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Free-Trade Agreements: A thrust to Indian Trade

Free-Trade Agreements: A thrust to Indian Trade

Free Trade Agreements (FTAs) are signed mutually between nations to promote ease of trade and investment by removing restrictions such as tariffs, import quotas, and export limits. India has been proactive in engaging with other countries to enhance international trade relations and has signed thirteen FTAs with nations across the globe. One of the prominent real-world examples of free trade agreements is the European Union wherein the member nations form an essentially borderless single entity for trade, and the adoption of the Euro by most of those nations smooths the way forward. The United States currently has several free trade agreements. It includes multi-nation agreements such as the North American Free Trade Agreement (NAFTA), which covers the US, Canada, and Mexico, and the Central American Free Trade Agreement (CAFTA) which includes most of the nations of Central America. These agreements show that about half of all goods entering the US come free of tariffs, according to government figures. Free Trade provides a great advantage as it allows permits for inexpensive imports and exports without tariffs or other trade barriers. A group of countries agrees to lower their tariffs or other barriers to facilitate more exchanges with their trading partners. As a result, all countries benefit from lower prices and access to one another’s resources.

The Association of Southeast Asian Nations (ASEAN) region is one of the regions which is on the priority list for India. There are various similarities between India and the ASEAN nations in terms of their culture and religion. The similarity also exists because of the proximity with India, especially with the Northeast part of India. The India Act policy has contributed to significant growth during the last decade in trade and investment opportunities. During the period of 2021-22, the merchandise trade between India and ASEAN countries rose to US$ 110.40 billion.

Significance, Models, and Advantages of FTAs
The free trade agreement is often signed through the mutual and formal agreement of the nations involved. It could simply mean the absence of trade restrictions among the nations involved in the policy. For example, a nation might allow free trade with another nation, however, does it with exceptions that forbid the import of specific drugs not approved by its regulators, animals that have not been vaccinated, or processed foods that do not meet its standards. It might also implement some policies which will exempt specific products from tariff-free status to protect home producers from foreign competition in their industries.

International trade is, in theory, no different than trade between neighbours, cities, or nations. However, it enables companies in each nation to concentrate on creating and marketing commodities that make the best use of local resources while importing goods that are scarce or unavailable domestically. This combination of domestic production and international trade enables economies to grow more quickly while better satisfying consumer demands.

There are various models of free trade which involve mercantilism and comparative advantage. The theory of mercantilism was dominating global trade before the 1800s. Under this trade idea, the priority was on having a favourable balance of trade relative to other countries and accumulating more gold and silver. To attain a favourable trade balance, countries would often use trade barriers like taxes and tariffs to discourage their residents from purchasing foreign goods. This idea incentivised the consumers to purchase the locally made product, thereby supporting domestic industries. However, the concept of comparative advantage states that countries can attain the maximum benefits through free trade. Ricardo, who introduced this concept demonstrated that as soon as countries prioritize the production of goods, they can produce more at a comparatively cheaper cost than other countries (which is where they have a comparative advantage) they will be able to produce more goods in total than they would by limiting trade.

FTAs support the growth of a nation in several ways by contributing to its rapid development. As it allows more focus on exports and resources where they have a strong comparative advantage. The significant focus help countries to attract foreign investment capital and provide relatively high-paying jobs for local workers as well. Free trade also creates a competitive environment where countries strive to provide the lowest possible prices for their resources which is in a way beneficial for consumers. Along with all the benefits, it has some challenges such as unemployment and business losses, more reliance of countries on the global market, etc.

Key Agreements Boosting India-ASEAN Trade Relations

Various agreements have contributed to the growth of India-ASEAN trade relations.

  • India ASEAN Comprehensive Economic Cooperation Agreement (CECA) - Trade in Goods, Services, and Investment Agreement (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam).

