Source: iPleaders
What Are Free Trade Agreements?
Source: Tutor2u
In a free trade agreement, a pact is signed between two or more nations to exchange goods and services in an unrestricted manner. It involves the reduction or elimination of trade barriers.
Thus, the goods and services can be bought and sold across the nation's boundaries with minimum or absent tariffs, quota restrictions, subsidies, and other prohibitions to inhibit trade. It is the opposite of the economic theory of protectionism, wherein the Government tries to regulate trade to promote the domestic industry, even at the cost of other countries.
It helps a nation secure the economies of specialization as it can now focus on manufacturing and selling the goods in which it is the most efficient and import those goods that are relatively scarce and are challenging to produce in a country.
Advantages
1. Promotes efficient operations: Free trade encourages a spirit of competition—firms of the nation attempt to produce goods most economically by maximizing efficiency and eliminating wastage of resources. Better quality products and services become available at a lower cost to consumers.
2. Improves the standard of living: Consumers can enjoy better quality goods at lower prices. Thus, their purchasing power improves. They can also enjoy a wider variety of products, thus enhancing their product experiences.
3. Prevents monopoly: It prevents the monopoly of domestic firms as they have to compete with goods and services of other countries.
4. Facilitates specialization: Each nation will produce that good in which it is the most efficient. There exists proper allocation of resources. A country would import those goods, which are challenging to manufacture. Thus there are economies of specialization.
Disadvantages
1. Less Tax Revenue: The Government cannot earn the tax revenue on importing the goods. Thus, a significant source of revenue is lost.
2. Threat to IP Protection: Foreign governments may not take intellectual property rights seriously, as a result of which the producers of different countries may plagiarize inventions, patents, and processes, thereby creating a similar product.
3. Overutilization of resources: Free trade incentivizes the producers to maximize their output to maximize their profit, as there are no volume restrictions on trade. There may be overutilizing natural resources and ultimate exhaustion of these resources.
4. Destroy domestic industries: Many industries of developing nations cannot compete with those belonging to developed nations in production efficiency. As a result, consumers find the goods of domestic industries much costlier than those of the other nations, thus destroying the domestic industry.
India-ASEAN Free Trade Agreement
Source: ASEAN Briefing
India and ASEAN Free Trade Agreement recently completed 25 years of cooperation and commitment. After initiating the economic reforms in 1991, the Indian Government introduced the 'Look East Policy,' primarily focusing on Southeast Asia and East Asia. In 2014, the 'Look East Policy' was upgraded to 'Act East Policy.
India- ASEAN relationship ties go back in history. Southeast Asia has borrowed heavily from Indian culture. With the end of the British colonial era, ties between India and ASEAN began to redevelop. There was an increasing contact between these regions, and the 'Look East Policy' was the game-changer.
Economic Impact
1. The 'Look East Policy' indicated growing trade relations between India and ASEAN nations. India-ASEAN free trade agreement, created in 2003, further boomed the trade relations. The Free Trade Agreement in Goods was enacted in 2010.
2. With a population of about 1.8 billion, the ASEAN nations and India are among the most significant economic regions and account for 10.2% of India's total trade. Most of the members of ASEAN are manufacturing-oriented economies, which is well complemented by the service-oriented Indian economy. In 2014-15, annual trade stood at US$76.53 billion.
3. Singapore is the primary hub for inward as well as outward investment. FDI inflows into India from ASEAN were about US$49.40 billion between April 2000 and May 2016. FDI outflows from India to ASEAN countries were about US$38.672 billion, from April 2007 to March 2015. About 12.5% of investment flows into India are from ASEAN.
4. Indian Government put in place a Project Development Fund to improve the economic and strategic relations with the ASEAN nations.
Challenges
1. India has been experiencing a deepening trade deficit with the region, further accentuating India's Current Account Deficit. The main challenges for India are:
2. The agreement has benefitted ASEAN more than India. Domestic Industries have suffered intense competition with the cheaper goods of ASEAN nations. For example, rubber imports from Malaysia and Palm oil imports from Indonesia have affected India's rubber and palm oil industry.
3. The agreement in services has failed to reap significant advantages for India. The Philippines has not ratified the FTA in services as there will be direct competition between India and the Philippines in direct competition in services which would be a disadvantage for the latter
India And RCEP
Source: ORF
A mega trade block, Regional Comprehensive Economic Partnership
(RCEP), is being negotiated between the ten members of ASEAN and six other members: South Korea, Australia, China, Japan, New Zealand, and India.
