Concerns of Indian players should be taken care of while crafting FTAs

Source: This post is based on the article “Concerns of Indian players should be taken care of while crafting FTAs” published in The Indian Express on 13th Jul 22.

Syllabus: GS2 – Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.

Relevance: Free Trade Agreements (FTAs)

News: A well-crafted trade agreement could help India enhance its share in global trade and help attain the government’s target of making the country a $5-trillion economy.

Signing FTAs with multiple countries

Recently, India has signed trade agreements with Australia and the UAE.

In the last week of June, New Delhi began talks for a similar agreement with the EU. These talks could have a bearing on tariff-related matters in agriculture and industry. India’s successful sectors like textiles, pharmaceuticals and leather could benefit from these deliberations.

Why an FTA with EU is significant to India?

In the last decade, India’s exports to EU countries have grown at a faster pace than the country’s overall exports.

The Netherlands, Germany, Belgium, Italy, and France have emerged as key markets for Indian products.

Hence, a successful free trade agreement (FTA) with the EU could help India to expand its footfall in markets such as Poland, Portugal, Greece, the Czech Republic and Romania. India’s exports have registered a double-digit annual growth rate in these countries in the last decade.

What are some concerns associated with signing of FTAs?

Before entering into trade agreements, India needs to take care of a few key concerns.

– Competing on equal terms: It has been observed that when India is an importer, the preferential tariffs under the FTA are significantly lower than the rates charged from countries given Most Favoured Nation (MFN) status by New Delhi. But when the partner country is the importer, preferential tariffs on Indian goods, in most cases, are closer to the MFN tariffs.

  • As a result, Indian exporters do not get the same returns as their counterparts in the partner countries — India’s trade with South Korea is a case in point.

Hence, before entering into a trade agreement care should, therefore, be taken to ensure that the domestic industry is not made to compete on unequal terms with the partner countries.

Rules of Origin: The India-UAE Comprehensive Economic Partnership Agreement includes a strong clause on the rules of origin. 40% value addition or substantial processing of up to 40% in the exporting country is required to qualify for lower tariffs. Rules of origin have been a bone of contention in most Indian trade agreements.

Way forward

Offset clauses should be built into trade agreements, especially for technology intensive sectors.

Under such clauses, the exporter is obliged to undertake activities that directly benefit the importing country’s economy.

An emergency action plan could be another useful ingredient of trade agreements.

In February 2020, the US made India ineligible for claims under GSP, America’s oldest preferential trade scheme. A contingency plan should be in place to tackle such situations.

Sunset Clause: India should also take a hint from the US-Mexico-Canada Agreement, to incorporate a “sunset” clause in trade agreements. The pact between the three North American nations provides for periodic reviews and the agreement is slated to end automatically in 16 years unless the countries renegotiate it.

Finally, India should negotiate for parity between services and merchandise. India’s trade in services is low, and its overall score in the OECD’s Services Trade Restrictiveness Index (STRI) exceeds the world average. It is especially high in legal and accounting services due to the licencing requirements in both these segments.

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