In a significant bilateral move, India and the United Arab Emirates (UAE) last week signed a mega Comprehensive Economic Partnership Agreement (CEPA). Set to go live from June 1, the deal is expected to boost India’s trade with its third-largest trading partner.
The first free trade agreement (FTA) implemented by the Narendra Modi government since coming to power and overall the first such deal in a decade, the CEPA is expected to set the path for a host of trade agreements currently being negotiated by India. The last such CEPA was signed back in 2011 with Malaysia.
Moneycontrol takes a deep dive into the details to tell you everything you need to know about the 880-page deal.
Final agreement
Contrary to what the government had announced earlier, the CEPA is the final form of the trade deal that will be signed with the UAE. Since announcing discussions and launching talks back in September 2021, the commerce and industry ministry had maintained that any deal with the UAE would be concluded in two steps.
This included an ‘early harvest’ deal to be signed by early 2022, and a far more comprehensive trade and economic partnership deal in the future. An early harvest trade deal is one in which both parties sign off on a set of relatively easily achievable deliverables.
However, commerce and industry minister Piyush Goyal has clarified that the deal shouldn’t be termed an ‘interim agreement’ or arrangement, saying it is a fully legally scrubbed deal protecting the trade and strategic interests of both sides. The CEPA is expected to go live from June 1 after both sides sign it into law.
Fastest FTA
Negotiated in just 88 days, the CEPA is the fastest trade deal to have been negotiated until now. The deal is also the first major trade agreement in a decade to be signed by India.
The UAE is India’s third largest trading partner globally, after the United States and China. Bilateral merchandise trade between India and the UAE was worth $43.3 billion as of 2020-21 and is spread across thousands of traded items. In 2019-20, the pre-pandemic year, trade between the two countries was estimated at $59 billion.
The deal aims to boost bilateral merchandise trade to $100 billion over the next five years, and services trade to $15 billion, almost double of pre-pandemic levels.
Wide coverage
From Day 1 of the agreement coming into force, 90 percent of India’s current exports to the UAE will have immediate market access at zero duty. Duties on an additional 9 percent of India’s exports are set to reduce to zero within the next 5 to 10 years, according to CEPA provisions. This would cover electronic goods, chemicals and petrochemicals, stone, cement, ceramics, and machinery.
The CEPA is likely to benefit about $26 billion worth of Indian shipments that are currently subjected to 5 percent import duty by the UAE. The major beneficiaries of this would be gems and jewellery, apparel, engineering products, and pharmaceuticals exports.
Tariff rate quotas
As part of the CEPA, India has set lower tariff rate quotas (TRQs) for select imports from UAE, prime among which is gold, one of India’s largest imports. In essence, a TRQ allows a lower tariff rate on imports of a given product within a specified quantity and requires a higher tariff rate on imports exceeding that quantity.
For upto 200 tonnes of gold imports from the UAE, India has allowed the country a TRQ of 2 percent, which is 1 percentage point lower than the average tariff for gold imports into India from all other countries (3 percent). In 2020-21, India imported 70 tonens of gold from the UAE. The latest move is expected to have major implications for gold smuggling. As the cost of importing gold from the UAE will fall, the incentive for smuggling is set to be reduced.
On the other hand, the legal import flows of gold are set to increase from the UAE. “The UAE, therefore, has a 1 percent price advantage as compared to the rest of the world. This is expected to help Indian jewelers easily source gold from the UAE at lower prices,” commerce secretary BVR Subrahmanyam said. Considering that the UAE is the second-largest source of the yellow metal, India’s gold import bill is expected to rise as a result of the CEPA.
India has also provided similar TRQs for certain other items on which the UAE has expressed export interest. These include copper, polyethylene (the most common form of plastics), certain chemicals and metal items. These TRQs will be reviewed after 10 years.
Safeguarding domestic industry
The CEPA is also the first of its kind in India’s stable of FTAs given that it comes with an inbuilt safeguard mechanism. The government has criticised the lack of safeguards in previously negotiated FTAs that left domestic industry vulnerable to import surges. This is considered to be one of the main reasons why India’s trade deficit with the ASEAN nations has ballooned following the signing of the ASEAN FTA back in 2010.
The CEPA with the UAE incorporates a permanent safeguard mechanism that can be resorted to by either nations, in case of a sudden surge in imports. Both countries have also prepared separate exclusion lists, detailing the products that they want to keep out of the ambit of the FTA, owing to sensitivities.
To protect domestic industry, India has decided to keep a range of agri products outside the deal. This includes dairy, tea, coffee, rubber, spices, sugar and tobacco products. Manufactured items such as pharmaceuticals, certain chemicals including azo dyes, aluminium and copper scrap, certain categories of steel, helicopters and aeroplanes have also been kept out.
Rules of origin
The CEPA is also the first deal signed by India with stringent rules of origin norms. The agreement recognizes that there should be strict monitoring of trade flows from both nations to prevent products from other countries from circumventing the FTA route. This is an increasing challenge for India.
A case in point is the entry of Chinese goods that are shipped to Vietnam, Thailand, or Malaysia and then re-exported to India. Since these countries are India’s FTA partners, the final import duty on the goods in question remains relatively low, while the government loses revenue and the market is flooded.
Instead, the deal focuses on mandating stringent norms for value addition, or the minimum amount of economic value that has to be added to the product if it is not originally made in the UAE, for it to be allowed for export to India under the CEPA. Officials say that while value-addition provisions are usually set at 35 percent, the latest deal sets it at a high 40 percent, ensuring that goods from other nations will not be simply shipped through the UAE to India.
New topics raised
The deal also includes a series of chapters that India has successfully negotiated and signed for the first time. The government considers the CEPA to be one of India’s ‘new-age FTAs’ which incorporates topics that have hitherto been untouched. These include detailed and separate chapters on government procurement, digital trade, and intellectual property rights.
Digital trade will be focused on cooperation, provisions on cross-border transfer of data, and harmonization in digital standards. It also has a moratorium on duties on cross-border electronic transactions, in line with World Trade Organisation norms. Officials said dispute settlement provisions won’t apply to digital trade.
A separate Annex on Pharmaceuticals has been incorporated to facilitate early access of Indian pharmaceuticals to the UAE market. This includes automatic registration and marketing authorization within 90 days for Indian products approved by developed countries such as the US, UK, European Union and Japan.
For the first time, a separate chapter on small and medium enterprises has also been incorporated that recognises the fundamental role of SMEs in maintaining dynamism and enhancing the competitiveness of their respective economies. The CEPA also reaffirms the importance of incorporating an SME perspective into economic and trade issues.
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