Brainstorming meeting on Indo-EU FTA: Issues and Concerns

Faced with the slow progress of the multilateral trade negotiations, more and more countries are entering into Regional Trade Agreements (RTAs). The European Union, with its significant presence in multilateral and regional trade agreements, and India, which has been a late starter, are about to forge an Indo-EU Free Trade Agreement (FTA). The varying capacities of these trading partners necessitated an assessment of the challenges that India would face while negotiating with its largest trading partner.

Will the FTA be mutually beneficial to both partners? Will it address concerns related to development? What is the level of India's preparedness for negotiating an FTA?

A 'brainstorming' meeting on 'Indo-EU FTA: Issues and Concerns' jointly organised by the Centre for Trade and Development (Centad) and Make Trade Fair Campaign, Oxfam International, attempted to answer these questions.

The meeting was held on August 21, 2007 at India Habitat Centre, New Delhi, and was attended by academics, civil society representatives and government representatives.

The deliberations were spread over four sessions. Each session was chaired by an eminent expert and was followed by open discussions.

The key issues that were discussed are as follows:

• Significance and challenges of an Indo-EU FTA:
  An introductory background of the Indo-EU FTA and its current state of play.
• Rationale for forging an Indo-EU FTA:
  India's position on the FTA in the face of its commitments to multilateral trade agreements, experiences from FTA engagements, and challenges in the FTA.
• Towards a balanced FTA-Issues and concerns relating to:
  NAMA, customs facilitation, services, and competition policy.
• Building a civil society partnership for a fair Indo-EU FTA.

Linu Mathew Philip, research officer at Centad, while introducing the main topic of debate for the day, said that a stalemate in the multilateral trade agreements has led to a marked drift towards RTAs.

In the World Trade Organisation discussions, the main focus on market access has led to the negligence of development issues and the interests of developing countries. An FTA with the EU, India's largest trading partner, will have a significant impact on India's trade. Since very little study has been done on this issue, the meeting aimed to discuss India's preparedness for such an FTA, the likely impact on development - both economic and sustainable - and strategies for civil society to voice concerns on issues that might not have been raised.

Below is a summary of the major points raised and discussed.

Introducing the Indo-EU FTA: Background and current state of play

Chair of Session I, Professor Nagesh Kumar, Director General, Research and Information System for Developing Countries, New Delhi, introduced the subject of discussion by noting that the FTA was "timely and important" - timely, because India is going to negotiate an agreement with a major trading power which controls one-third of global trade, and important because it is for the first time that India will be negotiating with a large developed region like the EU.

Prof Kumar enumerated the various challenges. The EU represents a strong negotiating asset. It is also India's adversary at the WTO and this is the first time that cooperation in trade is sought with a group that is also an adversary at the multilateral level.

The FTA will provide the EU with access to a large expanding market, an economy with a growth rate of 9.8% and a population of 1 trillion, and, most importantly, a market which has been protected by very high tariffs. For India, the EU is a prosperous region but suffers from a saturated market and stagnating growth rate of 1-2% and where the average level of tariff is low.

Will India gain from the FTA? The answer, according to Prof Kumar, was "yes", if some issues were addressed. These include:

• Lack of harmonisation in product and environmental standards that has made the process of market access cumbersome.
• High tariff peaks that apply to products of India's export interest such as textiles, apparels, leather goods, processed foods and labour intensive goods.
• Barriers to export of services from India.
• Subsidies to European farmers (which are as high as 50%) which is unfair competition.

India needs to incorporate the differential treatment that the EU has signed with other FTA partners in its negotiations and contain the tendency of the EU to incorporate WTO-plus provisions in non-trade areas in its bilateral trade agreements.

He concluded by arguing that given these challenges, much depends on India's ability to negotiate a "balanced" agreement, and on Indian business to take advantage of the market access that will be provided as part of the negotiations.

Background Theme

Moana Bhagabati, Assistant Professor, Madras Institute of Development Studies, Chennai, provided a historical background of the events leading to the current negotiations of the Indo-EU FTA.

The current negotiations are a culmination of a process that began more than four decades ago, in 1962, when India became one of the first countries to establish diplomatic relations with the European Economic Community (EEC). The 1993 'Joint Political Statement' and 'Cooperation Agreement on Partnership and Development' and the 1994 'Cooperation Agreement' are significant as they are the "direct forerunners" of the present negotiations.

