The changing face of FTAs in today's global economy

FTAs are an exception to the principle of Most Favoured Nation (MFN) enshrined in World Trade Organization (WTO) agreements on goods, services, and intellectual property.

Free Trade Agreements (FTA) are agreements entered into between countries with the aim of reducing barriers to trade and investment. The countries that are parties to the agreement extend to each other preferential benefits in the form of reduced tariffs, increased market access, etc. These agreements could be either bilateral or plurilateral.

FTAs and the World Trade Organization

FTAs are an exception to the principle of Most Favoured Nation (MFN) enshrined in World Trade Organization (WTO) agreements on goods, services, and intellectual property. Per the aforesaid principle, WTO member countries shall treat all other member countries equally.

An FTA must meet the following requirements:

(1) Duties and other restrictive commercial regulations must be eliminated.

(2) All trade must be covered.

(3) Measures applicable to non-parties may not be higher or more restrictive than those in effect prior to the FTA. The WTO also requires that information regarding the FTA is duly notified to the WTO Secretariat to ensure transparency.

Thus, the WTO does not prohibit member countries from entering into FTAs.

FTAs provide relaxation of trade barriers for the parties concerned, over and above the commitments made by the parties at the WTO. Thus, the FTAs are essentially WTO-plus. In other words, the FTAs are instruments towards achieving the objective of the WTO, i.e., elimination of trade barriers, albeit only for the parties to the FTAs.

It is comparatively easier to negotiate bilateral or plurilateral FTAs involving a smaller number of countries than multilateral agreements involving all the member countries of the WTO. Frequent deadlocks and limited progress in WTO negotiations has led to the emergence of FTAs. Thus, FTAs can help achieve trade liberalisation in areas where WTO discussions fail, such as the environment, government procurement, digital trade, intellectual property, and so on.

Benefits to businesses

Businesses can reap a number of benefits from FTAs. The FTAs reduce or eliminate the tariffs on goods, which in turn enable access to cheaper raw materials or goods. Thus, it would be prudent for businesses to undertake the exercise of tariff mapping for their imports as well as exports, so that the tariff concessions available under various FTAs are factored for efficient supply chain management.

Also, the FTAs assist in addressing and eliminating non-tariff trade barriers such as import licensing, quotas, etc., that would otherwise obstruct the free flow of goods and services. They also promote investment and provide greater market access. This, in turn, results in an increase in the variety and volume of imports and exports, as well as diversification of products and markets.

FTAs and India

India has signed FTAs with many countries. Major FTAs include the South Asian Free Trade Area (SAFTA) and Association of Southeast Asian Nations (ASEAN), as well as agreements with Singapore, Mauritius, and so on. These FTAs are traditional in nature, in the sense that these agreements mainly deal with trade in goods.

There has been an evident and much-needed shift in approach in the new-age FTAs India has recently signed with the United Arab Emirates (UAE) and Australia. These FTAs are not mere agreements for trade in goods, instead they are comprehensive agreements covering various aspects such as environmental provisions, trade in services, intellectual property, government procurement, digital trade, movement of people, etc.

This shift in approach is also in line with the global trend seen in the mega FTAs, namely, the Regional Comprehensive Economic Partnership Agreement (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Currently, India is in the process of negotiating FTAs with the United Kingdom, the European Union, Canada, and the Gulf Cooperation Council. As far as these FTAs are concerned, businesses / other stakeholders can consider making a representation before the government to address their concerns on various aspects, including barriers to trade and investment, so that the benefits can be maximised.

India-Australia FTA

The Australia-India Economic Co-operation and Trade Agreement, which is an interim agreement, came into force on 29th December, 2022. Further negotiations are likely to begin soon to transform this into a Comprehensive Economic Partnership Agreement, so as to cover areas such as digital trade and government procurement.

This is the first trade agreement of India in which the partner country has offered 100 percent tariff elimination. The concessions offered under the agreement are likely to present significant opportunities for both Indian as well as Australian businesses. Further, the volume of India-Australia bilateral trade in both goods and services, which is expected to cross $45 billion by the year 2035, is testimony to the importance that the trade deal holds for both countries.

V. Lakshmikumaran is Founder & Managing Partner, Lakshmikumaran & Sridharan Attorneys