Free Trade Agreement

Context

• India currently has 11 Free Trade Agreements or Regional Trade Agreements with other countries/regions in addition to 6 limited coverage Preferential Trade Agreements.
• Strategically, FTAs have helped India compete at a global level and enhance its growth.
• Last year Parliament Standing Committee on commerce in its report had recommended the government to iron out the issues hindering the signing of Free Trade Agreements with the US and the EU nations.

What is a Free Trade Agreement (FTA)?

• A FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
• Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
• The concept of free trade is the opposite of trade protectionism or economic isolationism.
• Countries often agree to FTAs if their economic structures are complementary, not competitive.

Difference between Free Trade and Fair Trade

• Although these terms are often confused, there are significant differences between free trade and fair trade.
• FTAs are aimed at fostering open trade between nations to improve economic growth among all involved parties.
• The fair trade movement is focused on fostering economic equity on a global scale so that the workers who make goods in other countries receive fair wages and improve their lives and communities.

How many FTAs does India have?

• India has signed it’s first Free Trade Agreement (FTA) with Sri Lanka in 1998.
• Likewise, India had FTAs with: Nepal, Bhutan, Thailand, Singapore, ASEAN, Japan and Malaysia.
• India has signed Preferential Trade Agreements such as:

1. Asia Pacific Trade Agreement (APTA) with Bangladesh, China, India, Lao PDR, Republic of Korea, and Sri Lanka
2. Global System of Trade Preferences (GSTP)
3. India – MERCOSUR PTA etc. with South American countries

Key benefits offered by FTA

• Reduction or elimination of tariffs on qualified: For example, a country that normally charges a tariff of 12% of the value of the incoming product will rationalize or eliminate that tariff.
• Intellectual Property Protection: Protection and enforcement of intellectual property rights in the FTA partner country is upheld.
• Product Standards: FTA enhances the ability for domestic exporters to participate in the development of product standards in the FTA partner country.
• Fair treatment for investors: FTA provides treatment as favourably as the FTA partner country gives equal treatment for investments from the partner country.
• Elimination of monopolies: With FTAs, global monopolies are eliminated due to increased competition.

Disadvantages of FTAs

The biggest criticism of free trade agreements is that they are responsible for job outsourcing. There are some primary disadvantages:

• Increased job outsourcing: Reducing tariffs on imports allows companies to expand to other countries. Without tariffs, imports from countries with a low cost of living cost less.
• Theft of intellectual property: Many developing countries don’t have laws to protect patents, inventions, and new processes.
• Crowd out domestic industries: Many emerging markets are traditional economies that rely on farming for most employment. These small family farms can’t compete with subsidized agri-businesses.
• Poor working conditions: Multinational companies may outsource jobs to emerging market countries without adequate labour protections.
• Degradation of natural resources: Emerging market countries often don’t have many environmental protections. Free trade leads to the depletion of timber, minerals, and other natural resources.
• Destruction of native cultures: As development moves into isolated areas, indigenous cultures can be destroyed. Local peoples are uprooted.  
• Reduced tax revenue: Many smaller countries struggle to replace revenue lost from import tariffs and fees.
• Bane to Indigenization: An FTA will basically put a big challenge to the ‘Make in India’ programme which the current government is aggressively promoting.

Assessment of India’s FTAs

(1) India-ASEAN FTA

• Despite the fact that 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.
• With the agreement in 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, palm oil imports from Indonesia have made it a tough ordeal for the local manufacturers of palm oil and rubber.

(2) India- RCEP [India opted out from signing]

• The agricultural sector of India, which faces issues like lack of investment, low productivity, obsolete technology and fragmented landholdings will suffer more.
• Indian market will be flooded with products from other nations which are comparatively cheaper and have a more efficient agricultural sector.

Way Forward

• India is one of the fastest-growing large economies of the world and FTAs have played a significant role in enhancing the trade volume of the country.
• FTAs must bring the expected tangible benefits.
• Therefore, there is a need for a detailed assessment of FTAs in terms of goods, services and investment flows by all the stakeholders involved.
• Beyond mere economic cost-benefit analysis, India must approach such FTAs from a geostrategic perspective also.