New trade deals: A positive movement

To benefit from the economic partnership deals with the UAE and Australia, and future FTAs, design adequate strategies for utilising the opportunities these agreements will provide

With India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP), the economic integration agreement of East Asia in 2019, the Government of India signalled that global economic engagements were not among its priorities. Reinforcing this policy stance was the adoption of Atmanirbhar Bharat Abhiyan in 2020 and the call, vocal for local. Just over a year later, the government’s stance regarding its global economic engagements changed dramatically; not only did it revive several long-stalled free trade agreement (FTA) negotiations with partners such as the European Union and Australia, but it also initiated FTA talks with new partners, including the United Kingdom. While announcing this change in policy stance, commerce and industry minister Piyush Goyal said, “We are at a very positive momentum in terms of FTAs”.

From New Delhi’s renewed embrace of FTAs it seems obvious that the scepticism against FTAs that the government nursed earlier is passé. This is largely due to the robust export performance since early 2021 (Shutterstock)

An articulation of the “positive momentum” was that by late-2021, India was negotiating eight FTAs. The first of these negotiations was successfully concluded in early 2022 when the Comprehensive Economic Partnership Agreement (CEPA) with India’s third-largest trade partner, the United Arab Emirates (UAE) was forged. In April, India signed an Economic Cooperation and Trade Agreement (ECTA) with Australia, an “early harvest agreement”, designed as the stepping-stone towards a Comprehensive Economic Cooperation Agreement (CECA) between the two countries.

The India-UAE CEPA marks a departure from India’s past FTAs in three significant ways. First, the negotiations were concluded less than three months after being initiated in end-September 2021. This is remarkable given that FTA negotiations involving India have generally been long drawn. Second, the agreement covers the widest array of subjects, including digital economy and government procurement, which have never been included in any bilateral trade agreement that India has negotiated thus far. The third and the most important aspect is that market opening commitments that India has accepted in this agreement, especially in the goods sector, is the most extensive of any FTA signed by the country. When CEPA is fully implemented (after 10 years), India would have eliminated tariffs on almost 85% of its tariff lines and reduced tariffs significantly on another 5%. Consequently, India’s average tariff rate, which was over 14% when the India-UAE CEPA was signed, would be reduced to 3.4%. The UAE, on the other hand, has agreed to eliminate tariffs on 99% of its tariff lines when CEPA is fully implemented.

India’s first FTA with a trade partner from the Middle East and North Africa (MENA) should provide momentum to its exports of textiles, leather, footwear, pharmaceutical products and medical devices, and automobiles, among others. For a start, CEPA should help in reversing the decade-long declining trend in the two-way trade between India and the UAE, setting the stage for increasing bilateral trade between the two countries to over $100 billion within five years.

Apart from these direct benefits, CEPA could provide an impetus for strengthening India’s economic relations with other countries in the Gulf by providing momentum to discussions for a possible FTA with the Gulf Cooperation Council, the blueprint for which was agreed upon between the two sides in 2004.

Although the India-Australia ECTA is being seen as the first step towards an eventual comprehensive trade agreement, the two countries have taken huge strides towards liberalising bilateral trade in goods. Australia has agreed to eliminate tariffs on 98% of its tariff lines when the agreement becomes effective, while the remaining tariffs will be eliminated within five years. In contrast, India has committed to eliminate tariffs on 69% of its tariff lines, while almost 30% of its tariff lines are in the exclusion list. Through these commitments, India will reduce its average tariff rate from 14% to just over 6%.

Although these commitments look conservative, in effect, India has agreed to provide significant market access by agreeing to immediately eliminate tariffs on 85% of imports from Australia, worth almost $ 9 billion over the period 2018-20. India has agreed to eliminate tariffs on a number of products of export interest to Australia, including sheep meat, wool, barley, cotton, hides and skins, and certain metallic ores and has slashed tariffs on lentils, almonds, oranges, mandarins, and pears.

India expects its bilateral trade with Australia to double within the next five years. This could happen if India is able to increase its exports of pharmaceuticals and cotton and textiles, in which Indian producers are competitive, and in electronics products, such as mobile phones, which have lately seen robust increase exports.

From the government’s renewed embrace of FTAs it seems obvious that the scepticism against FTAs that the government nursed earlier is passé. This is largely due to the robust export performance since early 2021. With exports exceeding the psychological threshold of $ 400 billion for the first time in 2021-22, the government expects that Indian industry will make the most of market access opportunities offered by FTAs, including those in the pipeline.

In the past, India had failed to increase its exports to the Association of South East Asian Nations (ASEAN), Korea, and Japan, its major FTA partners, triggering downbeat sentiments against FTAs in general. This was because once FTAs were concluded, the government and the businesses did not develop adequate strategies for utilising the opportunities these agreements had offered. Consequently, the export thrust expected from FTAs were never realised. Hopefully, lessons would be learnt from the past failings.

Biswajit Dhar is professor of economics, Jawaharlal Nehru University The views expressed are personal.

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