Embed trade pact with New Zealand in broader economic and strategic context

India and New Zealand have reportedly concluded two rounds of negotiation for a preferential trade agreement (PTA).

There are significant differences in gross domestic product and population levels of the two countries. The bilateral trade in goods of $0.75 million in the year ended April 2010 is small.

Still, there are four sound reasons for both sides to negotiate a PTA if it is broad-based beyond trade in goods, and is positioned in the broader Asia Pacific context.

First, while there is consensus that multilateral and rule-based arrangements for international trade managed by the World Trade Organisation (WTO) are the first base option globally, the prospects for Doha round of the WTO negotiations are not hopeful.

The past success in reducing tariffs on goods (and some non-tariff barriers) globally have made tariffs on goods less of an impediment than other factors, such as the exchange rates (as demonstrated by the contentious meeting of the G20 finance ministers and central bankers in South Korea on October 22-23, 2010) and trade transaction costs including ‘behind the border’ trade facilitation measures.

India needs to show greater urgency in unifying its large internal market (for which passage of goods and services tax, or GST, will be essential) and speedier and better execution and management of infrastructure projects enhancing connectivity among different parts of the country, and with the rest of Asia.

The WTO has, however, not had similar success in liberalising international trade in service transactions, and in Mode 4 concerning movement of natural persons. Both these are of special interest to India. Not only is trade in services a significant part of its total international trade (29% in 2008), as compared to New Zealand (23%), but also India’s services trade is primarily in other commercial services, accounting for 72% of the total in 2009, requiring movement of natural persons.

The above explains proliferation of PTAs in spite of their sub-optimal nature. Both the countries have PTAs with Asean and economic partnership agreements (EPAs) with some individual Asean countries such as Singapore.

Second, there is a strong case for expanding the scope beyond goods. New Zealand has shown receptivity to such expansion in its other PTAs, particularly with Australia and Singapore. India’s total international trade of $580 billion in 2009 is much larger than New Zealand’s $66 million. Thus, New Zealand would gain access to a much larger market and which will grow rapidly, as compared to India.

As an aggressive globalizar, New Zealand’s tariff rates on goods are already substantially lower than India’s. A simple average of applied tariffs by New Zealand on most favoured nation (MFN) basis is 2.2% overall (1.4% for agricultural products and 2.3% for non-agricultural products).

In contrast, the corresponding overall tariff rate for India was 13% (32% for agricultural products). Moreover, 71% of New Zealand’s agricultural imports and 62% of non-agricultural imports currently do not attract any tariffs from any country. This will further limit gains for India.

Thus, the benefits to New Zealand from goods-only PTAs are likely to be substantial, particularly as the growth in its traditional markets of Australia, the US, the UK, Europe and Japan is expected to be limited for the next several years.

The commodity composition of the bilateral trade and other complementarities, however, suggest the possibilities of less uneven gains. These could be realised by broadening the scope of the PTA, or alternatively by concluding separate understandings, such as on services and manpower flows.

WTO’s country trade profile for 2009 suggests that two-thirds of India’s total goods exports were manufactured goods, while agricultural goods accounted for only a tenth of the total. In contrast, about three-fifths of New Zealand’s total exports were agricultural products, while only one-fourth were manufactured goods.

New Zealand’s considerable proven expertise in the dairy industry also has the potential to provide gains if it is turned into a partnership with Indian dairy cooperatives.

New Zealand’s exports to India, its 11th largest market, were dominated by coal, unprocessed logs, wool and sheep skin leather, all vital resources. India’s exports basket is narrowly based on diamonds, jewellery and bed linen.

There are also complementarities in services trade, which provide opportunities for balanced trade. Thus, India’s services are mainly in ICT-enabled and professional services (76% in 2009), while New Zealand’s services exports are in tourism, education and recreation. Partnership of Indian companies with New Zealand organisations could be facilitated by a broader PTA, particularly in ICT-enabled services.

Similarly, partnership by New Zealand organizations with Indian education industry could provide significant market potential for them and help address major constraints in India’s progress towards a knowledge-based economy. India is already among the fastest growing education market for New Zealand, with nearly 9,000 Indian students contributing around NZ$100 million to its economy.

Indian visitors to New Zealand in 2009 were 26,000, constituting the ninth largest group. As incomes grow, flows of Indian visitors can be expected to increase. Measures such as visa on arrival, multiple entry longer term business visas and greater cultural exchanges could assist in facilitating deeper engagement.

The Indian Diaspora of over 0.1 million in New Zealand, with about 30% in professional, managerial and administrative positions could be an important catalyst for deeper engagement between the two countries.

The liberalisation of the services sector and expansion of the Diaspora could have positive impact on bilateral investment flows which currently are insignificant.

Third, New Zealand’s population is ageing, with median age projected to be 40 years by 2030 as compared to 32 years for India. With ageing, health care costs increase disproportionately. New Zealand will face sustainability challenges in financing pensions as they are primarily general revenue based.

Partnerships with India’s pharmaceutical and health care industries could help in managing health care costs while using Indian research capabilities in a wide range of areas by off-shoring some of the R&D and related activities could expand economic space for both.

Fourth, both countries are members of the East Asian Summit comprising 10 Southeast Asian countries plus India, New Zealand, Japan, Korea, Australia and China (US and Russia are expected to join soon), which is among the more representative forums for promoting economic integration in the Asia Pacific.

As the region increases its weight in global economic affairs, a broad-based bilateral PTA will provide constructive signal for greater integration in the region.

India, however, must take steps to ensure the transaction costs of accessing the PTAs and the EPAs are low, particularly for the SMEs. Monitoring utilisation rates of these agreements by different sectors also merits consideration.

Mukul Asher (sppasher@nus.edu.sg) is a professor of public policy at the National University of Singapore, and Rahul Sen (rahul.sen@aut.ac.nz) a senior lecturer, School of Economics, AUT Business School, Auckland, New Zealand. Views are personal.