FTA Ground too slippery for micro, small and medium enterprises

In recent years, India’s trade policy is being determined more and more by Free Trade Agreements (FTAs) which threatens access to essential medicines, seeds, and domestic micro, small and medium enterprises. India is currently engaged in negotiating such bilateral agreements with several countries, having already signed FTAs with some of them. The latest, and also the most hotly debated, is the one it is negotiating with the European Union (EU). FTAs are trade agreements between two countries which aim to give each other access to markets by lowering or removing border protection measures, such as border taxes on exports and imports, and other barriers.

FTAs can cover trade in goods or trade in services, and can also cover many areas that are not part of the rules of the World Trade Organization, such as changes to regulation in intellectual property rights (IPRs), investment, public procurement and competition policy. Under FTAs, markets are supposed to be fully opened up, with foreigners and locals treated equally, and developing countries not entitled to the ‘special and differential treatment’ concessions, hitherto given in the WTO.

India's policy on FTAs is bound to have a significant impact not only on its export markets but also on the economy of domestic production system, severely impacting the growth prospects of the Micro, Small and Medium Enterprises (MSME). MSMEs are enterprises engaged in manufacturing and services with investment in plant and machinery below Rs 25 lakhs and Rs 10 lakhs respectively.

India’s MSME sector plays an important role in the socio-economic development of the country. There are 28.5 million MSMEs in India that employ about 60 million people (mostly from the disadvantaged sections), contribute about 8% to its GDP, 45% to its industrial output and 40% to its exports. Out of these, over 25 million MSMEs are micro enterprises which have extremely limited capacity to compete against the large enterprises from developed countries.  Provisions contained in the FTAs could have far reaching impact on their growth prospects. It is therefore important that any major trade policy of the government adequately safeguards the interests of this sector. This is exactly what the Prime Minister’s Task Force Report 2010 on MSME points out.

As FTA negotiation processes are shrouded in secrecy with limited stake holders consultations, there is a need to inform, raise awareness and build the knowledge and skills of MSMEs on FTAs. To address this need, Third World Network, in partnership with Traidcraft and Shramik Bharti, and in collaboration with and supported by the Commonwealth Foundation, Network for Social Change and the Heinrich Boell Foundation, have done a pilot project to generate knowledge, disseminate information and build the skills/capacity of MSME stakeholders with a view to equip MSMEs with tools that may help them understand the nuances of FTAs. A toolkit designed by TWN and its partners helps to understand FTA provisions and assess their possible impact on MSMEs.

Under FTAs, the key trade issues can be classified as Good Trade Issues and Non-Goods Trade Issues. In Goods Trade, there are mainly six issues: (i) Import Duties, (ii) Export measures, (iii) Non-tariff measures, (iv) Rules of Origin, (v) Anti-concentration clause and (vi) Sectorals.

(i) Import Duties: Duty, tariff/tax that is imposed by the government on goods entering a nation is called import duty. The government uses “import duty” as a policy instrument to protect and promote its indigenous industry. Currently, under the WTO regime, the industrial goods entering India face on an average, a maximum duty of 34.4% (bound tariff) and actual duty (applied tariff) of 10.1%. FTAs require India to reduce this to zero on at least 85% to 95% of its products. Increased import competition due to tariff elimination could be a big threat for MSMEs, with hardly any safeguards available to protect the economy against the import surge.

(ii) Export Taxes: Currently India levies export taxes of 10% to 25% on tanned and non-tanned hides, skins and leathers including vegetable dyed leather, and also on a number of other raw materials to help ensure that these resources are available to domestic industry at cheaper cost. If India removes these existing export taxes on a range of products, as envisaged in FTA requirements of some countries, like the EU, MSMEs could face severe shortage of raw material and would no longer be able to trade competitively, adversely affecting the livelihoods of millions of people dependent on them.

(iii) Non-Tariff Measures: All measures other than normal tariffs, namely trade procedures,
regulations, standards, licensing systems etc. are called Non-Tariff Measures (NTMs). Those NTMs that cannot be justified under WTO law are generally termed as Non Tariff Barriers (NTBs).
Developed countries are known to use high NTM/NTBs to block imports from developing countries through FTAs. This would make it compulsory for MSME exporters to meet the high health, safety, labour and environment standards imposed by these countries. However, a majority of MSMEs in India neither have the capacity, nor the facilities to match the high standards of developed countries. So MSMEs exports may face very high rate of rejection in importing countries. Also, compliance requirement and procedures are often very complicated and costly.

(iv) Rules of Origin (ROO): Essentially, the “Rules of Origin” mean that for a product to be exported to a FTA partner country, the product must have enough local content (usually a minimum of about 30%-60%), to qualify for preferential duty (zero or lower than the general duty). The difference between the value of the final product and the costs of the imported inputs constitutes the share of local content. Generally, manufactured products undergo several stages of processing; with each stage requiring inputs sourced from abroad which add some value, before turning into the final product. Developed countries usually want strict ROO in FTAs, due to which MSMEs (whose products often have huge import content) will not be able to import intermediate goods at cheaper rates, and their products will no longer qualify for exports and additional market access.  Also, it will be difficult for these enterprises to calculate the local content and to meet the cumbersome procedural requirement in obtaining the ROO certificate. As an export promotion measure, Indian MSMEs are provided reimbursement of import duty under ‘duty drawback scheme’, if the import is meant for manufacturing of export products. This may encourage higher import content but then these products will come up against the ROO barrier and will not be able to export to FTA partners with strict ROO.

(v) Anti-concentration clause: Many MSME dominant industries benefit from protection through a sensitive list where there is no obligation to cut tariffs. However, an anti concentration clause allows only some products (20% of the tariff lines) in the sensitive list and not the whole sector.
Consequently, India would lose its flexibility to protect whole sectors and FTA partners would gain market access to all sectors. Many countries, like the EU, want to include the anti concentration clause in their FTAs, which may become problematic for the auto, textile/garments and fisheries industries, and also for gender sensitive products where women workers are employed in large numbers. Women’s employment opportunities in MSMEs will be severely affected if such a product (like food processing industry is left out of the sensitive list.

(vi) Sectorals: Under the WTO’s proposal on Sectorals, trading partners have to reduce import duty to zero in some sectors with immediate effect on a voluntary basis. This relatively new and much contested proposal may be replicated in some FTAs. If Sectorals clause is included in FTAs, India may have to make import duties zero in some sensitive industry segments like textiles sectors.

Under the non-goods trade, there are 4 key issues which may again impact the MSMEs -- (i) Intellectual Property Rights policy, (ii) Investment policy, (iii) Public Procurement Policy and (iv) Competition policy.

(i) Intellectual Property Rights (IPRs): Under WTO’s Trade Related Intellectual Property Rights
(TRIPS), member countries are obliged to adhere to minimum harmonised standards for protection of IPRs like patents, geographical indications, trademark, and industrial design rights, copyright etc.  TRIPS, however, provides some flexibilities to developing countries in special circumstances. India has refused to commit beyond TRIPS in its concluded FTAs but is still negotiating on TRIPS plus with the EU and Switzerland. Stricter IPR regime may create some major problems for MSMEs. Only 1.65% registered SMEs in the world have patents, as most of them lack the resources and capability to do research and development and acquire advanced technologies. Smaller producers are thus likely to be pushed out by bigger companies, which can get patents much more easily as they have huge resources to spend on Research and Development and patent applications. Stricter IPR regimes will give developed countries considerable control over critical resources in developing economies, and threaten products which are based on traditional knowledge.

(ii) Investment Policy: In most industries in India, foreign direct investment with certain restrictions is already allowed. However, investment under FTAs will allow foreign investors to operate largely without any constraints, treating them equal to domestic investors. In addition, foreign investors can sue governments directly if their rights or profits are infringed upon (as is happening in the case of tobacco industry in countries like Uruguay, Australia etc). Under FTAs, wholly foreign owned enterprises may be set up in many areas without having to comply with any performance requirements like having Indian board members, investing a minimum amount, having local labour, or technology transfer. This would severely impact MSMEs and could lead to small businesses being taken over by large enterprises. Such acquisitions have already begun in the pharmaceutical industry.

 (iii) Public Procurement: Public procurement of goods and services on behalf of a government agency, accounts for 10% to 15% of GDP in developed countries, and up to 20% in developing countries. India uses government procurement as a development policy tool to address economic and social inequalities by giving certain preferences to vulnerable groups like MSMEs. However, countries like the EU are very keen to get ‘market access’ to the significant government purchases/ procurement market in countries like India. If this happens, foreign companies will have a legal right to be treated equally with domestic companies when they apply for public procurement contracts. In that case, Indian MSMEs which supply many products to the government (such as leather, plastic and metal products) will have to compete with foreign companies. This is likely to result in MSMEs losing out in terms of market share for their products, like in the pharmaceutical segment, the minimum turnover required to be considered as a supplier is now Rs 25 crores in some states and at the Centre. This has automatically eliminated most MSMEs from this segment of government purchase.

(iv) Competition Policy: Developed countries demand that competition policy should be included in FTAs, and that companies should be given equal treatment regardless of their nationality. India has not made major concessions under this chapter till now. But the EU wants a stronger competition policy and if ‘Competition Policy’ clause is included in FTAs, the Indian government cannot discriminate between foreign and Indian enterprises, leading to reduced policy choices for it. It may not be able to treat Indian MSMEs preferentially over bigger and foreign industries and also may not be able to proffer development schemes for them. Free competition often allows smaller enterprises to be eaten up by larger ones.

Thus FTAs are likely to have a significant impact on Indian producers, by reducing India’s ability to change policy in favour of Indian Polity. They would affect not only the livelihood, but also the lives of the people. Unbridled influx of multinationals, with no government control over them, is likely to cripple local industries, and Trade Related Intellectual Property Rights are likely to give considerable control to developed countries over critical resources in developing economies.

Shobha Shukla - CNS
(The author is the Managing Editor of Citizen News Service (CNS). She is a J2J Fellow of National Press Foundation (NPF) USA. She has worked earlier with State Planning Institute, UP and taught physics at India's prestigious Loreto Convent. Email: shobha@citizen-news.org, website: http://www.citizen-news.org)