When free trade isn’t fair

In a recent comment, the Gujarat Chief Minister Narendra Modi expressed grave concerns on the outcome of a little known Free Trade Agreement (FTA) that the Indian government is hastily attempting to sign with the the European Union. His concern was that the impact of this proposed EU-FTA on the domestic dairy and animal husbandry industry in India would be debilitating if cheap European dairy products supported heavily by EU subsidies get inroads to Indian consumers. His fears are not unfounded. Indeed, this scenario could well turn out to be true. 

In February this year, the EU 2014-2020 budget was announced.Of the 960 billion euros budget, a mammoth 38 per cent, or 363 billion euros, was allocated purely for farm subsidies, which will without doubt make EU farm and dairy products ridiculously cheap compared to Indian products which any way suffer from massive cost additions due to various infrastructure issues. This is true for other industries as well. One could well imagine world class corporations like IKEA and Carrefour competing with domestic brands at prices that are cheaper than those of domestic products. If these are the things to come, then the so-called ‘Free’ Trade Agreement could well turn out to be our costliest trade agreement. Since any FTA encourages direct imports, it is not a natural builder of employment, rather a reducer of the same, as over time, domestic industries shut down giving way to cheaper imports. Various reports mention how FTAs in Senegal in 1990s led to employment cuts by 30-35 per cent, especially in the manufacturing sector. 

Similar trends were observed in Sierra Leone, Uganda, Sudan, Ghana and other African nations.In the year 2000, EU and Mexico signed a so-called ‘Global Trade Agreement’. Within three years post-GTA, Mexico’s GDP growth was crawling at one per cent, with their trade deficit touching a figure of 80 per cent. The rural-urban employment gap got wider, thus creating lot of social and local tension in the region. Mexico currently has FTAs with around 44 countries. Significantly due to this, they were one of the hardest hit during the economic slowdown, wherein their GDP plummeted by more than six per cent during 2008-2009. As per economic surveys, the poverty level on absolute terms has gone up from 35 to 46 per cent during the period 2006-2010.Indian FTAs are leading to similar results only. A joint study by Corporate Europe Observatory and FDI Watch slammed the proposed EU-India FTA. The authors of the study mention, ‘The EU and the Indian government have handed the negotiation agenda over to corporate lobby groups, ignoring the needs of their citizens.’ And the issue is not just limited to dairy and agricultural products. 

A paper titled ‘India-EU free trade agreement – should India open up banking sector?’ concludes the following, ‘The provisions in FTAs are likely to further destabilise the financial system and so make future crises more likely.’ Oxfam, Médecins Sans Frontières, Stop AIDS Campaign, Health Action International (HAI) Europe and Act-Up Paris protested against the EU-India FTA outside the European Parliament in April 2013 because access to critical medicines and aid for disadvantaged communities would be gravely affected by the EU-India FTA.An April 2013 paper by Indian automobile industry body SIAM on the EU-India FTA mentions, ‘...The EU FTA is a retrograde step and will have a severely damaging and long term irreversible effect in several ways for the Indian economy, auto industry and consumer at large.’ Similar are the statements of other industry bodies like CII, FIEO etc which are strongly cautioning the government against signing FTAs. India signed an FTA with Japan in 2011. Imports from Japan grew by over three per cent to $12.5 billion in 2012-2013, while our exports to Japan fell down to $6.26 billion from $6.32 billion one year ago. India signed a free trade agreement with ASEAN nations in 2009. 

Look at the economics since then. India’s trade deficit with the ASEAN group has increased to $18 billion in 2012-2013 from $14.9 billion in 2009-2010. Is it any wonder that in the year 2012-2013, India’s current account deficit reached a historic high of 4.3 per cent of GDP, one reason the rupee has now plummeted to record lows (and was Rs 61.86 per dollar on 7 August2013, a never before seen low)?When it comes to poverty reduction, the world doesn’t really require such hollow and lopsided policies like FTAs, rather what we require are fairer wealth distribution policies. Today, the wealth accumulated by the hundred richest persons in the world is enough to end global poverty four times over! Shockingly, the wealth of the top one per cent has increased by 60 per cent over the last two decades and was not even affected by the last financial crisis.And there is every likelihood that any FTA-driven Indian economic growth, if at all, would be a jobless one, and might not be sustained in the long run. We don’t need FTAs with other nations to increase their wealth; we need poverty reduction policies for our people; and the government should realise this as soon as possible.

The author is a management guru and director of IIPM Think tank

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