FTAs: Need of the hour

The Covid-19 pandemic and the Russia-Ukraine conflict have exposed the frailties in the global supply chain and have alarmed the countries to secure their supplies. Across policy circles, there is a clarion call for friend-shoring, which means shifting manufacturing to friendly nations and sourcing inputs from them. So, it is in India’s interest to bolster our supply chains by signing free trade agreements (FTA) with its trading partners. Until this year, India had signed 11 free trade agreements. Recently, India has shown great enthusiasm for signing FTAs with its trading partners. The signing of the Comprehensive Economic Partnership Agreement (CEPA) with the UAE and the Economic Cooperation and Trade Agreement (ECTA) with Australia in 2022 is a testimony to India’s renewed interest in signing FTAs.

Assessment and Prospects of RTAs

India has always been wary of joining regional FTAs. The most notable one is the Regional Comprehensive Economic Partnership (RCEP). RCEP is the world’s largest trade bloc comprising ASEAN, Australia, New Zealand, Japan, South Korea and China. According to a NITI Aayog Note on FTAs, the utilisation rate of Regional Trade Agreements (RTAs) has been 5% to 25%. After seven years of negotiations, India pulled out of the RCEP deal, citing that its concerns remain unresolved. India runs a huge trade deficit with its FTA partners like ASEAN, South Korea and Japan, who are also parties to the deal. Further reduction and elimination of tariffs would flood India with cheaper goods from these countries, worsening the trade balance. India also feared losing out to competitive dairy imports from Australia and New Zealand.

Recently, India also pulled out of the trade-related negotiations of the Indo-Pacific Economic Framework (IPEF) because there is haziness around the market access and trade agreements even after the adherence to high standards of labour, environment and digital trade regulations. The IPEF is an economic initiative led by the US, and 14 nations participate in the negotiations comprising 40% of the global GDP.

The IPEF revolves around four pillars: trade, supply chain, tax and anti-corruption and clean energy. Unlike RCEP, India has not walked away completely. Being part of other initiatives like the supply chain would allow India to secure strategically vital goods from like-minded countries. India’s abstention from joining the regional trade agreement is in India’s interest. Despite that, India has reinforced its commitment to globalisation at various forums in the world.

The commitment is evident from the ongoing talks with the EU, Canada, the UK and Israel for bilateral free trade agreements. Further, negotiations on an FTA with the Gulf Cooperation Council (GCC) are about to start. Free trade agreements are fruitful when the economic structures of the members are complementary and not competitive. Members in the regional trade blocs like RCEP compete directly with India in apparel and engineering goods. Hence, lowering or removing import duties in free trade may hurt India’s domestic industries. For example, India’s trade deficit with ASEAN has widened from $14.78 billion in FY2016 to $25.76 billion in FY2021 despite the FTA.

Trade Pacts Reimagined

Most of India’s FTAs have disproportionately benefitted the bilateral partner. However, the trend may reverse with the new agreements. As per the terms of India-Australia ECTA, Australia will provide 100% market access for all Indian goods and lower tariffs on 95% of the Indian goods. Australia also offers zero-duty access for Indian goods from labour-intensive sectors like textiles, jewellery and footwear. India successfully included the ‘country of origin’ in the deal and excluded agriculture and dairy, which were the major pain points in the RCEP. It will prevent goods from being dumped into India, exploiting the lower trade barriers that India will have with Australia. Australia also found a new market for its coal exports as China has imposed a ban on Australian coal. According to the Ministry of Commerce and Industry, Coal is India’s second largest imported commodity by value (USD) in FY23.

UAE is India’s second largest trading partner. The India-UAE CEPA is expected to take the bilateral trade to $100 billion from the current level of $60 billion over the next five years. The pact could tap about $15 billion in services trade. The deal also includes $40% ‘local value addition’ and ‘country of origin’ rules. Initially, UAE will also allow duty-free access to 99% of Indian goods, while India will give duty-free access to 80% of UAE goods. Since UAE is an oil and services-led economy with little manufacturing, India could raise the oil supply from UAE and ramp up the export of labour-intensive goods.

Way Forward

Unlike the earlier FTAs, the recent ones have multiple complementarities, lower non-tariff barriers like standards, procedures and compliances and are not skewed towards imports. It is also an opportunity for India to rectify the inverted duty structure, where the tariffs on raw materials imports are greater than those on finished goods, thwarting the competitiveness of India’s exports. India should also look forward to maximising the utilisation rate of the FTAs. Finally, India is shifting gears to achieve its target of $2 trillion in global trade by 2030.


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