mind-the-terms-of-trade

Why in the news?

  • Recently, India has signed trade agreements with Australia and UAE.
  • The last week of June witnessed New Delhi beginning talks for a similar agreement with the EU.

How FTA with the EU could help India?

  • India’s booming sectors like textiles, pharmaceuticals and leather could profit from these considerations, which would also be keenly observed by instances of the services and renewable energy sectors.
  • A flourishing free trade agreement (FTA) with the EU could help India to develop its footfall in markets such as Poland, Portugal, Greece, the Czech Republic and Romania, where the country’s exports enlisted double-digit annual growth rates in the last decade.

The factors India needs to consider while signing FTA

1] Impact of tariffs on the domestic industry:

  • It has been followed that when India is an importer, the preferential taxes that accrue as a result of trade agreements are quite lower than the rates charged from countries given Most Favoured Nation (MFN) status by India.
  • But when the allied country is the importer, preferential taxes on Indian goods, in most cases, are more comparative to the MFN tariffs.
  • Indian exporters do not get the same recoveries as their counterparts in the associate countries.
  • India’s commerce with South Korea is a subject in point.
  • Before entering into a trade agreement care should be taken to assure that the domestic industry is not made to contend on unequal terms with the partner countries.

2] Adherence to the rules of origin

  • The India-UAE Comprehensive Economic Partnership Agreement forms a good example.
  • It comprises a strong clause on the laws of origin.
  • Forty% value addition or significant processing of up to 40% in the exporting country is mandated to qualify for lower tariffs.
  • Rules of origin have been a bone of view in most Indian trade agreements.
  • (CAROTAR, 2020): In 2020, the country notified the Customs (Administration of Rules of Origin under Trade Agreements) Rules (CAROTAR, 2020), which demand a basic class of anticipated diligence from the importer.

3] Including the offset clauses

“Offset clauses” — where the exporter is obliged to undertake activities that instantly assist the importing country’s economy — should be made into trade agreements, especially for technology-intensive sectors.

4] Emergency action plan

  • In February 2020, the US made India ineligible for affirmations under GSP, America’s most ageing preferential trade scheme.
  • The US Trade Representative’s Office considered India as a developed country and suspended beneficial treatment under the GSP.
  • A contingency agenda should be in place to tackle such situations.

5] Inclusion of the sunset clause

  • India should also take a line from the US-Mexico-Canada Agreement, to integrate a “sunset” clause in trade agreements.
  • The agreement between the three North American nations provides for systematic reviews and the agreement is slated to be complete automatically in 16 years unless the countries renegotiate it.

6] Parity between services and merchandise

  • India should negotiate for equality between benefits and commodities.
  • Low trade in services: India’s trade in favours is low, and its overall score in the OECD’s Services Trade Restrictiveness Index (STRI) surpasses the world norm.
  • It is extremely elevated in legal and accounting services due to the licencing provisions in both these elements.
  • Expansion in banking and financial services: There is also influential room for the development of trade in the banking and financial services industry.

Conclusion

  • A well-designed trade agreement could help India enrich its share in multinational trade and aid to attain the government’s mark of making the country a $5-trillion economy.
  • Well-crafted trade agreements and policies can lead India to the second-largest economy in the world in recent upcoming years.