Slow Lane to Free Trade

India's Minister of Commerce and Industry Anand Sharma, left, shakes hands with South Korean Trade Minister Kim Jong-hoon after signing a Comprehensive Economic Partnership Agreement (CEPA) in Seoul, Aug. 7. Under the accord, the two countries are to cut tariffs on goods and services in a move to increase bilateral trade. / Korea Times

By Kim Chung-ho and Barun Mitra

India and South Korea signed an agreement on Aug. 7 to cut barriers and boost trade between the two countries. But, behind the political rhetoric, the reality of the Comprehensive Economic Partnership Agreement (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.

It is at least a step in the right direction: with the World Trade Organization (WTO) talks in the Doha Round in a coma, both governments are right to seek other ways to boost bilateral trade.

But both governments are being far too timid in trade agreements that will not boost trade much at all, like South Korea's recent Free Trade Agreement with the European Union and one India is seeking with the Association of Southeast Asian Nations (ASEAN).

Liberating trade between Indians and Koreans would make 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 that has expertise in information technology, electronics and automobiles.

South Koreans have long understood the value of trade with the rest of the world. In the early 1960s, they had similar living standards to 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 related 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 beginning in 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 but sixth largest for trade in 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 from the government-protected oligopoly, keen Indian consumers are buying 9 percent more cars a year, 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.

Despite all this, the flipside is India's remaining tariffs on auto components, benefiting a tiny minority who fiercely opposed the CEPA and got special protection ― at the expense of Indian consumers.

India has secured limitations and exceptions in the CEPA 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.

Decades of protection from trade prevented growth but liberalization made many Indian businesses globally competitive. Yet, New Delhi continues to insist that coddling India's farmers is the route out of poverty, while constraining their property rights and their 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 their market.

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

Both governments proudly announced the CEPA last week as an historic achievement, but our worry is that the signing of the agreement lacked its contents and served as a photo opportunity. Let us sign a free trade agreement that does what it says on the tin: free trade.

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