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The free trade agreements (FTAs) India has signed in the past decade or so, say with Japan, Korea, or ASEAN, have yielded sub-optimal benefits on exports and led to the widening of the trade deficit. It was precisely this trepidation with FTAs that guided India’s decision of opting out of the Regional Comprehensive Economic Partnership (RCEP), a trade deal signed in 2020 between 15 countries, including China.
However, India’s appetite for FTAs and economic partnerships has expanded unprecedentedly in the last year with agreements already signed with UAE (effective 1 May 2022) and Australia (interim FTA signed on 2 April 2022). Another one with the UK is expected to be signed before the end of the year and active negotiations are underway with, inter-alia, European Union (EU), Canada, and Israel. In this context, it is important to understand what sets apart FTAs signed with UAE and Australia, given that it has resulted in India shedding its reservations about FTAs, completing the negotiation process in record time, and laying out highly ambitious targets for the future.
India has managed to strike a good bargain with both UAE and Australia on tariff concessions. For instance, under the FTA with UAE, the latter will immediately eliminate tariffs on 80% of tariff lines (accounting for 99% of Indian exports) while tariffs on 17% of tariff lines will be eliminated in a phased manner over 5 or 10 years. Further, merely 0.5% of tariff lines have been kept in the Phase Reduction list (with only 50% tariff reduction) and only 2.4% of tariff lines lie in the exclusion list which will not see any tariff reduction. In comparison, India has agreed to an immediate elimination of only 65% of its tariff lines and phase elimination over 5/7/10 years of slightly over 20% of its tariff lines. Moreover, under the Phase Reduction list, India has negotiated tariff rate quotas (TRQs) i.e., reduction of tariffs only up to an agreed quantity, on items of export interest to India including gold, gold jewellery, copper, polyethylene and polypropylene. It must be noted that TRQs have been used scarcely even in FTAs signed with large trading partners like Japan, Korea, or ASEAN. Finally, keeping in mind the health and protection of sensitive domestic industries like agriculture and dairy products, India has kept nearly 10% of its tariff lines outside the ambit of reduction under the FTA with UAE.
Correspondingly, the FTA with Australia is the first trade agreement India has signed wherein the partner country has agreed to 100% tariff elimination. Under the FTA, Australia has agreed to immediate zero duty access on more than 98% of its tariff lines. This clause is expected to benefit labour intensive sectors such as textiles, leather goods, jewellery, inter-alia, with India expecting to generate an estimated 1 million jobs in the next 5-7 years. The remaining tariff lines will be eliminated in 5 years. Meanwhile, India will provide immediate zero duty access on only 40% of its tariff lines and keep nearly 30% of tariff lines in the exclusion list. Simultaneously, India has attempted to satisfy Australia’s export interests by offering meaningful TRQs on certain agricultural products, duty elimination/ reduction on key raw materials like coal and most notably, tariff reductions on selected wine products.
The India-UAE FTA has already started yielding results. The cumulative export value from India to UAE till August 2022 has registered an impressive 36% year-on-year (YoY) growth compared to a paltry average growth of 10.5% in the preceding 3 years. While the India-Australia FTA is still waiting to be ratified on account of a change in government, the potential for export growth is evident with cumulative value in 2022-23 registering a growth of 28% compared to a 3-year average growth of only 9.7%. Although India remains in trade deficit with both the countries, the uptick in exports is an encouraging sign.
Exclusive Access and Distinct Provisions
The two FTAs mark the first time wherein a separate Annexure has been included in the respective agreements to facilitate trade in pharmaceutical products. The FTA with UAE has exclusive provisions on, inter alia, fast track approval, accredited laboratories, and marketing authorisation within 90 days for products approved by regulatory authorities of Australia, Canada, EU, Japan, USA, and UK. While the Annexure under the Australia FTA is comparatively limited in scope, the underlying principles remain the same. This is a significant step in accelerating the expansion of India’s $25 billion pharmaceutical export market in the coming years.
Furthermore, given its predicaments in steel trade under FTAs with ASEAN, Japan, and Korea, India has negotiated a special ‘Melt and Pour’ provision in the two FTAs as product-specific rules of origin for steel products. This will ensure that no third country is able to misuse the FTAs and only those authenticated steel goods which have been produced in the partner countries are eligible for any duty concessions. The inclusion of such a clause in two FTAs is indicative of India’s changing outlook towards international trade wherein it is prepared to learn from its experiences and insist on meaningful protections for a nationally significant industry.
The Australia FTA marks the first time a binding most-favoured-nation (MFN) clause for trade in services has been inducted under an Indian trade agreement. This is a significant step forward for India given that all its previous FTAs, including the one with UAE, allows it with an option to only consider a request from the other party for incorporating a more favourable treatment given in another FTA. However, the India-Australia FTA binds both countries in affording MFN treatment on market access and national treatment to 31 key service sectors, including higher and adult education, tourism and travel as well as banking and other financial services.
The India-UAE FTA is further significant in that it includes a substantive and ambitious scope to expand digital trade and government procurement between the two countries. While the digital trade section includes non-binding clauses to facilitate cooperation on, inter alia, digital identities, online consumer protection, and cross border flow of information, the chapter on government procurement binds 34 central government entities in India on not discriminating between local and foreign suppliers for procurements above INR 200 crores. It is the first time that India has incorporated a full text on Government Procurement and once again reflects its sincerity and growing confidence in multiplying its options in international trade.
Trade Remedies and FTA Review
For the first time, a bilateral safeguard mechanism has been negotiated in FTAs which protects trading partners from a sudden surge in imported quantities of goods as a result of tariff reduction or elimination. Under this mechanism, the parties have the right to suspend further tariff reduction and increase the duty to the MFN rate on the day preceding the date the FTA came into force. The scope for the same is slightly different in the two agreements, but both call for proper investigation by concerned authorities and sufficient time lapse before such a safeguard is applied. This will protect domestic industries from any unprepared surge in imports from partner countries and will likely act as a disincentive for malicious actors.
Finally, the Australia FTA has introduced a new clause on a compulsory review mechanism of the agreement after 15 years. The compulsory review, if requested, will mandate the two parties to revisit the FTA on aspects such as trade in goods, tariff commitments and rules of origin, including product specific rules. This is a significant addition to an FTA given that it provides a structured framework for the two parties to renegotiate an agreement based on changed strategic and economic imperatives.
The FTAs with UAE and Australia provide noteworthy insights into India’s evolved position and transformed vision on the potential of international trade. These will also serve both as a template for upcoming FTAs and as benchmarks to evaluate the same. What is certain is that these only mark the beginning of India’s new international trade doctrine.