It is a free trade agreement including goods and services, investments, IP Rights, technical and economic cooperation. If enforced, it would comprise one of the most significant trading blocks worldwide. The combined GDP would estimate at $ 17 trillion, including around 3 billion people, and cover more than 40 percent of the world's trade.
Advantages
1. India is not a part of the other major trade blocs of the world, such as Asia Pacific Economic Cooperation (APEC), the Trans-Pacific Partnership (TPP). It was feared that with these trade blocs and their FTAs, India might lose its market share, especially textiles and pharmaceuticals. RCEP would advantage India here.
2. RCEP will complement India's pre-existing Free Trade Agreements with ASEAN, Japan, and South Korea. Access to the consumer markets of these nations would be enhanced.
3. India is a service-oriented economy. Free Trade Agreements in services would provide an edge to our nation, especially in Information Technology-related services, healthcare services, and educational services.
Challenges
1. The agreement poses severe threats to the Indian Agriculture sector, plagued by obsolete technology, low productivity, inadequate investment, and fragmented landholding.
2. The domestic industry will have to face stiff competition from the cheap agricultural products of other nations' more efficient agricultural sectors. Besides, the allied sectors like the dairy sector would also face immense losses from countries like New Zealand, which has a strong dairy sector.
3. As India is in a nascent stage as far s the industrial sector is concerned, it has given up a three-tier tariff reduction proposal that would offer different coverage for ASEAN, Japan, and South Korea, and a much lower level of tariff reduction coverage for Australia, China, and New Zealand.
4. The agreement on intellectual property rights may lead to India losing its status as the world’s pharmaceutical hub. Japan is pressurizing its negotiation.
5. Extending patent terms and enforcing solid measures would enervate the pharmaceutical sector and make the medicines expensive for domestic consumers. Dilution in measures, however, might again open Pandora's box for India.
6. FTA is a significant threat to the 'Make in India' Programme that the Government is aggressively promoting. For example, granting tariff-free Chinese goods would destroy the already affected domestic industries.
South Asia Free Trade Agreement (SAFTA)
Source: The Financial Express
SAFTA is a trade agreement to foster the growth of trade and economic relations between the South Asian nations by reducing tariffs and promoting exports.
It covers the countries of SAARC, i.e., the South Asian Association for Regional Cooperation. It includes India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan, and the other two countries, namely Afghanistan and Maldives.
SAFTA's concept was first conceived in 1993 as a Preferential Trade Agreement but was later upgraded to a Free Trade Agreement in 2004. It came into force in 2006.
It classified the nations into Least Developing Countries and Non- Least Developing Countries, thus providing an equal platform for all the regions.
However, the trade growth among member nations is meager despite more than ten years since enactment. There have been contentious issues between the neighbors owing to the geopolitical scenario. For Example, India and Pakistan are at perpetual loggerheads. This situation becomes the elephant in the room in case of any summit. The proximity of China and Pakistan adds to the problems.
The trade amongst the nations is so weak as to constitute only 5 percent of the total trade of the nations.
Several nations are apprehensive of losing out on their domestic industries compared to other nations. As a result, several goods have been included in the 'sensitive list .'When included in this list, these goods become immune to tariff concessions.
India-European Union Free Trade Agreement (Proposed)
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| Source: Trade Promotion Council of India |
In 2016, Bilateral Investment Treaties with many countries were unilaterally terminated by India to put forward its condition of exhausting all judicial and litigation measures available in the country first and then only go for international litigation or arbitration. The skepticism of the nations towards future investment in India has been intensified.
Future of Free Trade Agreements and India
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| Source: Supply Professional |
2. The clause for mandating five years of national litigation before approaching international tribunals goes against the Government's slogan of 'More Governance, less Government .'It also reduces the ease of doing business in the country.
3. Despite having a strong service sector, especially in Information technology, healthcare, and education, India lacks maturity in the agricultural and industrial sectors (especially the Micro, Small and Medium-scale enterprises).
4. To secure an advantage in the service sector, India often ends up compromising on the primary and secondary sectors, thus affecting the livelihoods of many involved in these sectors.
5. There is a need to focus on universal inclusion in the economic networks to enable individuals and families to achieve financial security. Economic reforms must support India's trade policies to promote a more competitive and innovative Indian Economy.
References:
https://m.rbi.org.in//scripts/bs_viewcontent.aspx?Id=2255
https://www.thebalance.com/free-trade-agreement-pros-and-cons-3305845
https://ec.europa.eu/eurostat/web/products-eurostat-news/-/ddn-20190701-1
Written by Aishwarya Saxena
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