What’s in the news?
- India and the United Kingdom have launched formal Free Trade Agreement (FTA) negotiations, with the aim of concluding an early harvest trade agreement over the next few months.
- Both countries have agreed to avoid “sensitive issues” in the negotiations. 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.
- 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 decade.
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.
- 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.
- India had concluded an early harvest agreement with Thailand in 2004 but has not been able to conclude a comprehensive FTA with the country. 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. The exception to the rule are full-scale FTAs, subject to some conditions.
- Experts noted that it is often beneficial to negotiate the entire deal together, as an early harvest deal may reduce the incentive for one side to work towards a full FTA.
What is the status of the trade pacts under negotiation?
- India now has in place 10 FTAs and six PTAs (preferential trade agreements). In addition, India is negotiating 16 new and expanding seven existing agreements, including with trading partners such as Canada, the EU, the US, alongside Australia and the UK.
- 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.
- Experts noted that New Delhi may seek conditions in such FTA that trading partners import more from India.
Levels of Economic Integration
- Economic integration takes the form of the Preferential Trade Area, Free Trade Area, Customs Union, Common Market and Economic Union.
- A preferential trade area (PTA) is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration.
- A free trade area is the region encompassing a trade bloc whose member countries have signed a free-trade agreement (FTA). Such agreements involve cooperation between at least two countries to reduce/abolish trade barriers. e.g. South Asian Free Trade Area (SAFTA).
- A customs union is defined as a type of trade block which is composed of a free trade area with no tariffs among members and (zero tariffs among members) with a common external tariff. e.g. BENELUX (Belgium, Netherlands and Luxembourg).
- A common market has the same features as a customs union, but, in addition, factors of production (labour, capital and technology) are mobile among members. Restrictions on immigration and cross-border investment are abolished. e.g. European Common Market (ECM).
- An economic union is the last step in an economic integration process. In addition to free movement of goods, services and production factors, it also requires integration of economic policies, both monetary and fiscal. Under an economic union members harmonized monetary policies, taxation and government spending. (e.g. European Economic Union).