India’s Free Trade Agreements – The ‘present’ and the ‘future’

Trade is of great importance to most nations in the modern world. Trade without barriers – free trade – is promoted by institutions like the World Trade Organisation (WTO). In this background, as an emerging superpower, India’s Free Trade Agreements deserve special attention.

In this article, let us analyze some of the Free Trade Agreements (FTAs) signed by India and some of the new/proposed FTAs.

Table of Contents

What are Free Trade Agreements (FTA)?

A Free Trade Agreement is an agreement between countries to reduce or eliminate trade barriers. Trade barriers include tariff barriers like taxes and nontariff barriers like regulatory laws.

Trade barriers include tariff barriers like taxes and nontariff barriers like regulatory laws.

A Free Trade Agreement or FTA is an agreement between two or more countries where the countries agree on certain obligations that affect trade in goods and services, and protections for investors and intellectual property rights, among other topics.

India- ASEAN Free Trade Agreement

• Recently, India and The Association of Southeast Asian Nations (ASEAN) completed 25 years of cooperation and partnership.
• With the initiation of economic reforms in India from 1991 onwards, the then government initiated the ‘Look East Policy’ which was particularly focused on Southeast Asia and East Asia.
• The successive governments rigorously implemented the policy. With the regime change in 2014, there was an upgrade of the ‘Look East Policy’ to the ‘Act East Policy’.
• The India-ASEAN relationship and ties go way back in history. Culturally, Southeast Asia has borrowed heavily from India and there were even Indian kings who went to Southeast Asian lands and established new dynasties there.
• With the end of the colonization era, slowly the ties between India and ASEAN started to develop yet again.
• There was increasing contact between people and this led to a rise in exchanges and even economically.
• Look East Policy was a game-changer and after that, there has been no looking back and only growth of relations between the two regions.

Economic Perspective

• The Economic relation is a pillar on which the two region’s partnership rests. In this context, with the enforcement of the ‘Look East Policy’ there were growing trade relations in goods and investments. After the India-ASEAN free trade agreement was created in 2003, trade relations boomed even further.
• In 2009, the Free Trade Agreement in Goods was signed and enacted in 2010. The ASEAN-India Free Trade Area (AIFTA) has been completed with the entry into force of the ASEAN-India Agreements on Trade in Service and Investments on 1 July 2015. With this, India will stand to gain as it has always asked for an FTA that will be more comprehensive and include services which has been India’s stronger sector.
• The ASEAN nations and India together consist of one of the largest economic regions with a total population of about 1.8 billion. ASEAN is currently India’s fourth largest trading partner, accounting for 10.2 per cent of India’s total trade. India, on the other hand, is ASEAN’s 7 th largest trading partner.
• India’s service-oriented economy perfectly complements the manufacturing-based economies of the ASEAN countries. The annual trade between India and ASEAN stood at approximately US$ 76.53 billion in 2014-15. However, it dropped to US$ 65.04 billion in 2015-16 due to declining commodity prices against the backdrop of a sluggish global economy.
• Investment flows are quite remarkable both ways, with ASEAN accounting for approximately 12.5 per cent of investment flows into India since 2000. Singapore is the primary hub for both inward and outward investments. Foreign direct investment (FDI) inflows into India from ASEAN between April 2000 and May 2016 were about US$49.40 billion. FDI outflows from India to ASEAN countries, from April 2007 to March 2015, according to data from the Department of Economic Affairs (DEA), was about US$38.672 billion.
• To enhance economic and strategic relations with the Southeast Asian countries, the Indian government has put in place a Project Development Fund to set up manufacturing hubs in Cambodia, Myanmar, Laos, and Vietnam(CMLV) countries through separate Special Purpose Vehicles (SPVs).

Challenges in India-ASEAN Free Trade Agreement

Even though the Trade Agreement with ASEAN has helped trade grow immensely with India, still, the issue remains that the agreement has benefitted the ASEAN region more than India.

