Free Trade Agreements (FTAs): Challenges & opportunities – Explained, pointwise

Introduction

The government seems to be resetting its position on trade policy. The Union commerce secretary recently said India would fast-track free trade agreements (FTAs) as the country needs to engage with the rest of the world.

Since the world is moving towards bilateral and regional trade arrangements, such deals would be important. Hence, India is now performing a review and re-negotiation of the existing FTAs with ASEAN, Japan and Korea, and at the same time, forging enhanced trade alliances with the European Union, UK, US and Australia.

So, let’s understand in detail about Free Trade Agreements (FTAs):

What is a Free Trade Agreement (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.

Coverage: The agreement may also cover, among others, services, investment, and economic cooperation.

• FTA normally covers trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.).
• FTA can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy, etc.

Main focus: The focus of an FTA is primarily on economic benefits and encouraging trade between the countries by making it more efficient and profitable. But FTAs may also have political, or strategic benefits.

Types of FTA

• 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 the positive list. India MERCOSUR PTA is such an example.
• Bilateral Investment Treaty (BIT): A Bilateral Investment Treaty (BIT) provides investors with various guarantees when investing in the country of the treaty partner.
• Economic Partnership Agreement (EPA) or Comprehensive Economic Partnership (CEP): The EPA/CEP agreements are comprehensive in scope, covering such fields as trade in goods, trade in services, investment, and economic cooperation
• Foreign Investment and Protection Agreement (FIPA): The main provisions of the Foreign Investment and Protection Agreement cover the handling of foreign investments by the host country, the transfer of capital and investment income, compensation for expropriation, and procedures for settling disputes.
• 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 the Southern African Customs Union (SACU) among South Africa, Lesotho, Namibia, Botswana, and Swaziland. 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. European Common Market is an example.
• Partnership Cooperation Agreement (PCA): The aim of the Partnership and Cooperation Agreement (PCA) is to encourage political, commercial, economic, and cultural cooperation. With attention for human rights and democratic processes, the PCA moves beyond many other trade agreements

Rationale behind FTAs

• Market access: By eliminating tariffs and some non-tariff barriers, FTA partners get easier market access into one another’s countries.
• Preferential treatment for exports: Exporters prefer FTAs because they get preferential treatment over non-FTA member country competitors.
• Increased Investment: Possibility of increased foreign investment from outside the FTA. Consider two countries A and B having an FTA. Country A has high tariff and large domestic market. The firms based in country C may decide to invest in country A to cater to A’s domestic market. However, once A and B sign an FTA and B offers better business environment, C may decide to locate its plant in B to supply its products to A.
• Job creation: Sectors like automotive, textiles, handicrafts, leather, pharmaceuticals, light electricals, some chemicals, many agricultural items, jewellery and professional services, which are all employment-intensive, can trigger huge job creation riding on exports.

Issues with FTAs

• 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 flexibilities like the use of compulsory licensing allowed under the TRIPs.
• Crowding out of domestic Industries: Many emerging markets are traditional economies including India rely on farming for most employment. They can’t compete with subsidized agri-businesses in the developed countries. This can give rise to unemployment.
• 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.
• Political factors: For many, FTAs are a political and not economic decision. Diplomats may want to achieve political ends at the cost of economic.
• Dumping through imports by FTA partner countries and re-routing of imports from non-FTA partner countries through FTA partner countries.

Challenges

• Lack of awareness about the FTAs and high cost of compliance: Utilization rates for India’s FTAs are low, due to a failure to disseminate information especially to MSMEs
• Widening of trade deficits: Due to various factors, India’s trade deficit with its FTA partners esp ASEAN, Japan, and Korea has widened. Importantly, the deficits have also widened for India’s dominant value-added sectors, reflecting a deteriorated quality of India’s trade with its FTA partners.
• Export competitiveness: The more important reason is India’s own supply-side constraints and bottlenecks, i.e., its difficult regulatory environment, poor logistics quality, inadequate and inefficient trade infrastructure, and high transactions costs, among others, all of which hurt export competitiveness.

Suggestions/Measures

1. Alignment with Aatmanirbhar Bharat strategy: Our future FTA negotiation strategy and tariff schedules need to be completely aligned with the Aatmanirbhar Bharat strategy. This does not imply complete protection for these industries, but a phase-wise reduction of import tariffs over years under the FTA. SO that domestic industries can completely integrate with global value chains (GVCs).
2. Strengthening of safeguard clauses: We need to strengthen the safeguard clauses within existing FTAs under review, as well as in the new ones. Within the FTA, provisions should be made to prevent the dumping of cheap imports.
3. Engagement with the Eurasian Economic Union (EAEU), comprising Russia and many of the erstwhile Soviet republics, should be another high-priority area. The EAEU is rich in energy resources, has a hunger for our pharmaceuticals, textile and agriculture exports, and traditional goodwill for India.
   • Africa is another large, growing market, and we should leverage their apprehension of Chinese dominance and take a lead in initiating a dialogue with the AfCFTA.
4. Drawing up a negative list of FTA partners: We need to be careful while dealing with countries with huge subsidies and large scale manufacturing, like China The government wisely abandoned the RCEP, where the proposed tariff elimination on 80% trade would have wrecked our domestic industry. The US, with its insistence on binding rules on digital trade and intellectual property and ambitious market access for US exports, is another one to avoid.
5. Improvement in competitiveness: The FTAs can ensure market access to only the right quality products made at competitive prices. Improvement in firm-level competitiveness is a must. The government can help by ensuring lower duties on raw materials and intermediates than on the concerned finished products. It can set up an elaborate quality and standards infrastructure for essential products.

Way forward

For the industry to grow and become globally competitive, integration into the global value chain is inevitable. However, this requires pragmatism while choosing trade partners for opening up domestic markets, especially China, which is known for its unfair trade practices. Ultimately, all trade deals are a game of ‘win some, lose some’ and a balanced outcome is what all trade partners should be looking for.

Sources: Financial Express, Business Standard, The Hindu, TheHinduBusinessline