Context

In recent months, India has signed trade agreements with Australia and UAE. n the last week of June, New Delhi began talks for a similar agreement with the EU.

How FTA with EU could help India

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

So, what are the factors India need to consider while signing FTA

1] Impact of tariff on domestic industry:

• It has been observed that when India is an importer, the preferential tariffs that accrue as a result of trade agreements are significantly lower than the rates charged from countries given Most Favoured Nation (MFN) status by India.
• But when the partner country is the importer, preferential tariffs on Indian goods, in most cases, are closer to the MFN tariffs.
• As a result, Indian exporters do not get the same returns as their counterparts in the partner countries.
• India’s trade with South Korea is a case in point.
• Before entering into a trade agreement care should, therefore, be taken to ensure that the domestic industry is not made to compete on unequal terms with the partner countries.

2] Adherence to the rules of origin

• The India-UAE Comprehensive Economic Partnership Agreement sets a good example.
• It includes a strong clause on the rules of origin.
• Forty per cent value addition or substantial processing of up to 40 per cent in the exporting country is required to qualify for lower tariffs.
• Rules of origin have been a bone of contention 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 require a basic level of due diligence from the importer.

3] Including the offset clauses

• “Offset clauses” — where the exporter is obliged to undertake activities that directly benefit the importing country’s economy — should be built into trade agreements, especially for technology intensive sectors.

4] Emergency action plan

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

5] Inclusion of sunset clause

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

6] Parity between services and merchandise

• India should negotiate for parity between services and merchandise.
• Low trade in services: India’s trade in services is low, and its overall score in the OECD’s Services Trade Restrictiveness Index (STRI) exceeds the world average.
• It is especially high in legal and accounting services due to the licencing requirements in both these segments.
• Expansion in banking and financial services: There is also significant room for expansion of trade in the banking and financial services industry.

Conclusion

A well-crafted trade agreement could help India enhance its share in global trade and help attain the government’s target of making the country a $5-trillion economy.

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Back2Basics: CAROTAR Rules

• Importers will have to do their due diligence to ensure that imported goods meet the prescribed ‘rules of origin’ provisions.
• This is the essential availing concessional rate of customs duty under free trade agreements (FTAs).
• A list of minimum information, which the importer is required to possess, has also been provided in the rules along with general guidance.
• Also, an importer would now have to enter certain origin related information in the Bill of Entry, as available in the Certificate of Origin.

Why need CAROTAR?

• CAROTAR 2020 supplements the existing operational certification procedures prescribed under different trade agreements.
• India has inked FTAs with several countries, including Japan, South Korea and ASEAN members.
• Under such agreements, two trading partners significantly reduce or eliminate import/customs duties on the maximum number of goods traded between them.
• The new rules will assist customs authorities in the smooth clearance of legitimate imports under FTAs.

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