Pushing for Free Trade Agreements

Context

• In recent times, the Indian government has been actively pursuing free trade agreements (FTAs) with a wide range of countries.

Current Scenario

• After initially fighting against the Free Trade Agreements (FTA), the Government has now started rooting for it. 
• Many pacts have been signed with different countries like Australia and the UAE and many are under process like the UK and the European Union, among others.

Image Courtesy: FTA 

Free Trade Agreement (FTA)

• About: 
  • A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them. 
  • Goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
  • The concept of free trade is the opposite of trade protectionism or economic isolationism.
• Relationship Between Multilateralism and FTA
  • Article 1 of GATT (General Agreement on Tariffs and Trade) (about Most Favoured Nation) states that “any advantage, favour, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.” 
  • However, derogations from this MFN principle are permitted for forming FTAs under specific conditions as per the following provisions of the WTO Agreements: 
    • FTA members shall not erect higher or more restrictive tariff or non-tariff barriers on trade with non-members than existed prior to the formation of the FTA.
    • Elimination of tariffs and other trade restrictions be applied to “substantially all the trade between the constituent territories in products originating in such territories.”
    • Elimination of duties and other trade restrictions on trade within the FTA to be accomplished “within a reasonable length of time,” meaning a period of no longer than 10 years
• Different Types of Economic Engagements:
  • Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on an agreed number of tariff lines. The list of products on which the partners agree to reduce duty is called a positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover substantially all trade. 
  • Free Trade Agreement (FTA): In FTAs, tariffs on items covering substantial bilateral trade are eliminated between the partner countries; however, each maintains an individual tariff structure for non-members. India Sri Lanka FTA is an example. The key difference between an FTA and a PTA is that while 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. Thus, compared to a PTA, FTAs are generally more ambitious in coverage of tariff lines (products) on which duty is to be reduced. 
  • Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic Partnership Agreement (CEPA): These terms describe 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 and it covers a broad range of other areas like trade facilitation and customs cooperation, investment, competition, IPR etc. 
  • Custom Union: In a Customs union, partner countries may decide to trade at zero duty among themselves, however they maintain common tariffs against the rest of the world. An example is Southern African Customs Union (SACU) amongst South Africa, Lesotho, Namibia, Botswana and Swaziland. The European Union is also an outstanding example. 
  • Common Market: Integration provided by a Common market is one step deeper than that by a Customs Union. A common market is a Customs Union with provisions to facilitate free movements of labour and capital, harmonize technical standards across members etc. The European Common Market is an example. 
  • Economic Union: Economic Union is a Common Market extended through further harmonization of fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union (EU) is an example

Significance of FTAs (Why are all Countries opting for it?)

• By eliminating tariffs and some non-tariff barriers FTA partners get easier market access into one another’s markets. Countries negotiate Free trade Agreements for a number of reasons.
• Exporters prefer FTAs to multilateral trade liberalisation because they get preferential treatment over non-FTA member country competitors. 
• FTAs may also protect local exporters from losing out to foreign companies that might receive preferential treatment under other FTAs.
• Possibility of increased foreign investment from outside the FTA. 

Major Challenges in finalising FTAs

• Demographic dividend: 
  • These Non-tariff issues could pose hurdles for India in reaping the gains of its comparative labour advantage.
• Shift of focus: 
  • Wrapping up these FTA talks could narrow soon given that India’s focus would shift to the series of events linked to India’s G20 Presidency.
• Influential lobbies can delay it more: 
  • Political lobbying from influential lobby groups such as farmer unions and the auto sector could intensify.
• Priority to non-tariff issues: 
  • In much of the negotiations currently under discussion, climate action, carbon emissions and labour issues are taking precedence over trade issues.
• Protectionist Tendencies: 
  • Moves such as plans to raise import duties on “non-essential items”, will only expose the government to the charge of being protectionist. 
  • The first two decades after 1991-92 saw a steep decline in tariff rates. 
  • The trend, however, has been reversed under the ruling government with the average applied import tariff actually rising. But still challenges remain.
• Recessionary conditions: 
  • These could potentially offer partner countries a handle to trigger non-tariff protectionist measures as developed nations stare at recessionary conditions. 
• Environmental issues: 
  • Developed countries such as the US have brought up the issue of carbon emissions in the process of manufacturing melted steel as a non-tariff-related issue.
  • India mostly produces steel generated from iron ore which comes from mining.
  • Most developed countries have resorted to methods to generate it from scrap which results in lower carbon emissions. Thus, there may be a levy of carbon adjustment tax.
• GSP (Generalised System of Preferences): 
  • Currently, we may benefit from the GSP but if they come in a non-tariff barrier by citing labour or environment, then it becomes an issue citing standards, adjustments, child labour as reasons.
  • India had been a beneficiary of the US’ GSP programme since November 1975, under which beneficiary countries are allowed to export thousands of products to the US without the added burden of duties. 
• Carbon Border Adjustment Mechanism: 
  • The European Union has proposed CBAM to tax carbon-intensive products, such as iron and steel, cement, fertiliser, aluminium and electricity generation from 2026. 
  • Here, EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules.

Way Ahead

• Reducing barriers: At a time when firms are looking to diversify away from China, pursuing a China plus one strategy, India must lower barriers to trade, seek actively to be a part of global value chains.
• Proceed with care: While negotiations must surely proceed with care, they must not be derailed over these issues.