• 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.

• 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.

5.  India - 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) Development of infrastructure facilities. Promotion of investment from foreign sources. 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

 

 

STRAIT OF HORMUZ

 

 

1. Context

 

The war in West Asia has largely centred around one key geographical lever — the Strait of Hormuz.

 

2. What is the Strait of Hormuz?

 

• The Strait of Hormuz is a strategically significant and narrow maritime passage situated between Iran and Oman, serving as a link between the Persian Gulf, the Gulf of Oman, and the Arabian Sea. The U.S. Energy Information Administration (EIA) has labeled it as the world’s most vital oil transit chokepoint, through which nearly 20% of global liquid petroleum fuels and a substantial portion of LNG trade pass. In May, more than 45% of India’s crude oil imports were estimated to have transited through this strait. Given that India is the third-largest consumer of crude oil globally and imports over 85% of its oil needs, the strait plays a crucial role in its energy security.

• Data from the commodity analytics firm Kpler indicates that, as of June, India has been importing over 2.2 million barrels per day (bpd) of crude oil from Russia, which constitutes more than 41% of its total oil imports.

• While oil imports from the U.S. have shown a steady rise, supplies from West Asian nations such as Iraq, Saudi Arabia, the UAE, and Kuwait have remained relatively consistent. Many of these shipments were likely planned prior to the recent escalation in tensions between Israel and Iran, and therefore, may not reflect the impact of the current geopolitical developments.

• Over the past two to three years, India has notably adjusted its oil import strategy. Russia has emerged as India’s top crude supplier, overtaking traditional exporters from West Asia. Importantly, Russian oil bypasses the Strait of Hormuz, as it is mainly transported via alternative sea routes like the Suez Canal and Red Sea, and sometimes through the Cape of Good Hope or Pacific Ocean routes.

3.Why is Strait of Hormuz Critical?

 

• The Strait of Hormuz is commonly considered the most critical maritime chokepoint in the world. It links the Persian Gulf with the Gulf of Oman and the Indian Ocean, serving as a major export corridor for regional oil producers.
• At its narrowest point, it measures only about 21 nautical miles (38 km) across. Under typical conditions, nearly 21 million barrels of oil—around one-fifth of global consumption—flow through it daily.
• Alongside crude oil, substantial quantities of liquefied natural gas from Qatar and the UAE are transported via this passage.
• A significant share, close to 80%, is destined for Asian markets, making countries like India, China, Japan, and South Korea heavily reliant on this route.

 

4. Other Major Global Chokepoints

 

• Apart from Hormuz, international trade depends on a few other strategically vital maritime passages, including the Strait of Malacca, Bab el-Mandeb Strait, Suez Canal, and Panama Canal.
• The Strait of Malacca lies between the Malay Peninsula and Indonesia’s Sumatra island and represents the shortest maritime route connecting the Indian Ocean with the South China Sea. This makes it indispensable for trade flows linking West Asia, Africa, and East Asia.
• The Bab el-Mandeb Strait is positioned between the Arabian Peninsula and the Horn of Africa.
• It serves as the southern entrance to the Red Sea, a necessary transit point for vessels heading toward the Suez Canal and onward to the Mediterranean, thereby forming a crucial segment of Asia–Europe trade routes.
• The Suez Canal, a man-made channel across Egypt, connects the Red Sea to the Mediterranean Sea, significantly reducing travel time by eliminating the need to circumnavigate Africa.
• Further west, the Panama Canal cuts through the Isthmus of Panama, linking the Atlantic and Pacific Oceans. This strategic shortcut facilitates trade between Asia, the Americas, and Europe, removing the necessity of sailing around South America

 

5. Why is the Strait of Hormuz strategically important for India?

 

• India’s current oil procurement approach already demonstrates a diversified and risk-mitigated strategy, especially in light of uncertainties in West Asian oil routes, with Russian crude now making up the largest share of India’s import basket.

