Free Trade Agreements (FTAs)

What are FTAs?

  • FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between them. 
  • FTAs normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.). FTAs can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy, etc.

Stages of Trade Integration

  • Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on an agreed number of tariff lines. The list of products on which the partners agree to reduce duty is called a positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover substantially all trade.
  • Free Trade Agreement (FTA): In FTAs, tariffs on items covering substantial bilateral trade are eliminated between the partner countries; however, each maintains an individual tariff structure for non-members. India Sri Lanka FTA is an example. The key difference between an FTA and a PTA is that while in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a negative list on which duty is not reduced or eliminated. Thus, compared to a PTA, FTAs are generally more ambitious in coverage of tariff lines (products) on which duty is to be reduced.
  • Comprehensive Economic Cooperation Agreement (CECA)/Comprehensive Economic Partnership Agreement (CEPA): These terms describe agreements which consist of an integrated package on goods, services and investment along with other areas including IPR, competition etc. The India-Korea CEPA is one such example and it covers a broad range of other areas like trade facilitation and customs cooperation, investment, competition, IPR etc.
  • Custom Union: In a Customs union, member countries may decide to trade at zero duty among themselves, however they maintain common customs duty against the rest of the world. Example: Southern African Customs Union (SACU) – South Africa, Lesotho, Namibia, Botswana and Swaziland.
  • Common Market: Integration provided by a Common market is one step deeper than that by a Customs Union. A common market is a Customs Union with provisions to facilitate free movements of labour and capital, harmonise technical standards across members etc. The European Common Market is an example.
  • Economic Union: Common Market extended through further harmonisation of fiscal/monetary policies and shared executive, judicial and legislative institutions among the member countries. The European Union (EU) is an example.

Early Harvest Package

  • The UK has recently stated that it wants an early harvest trade package with India prior to finalisation of a full-fledged free trade agreement.
  • Early harvest scheme is a precursor to a free trade agreement (FTA) between two trading partners. This is to help the two trading countries to identify certain products for tariff liberalisation before the conclusion of FTA negotiation. 
  • The EHS has been used as a mechanism to build greater confidence amongst trading partners to prepare them for even bigger economic engagement.

How is CECA/CEPA different from FTA?

  • A Comprehensive Economic Cooperation Agreement (CECA) or a Comprehensive Economic Partnership Agreement (CEPA) is different from a traditional Free Trade Agreement (FTA) on two counts:
    • Firstly, CECA/CEPA are more comprehensive and ambitious than an FTA in terms of coverage of areas and the type of commitments. While a traditional FTA focuses mainly on goods; a CECA/CEPA is more ambitious in terms of a holistic coverage of many areas like services, investment, competition, government procurement, disputes etc. 
    • Secondly, CECA/CEPA looks deeper at the regulatory aspects of trade than an FTA. It is on account of this that it encompasses mutual recognition agreements (MRAs) that cover the regulatory regimes of the partners. An MRA recognises different regulatory regimes of partners on the presumption that they achieve the same end objectives.

Rationale for signing Free Trade Agreements 

  • By eliminating tariffs and some non-tariff barriers FTA partners get easier market access into one another’s markets. 
  • Exporters prefer FTAs to multilateral trade liberalisation because they get preferential treatment over non-FTA member country competitors. For example in the case of ASEAN, ASEAN has an FTA with India but not with Canada. ASEAN’s custom duty on leather shoes is 20% but under the FTA with India it reduced duties to zero. Now assuming other costs being equal, an Indian exporter, because of this duty preference, will be more competitive than a Canadian exporter of shoes. Secondly, FTAs may also protect local exporters from losing out to foreign companies that might receive preferential treatment under other FTAs.
  • Possibility of increased foreign investment from outside the FTA. Consider 2 countries A and B having an FTA. Country A has a high tariff and a large domestic market. The firms based in country C may decide to invest in country A to cater to A’s domestic market. However, once A and B sign an FTA and B offers a better business environment, C may decide to locate its plant in B to supply its products to A.
  • Such occurrences are not limited to tariffs alone but it is also true in the case of non-tariff measures. Especially when a Mutual Recognition Agreement (MRA) is reached between countries A and B. Some experts are of the view that slow progress in multilateral negotiations due to complexities arising from large numbers of countries to reach a consensus on polarising issues, may have provided the impetus for FTAs.

How is India placed globally in terms of its bilateral PTAs/FTAs/ CECAs/CEPAs?

  • India has preferential access, economic cooperation and Free Trade Agreements (FTA) with about 54 individual countries. India has signed bilateral trade deals in the form of Comprehensive Economic Partnership Agreement (CEPA)/ Comprehensive Economic Cooperation Agreement (CECA)/FTA/Preferential Trade Agreements (PTAs) with some 18 groups/countries. 
  • India is a late, and cautious, starter in concluding comprehensive preferential tariff agreements covering substantially all trade with some of its trading partners.

List of FTAs Signed By India

  • PTAs in Force: Asia Pacific Trade Agreement (APTA); India- Afghanistan; India-Mercosur; India-Chile. 
  • FTAs in force India- Sri Lanka; SAARC FTA; India –ASEAN FTA; India – South Korea CEPA; India – Japan CEPA; India – Malaysia CECA; India-Singapore CECA; India-Nepal; India-Bhutan. India-Australia ECTA (They are negotiating to upgrade it to a CEPA).
  • FTAs in Negotiation: India –EU BTIA; India- Canada FTA; India- New Zealand FTA etc. 

Are there provisions for review and implementation of FTAs?

  • Yes, the FTAs have provisions for review and implementation. This is normally done at specified intervals and there is an institutional mechanism to undertake such a review. 
  • It is important for stakeholders to provide regular feedback on the operation of the FTAs for this mechanism to be effective. For example, problems faced in SPS/TBT  measures or other NTMs need to be highlighted. 

Relationship between Multilateralism and FTAs? 

  • Article 1 of GATT (General Agreement on Tariffs and Trade) which enunciates the most favoured nation (MFN) principle of World Trade Organisation (WTO) states that “any advantage, favour, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.” 
  • However, exemptions from this MFN principle are permitted for forming FTAs under specific conditions as per the following provisions of the WTO Agreements:
    • Article XXIV of GATT for goods.
    • Article V of GATS (General Agreement on Trade in Services) for services.
  • The specific conditions under Article XXIV of the GATT permitting FTAs, are:
    • FTA members shall not erect higher or more restrictive tariff or non-tariff barriers on trade with non-members than existed prior to the formation of the FTA.
    • Elimination of tariffs and other trade restrictions be applied to “substantially all the trade between the constituent territories in products originating in such territories.”
    • Elimination of duties and other trade restrictions on trade within the FTA to be accomplished “within a reasonable length of time,” meaning a period of no longer than 10 years
  • Moreover, the “Enabling Clause, 1, allows developing countries to form preferential trading arrangements without adhering to the conditions under Article XXIV.

UPSC PYQ 2018:

Consider the following countries:

    1. Australia

    1. Canada

    1. China

    1. India

    1. Japan

    1. USA

Which of the above are among the ‘free-trade partners’ of ASEAN?

(a) 1, 2, 4 and 5

(b) 3, 4, 5 and 6

(c) 1, 3, 4 and 5

(d) 2, 3, 4 and 6

Answer: (c)

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