27 December 2022

Table of Content

Window for FTAs shrinks as India braces for set of non-tariff barriers

GS-2: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s Interest.

While India pushes the pedal on Free Trade Agreements (FTAs), it is also emphasizing over non-tariff issues such as carbon emission norms, climate action, labour and gender balance standards that comprise an increasingly substantive part of new agreements.  

Free Trade Agreement (FTA)

• A FTA is an agreement between two or more countries where the countries agree on certain obligations that affect trade in goods and services, and protections for investors and intellectual property rights, among others. 
• The main objective of FTA is to remove trade barriers of imports and exports and ensure hassle-free trade relations.
• Under a FTA, countries offer preferential trade terms, tariff concessions to each other.
• So far, India has signed a total of 13 FTAs with its trading partners such as Japan, South Korea, countries of ASEAN region etc.
• FTAs could be bilateral or multilateral. 

• Example, India has signed an agreement called South Asian Free Trade Area (SAFTA) with South Asian countries including Nepal, Sri Lanka, Bangladesh, Bhutan etc.

• In addition, India has also signed six Preferential Trade Agreements (PTAs). 

• Main difference between FTA and PTA: An FTA is comprehensive covering various areas, while a PTA is limited to only trade in goods and seeks only a tariff elimination in terms of a margin of preference.

Benefits of FTA 

• Reduction or elimination of tariffs on qualified.
• Diversification and expansion of export markets
• Cheaper access to raw materials
• Attract foreign investment
• Boost competitiveness
• Helps to tackle other geo-political reasons in the region
• Provide Intellectual Property Protection
• Development of product standards 
• Increases ability to bid on government procurements in the FTA partner country. 
• Increases ability of service companies to supply their services in the FTA partner country. 
• Fair treatment for investors as they will be treated favourable in the FTA partner country vis-a-vis FTA country’s own investors.  

Differences between the old (FTAs negotiated prior to 2015) and the new FTAs: 

• Before 2015, trade-related issues used to dominate – rules, operations, and tariffs measures and there used to be about a dozen chapters.
• In the new FTAs, the number of chapters has doubled with non-trade issues such as gender balance, labour standards, environment and climate issues dominating these FTAs. 
• Reasons behind:

• USA 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 available from mining whereas developed countries generate it from scrap, which results in lower carbon emissions.

• The European Union has proposed a Carbon Border Adjustment Mechanism (CBAM) from 2026 to tax carbon-intensive products such as iron and steel, cement, fertiliser, aluminium and electricity generation. 

Types of regional trade agreements

• Partial Scope Agreement (PSA): It allows only for trade between countries on a small number of goods. 

• Ex: India – MERCOSUR PTA and India – SAARC Preferential Trading Arrangement (SAPTA)

• Free Trade Agreement (FTA): It allows preferential arrangement in which members reduce tariffs on trade among themselves, while maintaining their own tariff rates for trade with nonmembers.

• Ex: India – South Asia Free Trade Area (SAFTA) and India Sri Lanka FTA

• Comprehensive Economic Cooperation Agreement (CECA): It generally covers negotiation on trade tariff and TQR rates only.

• Ex: India – Malaysia CECA

• Comprehensive Economic Partnership Agreement (CEPA): It covers negotiation on the trade in services and investment, and other areas of economic partnership. It may even consider negotiation on areas such as trade facilitation and customs cooperation, competition, and IPR. 

• Thus, it is more comprehensive than CECA.
• Ex: India – Japan CEPA and India – South Korea CEPA 

• Customs Union (CU): It is a FTA in which members apply a common external tariff (CET) schedule to imports from non-members. 

• Thus, it eliminates trade barriers among themselves and adopt common external trade barriers.
• Ex: European Union Customs Union and Southern African Customs Union

• Common Market (CM): It is a CU where movement of factors of production is relatively free amongst member countries. 

• Free movement of factors of production allows free trade and free movement of labour and capital.
• Ex: European Common Market

• Economic Union (EU): It is a CM where member countries coordinate macro-economic and exchange rate policies along with shared executive, judicial & legislative institutions.

• Ex: European Union

[Ref- IE]

[Self-study: Make notes on India-Mauritius CECPA (2021), India-UAE CEPA (2022), India-Australia ECTA (2022) and Current Engagements of India in RTAs with USA]

Fact File