Free Trade Agreement (FTA)

To fast-track free trade agreement (FTA) negotiations with several countries like the UK, Australia, the European Union, and Canada, India is keen to conclude an “early harvest” trade deal with some of these countries.

What are FTAs and other types of trade agreements?

• arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non-tariff barriers on substantial trade between them.
• FTAs 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 etc.
• Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on agreed number of tariff lines. For example, India MERCOSUR PTA.
• Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic Partnership Agreement (CEPA): agreements which consist of an integrated package on goods, services, and investment along with other areas including IPR, competition etc. The India Korea CEPA is one such example.
• Custom Union: partner countries may decide to trade at zero duty among themselves, however they maintain common tariffs against rest of the world. An example is Southern African Customs Union (SACU).
• Common Market: Customs Union with provisions to facilitate free movements of labour and capital, harmonize technical standards across members etc. European Common Market is an example.
• Economic Union: Common Market extended through further harmonization of fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union (EU) is an apt example of this type.

How Early harvest scheme (EHS) is different from an FTA?

• Early harvest scheme is a precursor to an FTA between two trading partners. This is to help the two trading countries identify certain products for tariff liberalisation pending the conclusion of FTA negotiation. It is primarily a confidence building measure.
• A good example of an EHS is the one between India and Thailand which was signed in October 2003, wherein several products were identified to be reduced to zero in a phased manner.

Why are FTAs significant?

• Market access: By eliminating tariffs and some non-tariff barriers partners get easier access into one another's markets.
• Preferential treatment over non-FTA member country: Eg. ASEAN has FTA with India but not with Canada, thus, custom duty on leather shoes is 20% but with India its reduced to zero. FTAs may also protect local exporters from losing out to foreign companies that might receive preferential treatment under other FTAs.
• FTAs offer better alternative to multilateral negotiations which are slow
• FTAs encourages competition which increases efficiency of products and services in order to be on par with its competitors. FTAs provide opportunities for greater integration with Global Value Chains, specialization and efficient usage of resources.

How has India participated in Trade Agreements (FTAs)?

• Regional trade agreements (RTAs): increasingly prevalent since the early 1990s. Currently, 14 RTAs are in force in India with a dozen more under negotiation.
• Asia Pacific Trade Agreement (APTA)
• Regional Comprehensive Economic Partnership (RCEP): India withdrew from the RCEP in 2019 due to concerns like large trade deficits with RCEP countries, inadequate protection against import surge, lack of service component etc.
• ASEAN FTA
• Bilateral agreements: first bilateral FTA with Sri Lanka (ISFTA) in 2000. India has not signed any major FTA in the last 10 years.
• Comprehensive Economic Cooperation Agreement (CECA) with Malaysia in 2011. The FTA with Korea is under review.

India’s reluctance towards FTAs can be attributed to its “not very encouraging” experience with past FTAs. What has been India’s experience with FTAs?

• Substantial gains from SAFTA: effective (in 2006), Indian exports to SAFTA countries have increased faster than its imports from them leading to a significant rise in trade surplus from about US$ 4 billion (in 2005-06) to US$ 21 billion (in 2018-19).
• The maximum growth in exports to SAFTA region has been recorded with Bangladesh and Nepal.
• No significant increase in exports due to FTAs: Since 2006, India’s exports to RTA partners increased by 13% y-o-y. The trend to non-partner countries was no different with exports increasing at the same pace
• India’s exports are much more responsive to income changes as compared to price changes and thus a tariff reduction/elimination does not boost exports significantly.
• Widened trade deficit: India’s trade deficit with ASEAN, Korea and Japan has widened post-FTAs.
• ASEAN in India’s total trade deficit increased from about 7 percent in 2009-10 to 12 percent in 2018-19.
• Low utilisation: Asian Development Bank, the utilisation rate (percentage of trade conducted through preferential route) of India’s FTAs varies between 5% and 25%, which is one of the lowest in Asia.

Why are FTAs not working as expected for India?

• Tariff related issues: India's obligation under the WTO was to remove tariffs on just 2 per cent imports, tariff cuts it offered in its FTAs was in the range of 74 percent to 86 percent. This has not turned out feasible for India since it stands at a disadvantage with nations like Japan and Singapore to compete on global platforms.
• Further, while FTAs removed tariff barriers substantially, Indian exporters still face a variety of nontariff barriers like import controls, import permits, SPS measures etc. For example- 76 per cent products exported to Japan face some non-tariff regulation.
• Absence of services component: Services is considered as India's strong area but its performance under FTAs is hampered due to absence of mutual recognition agreements (MRAs), which allow qualified personnel in one region to automatically qualify for offering services in any partner country.
• Domestic factors: Exporters in India face issues such as higher logistics costs, supply-side constraints like energy shortages etc.
• Lack of information on FTAs, complex rules of origin criteria, low margins of preference, higher compliance costs and administrative delays dissuade exporters from using preferential routes.
• Circumvention of rules of origin: Authorities in India have not been effective in checking illegitimate practices such as re-routing of imports from non-FTA partner countries through FTA partner countries, manipulative measures to obtain Certificate of Origins (CoO) etc.
• Inconsistencies due to overlapping RTAs: For example, India has an RTA with Malaysia and Singapore separately while they are also a member of India ASEAN CECA.
• Global perception of India being protectionist: For example, focus on self-reliance under Atmanirbhar Abhiyan, revised public procurement order giving preference to local content etc.

Steps taken by India to strengthen FTAs

• Strengthening RoO mechanism: processes for claiming exemptions under related customs exemption notifications has been tightened by placing onerous obligations on the importers through the Customs Administration of Rules of Origin under Trade Agreement Rules, 2020 (CAROTAR, 2020).
• CAROTAR 2020 has made it incumbent on the importer to collect sufficient information/documents to convince the authorities that rules of origin criteria for the imports have been met in order to get preferential tariff.
• Revision of Bilateral Investment Treaties (BITs): In 2015, India decided to review all of its existing BITs and released a Model BIT in 2016. The revised model BIT will be used for re-negotiation of existing investment chapters in CECAs/ CEPAs / FTAs and negotiation of future BITs.
• The model BIT includes an "enterprise" based definition of investment, non-discriminatory treatment through due process, national treatment, a refined Investor State Dispute Settlement (ISDS) provision etc.

Way Forward

• Strong safeguard clauses: designed in a way that the domestic industry gets protection in case of material injury well within time. Within the FTA, provision could be made for safeguard measures to be invoked if a volume or price trigger for the concerned products is reached.
• Aligning future FTA negotiation strategy/tariff schedules with the Atmanirbhar Bharat strategy
• Building new relationships in Post-COVID world order opportunity to leverage its geopolitical relations to create economic relations via creation of newer FTAs and also revision of its existing FTAs.
• Picking and choosing partners carefully: negotiating bilateral FTAs with countries where trade complementarities and margin of preference are high. For example, find more opportunities in markets like the US, EU etc where it already has a bigger presence.
• Domestic measures: reducing compliance cost and administrative delays, proper safety and quality standards to avoid dumping of lower quality hazardous goods into the Indian market, conducting awareness outreaches, low level of service link cost i.e., costs related to transportation, communication etc.

To realize the potential benefits of FTAs, it is important to ensure that they are on mutually reciprocal terms and at the same time focusing on products and services with maximum export potential.