So far, the main objective of India’s Foreign Trade Policy (FTP) has been to increase exports through tax incentives and duty rebates. Given the unprecedented structural changes in global trade, the new FTP is likely to focus on the FTA (Free Trade Agreement) as a driving force to expand exports through supply chain trade. global supply. There are two factors that attribute this. First, the FTA is likely to expand opportunities for exporting supply chain manufacturing across borders as part of competitiveness. Second, an impetus will be given to MSMEs to play an active role in building the export value chain. Indeed, they are likely to strengthen supply chain manufacturing competitively, due to the low wages in India.
As the new year 2022 opened with the focus on the new foreign trade policy ( FTP ) for 5 years, which has become overdue for a year, global trade has undergone major changes with the trade confrontation between the United States and China and the unprecedented COVID 19. The main impediment to global trade was the supply chain constraint which makes up three quarters of global trade and China being the dean. Protectionism has surged in the United States – the world’s largest consumer country. Global integration through trade and supply chain manufacturing is in decline. In these contexts, the FTA is resurfacing as a remedy for improving exports.
FTA is on the lips of business advisors to focus on the new FTP. Currently, multiple incentives are granted to increase exports. Given the United States’ disapproval of these incentives as non-WTO compliant and the EU’s progressive emphasis on green exports, India’s new CTF is likely to see major structural changes. Trade analysts predict that the FTP’s new priority will shift to the FTA as a new roadmap for export expansion than incentives. Once the FTA, which was seen as a harm to the domestic industry due to the reverse duty structure, will reappear a new avatar for export growth in the new FTP. In 2022 and 2023, India is planning three FTAs. FTA with the United Arab Emirates in January 2022, with the United Kingdom in December 2022 and with the EU in March 2023.
India has signed 13 FTAs and a number of agreements are in various stages of negotiation. India’s experience with the FTA has been bittersweet. While these FTAs have helped increase export opportunities, the majority of FTAs have been beneficial to partner countries. According to the AfDB, India’s use of FTAs ranges between 5% and 25%, which is one of the lowest in Asia.
Nevertheless, the Economic Survey painted a favorable picture of India’s benefits from the FTA. The 2019-2020 economic survey, unveiling the results, showed an overall increase of 13.4% in Indian exports of manufactured goods and 10.9% of goods between 1993 and 2018.
ASEAN free trade in the region through AFTA (Asian Free Trade Area) and EPA (Economic Partnership Agreement) and Korea FTA has proved to be a great success to boost exports. The successes of Toyota’s Asian car model after the yen revolution and Japanese consumer electronics are examples of this.
Similarly, the success of South Korea’s FTA in boosting its exports may be a lesson for India for its new FTP. After the Asian currency crisis in 1997, Korea adopted an aggressive FTA policy. By this, it has been difficult for domestic-oriented companies to build a global supply chain network. The Korean model suggests that FTAs with partner countries act as a key driver for shaping global supply chain practices. As trade increases through the FTA, the changing role of maritime logistics has been given greater priority. Therefore, India’s new CTF should also simultaneously focus on changing the role of maritime logistics to go hand in hand with FTA-induced export growth.
India should conclude an FTA with the United States. It is the main destination for Indian exports. In 2020-21, exports to the United States accounted for one-sixth of India’s total exports, accounting for 17.5%. The United States plays an important role in the export of consumer goods. It is the largest export destination for ready-made garments, seafood products, diamonds and pharmaceuticals, which are the major components of Indian exports. Studies by the World Bank and the Peterson Institute predict significant gains for the United States and India, if a free trade agreement is concluded.
With the removal of tariffs under the FTA, the trade potential between the two countries will increase through trade-related investments. The United States has the advantages of technology and financial muscle and India has an advantage in providing a low-cost production base. The FTA will encourage US investors to invest in India in preparing supply chain industries, while providing duty-free high-tech products as inputs.
The manufacture of cell phones by American investors is an example of this. Apple Inc’s investment in India is a good example. Concurrent investments by Foxcon, the contract manufacturer of the Apple phone, are the supply chain manufacturing cases.
India is moving towards a new manufacturing dynamism encompassing digitalization and automation, which are core industries. These industries need technology and skilled labour. The FTA with the United States will benefit from the transfer of technology through the import of low-cost components and materials.