• After recent U.S. air strikes targeting Iranian nuclear sites, Iran’s parliament passed a resolution on Sunday advocating the closure of the Strait of Hormuz, a vital corridor for global oil transportation. The final decision on this move now lies with Iran’s Supreme National Security Council.

• Although Iran has repeatedly issued threats in the past to shut the strait, it has never acted on them. Even in the present context, industry analysts consider the likelihood of an actual blockade to be low. Nevertheless, the increased risk perception surrounding the potential closure is expected to trigger global alarm, including in India, by raising concerns over the security of oil and gas supplies and potentially driving up global energy prices.

 

6. How does the Israel-Iran conflict pose a threat to global oil and gas flows?

 

 

• The Israel-Iran conflict poses a significant threat to global oil and gas flows due to the geopolitical sensitivity and strategic location of the region. At the heart of this issue lies the Strait of Hormuz—a narrow but crucial maritime passage through which nearly 20% of the world’s petroleum and a substantial share of liquefied natural gas (LNG) are transported.
• Iran borders this strait and has, over the years, repeatedly threatened to block it during periods of heightened tension, including in response to military actions or sanctions.
• When hostilities between Israel and Iran escalate—such as through air strikes, proxy conflicts, or cyber warfare—it increases the likelihood of retaliation from Iran that could involve disrupting maritime traffic in the Strait of Hormuz.
• Even if Iran does not fully close the strait, the mere threat or perception of such an action is enough to cause volatility in global energy markets. Tanker insurance rates rise, shipping routes are reconsidered, and countries heavily dependent on oil imports, like India, become increasingly vulnerable to supply disruptions and price shocks.
• Furthermore, any military conflict in this region risks damaging key infrastructure such as refineries, pipelines, or export terminals in the broader West Asian region.
• This would constrain oil production and distribution, affecting both the availability and price of crude oil and gas worldwide. Global markets respond quickly to these risks, often resulting in immediate spikes in prices due to concerns over supply security.
• In summary, the Israel-Iran conflict amplifies the risk to global oil and gas flows by potentially destabilizing a region that is central to global energy supply chains. It heightens fears of supply disruptions, increases market speculation, and threatens the economic stability of energy-importing countries, making it a matter of both geopolitical and economic concern

7. Way Forward

 

The flow of vessels through major international chokepoints is largely regulated by the United Nations Convention on the Law of the Sea. According to its provisions, straits that are used for global navigation fall under the concept of “transit passage,” which permits ships and aircraft from all countries to move through them freely, continuously, and without interference.

At the same time, coastal states bordering these straits are allowed to introduce regulations related to safety or environmental protection. However, they are not permitted to block passage or apply discriminatory restrictions on specific vessels. While this freedom of navigation is widely accepted in international law, its practical implementation often depends on the naval capabilities of states and the level of cooperation among them

 

 

For Prelims: Strait of Hormuz,  Persian Gulf, Energy Information Administration (EIA), liquefied natural gas (LNG)   For Mains: General Studies II: Effect of policies and politics of developed and developing countries on India’s interests.

 

Previous Year Questions   1.Which one of the following straits is nearest to the International Date Line? (UPSC CSE 2008) (a) Malacca Strait (b) Bering Strait (c) Strait of Florida (d) Strait of Gibraltar Answer (b) The International Date Line (IDL) roughly follows the 180° longitude, which lies in the Pacific Ocean, deviating slightly to accommodate international boundaries. The Bering Strait lies between Russia and Alaska, and it is very close to the 180° meridian, making it the closest strait to the International Date Line. Here's why the other options are incorrect: Malacca Strait – Lies between Malaysia and Indonesia, far west of the IDL. Strait of Florida – Lies between the U.S. (Florida) and Cuba, in the Atlantic Ocean. Strait of Gibraltar – Connects the Atlantic Ocean to the Mediterranean Sea, between Spain and Morocco, far from the IDL.

Source: Indianexpress