[Editorial] Crafting FTAs- Indian Player’s Concerns

What are the FTAs signed by India?

India has signed 13 Free Trade Agreements:

1. India-Sri Lanka FTA
2. SAFTA (Agreement on South Asian Free Trade Area)- involving Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, Sri Lanka and India
3. India-Nepal Treaty of Trade
4. India-Bhutan Agreement on Trade, Commerce and Transit
5. India-Thailand FTA – Early Harvest Scheme
6. India-Singapore Comprehensive Economic Cooperation Agreement (CECA)
7. India-ASEAN CECA – Trade in Goods, Services and Investment
8. India-South Korea Comprehensive Economic Partnership Agreement (CEPA)
9. India-Japan CEPA
10. India-Malaysia CECA
11. India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement
12. India-UAE CEPA
13. India-Australia Economic Cooperation and Trade Agreement

Of these FTAs, 3 were signed in just the last 5 years:

1. India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement
2. India-UAE Comprehensive Partnership Agreement
3. India-Australia Economic Cooperation and Trade Agreement (IndAus ECTA)

In addition to this, 6 limited coverage Preferential Trade Agreements have been signed:

1. Asia Pacific Trade Agreement
2. Global System of Trade Preferences
3. SAARC Preferential Trading Agreement
4. India-Afghanistan PTA
5. India-MERCOSUR PTA
6. India-Chile PTA

New Delhi has now commenced talks on an FTA with the EU and UK.

Why are these talks significant?

The ongoing FTA talks have a bearing on tariff-related issues in agriculture and industry.
These discussions could benefit sectors like pharmaceuticals, textiles and leather in India.
India’s exports to the EU have grown at a faster rate in the last decade than the overall exports of the country.
European nations like Germany, the Netherlands, Belgium, France and Italy have become key markets for Indian products.
Successful FTA between India and the EU would help increase Indian presence in markets like Greece, Portugal, Poland, Czech Republic and Romania. In these countries, Indian exports are already recording annual growth in double digits.

What are the concerns to be considered while crafting FTAs?

Observations show that Indian exporters don’t get the same returns as exporters in partner countries. This has been observed in case of India- South Korea trade.
This is because, when Indian players import, the preferential tariffs (from trade agreements) on the products are much lower than the rates applying to countries with MFN label (from India). However, when India exports to these partner countries, the preferential tariff on India goods, is often close to the MFN tariff rates.
‘Rules of origin’ is an important bone of contention in most of India’s FTAs.
In 2020, the USA stopped applying GSP to India. The country deemed India to be a ‘developed country’ and hence not requiring of the preferential treatment under the trade scheme. Such situations tend to disrupt the trade flow.
Indian trade in services is low. Its score in the STRI (Services Trade Restrictiveness Index of OECD) is more than the global average. This is especially so in case of legal services and accounting services– because of the licensing requirements.

What is the way ahead?

These agreements provide momentum to international trade by removing barriers- tariff and non-tariff. However, care must be taken to account for Indian players’ interests.
While crafting FTAs with partner countries, Indian negotiators must ensure that domestic players aren’t made to compete on unequal terms with their counterparts in the partner countries.
In 2020, India notified the CAROTAR or Customs (Administration of Rules of Origin under Trade Agreements) Rules. These rules require a basic level of due diligence from the importer. How these rules perform in the FTAs is yet to be seen.
The recently concluded India-UAE CEPA sets a good example in terms of ‘rules of origin’. It provides that 40% value addition or up to 40% substantial processing in the exporting country is a qualifying criterion to avail the preferential tariffs.
Offset clauses must be built into agreements, especially those involving technology-intensive segments. This clause requires the exporting country to undertake activities that benefit the importer’s economy directly.
Trade agreements could also include an emergency action plan. It would help tackle situations like the 2020 withdrawal of GSP-cover.
Lessons can be learnt from the US-Mexico-Canada Agreement with regards to ‘sunset clauses’ in trade deals. This tri-country deal provides for periodic review of terms and pact is to automatically end in 16 years, unless the parties renegotiate it.
While discussing trade terms, India needs to negotiate for parity between the merchandise and service sectors. It is to be noted that there is significant scope for expanding trade in banking and financial services.