👉 Which year are YOU targeting for success in the IAS/IPS/IFS Exam? 🚀

• With the agreement on goods signed, the domestic markets have faced stiff competition because they have to compete with the cheaper goods of the ASEAN region.
• For example, the rubber imports from Malaysia, and palm oil imports from Indonesia have made it a tough ordeal for the local manufacturers of palm oil and rubber, especially the rubber plantations of Kerala who have complained about the cheaper imports ever since the agreement was about to be signed.
• The other drawback of the agreement is that the agreement in services hasn’t reaped many benefits for India. According to ASEAN rules, until all the nations have ratified the FTAs in their Legislatures, the FTA will not be enforced.
• This has caused much trouble for India as the Philippines hasn’t ratified the FTA in services there will be direct competition between India and the Philippines in direct competition in services which would be a disadvantage for the latter.
• Over the years, with the statistics and trade figures, it can be easily deciphered that the trade imbalance in favour of ASEAN and India has an expanding trade deficit with the region which dearly hurts its Current Account Deficit and thus, hurts India’s overall financial.

India and RCEP

Regional Comprehensive Economic Partnership, also known as RCEP is a mega trade block that is being negotiated between the ten members of the ASEAN group and six other members namely South Korea, Australia, China, Japan, New Zealand, and India.

• It is a Free Trade Agreement (FTA) that is being proposed amongst these nations which will include goods and services, investments, intellectual property rights, economic and technical cooperation, and dispute settlement.
• If negotiated and enforced, it will be one of the largest trading blocs in the world. With a combined Gross Domestic Product of almost $17 trillion and covering more than 40 per cent of the world’s trade. It also covers more than 3 billion people.
• The bloc aims at tariff liberalization amongst the nations and so, there will be easier market access amongst all the nations amongst themselves.

Advantages for India

• For India, which is not a part of the other major trade blocs of the world, such as Asia Pacific Economic Cooperation (APEC), and the Trans-Pacific Partnership (TPP), this free trade agreement would prove to be of advantage as earlier it was feared that with the presence of these trade blocs and the negotiation of their FTAs, India might lose out its market share, especially in case of textiles, pharmaceuticals and medicines etc. to other Southeast Asian nations like Vietnam.
• Also, with India already having an FTA with ASEAN Japan, and South Korea, with the negotiation of the RCEP, it will complement India’s pre-existing FTAs and will allow better access to consumer markets in other nations.
• With the FTA being negotiated even in services, it will add to the advantage for India where they have a comparative advantage over other nations, especially in the context of Information Technology related services, healthcare services, and educational services.

Challenges for India

• The agricultural sector of India, which faces issues like lack of investment, low productivity, obsolete technology, and fragmented landholdings will suffer even more as with the negotiation of the RCEP agreement, now, the Indian market will be flooded with products from other nations which are comparatively cheaper and have a more efficient agricultural sector.
• The already negotiated FTA with ASEAN has hurt the interests of some particular communities such as rubber plantations and palm oil production. Also, the allied sectors, such as the dairy sector in India, which still is not at a mature stage, will face stiff competition from countries like New Zealand which has a very strong dairy sector and their economy thrives on the same.
• Also, the industrial sector of India is still in a nascent stage. In the context of goods, India has already given up on 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.
• With the agreement on the intellectual property rights to be negotiated, which is being pressurized by Japan, this will lead to the issue that India may lose its status as the pharmaceutical hub of the world. Agreeing to data exclusivity, extending patenting terms and unduly strong enforcement measures will weaken the generic pharmaceutical sector and will come in direct conflict with section 3(d) of the Indian Patents Act.
• This will make medicines expensive and inaccessible not just for Indians but for the entire developing world. India has already resisted pressure not succumbing to dilute the provisions of the European Union and the FTA to be proposed with the same. Thus, diluting the measures in this context might again open a Pandora’s box for India.
• Also, in the case of the services sector, where India is assuming and pitching for gains, it remains to be seen whether it will duly gain or not. India is pitching for Mode 3 and Mode 4 type gains. With Mode 4 types of gains highly unlikely to be awarded, in the context of Mode 3, except in the case of Information Technology and Information Technology Enabled Services, it remains to be seen whether it will benefit India much or not.
• Finally, to conclude, the FTA will pose a big challenge to the ‘Make in India’ program which the current government is aggressively promoting. For example, the granting of tariff-free access to Chinese goods, which have already flooded the Indian markets and have decimated the Indian goods and markets will further aggravate the situation and add to increase the budget deficit with China.

