Wednesday, September 29, 2010

India’s bilateral trade talks

Since further multilateral trade liberalizations agenda at the WTO is not moving forward (its nearly a decade since the Doha Round started—the Uruguay Round took eight years to complete), India is moving on with “Plan B”, which includes bilateral and regional trade deals. More here



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Thailand  2001 Under negotiation; likely to be signed in 2010
Singapore  2002 Signed in December 2007; to be reviewed
Sri Lanka 2003 Under negotiation
Mauritius  2003 Under negotiation
China 2003 Joint feasibility study underway
Asean 2003 Trade in goods pact signed in August 
2009; agreement on services to be 
signed soon 
Malaysia 2004 Likely to be signed by December 2010
BIMSTEC 2004 Under negotiation
GCC 2004 Under negotiation
Japan  2005 To be signed in October 2010
SACU 2005 Under negotiation
Chile  2005 Signed in March 2006; to be reviewed 
Israel 2006 Under negotiation
SAFTA 2006 In force
EU 2006 Under negotiation
EFTA 2008 Under negotiation
Australia 2008 Joint feasibility study underway
Nepal  2009 Treaty in force until 2016 
South Korea 2009 Under negotiation
New Zealand 2009 Under negotiation
Indonesia 2009 Joint feasibility study underway
Turkey  2010 Joint feasibility study underway
Pakistan _ No formal agreement; Most Favoured 
Nation status accorded 
Asean          =     Laos, Vietnam, Singapore, Thailand, Malaysia, Indonesia, 
                            Brunei, Cambodia, Myanmar, Philippines
      =    Bangladesh, India, Sri Lanka, Thailand, Myanmar
             =    Kuwait, Bahrain, Saudi Arabia, Qatar, UAE, Oman
           =    South Africa, Lesotho, Swaziland, Botswana, Namibia
         =    India, Pakistan, Sri Lanka, Bangladesh, Bhutan, Maldives,
                           Nepal, Afghanistan
           =    Switzerland, Iceland, Norway, Liechtenstein

India’s style of negotiating trade deals:

[..] India’s approach to trade talks has also evolved in the last seven years. For instance, the cloud of secrecy has given way to a consultative process, where industry associations and trade bodies are consulted and their concerns taken on board. FTAs are generally negotiated based on the feedback of the industry chambers and associations, which form the main basis of the negotiating text for the government. Even though the ministry of commerce and industry negotiates the deals, inputs and suggestions are also sought from other ministries and departments.

One reason for this is the improved political management of trade negotiations. Prime Minister Manmohan Singh created a new institutional framework for trade policy formulation within the government by creating the trade and economic relations committee (TERC), which includes the Cabinet ministers for external affairs, finance, commerce & industry, agriculture, deputy chairman of the Planning Commission and senior officials. TERC has played an important role in securing governmental green signals for FTAs. It has enabled the external affairs ministry to bring to bear considerations relating to foreign and strategic policy on FTAs. When the India-Asean FTA faced domestic political hurdles, for example, it was the external affairs ministry that gave the needed push by underlining the importance of closer strategic relations with Asean.

That apart, Indian industry’s attitude to FTAs has changed. “You cannot compare India of seven years ago with the India of today,” said a commerce ministry official. Over the last few years, Indian industry has also realised it can compete favourably in the global marketplace. “Besides, it has realised that we may have a scarcity of some product today, but five years from now, we might be world-beaters. We are factoring all this in when we go out to negotiate,” the official added.

Labor market flexibility and employment during crisis

The global employment level is set to remain stagnant for 2010 before recovering in 2011, so say the authors of this note. They argue that trade openness leads to faster rises in unemployment, but also faster recovery. Also, high severance pay reduces unemployment and high unemployment benefits actually increases it. Their analysis shows that reduction in unemployment growth is more pronounced under a domestic banking or debt crisis than in countries that are only exposed to the global demand shock. The impact of global downturn persisted longer on average while employment growth reverted faster after domestic crisis.

They evaluate the average response to a crisis for countries with low levels of trade [with a trade (imports + exports) to GDP ratio of 25%] and compare the response to countries with a high openness level [of 130%]. For labor market institutions, they use a measure of the severance pay associated with laying-off workers. They compare the responses to a crisis when severance pay is one standard deviation below and above the mean. Their conclusion is that higher openness to trade led to a stronger reduction in employment growth in the initial phase of the crisis, but also allowed for a faster recovery.

The initial negative impact of openness in the case of a debt and banking crisis is consistent with findings on the importance of access to finance for exporters (see Iacovone and Zavacka 2009 or Berman 2009). Unlike a global economic downturn, banking and debt crises have a direct impact on the availability of credit for firms. Since exporters are more sensitive to changes in external finance conditions given their high up-front costs, the higher the openness-to-GDP ratio the stronger is the importance of the financial constraint and the more pronounced the impact on employment.

Countries with higher unemployment benefits suffered on average a more severe reduction in employment growth. One potential reason for this finding is that unemployment benefits can cause downward real wage rigidity (Campolmi and Faia 2005, Zanetti 2007) – if unemployment benefits are high, workers are more likely to resist a downward adjustment of wages. Another possible explanation is the role of informal employment. In poor countries with no or very low unemployment benefits and small welfare systems, workers who lose a formal job are often forced to take up informal activities instead. Thus, they do not appear as unemployed in our data, but typically suffer a substantial deterioration in their incomes and working conditions. Robustness checks revealed that the results for unemployment benefits are strongly driven by countries which have unemployment benefits in the upper 20th percentile. Thus, moderate unemployment benefits that provide a safety net for workers do not appear to be detrimental to employment growth during times of crisis.