New-age trade deal

India should focus on bringing technology

Running a race against time, India has managed to sign a trade and investment agreement with the European Free Trade Area (EFTA) prior to the electoral code of conduct coming into force and limiting such announcements. The EFTA is a free-trade area comprising four nations that are on the margins of the larger European Customs union. The four countries — Switzerland, Norway, Liechtenstein, and Iceland — are not the largest economies in the area. But all of them are very high-income countries, and have strong positions in certain supply chains. In the world of finance, for example, both Switzerland (through its banking sector) and Norway (through its sovereign wealth fund) have a disproportionate influence. Tiny Liechtenstein also has an innovative financial sector, particularly when it comes to ESG (environment, social, governance) investing.

The agreement India and the EFTA have signed is thus of interest not just in terms of how a large but relatively poor country negotiates with a small high-income bloc, but what it reveals about how free-trade agreements (FTAs) are increasingly being designed. In the traditional sense, FTAs were based around the benefits conferred by the mutual lowering of tariffs. That is no longer the sole extent, however, of trade negotiations. Had it been the case, then it might have been viewed as one-sided — as tariffs on non-agricultural Indian goods in these countries are already relatively low. Trade negotiations now include “behind-the-border” requirements, such as harmonised regulations that can make trade easier. These mechanisms were developed, however, in response to concerns expressed by interest groups in high-income countries. India has innovated in this case, by including a different kind of “behind-the-border” requirement. It has conditioned the lowering of tariffs on the mobilisation of large-scale investment by the EFTA countries. The EFTA states have said they will “aim to increase” foreign direct investment in India through their countries by $50 billion in the first decade after the agreement comes into force. They have also promised another $50 billion in the five years after that. It is not exactly easy to see how these numbers could be mobilised. But it reflects these countries, as financial hubs, using their comparative advantage in international trade in an interesting and novel way.

The broader question must be how the benefits of trade with such small, high-income countries can be scaled up across the Indian economy. It is not just finance that India needs for its various wealth-creating sectors if growth and employment generation are to take hold over the coming decades. Technology is another crucial input. Here technical transfer is a component of trade that needs closer attention. EFTA countries — like many of their counterparts in the European Union — have companies that have cutting-edge technology but lack scale. India can provide scale as long as it is seen as a reliable destination in terms of intellectual property protection. Joint research and development — or, at least, the application at scale in India of ideas which have survived proof of concept in Europe — will be in the interests of both geographies. India’s impasse in trade negotiations with the European Union and the United Kingdom, seen in the context of the innovative EFTA deal, is perhaps a reflection of the over-emphasis placed on protecting the sectors of the past rather than energising investment and technology for the sectors of the future.