The Narendra Modi government appears to have reconsidered its stance on trade deals after questioning the benefits India would derive from the free trade agreements it has signed over the years. Over the last few years, the government has actively pursued agreements with various countries. Trade agreements have been signed with Australia and the United Arab Emirates, and negotiations are underway with the United Kingdom, the European Union, and others. But as these negotiations enter critical stages, non-tariff issues are receiving increasing attention, from carbon emission standards and climate change measures to labor and gender balance standards. Indian negotiators fear their inclusion would provide a means to impose non-tariff protectionist measures on partner countries, preventing India from taking full advantage of the trade deal.
For example, consider the hot topic of carbon emissions. Recently, the European Union reached agreement on a carbon boundary adjustment mechanism aimed at covering carbon-intensive products such as steel, cement, aluminum and fertilizers. This will apply from October 2023. Under this framework, taxes are imposed on imported goods based on emissions during the production process. According to the European Commission, the coordination mechanism will “equalize the price of carbon between domestic and imported products” so that the EU’s climate targets “by shifting production to countries with less ambitious policies”. We guarantee that it will not be damaged. This imposes costs on Indian exporters and acts as a barrier. Similarly, Indian steel makers are at a disadvantage when compared to US makers whose processes reduce carbon emissions.
As reported in the paper, Delhi’s policy makers raised these concerns by arguing that they need to be considered “carefully”. Negotiations must proceed cautiously, but must not be derailed by these issues. Governments must promote these trade agreements. Indeed, domestic reform agendas must be aligned with ensuring that profits from these trade agreements are maximized. Recent reports that the government plans to raise import duties on “non-essential items” run counter to the government’s acceptance of trade deals. Such moves only expose the government to accusations of protectionism. In his first two decades, from 1991 to 1992, tariff rates fell sharply. However, this trend has been reversed under the Modi government, with the average import tariffs applied actually increasing. As companies diversify away from China and pursue a China Plus 1 strategy, India must actively seek to lower trade barriers and become part of the global value chain. Hmm.
