Choosing the slow lane en route to free trade


The Japan Times
August 7, 2009

LONDON, INTERNATIONAL POLICY NETWORK — This week India and South Korea sign an agreement that they say will reduce barriers and boost trade between our two important economies. But the reality of the Comprehensive Economic Partnership (CEPA) is in the fine print.

By signing a free trade agreement that does not actually free trade, our governments are denying us the best tools to fight the recession. They admit as much by saying it will pave the way to removing more barriers to commerce in the future, even though this agreement has been in the works for over three years.

At least it is a step in the right direction. With the World Trade Organization talks of the Doha Round in a coma, both governments are right to seek other ways to boost trade. But both governments are being far too timid by pursuing trade accords that won’t boost trade much at all, such as South Korea’s recent free trade agreement with the European Union and one that India is seeking with the 10-member Association of Southeast Asian Nations.

Liberating trade between Indians and Koreans makes a lot of sense. India’s massive labor force and emerging globally competitive companies, particularly in information management and software, match up well with a relatively capital-intensive South Korea whose expertise is information technology, electronics and automobiles.

South Koreans have long understood the value of trade with the rest of the world. In the early 1960s, their living standards were similar to those of Ghanaians or Kenyans. Now, South Korea is at least 30 times more productive per capita than those two most successful economies in West Africa and East Africa. Some 70 percent of South Korean jobs are now directly linked to some form of international trade.

India has taken a lot longer. After a disastrous experiment with self- sufficiency that not even an economy with more than a billion people could sustain, India’s liberal reforms since 1991 have made dramatic improvements.

Further liberalization has brought the average import tariff in India down from 32 percent in 2000 to 15 percent in 2007, according to the WTO. In 1991 the average import tariff in India was 115 percent. India is now the world’s 16th-largest trading nation and the sixth-largest in trade of services.

In the 1990s, both South Korea and India grew a full three percentage points faster than countries that did not open up to trade, according to World Bank economists Aart Kraay and David Dollar. Trade was the key to growth before the global slump and remains the only sustainable route to recovery.

India’s booming automobile sector shows how. After putting up for decades with very few choices because of the government-protected oligopoly, keen Indian consumers are buying 9 percent more cars a year, making India one of the world’s fastest growing markets.

Among the many investors is South Korea’s Hyundai, now India’s second-largest car manufacturer. Through joint-ventures with foreign producers and newly gained expertise through trade, Indian manufacturers are becoming globally competitive too.

Nevertheless, India’s remaining tariffs on auto components benefit a tiny minority who fiercely opposed the CEPA and got special protection — at the expense of Indian consumers. India has secured CEPA limitations and exceptions for other so-called sensitive sectors such as agriculture and textiles. In other words, India’s negotiators are preventing Indians from getting cheaper food, better clothes or good Korean cars.

After decades of protection from trade prevented growth, liberalization made many Indian businesses globally competitive. Yet New Delhi continues to insist that coddling India’s farmers is the route out of poverty, as it constrains property rights and the freedom to trade even inside India.

Opposition to free trade is also deeply rooted among South Korea’s rice farmers, who fear competition will erode their 60 percent grip on the market.

Protection for a variety of vested interests means that the agreement will be implemented slowly, over 10 years. But why wait to boost two-way trade by what South Korean negotiators calculate to be worth $3.3 billion a year?

Both governments will proudly announce the CEPA this week as an historic achievement, but we should be worrying about the contents instead of admiring another photo opportunity. Let us sign a free trade agreement that does what it says on the tin: free trade.

Chung-Ho Kim, Ph.D., is executive director of the Center for Free Enterprise, South Korea. Both think tanks are members of the Freedom to Trade coalition. Barun Mitra is executive director of Liberty Institute, India.

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