Abstract
India has signed 13 Free Trade Agreements (FTAs) to boost its exports as of October 2023. Many of these trade pacts are causing an increased trade deficit and only imperceptible improvements in market access for the country’s goods and services. Such trade pacts are inclusive of India’s Comprehensive Economic Partnership Agreements (CEPAs) with Japan and South Korea. The study employs both theoretical and empirical research to arrive at meaningful conclusions. It aims to analyse India’s export potential, revealed comparative advantage and services trade restrictiveness with reference to two of its FTA partners, namely Japan and South Korea. It aims to give suitable recommendations to different stakeholders in the area for ways to address rising trade deficits and make such trade agreements more conducive to domestic consumers’ and manufacturers’/exporters’ interests.
Keywords
Introduction
India has signed 13 Free Trade Agreements (FTAs) with various countries and trade blocs till October 2023 to boost exports by reducing tariffs and non-tariff barriers. However, many of these agreements are causing an increased trade deficit for India, leading to a push for renegotiating existing agreements, particularly with Japan and South Korea. With reference to these trade partners, this study aims to understand the pitfalls of India’s trade agreements and uses empirical and theoretical methods to analyse India’s export potential, revealed comparative advantage (RCA) and services trade restrictiveness. The study’s findings will help India address trade deficits with its FTA partners and safeguard the interests of domestic consumers and manufacturers/exporters (CNBC TV18, 2023; Nandi, 2023).
The article is divided into the following sections. The first segment introduces the theme of this study. The second briefly reviews existing literature on the topic. The next segment elicits the research methodology. The subsequent part lists the study results. The last section concludes and draws future policy implications.
The subsequent section reviews the literature on the theme.
Review of Literature
Prior to beginning a discussion on any trade pact, it is vital to confabulate on relevant trade theories. Consequently, two pertinent concepts requiring discussion are comparative advantage and RCA. The classical theory of comparative advantage, first articulated by David Ricardo in 1817, elucidates the reasons behind international trade between two nations, taking into account the disparities in technology, labour productivity and production costs across various industries, both domestically and internationally. According to the Ricardian framework, a nation is likely to export products for which it possesses a comparative advantage, specifically those from sectors where it demonstrates greater productivity and lower costs of production. Heckscher–Ohlin further developed the concept of comparative advantage by incorporating the relative differences in resource endowments and factor prices. Their model suggests that a country is inclined to export goods that utilise the factors with which it is relatively more abundantly supplied (Jones et al., 2019; Vollrath, 1991).
RCA is a Ricardian trade theory metric, formulated by Balassa (1965), that reveals productivity disparities among nations. It provides a preliminary assessment of a nation’s competitive export capabilities but does not consider national policies like tariffs or subsidies. Thus, comparative and RCA are closely related, as the former elicits reasons for differences in export patterns, and the latter explains variations in export competitiveness among trading nations (Balassa, 1965; Jones et al., 2019; Vollrath, 1991).
India signed trade pacts with South Korea and Japan in 2009 and 2011, respectively. These agreements have not yielded the best results for the country, as it continues to see a rising trade deficit ever since the signing of these pacts. Post-signing of these FTAs, there was a drop in the RCA index values for India in its top product export categories, including those for Japan and South Korea (Banik & Kim, 2022; CNBC TV18, 2023; Nandi, 2023; Pandey & Unnikrishnan, 2023). In addition, the country’s FTA utilisation rate stands low at 25%. This owes to lack of awareness about existing FTAs, complex rules of origin and trade documentation procedures (Mishra, 2023). India also loses out due to intense competition from other low-value-added manufacturers/exporters, calling upon the need to raise its export profile by way of higher-value-added exports and improved logistics (Anand et al., 2015; Mishra, 2023).
Based on a review of studies, certain research gaps could be identified so as to aid with further analysis. There is a relative paucity of literature on the need for renegotiating India’s FTAs with South Korea and Japan, and the reasons for a relatively poor performance in these trade agreements. There is also a need to identify the prospective sectors for ensuring future export competitiveness.
The next section discusses the data and methods employed in this article.
Data and Methodology
The period of the study is from 2011 to 2022, as it corresponds with the aftermath of the signing of the Comprehensive Economic Partnership Agreement (CEPA) with both South Korea and Japan, keeping in view the latest data availability. The study follows a secondary data analysis approach in the following manner.
First, India’s export potential is assessed with the help of export potential maps of the Trade Map database for 2011–2022. The potential export value of product k supplied by country i to market j, in dollars, is calculated as supply × demand (corrected for market access) × bilateral ease of trade. Supply and demand are projected into the future based on GDP and population forecasts, demand elasticities and forward-looking tariffs. The estimated dollar value serves as a benchmark for comparison with actual exports and should not be interpreted as a ceiling value (ITC Trade Map, 2023c).
The supply side in the export potential indicator is based on the projected market share. As a result, the share of country i’s exports of product k in total exports of product k, multiplied by the exporter’s expected GDP growth rate (relative to the expected GDP growth of other exporters of the same product), captures the relative increase in overall supply performance (ITC Trade Map, 2023c). The demand component is based on projected imports; thus, market j’s imports of product k, augmented by expected growth of GDP per capita (subject to estimated revenue elasticities of import demand per capita at sector and development level) capture the demand (ITC Trade Map, 2023c). Ease of trade is based on the ratio of actual trade between exporter i and market j for products with potential relative to their hypothetical trade if exporter i had the same share in market j as it has in world markets (ITC Trade Map, 2023c).
