Oz Is Just the Start 

News: Recently, India and Australia established a free trade agreement (FTA) for both goods and services between the two nations. It is known as The Economic Cooperation and Trade Agreement (ECTA). 

What are the World Trade Organisation rules on FTAs in goods?  

Case I FTAs: If FTA includes one or more developed countries as members  

All member countries must eliminate duties and other trade restrictions on products traded among them. The trade barriers must be eliminated rather than just lowered. 

In this, substantially all or nearly all trade is covered. The partial trade preferences are prohibited in these types of FTAs.  

For example, India-Japan FTA comes under this category. Therefore, it eliminates trade barriers on substantially all products. But India-Japan trade is insignificant (India sent only 2. 2% of exports to Japan while Japan sent 1. 2% of its exports to India in 2010 year). Therefore, it has not led to many changes in bilateral trade.

Case II FTAs: When FTA members happen to be all developing countries.  

Member countries can simply reduce rather than entirely eliminate trade barriers. 

There may be exchange of trade preferences as the members want. The reductions may be applied to as many products as the members decide to choose. 

For example, All the India’s FTAs (except India-Japan FTA) have been with other developing countries. For example, Singapore in 2005, South Korea in 2010, ASEAN in 2010, Malaysia in 2011 and UAE in 2022. They have partial trade preferences.  

What has been proposed in the India-Australia FTA? 

It aims to provide for immediate tariff cuts and eventual elimination of tariffs. It will make most of India’s exports to Australia and Australia’s exports to India duty-free.  

It covers exchanges in a number of services sectors. For example, financial services, telecommunications, professional services, movement of natural persons and also concessions for Indian students (Like extended post-study work visas etc.).

Why is the India-Australia FTA significant? 

It comes under Case I FTA and will lead to a genuine free-trade relationship between India and Australia.  

Till now, Australia had FTAs with China and Vietnam. It was disadvantageous for Indian Exporters in the Australian Market. The FTA promises to give India a level playing field in labour-intensive products such as apparel and other light manufactures.
Indian producers who are dependent on Australian imports for their inputs into their products are going to benefit. Their cost of production will decrease. Therefore, the lower cost will also benefit the Indian Consumers. 

The FTA will lead to competition with Australian goods and enhanced productivity of the Indian producers. 

The FTA can help India to decouple its economy from that of China.  

It will make India have FTAs with two of its three partners in the Quad. i.e. Japan and Australia.  

What are the challenges? 

At present, India-Australia bilateral trade balance is in favour of Australia.

– For example, Australia’s largest export items to India is coal with pearls, gold, copper ore, aluminium, wine, fruits and nuts, cotton and wool representing its other exports. India exports, petroleum products, pharmaceuticals, gems and jewellery, etc. 

In recent years, India has been sceptical of competition from the foreign goods. Therefore, India has resorted to raising tariffs on a large proportion of imported items.

Way Forward 

There is a considerable scope for further expansion of bilateral trade between India and Australia. At present, India’s GDP is only $3 trillion and Australia’s GDP is at $1. 3 trillion.  

This FTA would serve as the stepping stone to similar agreements with India’s larger trading partners, notably, the UK and EU.  

At present, India must turn to the most ambitious free trade relationship of all i.e., an India-US FTA.

Source: The post is based on an article “Oz is just the start” published in The Times of India on 5th Apr 22.