The official launching of the "Strategic Partnership" in 2004 stemmed from a recognition in the EU of India's recent economic growth, and global recognition of India as one of the world's fastest growing economies. This strategy was reinforced by India's progress in its relations with Pakistan and its pursuit of new alliances with the United States and China.

In 2005, in New Delhi, a Joint Action Plan adopted a High Level Trade Group (HLTG), which was subsequently endorsed in the 2006 HLTG. The HLTG has been the basis for launching of the FTA.

The EU's economic strength puts the onus of carrying forward the FTA on India. However, the fact that the EU as a block is India's largest trading partner, and bilateral trade between the two parties has jumped from 4.4 bn euros in 1980, to 46 bn euros in 2006, makes it important to negotiate a successful FTA that would be in India's interests.

The current state of play

R S Ratna, Director, RMRT, Ministry of Commerce and Industry, Government of India, provided the government's perspective on the ongoing negotiations.

Pointing to the EU's experience in RTAs, the lack of harmonisation within the EU, and the short time-span to conclude the negotiations, by the end of 2008, he said that negotiators from India had a Herculean task. Ratna's presentation focused mainly on India's objectives in addressing tariff peak issues, getting GSP (generalised system of preferences) benefits for market access, seeking removal of non-tariff barriers in the EU and calling for removal of export subsidies in agriculture.

The EU has proposed liberalisation of tariffs covering 90% of trade; 10% trade coverage is not to be liberalised but this, he said, is not proposed to be permanent. It will have to be reviewed.

Being a developing country, India gets GSP benefits for exporting goods. So, in the current negotiations, it is important to ensure that market access for Indian exports is not merely WTO-plus, but also GSP-plus. India's main export item is apparel, where the EU has mixed rate of duties. Therefore, if India can make the EU commit on 0 duty on textiles and leather, it will provide a significant gain to India's exports.

Studies show that while tariffs are coming down in developed countries, the NTBs (non tariff barriers) are being raised. Therefore, even if the EU gives 0 duty concession to India, and does not give MRAs (Mutual Recognition Agreements) and accreditations to Indian agencies, it will be difficult for India to enter the EU market.

According to Ratna, India will propose that agriculture be on the sensitive list. At present, the EU provides export subsidies to its farmers and India provides duty reduction. If this arrangement is not rectified, India stands to lose. Bringing in WTO provisions that call for removal of export subsidies in agriculture in phases could create a level playing field.

Like the previous two speakers Ratna, too, pointed out the lack harmonisation of standards in the EU. This may lead to doubting the utility of the Indo-EU FTA. He acknowledged that compared to India the EU is better prepared for negotiations. Ratna ended his presentation by acknowledging that the brainstorming session was timely as inputs from such meetings are crucial.

Discussions:

In the discussions that followed the session, the most important issue that was discussed was the utility of an Indo-EU FTA given the lack of harmonisation of laws within the EU.

Ratna answered that the EU has, in principle, agreed to look into this matter. But till then, each country within the EU has to be approached bilaterally on issues that do not have a common EU law.

Rationale for an FTA

In Session 2, the Chair, I N Mukherji, Professor, Jawaharlal Nehru University, New Delhi, said that region-specific motivations related to environment and labour laws and wider foreign policy and security issues provide some of the rationale for an RTA. Besides, there is the "domino effect" - fear of exclusion in the face of other countries signing RTAs - that makes a country sign RTAs.

Multilateralism and FTA

Dr Partha Pratim Pal, Assistant Professor, Indian Institute of Management, Kolkata, provided a brief theoretical survey of issues related to RTAs and how it fits in the current multilateral system.

After the failure of multilateral negotiations at Seattle and Cancun, developed countries pushed for RTAs to achieve objectives that cannot be achieved at the multilateral level. After 2000, the US signed 30 RTAs, creating a "domino effect" among developing countries for RTAs with developed countries like the US and EU for fear of being excluded from these two big markets. Today, 60% of trade is through RTAs.

An RTA might pose several challenges for developing countries such as India, he said. Firstly, for a developing country like India, there is no guarantee of an increase in market access through an RTA with a developed country. If one is hoping to get tariff preference, the returns are not high, as in most developed countries, the level of MFN (Most Favoured Nation) tariff is already less than 4%. Secondly, RTAs may create a 'hub'n spokes effect', where if one weak country signs too many RTAs there is going to be preference dilution.

