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General Studies 2 >> International Relations

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1. Context

India and the U.K. are still negotiating a trade agreement that was initially supposed to be ready by Diwali of 2022. External Affairs Minister (EAM) S. Jaishankar has expressed hope that the two countries will be able to find a mutually beneficial "landing point" for the deal.

2. About the Free Trade Agreement

  • A Free Trade Agreement (FTA) is an agreement between two or more countries to reduce or eliminate barriers to trade, such as tariffs, quotas, and subsidies.
  • FTAs can also include provisions on other issues, such as investment, intellectual property, and labour standards.
  • The goal of an FTA is to promote trade and economic growth between the signatory countries.
  • By reducing or eliminating trade barriers, FTAs can make it easier for businesses to export their goods and services to other countries, which can lead to increased production, employment, and innovation.

3. Types of Free Trade Agreement

  • Bilateral Free Trade Agreement (BFTA) involves two countries, aiming to promote trade and eliminate tariffs on goods and services between them.  It establishes a direct trade relationship, allowing for a more focused and tailored agreement between the two nations.
  • Multilateral Free Trade Agreement (MFTA) Involving three or more countries, an MFTA seeks to create a comprehensive trade bloc, promoting economic integration on a larger scale. It requires coordination among multiple parties, addressing diverse economic interests and fostering a broader regional economic landscape.
  • Regional Free Trade Agreement (RFTA) involves countries within a specific geographic region, aiming to enhance economic cooperation and integration within that particular area. It focuses on addressing regional economic challenges and fostering collaboration among neighbouring nations.
  • Preferential Trade Agreement (PTA) involves a reciprocal reduction of tariffs and trade barriers between participating countries, granting preferential treatment to each other's goods and services. It allows countries to enjoy trading advantages with specific partners while maintaining autonomy in their trade policies with non-participating nations.
  • Comprehensive Economic Partnership Agreement (CEPA) is a broad and advanced form of FTA that goes beyond traditional trade barriers, encompassing various economic aspects such as investment, intellectual property, and services. It aims for a more comprehensive economic partnership, encouraging deeper integration and collaboration between participating countries.
  • Customs Union While not strictly an FTA, a Customs Union involves the elimination of tariffs among member countries and the establishment of a common external tariff against non-member nations. It goes beyond standard FTAs by harmonizing external trade policies, creating a unified approach to trade with the rest of the world.
  • Free Trade Area (FTA) with Trade in Goods (TIG) and Trade in Services (TIS): Some FTAs specifically emphasize either trade in goods or trade in services, tailoring the agreement to the specific economic strengths and priorities of the participating countries. This approach allows nations to focus on areas where they have a comparative advantage, fostering specialization and efficiency.

4. India's Free Trade Agreements

India is a member of several free trade agreements (FTAs) and is currently negotiating others.  India's FTAs have helped to reduce trade barriers and promote trade and economic growth. They have also helped to attract foreign investment and create jobs. 

  • The South Asian Free Trade Agreement (SAFTA) was signed in 1995 by the seven countries of the South Asian Association for Regional Cooperation (SAARC). SAFTA aims to reduce or eliminate tariffs on trade between the member countries.
  • The India-Bangladesh FTA was signed in 2010 and came into force in 2011. It is a comprehensive FTA that covers goods, services, and investments.
  • The India-Sri Lanka FTA was signed in 1999 and came into force in 2000. It is a comprehensive FTA that covers goods, services, and investments.
  • The India-ASEAN Free Trade Agreement was signed in 2002 and came into force in 2010. It is a comprehensive FTA that covers goods, services, and investments.
  • The India-Korea Comprehensive Economic Partnership Agreement (CEPA) was signed in 2010 and came into force in 2011. It is a comprehensive FTA that covers goods, services, and investments.
  • The India-Japan Comprehensive Economic Partnership Agreement(CEPA) was signed in 2022 and came into effect in 2023. It is a comprehensive FTA that covers goods, services, and investments.
  • The India-UAE Comprehensive Partnership Agreement (CEPA) was signed in 2022 and came into effect in 2022. It is a comprehensive FTA that covers goods, services, and investments.
  • The India-Australia Economic Cooperation and Trade Agreement (ECTA) was signed in 2022 and came into effect in 2022. It is a comprehensive FTA that covers goods, services, and investments.
  • The India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) was signed in 2010 and aims to enhance economic ties by addressing trade in goods and services, as well as investment and other areas of economic cooperation.
  • The India-Thailand Free Trade Agreement was signed in 2003 and focuses on reducing tariffs and promoting trade in goods and services between India and Thailand.
  • The India-Singapore Comprehensive Economic Cooperation Agreement (CECA) has been operational since 2005, this agreement covers trade in goods and services, as well as investment and intellectual property.
  • The India-Nepal Trade Treaty While not a comprehensive FTA, India and Nepal have a trade treaty that facilitates the exchange of goods between the two countries.
  • The India-Chile Preferential Trade Agreement was signed in 2006 and aims to enhance economic cooperation and reduce tariffs on certain products traded between India and Chile.

