How risk-free is free trade?

Should one say that the Indian Finance Minister, Dr. P. Chidambaram, in spite of his Harvard education in economics, does not have a good grasp of the intrinsic worth of free trade in stimulating domestic production and thus as the harbinger of national prosperity?

Dr. Chidambaram, who is known to be a good Finance Minister and an able supportive hand of the Indian Prime Minister, Dr. Manmohan Singh, himself a remarkable former Finance Minister, has reportedly told Singapore's Strait Times the other day that India must exercise "great caution" in negotiating free-trade agreements (FTAs) with more developed neighbours. In an interview with the daily, he also said, "FTAs are necessary despite complaints from the Indian industries about uneven playing fields but care should also be taken in assessing their overall impact".

According to him, India divides FTAs into categories. "One with our immediate neighbours' concerns as the largest economy in the region. The other with developed countries --ASEAN, Japan, South Korea, Singapore. There we have to exercise great caution." Asked about the prospect of India signing a free trade agreement with China, he said, "I don't think we should jump from a situation where trade has picked up immediately to an FTA. Let trade improve".

What did the Indian Finance Minister mean to say by stating "let trade improve"? Did he want to say that India would wait to consider whether it will sign an FTA with China until its export to that country matches, is close to or surpasses its import from that country? Perhaps, the connotation of his statement is exactly that, because the Sino-Indian trade volume is already huge. The Indian Commerce Minister said only last month that China should overtake the United States as India's biggest trading partner in two years.

The World Trade Organisation (WTO) permits regional trading blocs to make some departures from the rigid rules of its multilateral trading regime. The developed countries went for FTAs on a large scale allegedly to ward off the rules of the WTO after its global trade talks in Seattle proved abortive several years ago in face of disruptive demonstrations and virulent protests by angry trade union activists and other anti-globalisation groups.

But do we think about the dangers fraught in signing FTAs with industrially more advanced countries, as India seemingly does in spite of being a major industrial power of the world? Many of us even mount pressure in various ways upon the government for signing FTAs. The issues of injury or threat of serious injury to domestic industries, which justify taking safeguard measures under the relevant WTO agreement for protecting domestic industries do not appear to us as matters to be seriously examined prior to signing an FTA. All FTAs we have so far signed involve more than one relatively more developed countries.
On the contrary, the Indians, quite wisely, are not ready, unlike us, to take any risk of regretting, long after the marriage, that marriage was a mistake.

That's why they consider whether their domestic industries will face any serious threat of injury from foreign goods swamping their market after the signing of an FTA with any country more developed than theirs and assert the need for great caution in signing one like it.

We seem to be rather convinced that this is an age of FTA and we must go for it without any considerations of possible adverse consequences. In our view, the risks involved may be considered only when they surface. Perhaps, we are like those who regret that marriage was a mistake.

We should make out what the Indian Finance Minister, Dr. P. Chidambaram, conveyed by saying "FTAs are necessary despite complaints from the Indian industries about uneven playing fields but care should also be taken in assessing their overall impact". Why should the Indian industries complain about uneven playing fields when FTAs are signed following agreement by all the parties involved on their respective sensitive lists-- lists of items which they would initially keep outside the scope of free trade and gradually, through negotiations, make subject to tariff reduction in phases? They also agree on the rules of origin for determining the country of origin of products to be traded under the arrangement. The careful parties even simultaneously work out a mutual recognition arrangement for purpose of certification of product quality by the exporting country to be acceptable to the importing country under an FTA.

The aforesaid factors preclude the possibility that the Indian industries objection to some FTAs with more developed countries reflects anything other than their apprehension that their internal production capacities are not yet enough to meet the stronger competition they will be exposed to on signing such agreements. If it is so, should we not assess whether our level of industrialisation and internal production capacities are enough to consider that free trade agreements proposed by countries more developed than ours will not create uneven playing fields for our domestic industries and mar the prospect of future industrialisation?

If Harvard-educated Indian Finance Minister is right in his assessment that India should exercise great caution in signing free trade agreements with more developed countries for protecting the prospect of its future industrialisation, how cautious should Bangladesh be in the matter of signing such agreements? Being a least developed country with a large population and scarce land, Bangladesh has an overriding need to industrialise herself to be able to remove poverty, which is still very widespread. We should think a thousand times and thoroughly examine whether or not it will lead to injury of our domestic industries and curtail the prospect of our future industrialisation before we proceed to sign such an agreement with any country.

Unless the Bangladesh economy has enough complementaries with the economies of countries with which she enters into free trade agreements, it is likely that immediate benefits from such agreements will be marginal and she would be a loser in the long run.

The assumptions that the expansion of market size through FTAs will help augment the flow of foreign direct investment and inspire local entrepreneurs to establish new and big industries are not yet supported by the apparent realities. Foreign investment in this country is yet virtually limited to the energy, infrastructure and service sectors and to production of cosmetics and toiletries and some pharmaceuticals for the domestic market. No foreign company has begun to export product from this country in a significant volume although we have no option but use export as the engine of growth.

If TATA eventually implements its $2.5 billion investment proposal and begins to export its product, which is basically steel, don't think it has come to this country as a result of our signing FTAs. Rather, it will be wise to assume that its coming is the result of our decision against exporting gas. The Indian company would come to use our gas for manufacturing products which it can export. Had they been able to arrange gas in their own country, they would have never shown interest in setting up industries here. Whether or not this investment will be beneficial for our country is a different question. Local experts are yet to offer an unequivocal opinion on the matter.

Source: Financial ExpressMore

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