India and the United Kingdom have launched formal Free Trade Agreement (FTA) : Daily Current Affairs

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

Key phrases: bilateral trade, free trade agreement, early harvest trade agreement, Model BIT 2016

Why in news?

India and the United Kingdom have launched formal Free Trade Agreement (FTA) negotiations recently , with the aim of concluding an early harvest trade agreement over the next few months. The interim (early harvest agreement) aims to achieve up to 65 per cent of coverage for goods and up to 40 per cent coverage for services. By the time the final agreement is inked, the coverage for goods is expected to go up to “90 plus percentage” of goods

A Brief history

In the early 1990’s India liberalized its economy and opened up its borders to international trade and foreign direct investments (FDI) which resulted in India becoming a major player in the global arena. When India signed its first BIT with the United Kingdom in 1994, FDI inflows to India was at a meagre US$ 393 million compared to US$ 42 billion in 2017–18. Despite a fast developing economy, India is still considered a net capital-importer with foreign investment policies that have remained mostly liberal and investment-friendly. However, India and many Asian countries still lags far behind most Western countries in terms of offering effective institutions and a stable business environment. A negative consequence of increased participation in the globalized economy with comparatively lacking institutions is increased exposure to BITclaims and recently India has experienced a surge of claims which caught the Indian government off-guard. With the sudden termination of BITs and a new Model-BIT, India is demonstrating a drastic policy change towards BITs and the current system of investment protection under international investment law( IIL).

What is a BIT?

The United Nations Conference on Trade and Development (UNCTAD) has defined BITs as “agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other’s territories by companies based in either country.” Despite the reciprocal definition, the primary rationale of a BIT is to provide adequate legal protection to investors from a developed, capital-exporting country who invests in a developing, capital-importing country.

What are early harvest pacts?

Early harvest agreements are used to open up bilateral trade between two countries on a restricted list of goods and services, primarily as a frontrunner to clinching a more comprehensive FTA.

Why is the FTA important for India?

India has already walked out of key FTAs such as the Regional Comprehensive Economic Partnership (RCEP) and begun to renegotiate others , such FTAs have become critical
India finds existing agreements to be not benefitting domestic industry. Imports had been rising over the past years and exports grew at a tepid pace.
India has chalked out an aggressive Atmanirbhar Bharat plan which aims to make it an export powerhouse with $1 trillion exports by 2030.
So fewer trade barriers with a large market like the UK could give a push to exporters.

Benefits for Both

For INDIA

Enhanced mobility for its professionals and reduced fee for work and tourism visas, safeguards for agriculture, better market access for vaccines, basmati rice, wool, yarn, instant coffee, and tea pre-mix, among others.

For the UK,

Ease of doing business, removal of tariffs of up to 150% on whisky and 125% on British-made cars with an eye on expanding middle class in India
Also, removal of barriers to trade in services, food and drink, healthcare and medical devices. On the table is partnership on using green energy for industries and long-term academic collaborations between the two nations.

Why such FTAs have become important?

Committed to trade multilaterism with the World Trade Organisation (WTO) at its centre, India has renewed its efforts to strike bilateral trade deals with key countries for access to export market with an extensive set of preferential trade agreements.
More FTAs will give Indian products more access to global markets and the opportunity that India missed by staying out from the RCEP.
With multilateral trade talks at WTO stalled, it only makes sense to be part of large bilateral deals.

Issues with early harvest pacts:

Early harvest agreements are used to open up bilateral trade between two countries on a restricted list of goods and services, primarily as a frontrunner to clinching a more comprehensive FTA.
The problem, though, is that these early harvest schemes potentially target the low-hanging fruits, leaving the tougher goods and services for later. This strategy can lead to significant delays in wrapping up the mode broad-based FTAs, which could potentially lead to impediments.

For instance:

India had concluded an early harvest agreement with Thailand in 2004 but has not been able to conclude a comprehensive FTA with the country. In this case automobile industry associations had complained that relaxations extended to Bangkok in the early harvest had reduced the incentive for Thailand to work towards a full FTA.India also has a trade agreement with Sri Lanka dealing with goods but was not able to conclude an agreement on services and investments.
- Early harvest agreements that do not graduate into full-scale FTAs are exposed to legal challenges from other countries that are members of the World Trade Organisation (WTO), an organisation that was formed on the premise that member countries should not discriminate between their trading partners.
- However ,early harvest agreements may serve the function of keeping trading partners interested as they promise some benefits without long delays, as India had become known for long-drawn negotiations for FTAs.

What is the status of the trade pacts under negotiation?

India now has in place 10 FTAs and six PTAs (preferential trade agreements).

India is close to finalizing one FTA with the United Arab Emirates (UAE).
With the UK, the idea is to have an interim agreement by March this year.
India is in negotiations with Israel and hopes to launch discussions with Canada on the same in two or three months.
India is also negotiating a similar early harvest agreement with Australia, which is supposed to set the stage for a long-pending Comprehensive Economic Cooperation Agreement that both countries have been pursuing for nearly a decades
Government officials maintain that “a majority” of FTAs under negotiations are “comprehensive” and cover goods, services, investment, IPR, etc”. Non-Tariff Measures, regulatory procedures and trade facilitation are part of such negotiations.
There are indications that the proposed trade deal with the EU — restarted after a gap of six years as the two sides earlier pulled out citing disagreements over tariff rules covering the auto sector and the free-movement rights for professionals — is not aiming at an early harvest and is instead looking at a full-scale comprehensive FTA.
Meanwhile, India is also simultaneously carrying out a review of the existing FTAs with South Korea, Japan and ASEAN on the ground of India’s rising trade deficit with these trading partners.

Way forward:

With increasing globalisation, as has been clearly indicated during on-going pandemic, India cannot remain aloof anymore from the world market in the name of protectionism.
It is all the more necessary to tap more markets across the world particularly African continent with vast potential for exports with a vision to realise $5 trillion economy
It is very imperative to foster conducive environment and protection to foreign investment in the country and remove the fear of domestic laws. In this regard the revocation of Retro tax law is a welcome step
It will also help in resolving issues of trade deficits.

Source : The Hindu , Livemint

Mains Question

Q. For realising the objective of $ 5 trillion economy ,besides multilateral treaties, bilateral trade mechanisms have also become very important . Critically analyse with the help of a case study. ( 200 words / 12.5 marks )