Since trade and investment are top priorities for ASEAN and India's economic cooperation, the ASEAN-India Trade in Goods Agreement (AITIGA), which went into effect in January 2010, has remained at the forefront of interaction. According to the Agreement, India and ASEAN Member States have both agreed to liberalise tariffs on more than 90% of commodities and gradually reduce and eliminate levies on the remaining 76.4% of goods. Since the implementation of AITIGA, traffic in goods between ASEAN and India has grown dramatically, with an increase in exports of 23% and an increase in imports of 55% over the past ten years. There has been an increase in imports, particularly from Cambodia, Singapore, and Vietnam.

  • India-Singapore Comprehensive Economic Cooperation Agreement (CECA)

The bilateral commerce between Singapore and India has increased significantly. The two nations also agreed to liberalise the export rule of origin, rationalise product-specific rules, and include provisions on the Certificate of Origin to promote balanced trade. Tariff concessions will now apply to 30 more products.

  • India-Malaysia Comprehensive Economic Cooperation Agreement (MICECA)

In 2011, the MICECA was signed between India and Malaysia, the agreement includes concessions and reductions in tariffs for trading certain goods, services, investments, and movement of natural persons. Although the pandemic hit most parts of the world, Malaysia and India maintained their strong trade relations. As a result, the total trade expanded by 26% in 2021. The import in India from Malaysia increased by US$ 5.9 billion and the exports increased by US$ 3.12 billion.

  • India Thailand FTA - Early Harvest Scheme (EHS)

In 2006, India and Thailand have implemented the Early Harvest Scheme (EHS) to identify specific products for tariff reduction during the ongoing negotiations on the Free Trade Agreement. This is the first step toward the initial phase of the proposed comprehensive FTA. This program supports the tariff reductions to be nil for 82 products including fruits, processed food, gems and jewellery, iron and steel, auto parts, and electronic goods.

  • The India-UK FTA

The FTA between India and UK is still being discussed among the ministries of the nation. The considerable positive sentiments over the potential of this trade agreement are anticipated to be of great economic benefit to both nations. This free trade pact will provide a major thrust to Indian export and labour-intensive sectors like leather, textile, jewellery, IT, ITES, nursing, education, and healthcare. The PMs of both countries are working intensively on an ambitious roadmap for 2030. The data of India’s bilateral merchandise trade with the UK was worth US$ 17.4 billion in 2021-22, higher than the previous record of US$ 16.8 billion in 2018-19.

In addition to the above-mentioned trade agreements, India has collectively signed a total of 13 free trade agreements with its trading partners out of which 5 are described in brief. Other FTAs are-

  • India-Sri-Lanka free trade agreement
  • the agreement on the South Asian Free Trade Area (SAFTA) (India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan, the Maldives, and Afghanistan),
  • India-Nepal treaty of trade
  • India-Bhutan agreement on trade, commerce, and transit
  • India-South Korea Comprehensive Economic Partnership Agreement (CEPA)
  • India-Japan CEPA
  • India-Malaysia CECA
  • India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA)

Apart from the free trade agreements, India has also signed 6 limited coverage preferential trade agreements (PTAs)-

  • Asia Pacific Trade Agreement (APTA)
  • Global System of Trade Preferences (GSTP)
  • India-Afghanistan PTA
  • SAARC Preferential Trading Agreement (SAPTA)
  • India-Chile PTA

Way Forward
Free Trade in a broader term refers to the policies that allow the permit of inexpensive imports and exports, without tariffs or other trade barriers. India has been working closely across the globe to establish more of FTAs.  The negotiation under FTA should include terms and conditions to introduce more transparency and predictability in terms of non-tariff barriers to ensure a less cumbersome compliance procedure. There should be a discussion on resolving geopolitical issues and there should be reform in the selection of trade partners to expand free trade policy. India is also exploring more regions that are ready for a trade agreement with India and there is a huge potential to widen the access of the market to regions like Africa, and Central and Southeast Asia. There are some mismatches in the opinion of people across the nation on the implementation of free trade policies. The main issue which is being contradicted by the public includes unfair competition from countries where lower labour costs allow price-cutting and a loss of good-paying jobs to manufacturers abroad. Although the issue is being addressed by reforms and reviewing of the policies and relations with other countries.