Dr Pal also provided an analysis of an FTA by India in the face of its multilateral commitments. Offering compliance with WTO-plus agreements at the bilateral level weakens India 's position at the multilateral level. Saying "yes" to WTO-plus provisions at the bilateral level would make it difficult to say "no" at the multilateral level, he said.

Its G-20 partner countries, too, may question why India has been opposing many of these issues at the multilateral level when it has complied with them at the bilateral level.

Experiences from FTA engagement

Dr Sachin Chaturvedi, Fellow, Research and Information System for Developing Countries, New Delhi, discussed various fundamental trade concerns that have been addressed at the multilateral level but are being neglected by India in bilateral FTAs.

The multilateral and regional trading agreements have been used by developed and developing countries towards different, and sometimes contrasting, ends. Larger trading economies like the US and the EU have used FTAs as a means to achieve ends that would not have been possible at the WTO. For example, the US has marginalised environmental issues in bilateral agreements as this is not possible at the WTO. Similar is the case with the EU.

In contrast, commitment on environmental issues among developing countries at the multilateral level has been ignored at the bilateral level. Thus, environmental concerns have been voiced at the WTO by India, but there is no clear-cut Indian policy on environmental issues in the South Asian Free Trade Agreement (SAFTA).

The other two areas of negligence in regional trade agreements are Trade Facilitation (TF) and electronic commerce. Many key provisions on TF agreed to by nations at the WTO, are missing in SAFTA. The issue of electronic commerce has been ignored. Dr Chaturvedi called for government to pay attention to these issues as it is in India's interest and benefit in the Indo-EU FTA negotiations.

Trade law and challenges in FTA

Anuradha R V, a Delhi-based lawyer, highlighted the issues and challenges in preparing the Indo-EU FTA. The fundamental issues of concern to India are its level of preparedness, areas of interest, and its bargaining power.

The EU's motivations are clear: it seeks access to a large market with high tariffs. India's stand is still under debate, she noted, pointing to the lack of preparedness on the issue.

Various issues regarding the Indo-EU FTA need attention, she noted. Under the Rules of Origin (RoO), products specific to RoO need to be negotiated. With standards, especially those on SPM (Sanitary and Phytosanitary Measures and TBT (Technical Barriers to Trade), the biggest challenge is the lack of harmonisation. In services, while the EU's concern is mode 3, where it seeks to link the chapter on services to investment provisions (Establishment), India's main interests are in modes 1 and 4. Pertaining to the Competition Policy, India's new Competition Act is still pending implementation. On Intellectual Property Rights (IPRs), the EU's policy would be to make India comply with TRIPS (Trade Related Aspects of Intellectual Property Rights) rather than TRIPS-plus provisions, and its emphasis is mainly on Geographical Indications (GIs). On the issues of sustainable development, the EC draft mandate contains labour and environmental issues that are not provided in the HLTG.

In conclusion, she emphasised India's low level of India preparedness and the need for better domestic regulations to be able to bargain from a position of strength.

Discussions:

A question raised was the reason for India's support to WTO provisions in the RTAs, while opposing it at the multilateral level.

R S Ratna, as a government representative, answered that after the success of India's FTA with Sri Lanka in 1998, it was realised that including WTO provisions in RTAs would not be as onerous for two reasons: first, the obligations would not be as onerous as they would be at the WTO because one would have some manoeuvrability, and second, this will provide negotiators at the multilateral level an opportunity to assess the feasibility of these provisions at the regional level.

Towards a balanced FTA

The Chair of Session 3, Abhijit Das, Officer-in-charge, UNCTAD India Project, New Delhi, outlined the topic of discussion that would focus on the fundamental question: How would the FTA benefit India?

Balancing gains from NAMA

Manab Majumdar, Director, WTO, FTA and Foreign Trade Division, Federation of Indian Chambers of Commerce and Industry, New Delhi, made two important observations on the trade scenario.

First, because of the relatively low level of the average tariff in the EU and the relatively higher weightage in India's trade basket occupied by the EU compared to India's weightage in the EU's imports and exports, simulations may show altogether a net loss in the area of NAMA (Non Agricultural Market Access) for India, and there may be a proportional gain for EU goods. The substantial adjustment would thus have to be borne by India.

