View: Are we looking forward to the UK and the US trade agreements to compensate RCEP?

Pandemic has created lots of threats and opportunities simultaneously to the Indian economy. Since the fourth quarter of 2020, Indian trade shows signs of mild recovery, given some significant politico-economic changes in the international arena. Still, we have several uncertainties in the international negotiations front.

The new variation of the COVID-19 has started influencing the world once again. It has triggered a few vulnerabilities once more. Is it accurate to say that we are going to lockdown once more? How will it affect our global exchange? We have just revoked RCEP. Will trade arrangements with our significant trading partners like the US, UK, and EU allow us to play better on the global stage? Are these exchanges going to open new occasions to move upward in the stepping stool of global value chains (GVC)? Or on the other hand, these will be another arrangement of strategic negotiations with the least economic benefits like the current free trade agreement (FTAs).

The existing plethora of scholarly writing has called attention to the political economy inspirations driving the proliferation of trade agreements, which generated less economic benefits. In one of my examinations, I found that our existing FTAs don't significantly affect our trade after controlling the political economy factors.


Typically, nations do tend to sign trade agreements with whom they have a critical trading history. India did likewise under south-south collaborations, yet none of the current FTAs have produced any significant welfare gain. A conceivable explanation could be the shallow kinds of agreements, which don't completely cover numerous elements of exchange, for instance, non-tariff measures. Data or information lop-sidedness to the exporters is another explanation, for which all exporters can't explore the FTA routes adequately.

Current export shares (see figure) reveal that the US (16%), UK (3%), and EU (15%) are our major trading partners. We held a trade surplus with the US and UK by US$ 12.7 billion, and US$ 1.2 billion individually in 2018. Germany, Netherlands, Belgium, Italy, France, and Spain are our top exchanging nations EU locale. With EU, we are having a trade deficit of US$ - 5.6 billion.

The Biden-Administration and Brexit have provided India some changing international politico-economic platform for effective trade negotiations with these trading partners. But whether these deals will help combat the trade diversion effect of RCEP for India is an inquiry. Consequently, unlike the existing FTAs, India should be more cautious in signing deals with the UK and the US. We should not rush to arrange these agreements so that the incumbent and new exporters can effectively use the FTA courses.

International outsourcing of high-tech processed intermediate manufacturing like chemicals, pharmaceuticals, computers, electronics, optical, machinery equipment, motor vehicles,etc., has increased in developed nations like the US, UK, and EU nations. Developing countries like India have revealed higher linkages in the value chain of low-tech primary products used as intermediaries and processed intermediate goods like food, coke, refined petroleum, basic metal, rubber,plastic, etc. Given the growing regional-GVCs, the mega-regional negotiations would likely be more effective in enhancing the interconnectedness among nations regardingtheir participation in GVCs in “Factory Asia” or in “Factory EU.” Thus, for India, bilateral treaties may not compensate the benefits of mega-treaties to move up to the GVC-ladder.

Given our existing infrastructure, and other roadblocks of growth trajectory, the pandemic tells us that the V-shape recovery of the economy is theoretically possible. Under the circumstances, we should focus more on rebuilding our trade policy to gain a comparative advantage in high-tech processed intermediate products to create an “enabling environment” to trade in manufacturing and services.

(Author is a Trade Economist, and Associate Professor associated with BML Munjal University, Haryana. Views are author’s own.)