South Asia Free Trade Agreement (SAFTA)

• South Asian Association for Regional Cooperation or SAARC, as it is known, is a region comprising of all the South-Asian nations or the subcontinent i.e. India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan, and the other two countries namely Afghanistan and Maldives. It was conceived to improve the interrelationships between the nations and improve people-to-people contact as all the people are united culturally but divided by the borders.
• In this context, the concept of the South-Asia Free Trade Agreement or SAFTA was conceived for the first time in 1993 as a Preferential Trade Agreement ( an agreement amongst the nations to trade selected goods without tariffs or with very low tariffs) and later, it was upgraded to a Free Trade Agreement in 2004 and came into force in 2006. This was done to improve trade and economic relations amongst the member nations of SAARC.
• With the classification of nations as Least Developing Countries and Non-Least Developing Countries, there was a creation of an equal platform for all the players in the region so that the Free Trade Agreement would not lead to issues for the domestic markets.
• However, despite more than ten years after the enactment of the FTA, the trade growth amongst the member nations is meagre. This puts a question mark on the concept of the creation of an FTA in the region. Because of the geopolitical scenario of the subcontinent, there have always been contentious issues among the neighbours. For example, India and Pakistan have always had their differences and their relationship becomes the elephant in the room in case of any summit and negotiations to be done. Also, the proximity of Pakistan to China has added to the troubles.
• Other smaller nations have also played the China card again and again against India which has led to a void in the confidence among the nations. The trade amongst the nations is so poor that it comprises only five per cent of the total trade of the nations.
• The clause of ‘sensitive list’ has also hurt trade prospects which each nation apprehensive of losing out on its domestic industry as compared to the other nations and thus, has included quite a many of the list of goods and services to be traded in the sensitive list. When included in the list, the products become immune from tariff concession.

India-European Union Free Trade Agreement (Proposed)

• India-European Union (EU) FTA, officially known as the Broad-Based Trade and Investment Agreement has been negotiated for quite a while. However, in 2013, there was a breakdown in talks between the two sides and the talks have been stalled ever since. The European Union wants India to reduce the import duties on alcohol and automobiles and India wants the EU to declare India as a ‘data secure’ country.
• Also, in 2016, India unilaterally terminated Bilateral Investment Treaties with many countries across the world, with many of them being European nations. This has added to the increased scepticism of the nations who have question marks over the future investments to be made in India.
• The reason why the Bilateral treaties have been terminated is that India has put forward its condition of exhausting all the judicial and litigation measures available in the country first and then only going for international litigation or arbitration. The 2016 Model Indian Bilateral Investment Treaty requires the foreign investor to litigate for at least five years in the national courts before approaching the international tribunal.
• In contrast, the EU and Canada had put forward the idea of an Investor-State Dispute Mechanism at the global level in which the foreign investors in a country can drag the government to the international arbitration centres without exhausting the local litigation means and claim huge losses citing losses they suffered due to various reasons, including policy changes. This has been summarily rejected by India, Argentina as well and Japan. Japan has been opposing it because international arbitration will involve huge costs whereas India wants the foreign investors to exhaust the national judicial remedies and then only go for international arbitration.

Future of the Free Trade Agreements and India’s stand on them

The unilateral termination of the BITs with so many nations should be reviewed, especially when India is being projected as a bright spot in the global economy.

The move comes as a regressive step as it increases the confusion of the foreign investors who wish to invest in India. Also, the clause which says at least five years of national litigation is necessary after which the international tribunals can be approached looks like a step in the wrong direction.

This goes against the government’s slogan of ‘More Governance, Less Government’ and against the concept of ‘Ease of Doing Business’ in the nation.

Regarding the FTAs, India should be very careful in the clauses of negotiation. Despite having a strong services sector in a select few categories, ( IT, ITES, Healthcare and Education, etc.) the agricultural sector as well as the industrial sector, especially the Micro, Small, and Medium Scale Enterprises are still not as mature and strong as compared to the other countries with which India is negotiating FTAs.

For the sake of gaining an advantage in the services sector and access to foreign markets in services, which are also not completely accessible because of the nation’s reservations, India ends up compromising on the primary and secondary sectors which affects too many livelihoods and the economy overall.

Thus, the negotiations at an international level should be done only after proper deliberation and understanding of the situation.

Article by: Aadarsh Clerk