During the last few months, India renewed its interest to resume its stalled Free Trade Agreement (FTA) negotiations with European Union, United Kingdom, Australia, United Arab Emirates, and the USA. India’s Commerce Secretary BVR Subrahmanyam said ‘India is going to fast-track trade deals with at least half a dozen countries in line with its revamped foreign trade strategy[i]’. Taking a step ahead, India, and Australia jointly agreed to start an Early Harvest Scheme (EHS) by December 2021.[ii] Indian Commerce Minister Shri Piyush Goyal announced that India expects to sign a Comprehensive Economic Partnership Agreement (CEPA) with UAE by January 2022.[iii]
This is a shift from India’s earlier approach when it announced the review of all the existing agreements. There was view that the free trade agreements that were signed in the last two decades have adversely impacted the domestic supply chains[iv]. NITI Aayog in a study conducted in 2018 also observed unfavorable gains to our FTA partners. Assuming power in 2014, the Modi government began reviewing all existing trade pacts. Some of those that came under that review were pacts with Singapore (signed in 2005), South Korea (2010), Malaysia (2011), Japan (2011) and an FTA for goods with the ASEAN grouping (2010). These reviews are still undergoing. India has not signed any FTA with any country in the last decade except with Mauritius, in 2021. Importantly, during the same time period, total number of regional trade agreements enforced globally has increased from 224 to 350.[v]
As India resumes the stalled negotiations, it should move cautiously given its past experience. While it is difficult to assess whether the trade agreements will lead to a significant shift in the trade relationships, in the current scenario India should carefully review the clauses in the proposed agreements before signing. In this regard, this article attempts to explore some of the prominent factors that India should consider during the negotiations, to accrue better results from the upcoming FTAs.
Considering its trade and industry scenario, India uses a number of Non Tariff Measures (NTM) to protect its industry from substandard import. NTMs aim primarily at protecting public health or the environment and are essential for the formulation of effective development strategies to meet the Sustainable Development Goals. At the same time it creates hurdles for exporters and they need to comply with additional requirements. Despite reducing the number of NTMs, India remains among the nations with high NTMs. In the modern and liberal trade policy regime, with high competition both NTM and tariffs play a very crucial role. Traders hesitate to trade with an economy with multiple NTMs and it has been raised by traders from several countries earlier against India. It is important to reduce NTMs to avoid potential increases of costs and loss of welfare. In order to maximise the benefit of an FTA, India should seek to relax its NTMs while also addressing the intends of its domestic industry. At the same time, it should seek to reduce NTMs faced by its exports to its FTA partners.
Rules of Origin (RoO)
India has been facing serious issues of RoO misuse by its FTA partners for a long time. One of the primary reasons for this is ambiguity in the policies related to the origin of the product and the tariffs associated with it. In order to stop misuse, India amended its Customs Act 1962, in the FY21 budget, and issued a notification under Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR), mandating documents beyond the usual certificate of origin (COO) to claim tariff benefits under free trade agreements (FTA)[vi]. Thus, based on its experience, India should tactfully design its Rules of Origin in its upcoming negotiations to eliminate the misuses.
Complexity in Implementation
Generally, an FTA brings a number of changes in the existing trade regime, by increasing the overall transaction cost of trading unless corrective measures are taken so that the trading system does not turn out to be inefficient due to added complexity. All FTAs are bound by the additional rule of the game, which needs to be adhered to if one is to benefit from the tariff concessions. Thus, all concerned officials entrusted in enforcing the rules need to be well-versed with their intricacies.[vii] India’s policy makers should pay special attention to it.
Almost all the FTAs enforced by India till date, remained largely underutilised. FTA utilisation among developed nations is as high as 70-80% while by Indian exporters and importers, FTA utilisation is less than 3% of the available opportunity.[viii] Mere entering into a forced preferential trade agreement will not expand trade. The low utilisation highlights the untapped potential to utilise the benefits available to the industry through bilateral and multilateral trade agreements. Hence, there is an urgent need to take necessary steps to educate and encourage traders to take advantage of the FTAs.
From the above discussion, it is clear that, resuming the stalled trade negotiation is undoubtedly a right step taken in the right direction. However, India should carefully move ahead this time. For all the future negotiation, a thorough analysis is necessary before drawing conclusions and signing an agreement. A robust policy and efficient implementation will help the economy to expand trade and in turn boost the economy.
*Dr. Rahul Nath Choudhury is a Research Fellow at the Indian Council of World Affairs, New Delhi.
Disclaimer: The views are of the author.
[i] Mishra A. R. (August 12, 2021). India set to fast-track FTAs with six nations. Livemint. Available at: https://www.livemint.com/news/india/india-to-fast-track-ftas-with-six-countries-11628695044184.html
[ii] Choudhury, R. (September 21, 2021). High time India and Australia resume FTA negotiations to seal a conclusive deal. South Asia Monitor. Available at: https://www.southasiamonitor.org/spotlight/high-time-india-and-australia-resume-fta-negotiations-seal-conclusive-dealaccessed on 05.11.2021
[iii] Jayaswal, R. (Dec 14, 2021). India, UAE likely to finalise deal by next month: Goyal. Hindustan Times Available at: https://www.hindustantimes.com/business/india-uae-likely-to-finalise-deal-by-next-month-goyal-101639429113954.html accessed on 05.11.2021
[iv] Basu, N. ( December 17, 2021). Past FTAs ‘very tough’ on India, have discomfort with ‘old mantras’ of globalisation: Jaishankar. Theprint. Available at: https://theprint.in/diplomacy/past-ftas-very-tough-on-india-have-discomfort-with-old-mantras-of-globalisation-jaishankar/783529/ accessed on 27-12-2021
[v] Batra, A. (September 15, 2021). India's revamped FTA strategy. Business Standard. New Delhi. Available at: https://www.business-standard.com/article/opinion/india-s-revamped-fta-strategy-121091501643_1.html Accessed on 26.1121
[vi] Mishra A. R. (March 15, 2021). FTA partners upset over India’s new rules to trace goods’ origin. Livemint. Available at: https://www.livemint.com/news/india/fta-partners-upset-over-india-s-new-rules-to-trace-goods-origin-11615743367536.htmlaccessed on 05.11.2021
[vii] Pohit S. and Pal, B. D. (March 12, 2020). What ails India’s free trade agreements? IFPRI Blog. Available at: https://www.ifpri.org/blog/what-ails-indias-free-trade-agreements accessed on 05.11.2021
[viii] Deloitte (2017). FTA utilization – An opportunity in waiting for Indian industry!, Deloitte Touche Tohmatsu Limited.