What are FTAs?
Free trade agreements (FTAs) are arrangements between two or more countries or between a country and a trading bloc to abolish or reduce tariffs, quotas, and preferences on goods and services traded. Countries often agree to FTAs if their economic structures are complementary, not competitive. FTAs also cover areas such as intellectual property rights (IPRs), investment, and government procurement and competition policies. At the regional level, every customs union, trade common market, economic union, and customs and monetary union negotiate free trade areas.
India looks favourably upon regional trading arrangements (RTAs), such as FTAs, Preferential Trade Agreements (PTAs), Comprehensive Economic Partnership Agreements (CEPAs), and Comprehensive Economic Cooperation Agreements (CECAs).
India’s trade promotion strategies are briefly outlined below.
Types of trade agreements
Trade agreements are bilateral or multilateral treaties, or any other enforceable accord, which commits two or more countries to specified terms of trade and commerce. They mostly involve mutually beneficial concessions.
Free Trade Agreement
India has negotiated trade liberalization arrangements with several countries and trade groupings, including pre-FTA level schemes and alternative trade relaxation programs with ASEAN, Sri Lanka, and Thailand.
Prior to negotiating trade accords, potential trading partners sign framework agreements, which set the period for future substantive liberalization by defining the scope and provisions of orientation for some new area of discussions. India has previously signed framework agreements with the ASEAN (Association of Southeast Asian Nations) and MERCOSUR (Southern Common Market in Spanish) trade blocs, and countries like Japan and Korea. Aside from FTAs, India has negotiated other types of agreements to promote trade liberalization.
Early Harvest Scheme
An Early Harvest Scheme (EHS) is a precursor to an FTA between two trading partners. At this stage, the negotiating countries identify certain products for tariff liberalization pending the conclusion of actual FTA negotiations. The EHS is, therefore, used as a mechanism to build greater confidence between the trading partners, and structurally prepares them for subsequent, deeper economic engagement. India is keen on such schemes, and some EHS agreements are incorporated within existing treaties. India and Thailand signed an EHS in October 2003, where both countries agreed to reduce tariff duties on 83 products to zero, in a phased manner.
Preferential Trade Agreement
In this type of agreement, two or more partners give preferential right of entry to certain products. This is done by reducing duties on an agreed number of tariff lines. A PTA is established through a trade pact and is a stepping stone towards better economic relations with the concerned country. India enjoys PTAs with several countries, including Bangladesh, China, South Korea, and Sri Lanka. The key difference between an FTA and a PTA is that 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 Partnership Agreement and the Comprehensive Economic Cooperation Agreement
These terms refer to integrated trade negotiations on goods, services, and investments as well as agreement on a broad range of areas such as trade facilitation and customs cooperation, investment, competition, and IPR. India has signed CEPAs with South Korea (in effect since 2010) and Japan (in effect since 2011) and CECAs with Singapore (2005) and Malaysia (2011).
Founded on August 8, 1967, ASEAN consists of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. 2017 marked 25 years of India’s dialogue partnership with ASEAN, 15 years of summit-level meetings, and five years of strategic partnership. India places great importance on developing its relationship with ASEAN given the organization’s economic, political, and strategic significance in the larger Asia- Pacific region.
Strong ties with ASEAN is necessary to expand India’s market access, and to build greater connectivity between India’s northeastern states that border the Southeast Asian region. Towards this, India inked the framework agreement to activate its CECA with ASEAN on October 8, 2003. This initial agreement provided for an EHP, which covered areas of economic cooperation and a common list of items for exchange as an assurance building measure.
Subsequently, the ASEAN-India Free Trade Area (AIFTA) was negotiated and came into force on January 1, 2010. India also signed an FTA in services and investments with ASEAN in 2014, which came into force in 2015.
In 2016-17, ASEAN accounted for about 10.4 per cent of India’s exports and 10.6 per cent of India’s imports. While ASEAN has committed to tariff reduction on over 4,000 products and tariff liberalization of over 90 per cent – India currently suffers a trade deficit with the region. This is in the case of five ASEAN member states – Malaysia, Indonesia, Thailand, Brunei, and Lao PDR. The biggest deficit is with Indonesia, which has eliminated tariffs on only 50.1 per cent items out of those named in the FTA agreement. The areas of economic cooperation under the India-ASEAN FTA are as follows:
Where suitable, the Parties agree to strengthen their collaboration in the below areas, including, but not limited to:
Joint Recognition Arrangements, conformity assessment, accreditation procedures, and standards and technical regulations;
Trade financing; and,
Business visa and travel facilitation.
Sectors of cooperation
Agriculture, fisheries and forestry;
Services – Media and entertainment, health, financial, tourism, construction, business process outsourcing, environmental;
Mining and energy – Oil and natural gas, power generation, and supply;
Science and Technology – Information and communications technology, electronic- commerce, biotechnology;
Transport and infrastructure – Transport and communication;
Manufacturing – Automotive, drugs and pharmaceuticals, textiles, petrochemicals, garments, food processing, leather goods, light engineering goods, gems, and jewellery processing;
Human resource development – Capacity building, education, technology transfer; and,
Others: Handicrafts, small and medium enterprises, competition policy, Mekong Basin Development, intellectual property rights, and government procurement.
Trade and investment promotion
Fairs and exhibitions;
ASEAN-India web links; and,
Business sector dialogues.
Parties to the AIFTA may set up other bodies as may be necessary to coordinate and execute any economic cooperation activities undertaken pursuant to the FTA.
India being the dominant partner amongst the nations stands to gain the most from an increase in cooperation amongst the ASEAN nations which would give it access to newer markets. This would give a push to the manufacturing sector in India which would percolate to increase in employment.
The current government dispensation with its neighbour first policy has given increasing importance to ASEAN countries with trade growing YOY 14% to $81.3 billion and is expected to further grow in the future. The Increase in cooperations is also said to benefit India strategically in the midst of uncertainty about China’s policy of String of Pearls. India with the increasing trade and business partnership will have a strong foothold in the ASEAN nations and be able to protect is strategic assets.