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India-Aust trade push 'another win' for bilateralism

22 January, 2015

Australia's trade mission to India under Andrew Robb last week provided a much-needed impetus to conclude an Australia-India free trade agreement in 2015 – another APAC victory for the Coalition government having recently signed FTAs with Japan, China and Korea.

India has the third-largest economy on a Purchasing Power Parity basis (after China and the USA), and is expected to grow by six per cent in 2015. With a growing middle class, a democratic polity and a market-based economic system, India clearly is a promising destination for Australian businesses.

Australia's hopefully forthcoming agreement with India should be welcomed as the final stage of trade liberalisation with the giants of Asia, but we should not lose sight of the bigger prizes offered through unilateral actions and World Trade Organization negotiations.

Large opportunity

Economic engagement between India and Australia is ripe for improvement. India is currently Australia's fifth largest market for merchandise exports and 20th for merchandise imports. Similarly, for India, Australia ranks 36th for merchandise exports and 14th for merchandise imports. The services trade between the two countries is also relatively small, with Australian exports of about A$2 billion and imports valued at A$1.4 billion.

Investment between the two countries is also very small, with total foreign direct investments of a mere A$2 billion. In terms of the structure of trade, more than 70 per cent of Australian merchandise exports are minerals, and more than 80 per cent of services exports are travel related, both education and tourism.

So there is a large untapped potential for Australian firms to expand the size and scope of their business engagements with India. The governments in both countries believe the proposed Australia-India trade agreement will be a watershed for the future Australia-India economic relationship.

The seeds for a Comprehensive Economic Cooperation Agreement (CECA) between Australia and India were sown in April 2008 when the two countries agreed to undertake a feasibility study. A CECA encompasses not only reduced barriers to trade in goods and services, but also encourages other economic exchange such as investment and movement of people across countries. Thus, a CECA is much broader in scope than a simple FTA.

Based on the recommendation of the Joint Study Group in 2011, five rounds of negotiations for the India-Australia CECA have been held so far. The first round was held in July, 2011 and the last round in May, 2013. However, there was little progress thereafter due largely to a lack of domestic political will and rapidly changing political landscapes in both countries.

Open for business

With business-friendly political parties winning the elections in both countries, the bilateral CECA talks have begun again in earnest. The desire to move quickly on the Australia-India CECA received a further shot in the arm following the recent G20 summit in Brisbane where a strong camaraderie appeared between Australian Prime Minister Tony Abbott and Indian Prime Ministers Narendra Modi. Both countries have announced they are eager to move forward quickly to seal the agreement by the end of 2015.

But while it's generally accepted unilateral free trade and investment are beneficial for all participating countries, the trend towards bilateral deals shows the challenge facing the WTO in lowering trade barriers on a global scale.

The progress of the WTO Doha round launched in 2001 has been extremely slow due to a lack of consensus among its members facing the "nothing is agreed until everything is agreed" approach to the WTO agenda. Increasingly, politicians across many countries pursue the third-best trade expansion option through negotiating economic cooperation agreements on a bilateral or regional basis.

Consequently, there has been a nearly ten-fold increase in the number of such agreements since 1992.

Unfortunately this proliferation has led to what Professor Jagdish Bhagwati of Colombia University calls a "spaghetti bowl" problem. That is, firms and governments face a mass of interconnected and overlapping trade and investment agreements with partner countries which are difficult to comprehend in their totality.

A complex path for Australian businesses

Whereas large firms have the resources to navigate the complexity of myriad bilateral agreements, each with different scope and conditions, small growing firms find it much more difficult to understand let alone implement strategies for international expansion.

Although FTAs are a potentially useful middle ground between no agreement and multilateral agreements, their increasing numbers and complexity has rightly given rise to concerns, emphasising the need for progress with multilateral FTAs at the global level.

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