Opposites attract in trade talks
Matthew Roy has a look at the approaches the Indian and New Zealand governments could take in free trade negotiations.
India and New Zealand’s trade talks pit the needs of a rising economic power with a history of statism and protectionism against those of a small, export-dependent economy that is ardently committed to free trade. But it’s a case of opposites attracting – India and New Zealand’s differences have caused the two countries to seek each other out for trade talks and may hold the key to a successful deal.
New Zealand Trade Minister Tim Groser and Indian Commerce Minister, Anand Sharma announced the start of negotiations towards a free trade agreement between New Zealand and India at the end of January 2010.
Initial talks will now begin in April and reflect that the two countries have very different reasons for wanting an agreement.
New Zealand has a long history of negotiating comprehensive free trade agreements – beginning with Australia in 1983 through to China in 2008 and ASEAN in 2009 – and sees more open trade with India as a major benefit to the Kiwi economy. For instance, our free trade agreement with China, now the world’s third largest economy, contributed to a 43 percent surge in exports to a total of NZ$3.62 billion in 2009.
“China is an interesting parallel for our trade talks with India,” says John Ballingall, Deputy Chief Executive of the New Zealand Institute of Economic Research in Wellington who was also one of the diplomats that worked on a Joint Study that was the prelude to the India-New Zealand trade negotiations.
“New Zealand exports to China rose considerably after the agreement was signed, partly due to the reduction in trade barriers but also because of the publicity.”
“Currently India is in the too hard basket for many New Zealand businesses but a free trade agreement makes businesses consider exporting more seriously,” adds Mr Ballingall
New Zealand would like to repeat this success with India, an economy projected to be the world’s third largest by 2025. New Zealand's exports to India in 2009 have increased by 72 percent over the past three years making India our 13th biggest export partner but are still valued at just NZ$630 million (see graph below). Current duties and non-tariff barriers make India our only major partner with whom we do not trade substantial volumes of our mainstay horticultural exports.
Partial versus comprehensive
By contrast, although India has been freeing-up its trade as part of economic liberalisation begun in the 1990s, only one of the 10 trade deals the country has negotiated has been a comprehensive free trade agreement (with Singapore in 2005). The other nine agreements have been with developing nations, such as Malaysia and Pakistan, and leave tariffs and non-tariff barriers in place to protect domestic producers. .
The distinction between developing and developed country free trade agreements is important because both India and New Zealand are members of the World Trade Organisation (WTO). As signatories both countries have agreed to abide by WTO rules when it comes to negotiating free trade agreements with other members.
The effect of these rules (specifically Article XXIV of the General Agreement on Trade and Tariffs) is that any free trade agreements conducted separately between WTO members must eliminate duties on ‘substantially all trade’ which has been interpreted by countries such as New Zealand, Australia and the US as removing 90 percent of tariffs on all goods.
But the WTO provides an exemption for agreements between developing countries, Enabling Clause 197, which allows developing-country members to enter agreements in which tariffs on trade are reduced but not eliminated.
India is looking at negotiating a raft of free trade agreements with developed countries. The country began tentative talks with the European Union in 2009 and is also exploring trade co-operation as part of the Comprehensive Economic Partnership for East Asia along with New Zealand, Australia, Japan, China, South Korea and the members of the ASEAN economic block.
But it will not be able to use the Enabling Clause to shield domestic producers as it has in the past and that’s where New Zealand comes in says Robert Scollay, Associate Professor of Economics and Director of the APEC Study Centre at the University of Auckland.
“India is probably using an FTA with New Zealand as an experiment, as a template for free trade agreements with developed countries,” explains Mr Scollay.
“Although an agreement with a small economy such as New Zealand will produce some significant benefits, it is unlikely overall to lead to major economic gains for India. But it could help India to ease its way into freer trade without unduly threatening domestic economic interests.”
“New Zealand has seen this strategy before with China and Singapore which both selected New Zealand for their first comprehensive free trade agreement with a developed country,” Mr Scollay adds.
A free trade agreement with a small economy such as New Zealand will produce some benefits for India but it is unlikely overall to lead to major economic gains, say experts. India’s main aim is to use its talks with New Zealand to test the waters for future agreements with developed countries without unduly threatening domestic economic interests
The Indian Government seems to have judged correctly that New Zealand is too small to arouse India’s domestic interests: “There is simply no business opposition to a free trade agreement with New Zealand in India,” says Pritam Banerjee, the Delhi-based head of trade and international policy for the Confederation of Indian Industry.
In fact Mr Banerjee says that so far it is just the opposite. There is support for the agreement among a number of Indian companies that import intermediate goods from New Zealand. They would like to see the Indian Government remove import tariffs on hardboard used in construction and wool, which is used to make carpets.
The Confederation is planning to hold talks with its members during the first half of 2010 to find what items they would like to see included in the agreement. Mr Banerjee believes New Zealand will be asked to drop remaining tariffs on textiles, leather, jewellery and footwear, areas where India is a big exporter. The Indian Government will also be interested in easing visa restrictions for business travellers to New Zealand and looking at issues in the film and education sectors.
Media reports suggest that India may also separately seek New Zealand’s help to join the Asia-Pacific Economic Cooperation forum which seeks among other things to liberalise trade between member nations in the Asia Pacific.
What the kiwis want
The main areas where New Zealand would stand to benefit from a free trade agreement with India include a reduction in tariffs and non-tariff barriers on raw materials, agricultural and manufactured goods. But while WTO rules may help drive down tariffs on manufactured goods, for agricultural products, the trade body’s rules allow members to charge high tariffs, for example up to 150 percent on frozen sheep meat.
To negotiate better access, says Trade Minister Tim Groser, New Zealand will emphasise that it is not a threat to Indian producers and can provide complementarity through our counter-seasonal production and expertise in processing and value-added products.
“Agriculture is deeply, deeply sensitive issue in India which is easy to understand for a country where around 600 million people live on less than a dollar a day,” Mr Groser said speaking to the Asia New Zealand Foundation. “ The trick is focusing on rational views and looking at the realities underneath.”
For example negotiators are likely to stress that New Zealand’s dairy production is too small to affect India, which is the world’s biggest producer and that prices of liquid milk are too low in India to make New Zealand exports profitable.
Wiggle room
As well as agricultural tariffs, the WTO rules permit substantial wiggle room in the form the agreement takes. For a start the ‘substantially all trade’ definition used under WTO rules leave it largely up to New Zealand and India as to what percentage of goods and services on which barriers are eliminated. The period over which tariffs are cut is also negotiable as is the use of supplementary measures such as safeguards and tariff rate quotas.
New Zealand will be looking to include some areas that are not yet mandated by the WTO in agreements between members. These are the so-called Singapore Issues: chapters on investment; standards and conformance; customs procedures; intellectual property; government procurement; and competition policy that may be mandated by the WTO for member agreements in the future.
Mr Scollay at Auckland University also points out that WTO rules also allow plenty of variety in whether the agreements impose obligations on the partners to undertake specific actions or to refrain from specific actions, or are ‘soft’ expressed in terms of agreement to ‘cooperate’, ‘consult’, ‘exchange information’, or to abide by agreed ‘principles’ on a ‘best endeavours’ basis.
- by Matthew Roy
Image of a shopping mall in Kolkata sourced in Wikimedia Commons.
Article uploaded: 6 April 2010
Read more:
Trading up with India, a September 2009 article on the upcoming FTA
New Zealand Exports to India: 2007 to 2009 (in NZ$)
Source: World Trade Atlas