Deciding upon a Free Trade Agreement (FTA):

Deciding upon a Free Trade Agreement (FTA):

News: The article discusses about FTAs and how to decide FTA partners.

Facts:

What is an FTA: It is an arrangement between two or more countries under which they agree to end tariffs and non-tariff barriers on a large value of imports from partner countries. The agreement may also cover, among others, services, investment, and economic cooperation.

Factors to be considered while choosing an FTA partner:

• Trade profile: A country with a large bilateral trade deficit is designed to lose the FTA game. Consider two countries A and B. A exports goods worth $10 billion to B, while B exports goods worth $80 billion to A. If both agree to end duty through an FTA, A will provide eight times the market access at zero duty to B than B to A.
• Non-Tariff barriers not covered: Several non-tariff barriers like hygiene issues, national security issues are not covered under FTAs. It happens because two countries are not at a similar level of development, with the result that a partner country refuses imports even though it agreed to provide zero duty access.
• Dominance of one player: A dominant FTA partner may dictate changes in the partner country’s regulation to match its own. The US got many FTA partners to restrict the flexibilities like the use of compulsory licensing allowed under the TRIPs.
• Trade diversion: Countries with high import duties are at a disadvantage. FTAs favour products from partner countries by allowing them duty-free access, while products from other countries continue to pay import duties. This leads to the replacement of goods from the more efficient non-FTA country supplier by less efficient FTA partner country supplier. This nullifying effect of FTAs is termed trade diversion.
• Trade creation: High import duty is like a high wall protecting domestic industry from imports. When zero duty imports replace local products, the effect is called trade creation. Local industries suffer more when the high wall crumbles as a result of an FTA.
• Lack of consensus: For taking part in Global Value Chains, members must agree to a zero tariff zone and relax the rules of origin. Most FTAs fail to deliver on these counts. RCEP would be an apt example.
• Pre-existence of FTAs: Most countries already have an FTA with each other, so incremental market access would be negligible.
• Political decision: For many, FTAs are a political and not economic decision. Diplomats may want to achieve political ends at the cost of economic.