21/11/2019 : The Hindu Editorials Notes: Mains Sure Shot
Question – What do you understand by free trade agreement ? Free trade agreement is the guarantee to increase in export and investment flow and integration with global value chain . Critically analyze the statement. (250 words)
Context: Decision for not joining RCEP
What are FTAs?
- FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce or eliminate customs tariff and non tariff barriers on substantial trade between them. FTAs, normally cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading, etc.).
- FTAs can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy, etc.
Different type of FTAs:
- Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on agreed number of tariff lines. The list of products on which the partners agree to reduce duty is called positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover substantially all trade.
- Free Trade Agreement (FTA): In FTAs, tariffs on items covering substantial bilateral trade are eliminated between the partner countries; however each maintains individual tariff structure for non-members. India Sri Lanka FTA is an example. The key difference between an FTA and a PTA is that while in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a negative list on which duty is not reduced or eliminated. Thus, compared to a PTA, FTAs are generally more ambitious in coverage of tariff lines (products) on which duty is to be reduced.
- Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic Partnership Agreement (CEPA): These terms describe agreements which consist of an integrated package on goods, services and investment along with other areas including IPR, competition etc. The India Korea CEPA is one such example and it covers a broad range of other areas like trade facilitation and customs cooperation, investment, competition, IPR etc.
- Custom Union: In a Customs union, partner countries may decide to trade at zero duty among themselves, however they maintain common tariffs against the rest of the world. An example is Southern African Customs Union (SACU) amongst South Africa, Lesotho, Namibia, Botswana and Swaziland. European Union is also an outstanding example.
- Common Market: Integration provided by a Common market is one step deeper than that by a Customs Union. A common market is a Customs Union with provisions to facilitate free movements of labour and capital, harmonize technical standards across members etc. European Common Market is an example.
- Economic Union: Economic Union is a Common Market extended through further harmonization of fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union (EU) is an example.
Impact of FTAs:
- Impact on exports :-
- Mere signing of FTAs is not the guarantee to increase in exports. If import duty in partner country is very high than likelihood of increase in export by 10% in case of duty becomes zero are very high. In case of import by partner country at zero custom duty , chances of increase in export on signing of FTAs are very low. India has free trade agreement with ASEAN , Japan , South Korea and Australia and around 3/4th of trade happens at zero duty with little scope for increase in export on joining RCEP.
- But reduction of import duty to zero from high level of duty , is also not guarantee as non tariff barriers discourages exports and these NTBs are not part of FTAs as these are resolved bilaterally. Japan reduced the import duty on import duty on Indian apparel from high 10% to zero . But export could not increase due to NTBs.
- Investment flow:
- Australia and India has different experience of reducing import duty and increase in investment flow in automobile sector. Australia reduced the tariff on imports of automobile leading to shutting down of most of the automobile industries while India was able to develop the robust automobile industries with tariff protection. Most investments are a result of the package, such as tax cuts, cheap land, power, etc. offered by the host country. If the country is not the most efficient one some level of import wall may help to increase the investment. With increase in efficiency in economy , investment flow increases.
- Global value chain :- Country can be part of global value chain by having efficient port , customs , shipping , roads and regulatory compliance , infrastructure and by developing the harmonization of product and quality standard.
- Reverse the inverted duty structure
- Focus on quality and development of essential infrastructure