A few days ago, the Vietnamese rubber-stamp parliament ratified a free trade agreement with the European Union. Under the FTA, which will be effective from July this year, both parties would bring down duties on 99 percent of the products to zero.
The EU-Vietnam FTA causes insecurity among Indian exporters who fear losing the European market, who are already witnessing a significant slump in orders due to Coronavirus pandemic.
“In many segments, India is closely competing with Vietnam. Since Vietnam has signed an FTA, we will have to be careful in those segments over a period of time. India has been losing market share (in exports) to Vietnam and therefore if we talk about footwear, leather goods, furniture marine goods, tea and coffee, these are the sectors where we will have impact,” said Ajay Sahai, director general and CEO of Federation of Indian Export Organisations (FIEO), an umbrella body of Indian exporters.
Vietnam’s attractiveness as a manufacturing hub and its progress in free trade agreements has become a major worry for the Indian government as well as Indian exporters.
India desperately wants the largest pie of the companies shifting manufacturing units out of China, as the labour cost increases in the Communist country. But, as per a study by Nomura Group on 56 companies shifting production out of China between April 2018 to August 2019, only three of these relocated to India while 26 went to Vietnam, 11 to Taiwan, and eight to Thailand.
For various advantages over India, Vietnam is leaving India behind in the way to become a new “factory of the world” as China loses the pre-eminent position. Now, India must fast track its trade deals with the friendly countries around the world which could get their companies to manufacture in India, and implement necessary domestic macroeconomic reforms in order to compete with Vietnam.
A free trade deal with the European Union looks unlikely as the talks are going on for more than a decade with no concrete results. But, India could fast track trade deals with the United States, United Kingdom, Australia, New Zealand, West Asia, and other rich friendly countries that need a low-cost manufacturing hub for their companies.
The United States alone has an economy bigger than the European Union, and a free trade deal could be fast-tracked with the Trump administration. This would be India’s counter to EU-Vietnam free trade deal.
India-United States free trade deal is already in the final stage with broad contours of the deal already finalized. Both countries should hold whatever negotiation is left as soon as Coronavirus pandemic is over and announce the deal.
The trade deal was to be finalized during PM Modi’s visit to the United States but it got delayed due to Goyal’s US counterparts’ preoccupation with trade negotiations with Japan and China. “Therefore, probably, the finalization of the trade package got a little delayed. But we have almost resolved the broad contours of what we are going to announce. I don’t see any great difficulty in closing the gaps on the first announcement,” said Piyush Goyal.
The British PM Boris Johnson is also keen to have an FTA signed with India after Brexit and both countries must take the deal forward as they are already major trading partners.
On the Australian front, PM Scott Morrison would go to any extend to have a strategic alliance and free trade deal with India. The Indian government has been hesitant in signing a deal with Australia to protect its dairy sector, but after the Coronavirus pandemic, the global equations have changed drastically and strategic ties and driving economic ties. Therefore, India must take FTA with Australia forward.
If the Indian government wants to make the country “factory of the world”, bold and aggressive economic agenda must be pursued through land, labour, and capital reforms on the domestic front and FTAs with friendly nations on the international front. Otherwise, the tiny nations in Southeast Asia like Vietnam, Thailand would capitalize on the opportunity of the restructuring of global supply chains and India would be left behind in the race.