Second, an assessment of benefits or losses coming out of the Indo-EU FTA cannot be viewed in isolation; other agreements would also have to be taken into account. Given the EU's FTA engagements with other economies, and given the fact that some of those economies are competing with India, the absence of an Indo-EU FTA means India could fail to retain its market share in many of its significant tariffs.

There are many reasons for an Indo-EU FTA. First, India ranks 14th in market penetration in the EU's import market, where China occupies the first position and even Korea (8 th) and Taiwan (10 th) fare better. An analysis of products, like manufacturing products, shows that while China with 22% market share is much ahead of India (2.3%), Brazil (1.1%) fares relatively worse than India. However, for agricultural products, Brazil's presence is very high (10.4%) as compared to India (2%) and China (4.7%). ASEAN's share in both manufacturing and agricultural products is much more than India's.

Secondly, India's top five imports to the EU reveals uncomfortably close competition from ASEAN (Association of South East Asian Nations). China is, of course, way ahead in chemicals and even in gems and jewellery it is marginally higher. But China and ASEAN are either both close or way ahead in terms of sharing EU imports for these product groups. These happen to be India's top exports to the EU too.

Finally, ASEAN and Brazil, as part of MERCOSUR are in different stages of negotiations with the EU. An enhanced economic partnership is underway with China too.

India would need an FTA if not to enhance its market access, then at least to retain its market share.

Majumdar outlined the following strategies to be followed in the negotiations:

• Take a holistic view of NAMA and agricultural products and try to get tariff peaks at the EU reduced.
• Non Tariff Barriers (NTBs) should be also brought under negotiations to at least partially offset the trade in goods loss because of duties differential.

Majumdar expressed uncertainty about the outcome of the FTA. However, the fact that FDI (Foreign Direct Investment) flow from India to Singapore has gone up after the India-Singapore FTA, means there is reason for optimism in the proposed FTA. Hopefully after the industry consultation some of which is organised by FICCI in cooperation with UNCTAD, the outcome of the FTA would be clearer.

Adding to Majumdar's presentation Abhijit Das made two observations. A strong view has been expressed by D K Nair from the Confederation of Indian Textile Industries (CITI) that in textiles trade, as far as India's exports to the US and EU are concerned, customs duties are not an issue. So it remains to be seen how far removal of customs duties would boost India's exports.

Secondly, as far as export of vegetables is concerned, a study by the World Bank shows that at farm rate fruits and vegetables are the most competitive in the world. Given the high freight costs and India's abysmal infrastructure, to what extent can India have offensive interest in fruits and vegetables is a question that needs to be answered.

Services: Issues and concerns

Rupa Chanda, Professor, Indian Institute of Management, Bangalore, made observations on the issues and concerns related to trade in services in the Indo-EU FTA. She said at the outset that she did not have "a good feeling" about the Indo-EU FTA and its prospects.

Her presentation focused mainly on Indo-EU trade and investment relations in services, the contents of the HLTG report, India's interests, the EU's interests and the feasibility of this FTA in terms of achieving a balanced agreement. Her analysis was mainly based on her study of IT-ITES.

Though trade and investment relations are expanding, India accounts for only 1.1% of the EU's trade in services and even less that 1% of the EU's total FDI. This calls for an analysis of the potential benefits that India can gain from this FTA.

India's market access in services trade is factored by various issues.

Cultural and linguistic dependence of many activities in services limits the key markets that would be of interest to India. For example, across a broad range of services, the single most important market is the UK because of cultural and linguistic linkages. But in other regions it is relatively lower. Thus, the EU is not a large market for the service sector as a whole.

In mode 4 there are some key issues that India would like to resolve at the Indo- EU FTA. The biggest problem is lack of harmonisation. Often, companies after having access to one EU market have to reapply and go through the entire process again for another country.

Another problem is lack of gradation of visas. The EU only has a business visitor visa or a work permit. Some services require finer gradation by function or occupation between these two categories. Thus, like IT-ITES, many sectors want a possible gradation of visas by function or occupational category. Companies complain that there are problems even with business visitor visas as there are restrictions on how one can travel within the EU. For IT-ITES, the speed of intra-EU mobility is important for better efficiency.

