Free trade is dead, long live free trade!
A 75 year old, post-WW2 global consensus on rules-based free
trade is breaking down. Some of it for good economic reasons – global supply
chains have grown massively, but have also sacrificed redundancies at the altar
of efficiency. As a result, small disruptions (or even potential disruptions)
cause snowball effect on global supplies of critical goods – the recent
semiconductor shortage being a case in point. But a lot of it is political –
the axiomatic assumption of “winners and winners” out of free trade are being questioned
by those who think there have been too many “losers” too. Add to that the
recent geopolitical tensions around China, the factory of the world, and
free-trade-wallahs are at the receiving end of sharp backlash.
India’s public junking of RCEP, the China-led mega trade
bloc that was supposed to be the mother of all multilateral trade blocs in Asia,
was in the same mien. Endemic trade deficits with China and heightened border
tensions meant India was loathe to risk being in a Chinese tent where China could
dominate rule-making. Brexit was driven by UK’s very similar frustrations – too
many seemed to be “losing out” due to a rigid rules-based EU architecture.
A different set of compulsions have come to the fore in a
post-Covid world. Faced with severe economic slowdown and having adopted a
tight-fisted fiscal strategy, Government of India (GOI) has been pushing
through a slew of supply-side “reforms” to prepare the ground for the cyclical
upturn, whenever the latter happens. Strategic bilateral FTA are part of the
reform tool-kit, and hence back in flavour. Similarly, a big premise of Brexit was
UK’s ability to strike “better deals” individually with strategic partners like
India. An Indo-UK comprehensive FTA is a key part of the Enhanced Trade
Partnership understanding reached at Prime Ministerial levels.
In a nutshell, the rationale for an Indo-UK FTA has gotten
stronger on politico-strategic grounds. However, the economic rationale too is
quite compelling.
Indo-British trade has moved significantly away from a
shared colonial legacy. Looked at from a headline perspective, India and UK are
no longer very important to each other on trade – neither country figures in
the other’s Top 10 list of trading partners.
But looked under the hood, the importance is rather more
than headline numbers.
Beyond the Headlines
For starters, UK is one of the few large economies with
which India enjoys a merchandise trade surplus – amongst the G20 countries,
India’s trade surplus with UK is second only to that of the US. Once trade in
services is added, the total trade surplus is even higher. Further, UK is the
third largest export market for India’s textiles – an industry that has long
been the focus on policy attention due to its high employment-intensity.
Complementarity of trade
India and UK also have complementary trade profiles. World Bank’s Trade Complementarity Index (TCI) for both countries are at relatively high 50s and 60s – demonstrating that India export basket fits in well with UK’s import basket and vice versa.
Investment Flows and Geopolitics – Linking up the sinews
India’s interest in UK as an investment destination
outstrips, on relative importance, India’s trade relations. Led by the Tata
group’s acquisitions of marquee British companies like Corus and JLR in the
early part of the 21st century, India is today the second-largest
source of FDI for UK (behind US). The London capital market eco-system has also
proved to be one of the leading hubs of capital raising for Indian companies.
Several British institutions are setting up operations in GIFT City IFSC.
However, it is at the geopolitical level that the
congruences have gotten sharper. India’s a key pillar of Indo-Pacific
strategies of all Western powers, UK included. The China variable has gotten
ever-so-angular in recent months, prompting a revisit of military level
equations in geopolitics by all major powers. UK, while undergoing a massive
reprioritization of defence expenditure, has committed to a continuous naval
presence in the Indo-Pacific. The AUKUS arrangement further cements those
commitments.
India’s experience with FTA – At the margin, not bad
A popular chestnut is that India has been on the receiving
end of FTAs and has ended up importing more and exporting (relatively) less. The
Economic Survey 2020 did an exhaustive analytical study on the point – it
showed actual results to the just the reverse. The coverage of the study was 14
FTAs concluded by India with various countries and regional groupings (like
ASEAN) in the 21st century. On the whole, India exported more than
it imported, incrementally, as a result of FTAs.
Source: Economic Survey 2019-20
In terms of total trade, overall impact of FTAs was 10.9% on
exports and 8.6% on imports. Specifically for manufactured products, the impact
was higher – 13.4% for exports and 12.7% for imports. Ergo, India “gained” a
trade surplus of 2.3% per annum on total merchandise trade and 0.7% on
manufactured products trade.
The author is the Managing Partner and CIO, ASK Wealth
Advisors. The views and opinions expressed in this article are
personal.