Later, the country’s top 10 product exports (HS codes at 2-digit level) to South Korea are culled with the help of the Trade Map database from 2011 to 2022 (by calculating average values for the period, and accordingly, sorting from the highest to the lowest values). In addition, data on the country’s total product exports and world total product exports are extracted using the same database for the purpose of calculating the RCA values (ITC Trade Map, 2023b). The RCA index of country i for product j is often calculated by the product’s share in the country’s exports in relation to its share in global trade.
Here, Xij and Xwj are the values of country i’s exports of product j and world exports of product j, and where Xit and Xwt refer to the country’s total exports and world total exports. A value less than unity implies that the country has a revealed comparative disadvantage in the product. Similarly, if the index exceeds unity, the country is said to have an RCA in that product (Pandey & Unnikrishnan, 2023; WITS, 2023).
Third, data on the Services Trade Restrictiveness Index (STRI) is extracted from Organisation for Economic Co-operation and Development (OECD) Stat only for the year 2022, keeping in view the latest data availability for both India and South Korea. STRI aids in assessing market barriers in services trade for any given economy (OECD Stat, 2023).
Similar exercises pertaining to Japan’s export potential, RCA values of India’s top 10 product exports to Japan, and STRI are repeated for the related time period.
Accordingly, the research hypothesis for this study is formulated as follows.
H0: India’s FTAs with South Korea and Japan have not yielded the desired results and, hence, require renegotiation.
The subsequent segment presents the study’s results and briefly discusses the same.
India’s export potential for all product categories is $8.8 billion in the South Korean market. Actual exports are worth $4.8 billion. The unrealised potential remaining in individual products is $5.3 billion (ITC Trade Map, 2023c). Similarly, for the Japanese market, the corresponding figures stand at $8.8 billion, $4.8 billion and $5.1 billion, respectively (ITC Trade Map, 2023c). This implies there is significant ground to be covered for India in these two export markets in terms of product exports and their potential.
The calculated RCA values for India’s two trade partners are summarised in Tables 1 and 2.
Revealed Comparative Advantage (RCA) Values for India’s Top 10 Product Exports to South Korea from 2011 to 2022.
Revealed Comparative Advantage (RCA) Values for India’s Top 10 Product Exports to South Korea from 2011 to 2022.
Revealed Comparative Advantage (RCA) Values for India’s Top 10 Product Exports to Japan from 2011 to 2022.
Where HS code 27 refers to mineral fuels, mineral oils…, 76 to aluminium and articles thereof, 29 to organic chemicals, 72 to iron and steel, 52 to cotton, 23 to residues and waste from the food industries..., 84 to nuclear reactors, boilers, machinery and mechanical appliances…, 78 to lead and articles…, 85 to electrical machinery and equipment… and 79 to zinc and articles thereof.
Where mineral fuels, mineral oils and products of their distillation; bituminous substances (HS code—27), organic chemicals (HS code—29), fish and crustaceans, molluscs and other aquatic invertebrates (HS code—03), natural or cultured pearls, precious or semi-precious stones, precious metals (HS code—71), nuclear reactors, boilers, machinery and mechanical appliances; parts thereof (HS code—84), iron and steel (HS code—72), vehicles other than railway or tramway rolling stock, and parts and accessories thereof (HS code—87), ores, slag and ash (HS code—26), Articles of apparel and clothing accessories, not knitted or crocheted (HS code—62), electrical machinery and equipment and parts thereof; sound recorders and reproducers and television (HS code—85).
Clearly, the tabulated RCA values for top product exports to South Korea and Japan do not show an encouraging trend over the period 2011–2022. There is, thus, a trend of declining competitiveness of India’s product exports to these FTA partners, marked by the majority of RCA values falling over the study period, especially for the metals, chemicals and electrical equipment sectors on account of factors such as relatively high non-tariff measures (NTMs) in the destination markets (Banik & Kim, 2022).
The STRI values for India, South Korea and Japan are 0.42, 0.32 and 0.17, respectively, in the year 2022 (OECD Stat, 2023). Thus, India has significant scope for services trade with both South Korea and Japan, owing to relatively low services trade barriers/restrictiveness in these two markets. Yet more steps could be taken by India’s trade partners to reduce trade barriers for the country’s exports in these two markets (Banik & Kim, 2022).
Quite evidently, the research hypothesis is vindicated by these results.
The next section concludes this study and lists its future policy implications.
India’s FTAs with South Korea and Japan have not yielded the desired results for the country in terms of market access and trade balance, requiring renegotiation to make them more equitable. To address this, the country should focus on designing services-intensive trade agreements, as India has a relative comparative advantage in the same (Banik & Kim, 2022; Chanda & Tokas, 2020); implementing policy-driven trade facilitation measures of the likes of WTO-compliant production-linked incentive (PLI) scheme (Mishra, 2023), improving the logistics sector, inverted duty structures and non-tariff barriers in FTA negotiations (Mishra, 2023); diversifying into high value-added exports such as chemicals, automobiles, electrical apparatus, artificial intelligence, nanotechnology and robotics (Anand et al., 2015) and raising awareness among exporters, particularly micro, small and medium enterprises (MSMEs), to maximise the benefits of utilisation of existing FTAs (Mishra, 2023).
