NEWS HIGHLIGHT
Theme : Economy, Inclusive Growth
Paper:GS - 3
India has been actively pursuing free trade agreements (FTAs) with a wide range of countries.
TABLE OF CONTENT
- Context
- Trends about the FTAs
- What is FTA?
- Multilateralism & FTAs
- Significance of FTAs
- Challenges in Finalizing FTA
- Road Ahead
Context : India has been actively pursuing free trade agreements (FTAs) with a wide range of countries.
Trends about the FTAs :
- The Government has now started rooting for FTAs.
- Many pacts have been signed with different countries like Australia and the UAE and many are under process like the UK and the European Union, among others.
What is FTA?
- A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them.
- 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.
Multilateralism & FTAs :
- Article 1 of GATT (General Agreement on Tariffs and Trade) (about Most Favored Nation) states that "any advantage, favor, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties."
- However, derogations from this MFN principle are permitted for forming FTAs under specific conditions as per the following provisions of the WTO Agreements:
- FTA members shall not erect higher or more restrictive tariff or non-tariff barriers on trade with non-members than existed prior to the formation of the FTA.
- Elimination of tariffs and other trade restrictions be applied to "substantially all the trade between the constituent territories in products originating in such territories."
- Elimination of duties and other trade restrictions on trade within the FTA to be accomplished "within a reasonable length of time," meaning a period of no longer than 10 years.
Significance of FTAs :
- By eliminating tariffs and some non-tariff barriers FTA partners get easier market access into one another's markets. Countries negotiate Free trade Agreements for a number of reasons.
- Exporters prefer FTAs to multilateral trade liberalization because they get preferential treatment over non-FTA member country competitors.
- FTAs may also protect local exporters from losing out to foreign companies that might receive preferential treatment under other FTAs.
- Possibility of increased foreign investment from outside the FTA.
Challenges in Finalizing FTA :
- Demographic dividend:
- These Non-tariff issues could pose hurdles for India in reaping the gains of its comparative labor advantage.
- Shift of focus:
- Wrapping up these FTA talks could narrow soon given that India’s focus would shift to the series of events linked to India’s G20 Presidency.
- Influential lobbies can delay it more:
- Political lobbying from influential lobby groups such as farmer unions and the auto sector could intensify.
- Priority to non-tariff issues:
- In much of the negotiations currently under discussion, climate action, carbon emissions and labour issues are taking precedence over trade issues.
- Protectionist Tendencies:
- Moves such as plans to raise import duties on “non-essential items”, will only expose the government to the charge of being protectionist.
- The first two decades after 1991-92 saw a steep decline in tariff rates.
- The trend, however, has been reversed under the ruling government with the average applied import tariff actually rising. But still challenges remain.
- Recessionary conditions:
- These could potentially offer partner countries a handle to trigger non-tariff protectionist measures as developed nations stare at recessionary conditions.
- Environmental issues:
- Developed countries such as the US have brought up the issue of carbon emissions in the process of manufacturing melted steel as a non-tariff-related issue.
- India mostly produces steel generated from iron ore which comes from mining.
- Most developed countries have resorted to methods to generate it from scrap which results in lower carbon emissions. Thus, there may be a levy of carbon adjustment tax.
- GSP (Generalised System of Preferences):
- Currently, we may benefit from the GSP but if they come in a non-tariff barrier by citing labour or environment, then it becomes an issue citing standards, adjustments, child labour as reasons.
- India had been a beneficiary of the US’ GSP programme since November 1975, under which beneficiary countries are allowed to export thousands of products to the US without the added burden of duties.
- Carbon Border Adjustment Mechanism:
- The European Union has proposed CBAM to tax carbon-intensive products, such as iron and steel, cement, fertilizer, aluminum and electricity generation from 2026.
- Here, EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules
Road Ahead :
- At a time when firms are looking to diversify away from China, pursuing a China plus one strategy, India must lower barriers to trade and seek actively to be a part of global value chains.
- While negotiations must surely proceed with care, they must not be derailed over these issues
FAQs :
1.What are FTAs ?
ANS.
-
A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them.
-
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
2.What does Article-1 of GATT talk about?
ANS. Article 1 of GATT (General Agreement on Tariffs and Trade) (about Most Favored Nation) states that "any advantage, favor, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties."