FTAs: Learning from peers

Source– The post is based on the article “FTAs: Learning from peers” published in the “Business Standard” on 27th July 2023.

Syllabus: GS3- Economy

Relevance: Issues related to external trade

News- The article compares the India approach to FTAs with other emerging economies.

What are the impacts of tariff liberalisation?

In the early stages of Free Trade Agreements, tariff liberalisation was the central agenda for shallow economic integration. An example of this is the US-Canada auto pact in 1965. It stimulated growth in the Canadian auto industry.

Similarly, the Thai auto industry experienced development through its participation in the Asean Brand to Brand complementation scheme in the late 1980s. This initiative offered preferential tariff margins to select regional economies.

How have FTAs evolved over time?

Developing economies have become aware about the advantages of integrating with global value chains. Now, FTAs have converted to deep trade agreements.

FTAs include trade in services and investment, and additional policy areas like intellectual property rights, dispute settlement and competition policy. In these deep trade agreements, the rules of origin are central to GVC-led trade.

How is India ‘s approach to FTAs different from other major emerging economies?

Tariff liberalisation– Asean’s FTAs with its regional neighbours like Japan, Korea, have tariff liberalisation commitments that are in the range of 87 percent to 99 percent of all tariff lines.

The Asean-India FTA has less than 80 per cent tariff liberalisation.

In its trade deal with Australia concluded in 2022, India adopted for liberalisation of only around 70 per cent of tariff lines as against 100 per cent by Australia.

Rule of origin– Stricter rules of origin does not favour GVC-type of production. It restricts the preferential market access offered by an FTA.

This is particularly relevant in the context of trade involving parts and components, which are essential in Global Value Chains. At each border crossing, the value addition may not always be significant.

India has negotiated a complex set of Rules of Origin in its Free Trade Agreements. It insists on both a change in tariff classification and substantial value addition.

In 2020, changes in the Customs Act have made the utilisation of FTAs even more burdensome.

Importers now have the additional responsibility of satisfying the government of India about the origin of the imported product, in addition to obtaining the Certificate of Origin.

In contrast, Asean has simplified its RoO criteria since the early 2000s. The RoOs of Asean’s FTAs, as well as those of its member states with East Asian economies, are simple with flexible cumulation rules.

Investment liberalisation– India’s model bilateral investment treaty incorporates an investor-state dispute settlement mechanism.

It is complex and requires the prior exhaustion of local remedies. These provisions have the potential to create obstacles for foreign investment.

On the other hand, China has evolved its BIT with a focus on economic development. The first-generation BITs, concluded between 1982 and 1989, only addressed dispute resolution related to determining compensation in cases of expropriation.

However, the next generation BITs expanded the scope to include the option for investors to approach the International Centre for Settlement of Investment Disputes.

The third generation BITs offer stronger international law protection to foreign investors. China’s BITs also apply uniformly in special economic zones.

Sustainability provisions in FTAs– These provisions have transitioned from being supplementary agreements in FTAs to becoming essential chapters in almost all modern FTAs.

India’s approach of categorising sustainability provisions as “non-trade” issues is also outdated. The increasing number of FTAs that now include commitments on internationally recognized labour rights and climate cooperation, aligning with the pursuit of sustainable development goals.

For instance, the Comprehensive and Progressive Trans-Pacific Partnership has detailed chapters dedicated to both environmental protection and labour standards.