India and Free Trade Agreements

Recently, the Regional Comprehensive Economic Partnership (RCEP) was finally signed with participation of 15 members including 10 ASEAN member countries and Australia, China, Korea, Japan and New Zealand, after over a decade of negotiations. While it is being described as the world’s largest free trading agreement, India had decided against joining RCEP last year citing several concerns.

Alongside this major development, the world governments are increasingly resetting their approach to trade agreements in the midst of the coronavirus pandemic. Consequently, there have been debates as to whether there is a need to rejig India’s trade relations with the rest of the world by overhauling its Free Trade Agreement (FTA) strategy. In this context, it is pivotal to understand what FTAs are and why are they important? What significance do they hold for India in the present Global Scenario? What has been India’s experience with FTAs in the past? Why are FTAs not working as expected for India? What are the steps taken by India to strengthen its existing FTAs? And moving forward, what should be India’s approach towards FTAs? In this edition we will attempt to answer these questions.

What are Free Trade Agreements (FTAs) and why are they important?

FTAs are arrangements between two or more countries or trading blocsbthat primarily agree to reduce or eliminate customs tariff and nontariff barriers on substantial trade between them.

There are several variants of FTAs like
PTAs, CEPA or CECA. But following can be cited as key features of FTAs

Key features of Free Trade Agreements (FTA)

  • In FTAs, member countries specifically identify the duties and tariffs that are to be imposed on member countries when it comes to imports and exports.
  • FTAs normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.), but can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competi- tion policy etc.
  • FTAs also generally provide a criteria known as the ‘Rules of Origin (RoO)’ that are needed to determine the country of origin of a product for purposes of inter- national trade (for imposition of preferential tariff). These RoO are enforced by issuance of a Certificate of Origin (CoO) by authorized agencies of the trading partner.
  • FTAs act as an exception to the Most Favoured Nation principle adopted by WTO.

FTAs play an integral role in globalization and free trade in the following ways

Creating a more Dynamic Business Climate:

Free trade encourages competition on a global level, which consequently leads to increase in a efficiency of domestic industries, cheaper and better-quality products for consumers and increases specialization within countries.

Abolition of global monopolies

With elimination of tariffs and quotas, global monopolies are eliminated due to increased competition.

Promote regional economic integration and global economic growth

FTAs help build shared approaches to trade and investment and provide support for stronger people-to-people and busi- ness-to-business links thus enhancing global growth.

How are Free Trade Agreements (FTAs) different from other trading agreements such as the PTA and CECA/CEPA ?

  • Preferential Trade Agreement (PTA): Compared to a PTA, FTAs are generally more ambitious in coverage of tariff lines (products) on which duty is to be reduced. For example- in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a negative list on which duty is not reduced or eliminated.
  • Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic Partnership Agreement (CEPA): FTA is different from these on two counts – Firstly, CECA/CEPA are more comprehensive and ambi- tious than an FTA in terms of coverage of areas and the type of commitments. While a traditional FTA focuses mainly on goods; a CECA/CEPA covers many areas like services, investment, competition, government procurement, disputes etc. Secondly, CECA/CEPA looks deeper at the regulatory aspects of trade than an FTA and encompasses mutual recognition agreements (MRAs) that cover the regulatory regimes of the partners.

What is the relationship between Most Favored Nation (MFN) principle and Free Trade Agreements (FTA)?

  • Article 1 of GATT (General Agreement on Tariffs and Trade) which enunciates the MFN principle of WTO prohibits member countries to discriminate between their trading partners and states that if a country grants some nation a special favour (such as a lower customs duty rate for one of their products),it has to do the same for all other WTO members.
  • However, derogations from this MFN principle are permitted for forming FTAs under specific conditions such as
  1. FTA members shall not erect higher or more restrictive tariff or non-tariff barriers on trade with non-members.
  2. Elimination of tariffs and other trade restrictions should be applied to “substantially all the trade between the constituent territories in products originating in such territories.”
  3. Elimination of duties and other trade restrictions on trade within the FTA to be accomplished within a reasonable length of time (no longer than 10 years).