5India - UK Free Trade Agreement

5.1. Background

  • Both countries have agreed to avoid sensitive issues in the negotiations.
  • The interim (early harvest agreement) aims to achieve up to 65 per cent 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 a 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.
  • While the commencement of negotiations does mark a step forward in the otherwise rigid stance adopted and when it comes to trade liberalisation, experts point to impediments and the potential for legal challenges going ahead.

5.2. GATT (General Agreement on Trade and Tariffs)

  • The exception to the rule is full-scale FTAs, subject to some conditions.
  • One rider, incorporated in Article XXIV.8 (b) of GATT, stipulates that a deal should aim to eliminate customs duties and other trade barriers on "Substantially all the trade" between the WTO member countries that are signatories to an FTA.
  • For this Agreement, a free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
  • 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.
  • These agreements are not just about goods and services but also issues like investment.
  • If you are trying to weigh the costs and benefits, it is always better to have the larger picture in front of you.
  • In the case of the early harvest agreement inked with Thailand, 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.
  • Early harvest agreements may serve the function of keeping trading partners interested as they promise some benefits without long delays, as India becomes known for long-drawn negotiations for FTAs.
  • Government emphasis on interim agreements may be tactical so that a deal may be achieved with minimum commitments and would allow for contentious issues to be resolved later.
For Prelims: Free Trade Agreement, India-U.K, Bilateral Free Trade Agreement, G-20 Summit, Agenda 2030, Covid-19 Pandemic, SAARC, General Agreement on Trade and Tariffs, Comprehensive Economic Partnership Agreement, Multilateral Free Trade Agreement, Regional Free Trade Agreement, Preferential Trade Agreement, Customs Union, 
For Mains: 
1. Evaluate the potential impact of the India-UK FTA on the Indian economy, considering both positive and negative aspects (250 Words)
2. Critically evaluate the significance of Free Trade Agreements (FTAs) in promoting trade and economic growth, considering their potential benefits and drawbacks. (250 Words)
Previous Year Questions
1. Consider the following countries:
1. Australia
2. Canada
3. China
4. India
5. Japan
6. USA
Which of the above are among the free-trade partners' of ASEAN? (UPSC 2018)
A. 1, 2, 4 and 5          B.  3, 4, 5 and 6      C.  1, 3, 4 and 5       D.  2, 3, 4 and 6
Answer: C

2. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if (UPSC 2018)

(a) Industrial output fails to keep pace with agricultural output.
(b) Agricultural output fails to keep pace with industrial output.
(c) Poverty and unemployment increase.
(d) Imports grow faster than exports.

Answer: C

3. The SEZ Act, 2005 which came into effect in February 2006 has certain objectives. In this context, consider the following: (2010)

  1. Development of infrastructure facilities.
  2. Promotion of investment from foreign sources.
  3. Promotion of exports of services only.

Which of the above are the objectives of this Act?

(a) 1 and 2 only     (b) 3 only         (c) 2 and 3 only           (d) 1, 2 and 3

Answer: A

4. A “closed economy” is an economy in which (UPSC 2011)

(a) the money supply is fully controlled
(b) deficit financing takes place
(c) only exports take place
(d) neither exports nor imports take place

Answer: D

5. With reference to the “G20 Common Framework”, consider the following statements: (UPSC 2022)
1. It is an initiative endorsed by the G20 together with the Paris Club.
2. It is an initiative to support Low Income Countries with unsustainable debt.
Which of the statements given above is/are correct?
(a) 1 only         (b) 2 only            (c) Both 1 and 2          (d) Neither 1 nor 2
Answer: C
 Source: The Hindu

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