Delinking mode 4 from commercial presence in the EU is very time consuming. Documentation requirements, legalisation requirements, immigration checks etc, required to set up commercial presence, take up so much time that ultimately business opportunities are lost.

Other issues in mode 4 that need attention are:

• The need for possible future extension of the EU blue card scheme to non-EU nationals
• Removal of economic requirements within the EU
• Facilitation of Mutual Recognition in select professions, with select members
• Totalisation, which involves a need to create a template to cover social security for professionals
• Greater flexibility in labour laws in some countries since EU has rigid labour laws.

Though these may appear as "nitty-gritty" issues, Prof Chanda felt they hinder trade.

Areas of concern in mode 3 include:

• Cumbersome procedures and legalisation requirements in EU countries. In the US this takes much less time.
• Template for harmonising certain requirements for commercial presence across member countries.
• Removal of stringent requirements for subsidiary presence.
• Removal of discrimination for subsidiaries and branches of third country companies.
• Taxing offshore earnings of Indian companies.
• Issues related to transfer pricing. This has become important because as Indian companies become more global how they attribute the costs across different locations will have implications.
• Stringent local staffing requirements in some countries.
• Limitations on nature of residency requirements for intra-corporate transferees.

Mode 1 related concerns include stringent EU directives and restrictive national legislations in EU countries on data protection. A lot of "preparation on the regulatory front" from India 's side, she said, was required to get mode 1 access.

Concluding her observations, Prof Chanda pointed out that a study of the feasibility of the issues raised would point to the fact that several of India's key interests are not in the EU mandate. These include immigration policies, labour policies, social security, investment regulations and taxes. These are all bilateral issues. Some of the EU's interests involve sensitive sectors such as opening up of legal and retail services, and sensitive issues such as government procurement, independent regulations and legislative amendments. Having a more liberalised approach in mode 3 from India's side would be in both India and the EU's interest. This is significant as mode 3 will provide access to mode 4 and mode 1. But India's objectives in services, Prof Chanda said, would be better achieved on a bilateral basis than from an FTA with the EU.

Customs facilitation - Making the difference?

C Satpathy, member of the Customs, Excise & Service Tax Appellate Tribunal, Kolkata, made observations on issues on customs facilitation that need attention at the negotiating table.

In his opinion the Indo-EU FTA is significant as India is finally negotiating with one of its major trading partners. There is reason for optimism if some problems can be addressed. These include enabling the EU to harmonise, simplification of RoO procedures, removal of the anti-dumping clause and removal of ad valorem rules.

Harmonisation and simplification of customs procedures and documentations in the EU would go a long way in saving costs for Indian traders.

Prevention the anti-dumping clause that the EU is keen to include in the agreement is important, as the EU has been applying anti-dumping on Indian textiles only as a form of protectionism. He cited the case of intra-EU trade where there no anti-dumping clause.

The certification of RoO, Sathpathy said, should be the responsibility of India's commerce department and not the customs department as has been insisted on by many European countries. Also, RoO must be liberal and easy to comply with. A consultative machinery under the FTA to cross verify doubtful RoO claims and provisions for sharing of information between customs authorities of the two parties would go a long way in simplifying trade. India would also want a facility for advance ruling on matters related to RoO.

Ad valorem rules that the EU would like to include ought to be opposed as Indian traders might find it difficult to comply with them.

At the domestic level, Satpathy outlined a few measures that should be taken to facilitate trade:

• Formation of a Central Trade Facilitation Authority which at present is non-existent.
• A nodal point for disseminating information relating to customs and other formalities.
• A system of pre-arrival clearance which the EU would be expecting from India.

India has reason to be optimistic about an FTA with one of its largest trading partners, he concluded. It might provide the EU with a large market access, but Indian traders, too, would ultimately gain from the access to European markets.

Revisiting the Competition Policy: Issues and concerns in the proposed Indo-EU FTA

Nitya Nanda, Fellow, The Energy and Resources Institute, New Delhi, provided an overview of the place of Competition Law in the Indo-EU FTA. He also compared the existing Indian legislations with the Competition policy of the EU.

The HLTG report, among other provisions, calls for identifying anti-competitive behaviour including rules on state aid and exchange of non-confidential information. These provisions are controversial and thus important for India to focus on.

