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INDIA and South Korea will sign today an agreement that they say will cut barriers and boost trade between the two important economies. But, behind the political rhetoric, the reality of the Comprehensive Economic Partnership (CEPA) is in 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 that 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 Organisation (WTO) talks in 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 in trade agreements that will not boost trade much at all, such as South Korea's recent free trade agreement with the European Union and the one that 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 labour 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 cars.
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 per cent 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 liberalisation has brought the average import tariff in India down from 32 per cent in 2000 to 15 per cent in 2007, according to the WTO. In 1991, the average import tariff in India was 115 per cent. 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 car sector shows how. After putting up for decades with very few choices from the government-protected oligopoly, keen Indian consumers are buying 9 per cent more cars a year, one of the world's fastest growing markets.
Becoming globally competitive
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 flip side is India's remaining tariffs on car 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 liberalisation 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 amongst South Korea's rice farmers, who fear that competition will erode their 60 per cent grip on their market. Protection for a variety of vested interests means that the agreement will be implemented slowly, over 10 years.
Why wait to boost two-way trade by what South Korean negotiators calculate as US$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.
Mr Mitra is executive director of Liberty Institute, India. Dr Kim is executive director of the Centre for Free Enterprise, South Korea. Both think tanks are members of the Freedom to Trade coalition
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