Indian industries in 6,000 broad sectors. The FTA with the UK currently in the works will reduce barriers to trade in sectors like automobiles, agri-foods, and clean energy. FTAs are a vital tool to facilitate and reimagine global trade. Data has shown India has benefitted from FTAs. Exports to ASEAN increased to $31.49 billion in 2020-21.
Broadly speaking, FTAs are a way for a country and its economy to open up. Not just its markets and industries, but open up to new technology and innovations. Otherwise, they remain stagnant and could be left behind. It’s also good for the economy. In 2003, the U.S. International Trade Commission stated NAFTA could increase US economic growth by 0.1-05% per year. Through FTAs, a country gets a lot of money coming in.
The cumulative investment India has received from countries through FTAs in the past five years is almost $90 billion.
COUNTERVIEW: It’s not all good news
One of the tenets of capitalism is open and free trade. However, that comes with some significant risks and downsides. On paper, countries engaging in FTAs should benefit to a certain extent. That balance isn’t always guaranteed. It’s often the richer developed country that gets a bigger slice of the pie. The system is inherently unbalanced since developing economies are in a weaker bargaining position.
Speaking of India’s FTAs, they haven’t always been good. The ones with South Korea and the South Asian Free Trade Area (SAFTA) have benefitted other economies more than India’s. Because market sizes differ, the impact of various FTAs has been uneven and, in some cases, underwhelming. Domestic manufacturers were the worst hit since FTAs made imports cheaper.
One of the broad criticisms of the WTO and its trade policies is that it favours developed economies, and they get a bigger microphone. There’s a view that countries like the USA and Japan use FTAs to get advantages from developing countries that they couldn’t from the WTO. This could facilitate domestic political opposition. One such example is the Trans-Pacific Partnership (TPP) in the US which faced headwinds.
- Decoding India’s revived Free Trade Agreement rush – World Economic Forum
- A Brief History of International Trade Agreements – Investopedia
- Free Trade Agreements – A brief history – European Student Think Tank
- Trade agreement: Why India made a U-turn on free trade deals – BBC
- India’s return to free trade deals – a decade in the making – Hinrich Foundation
- FTAs and India’s global outreach – Financial Express
- A preferential route: Effectiveness of FTAs in Indian exports – Economic Times
- Pros and Cons of Free Trade Agreements – The Balance
- FTAs need to be reworked – BusinessLine
- America’s Uneasy History with Free Trade – Harvard Business Review
What is your opinion on this?
(Only subscribers can participate in polls)
a) Free Trade Agreements are good for developing countries.
b) Free Trade Agreements are bad for developing countries.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
A road paved with surprises — why Indian economy’s steady course can’t be taken for granted
For the Left:
West’s Double-Standards on Human Rights and Terrorism: The Boot Could Be On The Other Foot, Too
🇮🇳 STATE OF THE STATES
Reward for newly elected panchayat officials (Haryana) – Manohar Lal Khattar, the chief minister of Haryana, announced on Saturday that his administration has released ₹300 crores as a reward for the newly elected members of Panchayati Raj Institutions (PRIs). For the various PRI positions, a total of 71,696 delegates have been chosen. Up to 40,000 of them were unanimously chosen.
Why it matters: The CM declared that democracy starts at the panchayat level. The CM emphasized his government’s accomplishments in rural areas and stated that this endeavour is intended to make the panchayats financially stable.
Additional ₹5 crores for Assam Agitation Welfare Trust (Assam) – Himanta Biswa Sarma, the chief minister of Assam, said on Saturday that the Assam Agitation Welfare Trust would receive an additional ₹5 crores. The trust was established with a capital of ₹5 crores, and after the chief minister announced an additional ₹5 crores, it will now have a total of ₹10 crores at its disposal.
Why it matters: According to Sarma, the money would be used to provide different relief measures to the families of Assam Agitation martyrs and others who were gravely injured during the agitation. The Assam Accord Implementation Department was also given a directive by the chief minister to create an online record of those who were shot at or suffered significant injuries while participating in the Assam Agitation.
SMEs for women (Odisha) – The Odisha government declared on Saturday that it would convert the Self Help Groups (SHGs) for women into Small and Medium-sized Enterprises (SMEs) and transform them into thriving financial hubs after empowering 70 lakh women through SHGs.
Why it matters: Micro and mini industrial parks will be built in each of Odisha’s 30 districts to promote female entrepreneurship, and the state’s chief minister said that each district-level federation will receive a revolving fund worth ₹1 crore, a block-level federation will receive ₹50 lakhs, and a panchayat-level federation will receive special market and office space.
Measles almost public health emergency (Maharashtra) – Similar to Covid, the measles disease outbreak in the state and the nation is on the verge of becoming a public health emergency, according to Dr Subhash Salunkhe, the head of the state’s 11-member task force established to address the mounting cases of the disease.
Why it matters: The state has so far reported 93 outbreaks and a total of 807 cases. For the record, a measles outbreak is considered to exist when five cases or more are reported in a specific area.
Boost in assistance to PwD (Tamil Nadu) – On Saturday, Chief Minister M.K. Stalin announced a rise in the amount of money provided each month to different categories of people with disabilities, from ₹1,000 to ₹1,500. He claimed that his government wanted people with disabilities to live in complete freedom.
Why it matters: Stalin stated that 4,39,315 people were receiving support from the Revenue Department and that increasing the amount would result in an additional expenditure of ₹263.58 crores. He was speaking at a celebration honouring the International Day of Persons with Disabilities.
🔢 KEY NUMBER
28% – A survey by Local Circles revealed that 28% of adolescents between the ages of 13 and 17 years spend six hours or longer on digital devices.