View of the Mumbai skyline from the Bandra-Worli Sea Link. Mumbai, India. Photo: Chetan Rana
Is the EFTA Deal a Harbinger of Change?
There are always winners and losers in free trade agreements but according to economic theory, the proceeds to the winners exceeds the losses incurred by the losers. From India’s point of view, the potential upside from opening itself to freer trade is enormous, but there is a downside, too.
The Law of Comparative Advantage explains the advantage of free trade. Trade enables companies, regions and countries to focus on what they are best at doing. Ergo, according to the theory, on aggregate all actors and players are better off.
But there are—though not fatal—problems with international trade. These problems don’t mean freer trade or globalisation is necessarily a bad thing, but there is nuance here.
For one thing, there is the ‘infant industry argument’. Consider a comparison between India today and the US just over a century ago; during the 19th century, the US imposed substantial tariffs on the import of manufactured goods. Without the trade barriers of that period, it may well have been much harder for the United States to develop the way it did.1
So, if the US benefited from tariffs whilst it was an emerging economy, shouldn’t the same argument apply to today’s emerging markets – including India?
There are other arguments against long-distance trade that have recently come into vogue, including:
- the threat posed to the resilience of a supply chain;
- security concerns during an era when security is emerging as a bigger issue; and
- environmental factors including the carbon costs associated with a geographically distanced supply chain.
But another argument has been holding sway on politicians, an argument relating to the social unrest that results when the losers from free trade are not supported. The US economy has surely benefited from trade with China, but some sectors and regions have been devastated.
There is, however, a flip side. An inward-looking world in which the largest economists build trade fortresses is a poorer world. A more outward-looking world—one in which the largest economies are interdependent—is a world in which conflict between major powers is less likely.
China and India may be emerging markets, buy they are also the second and fifth largest economies in the world, respectively.
The total GDP of the Association of Southeast Asian Nations (ASEAN) countries is $3.6 trillion2, meaning that if that if Brunei Darussalam, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam were counted as one, the economy would be ahead of India in the rankings of the world’s largest economies.3
The world needs India and, indeed, ASEAN countries to become more closely integrated within a freer trade network.
India & The EFTA
Now India and the European Free Trade Association (EFTA)—which is made up of Norway, Switzerland, Liechtenstein, and Iceland—have agreed on a trade deal.4 This deal will entail $100 billion of foreign direct investment from the EFTA region into India, and the removal of customs duties on 95.3% of industrial imports into India from the same region. There will also be a relaxation of tariffs on certain goods imported into EFTA countries.
For India, the big advantage of the trade deal is the potential for job creation from the investment at a time when domestic unemployment is quite high. Curiously, the deal does not remove custom duties on gold which, for Switzerland, boasts the largest economy in the EFTA. This must be disappointing for them as gold is by far their largest export to India.
Officials from both India and Switzerland wax lyrical on now important the trade agreement is. From Switzerland’s point of view, the deal is an opportunity for its infrastructure, construction, luxury goods, digitalisation, clean tech, and electromobility sectors. There is no doubt in my mind that chocolate makers will eagerly anticipate an uptick in sales, as will makers of luxury watches, too.
Even so, relative to India’s total trade, the deal with EFTA is small beer. India’s trade deficit in China in one year is roughly the same size as the slated investment from EFTA over ten years. Bilateral trade between India and Switzerland was worth just CHF17.7 billion in 2023 (around £15.5 billion).5
India & Other Nations
At the end of 2022, India and Australia agreed on the Australia-India Economic Cooperation and Trade Agreement (ECTA).7 Trade between India and Australia is expected to double in value to around $50 billion dollars towards the end of this decade.
India is also in discussion with ASEAN countries to update their 15-year-old free trade agreement, the ASEAN India Trade in Goods Agreement (AITGA). The first round of negotiations occurred in February 2024 with a targeted completion of 2025.
Outside southeast Asia and Oceania, India has agreed on a deal with the United Arab Emirates (UAE) for a trade corridor connecting India with Europe.6
The Challenges
Companies around the world are working to build more resilient supply chains, while reducing reliance on China. India is an obvious alternative. In fact, India’s opportunity to compete with China is probably the main impetus behind its drive to agree on trade deals.
But these things are complicated. It took 15 years for the India EFTA deal to be agreed on. And whilst their discussions with the UK and EU are ongoing, they are likely to continue for several more years.
India & China
In 2021, China, Japan, South Korea, Australia, New Zealand, and ASEAN nations—plus several other smaller economies in the Pacific region—agreed on the Regional Comprehensive Economic Partnership (RCEP) Agreement. But one noticeable absence was India, despite being one of the original negotiating members. It seems that India’s reluctance to sign up relates to competition from China.
India’s Trade Map is Changing
It is an understatement to say that the opportunity and economic outlook for India is immense. It may currently sit at number five in the list of the world’s largest economies, but ignoring all other factors in its favour, favourable demographics alone should be enough to catapult India up in to the top three within a few years.
But the global imperative to create a more resilient supply chain—and minimise dependency on China—is India’s greatest opportunity. To turn that opportunity into reality, it needs trade deals. And that means it will have to slowly open itself to more and more international competition.
Sources
1 Joon Yoon, Yeo (2021). Tariffs and industrialization in late nineteenth century America: the role of scale economies, European Review of Economic History, 25 (1): 137–159. DOI: 10.1093/erehj/heaa001
2 Biswas, Rajiv (2024). ASEAN economic outlook in 2024, S&P Global Market Intelligence. Accessed: 18 March 2024. Available at: https://www.spglobal.com/marketintelligence/en/mi/research-analysis/asean-economic-outlook-in-2024-jan24.html#:~:text=The%20total%20nominal%20GDP%20of,USD%201.6%20trillion%20in%202009
3 Worldometer (2024). GDP by Country. Accessed: 18 March 2024. Available at: https://www.worldometers.info/gdp/gdp-by-country/
4 European Free Trade Association (2024). Ongoing Negotiations – India. Accessed: 18 March 2024. Available at: https://www.efta.int/free-trade/ongoing-negotiations-talks/india
5 von Wartburg, Reto Gysi (ed.) (2024). Explainer: Will the India-EFTA pact be a ‘game-changer’?, SWI swissinfo.ch. Accessed: 18 March 2024. Available at: https://www.swissinfo.ch/eng/swiss-politics/explainer-will-the-india-efta-pact-be-a-game-changer-switzerland/73650947
6 Cornwell, Alexander & Kamdar, Bansari Mayur (2024). India, UAE Sign Pact on Trans-Continental Trade Corridor, U.S. News & World Report. Accessed: 18 March 2024. Available at: https://www.usnews.com/news/world/articles/2024-02-13/india-uae-sign-pact-on-trans-continental-trade-corridor
7 Economic Times, The (2022). India, Australia free trade agreement to come into force from December 29, The Economic Times. Accessed: 18 March 2024. Available at: https://economictimes.indiatimes.com/news/economy/foreign-trade/india-australia-free-trade-agreement-to-come-into-force-from-december-29/articleshow/95879168.cms