Issues that the EU would like to include in the Competition Provisions include:

• Substantive provisions in competition law which include restrictive trade agreements and concerted practices, abuse of dominant position and review of mergers and acquisitions. The proposed Indian law on competition policy has these provisions.
• Non-discrimination of trading partners: Indian competition law has no explicit provision on non- discrimination, but the law provides for "equality before law" to enable non-discrimination. However, while taking into account public interest and economic development considerations, discrimination might occur as public interest in India may at times be different from public interest in the EU.
• State-aid: The EU would like transparency in dealings, periodic review of measures, and annual reporting on the amount of state aid. But there is no legal framework governing state aid in India nor is state aid normally included in a national competition law. Besides, in the absence of information on the amount of state aid in India, ensuring transparency, review and annual reporting will involve costs.
• Mutual recognition of legislations: EU and India recognise extra-territorial jurisdiction but areas of conflict could emerge if, for example, two European companies want to merge and India would not want that due to differential impact. The outcome is uncertain as other factors like economic strength of a country determines its bargaining power.
• Cooperation and consultations: India and the EU have a mandate on foreign cooperation. But the experience in consultation and cooperation on international cartels is "not encouraging".
• State enterprises: The EU expects positive discrimination of state enterprises including phasing out state monopolies of a commercial character.

Nanda also pointed out other concerns. The Indian competition law, he said, has been "ineffective", mainly because of lack of resources. More significantly, with little knowledge about whether anti-competitive practices actually take place, undue importance was being given to Competition policy in the FTA. In this context he also pointed to the dichotomy of international cooperation on one hand and trade (which involves competition) on the other. Most important was the question as to why India opposed the Singapore issues on competition as late as July 2004, but has agreed to incorporate them in the Indo-EU FTA in 2006. Ultimately, he did not recommend linking competition laws with trade.

Discussions:

An important issue that was debated in the discussions that followed was whether the FTA would provide benefits in market access in services, especially mode 3, given the difficulties that have been encountered so far and the role of the political economy of individual countries in determining market access in services.

Prof Chanda answered that the biggest benefits are likely to come in mode 3 if both parties negotiate to remove some of the domestic regulations related problems Political economy, she agreed, determined labour laws. Though little can be done, one possibility is that a shortage of labour in a particular sector would give a stronger ground to argue for legislations with the respective countries. A flexible sector specific rather than a "blanket approach" across sectors is required.

The Road Ahead: Civil society interface

In Session 4, making the introductory remarks, Linu Mathew Philip pointed to the role of civil society in drawing attention to developmental issues, which might have otherwise been ignored. Participants drew attention to the issues that had been ignored in the previous sessions.

The following issues were raised:

• Serious gaps in civil society engagement in the Indo-EU FTA were noted due to the 'closed' nature of the negotiations where information was not in the public domain.
• The discussions had failed to bring out the impact of the proposed FTA on the rural or urban poor who constitute 80% of India's population. The benefit or loss to the average Indian farmer in terms of his input costs and income therefrom was ignored. Issues related to employment of the unorganised sector did not find a place in the discussions either.
• A Global Europe Strategy Paper that articulates the EU's trade strategy, mentions access to energy sources as one of its key objectives either through the WTO or FTA. With many companies in India engaging in contract farming of bio-fuels, clarity is required on whether the EU will use the FTA to access contract faming in bio-fuels.
• The FTA and other such agreements ought to be ratified by the Indian Parliament given that a few representatives conclude such agreements on behalf of the nation. In the absence of such political reforms, a more informed policy by the government before engaging in such FTAs, would give more strength to the negotiating process.
• An effective cost-benefit analysis of the FTA and its impact on stakeholders - both directly and indirectly affected by trade - is needed. Since trade also impacts livelihood, prices, and employment generation, the role of civil society becomes crucial in voicing these concerns. .
• From the government perspective, however, civil society needs to be informed about the opportunities that would open up as a result of the trade-led growth that India is trying to leverage as one of its development policy objective. Seeking information and sharing end goals with government would ensure a beneficial civil society-government partnership.

The meeting and the session ended by concluding that these discussions would enable better understanding of the issues that need to be raised at the ongoing negotiations.

(Centad thanks Namrata Pathak, research scholar, JNU, for her substantial contribution in preparing this report.)