Free Trade Agreement (FTA)

A Free trade Agreement (FTA) is an agreement between two or more countries where the countries agree on certain obligations that affect trade in goods and services, and protections for investors and intellectual property rights, among other topics. 

A free trade agreement (fta) is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

The concept of free trade is the opposite of trade protectionism or economic isolationism.

Free trade policy is often implemented by means of a formal and mutual agreement of the nations involved. However, a free-trade policy may simply be the absence of any trade restrictions.

Governments with free-trade policies or agreements in place do not necessarily abandon all control of imports and exports or eliminate all protectionist policies. In modern international trade, few free trade agreements (FTAs) result in completely free trade.

For example, a nation might allow free trade with another nation, with exceptions that forbid the import of specific drugs not approved by its regulators, animals that have not been vaccinated, or processed foods that do not meet its standards.
It might also have policies in place that exempt specific products from tariff-free status in order to protect home producers from foreign competition in their industries.

Free trade has allowed many countries to attain rapid economic growth. By focusing on exports and resources where they have a strong comparative advantage, many countries have been able to attract foreign investment capital and provide relatively high-paying jobs for local workers.

For consumers, free trade creates a competitive environment where countries strive to provide the lowest possible prices for their resources. This in turn allows manufacturers to provide lower prices for finished goods, ultimately increasing the buying power for all consumers.

However, there are economic losers when a country opens its borders to free trade. Domestic industries may be unable to compete with foreign competitors, causing local unemployment. Large-scale industries may move to countries with lax environmental and labor laws, resulting in child labor or pollution.

Free trade can also make countries more dependent on the global market. For example, while the prices of some goods may be lower in the world market, there are strategic benefits for a country that produces those goods domestically. In the event of a war or crisis, the country may be forced to rebuild these industries from scratch.

Pros	Cons
Allows consumers to access the cheapest goods on the world market.	Competition with foreign exports may cause local unemployment and business failures.
Allows countries with relatively cheap labor or resources to benefit from foreign exports.	Industries may relocate to jurisdictions with lax regulations, causing environmental damage or abusive labor practices.
Countries can produce more goods collectively by trading on their respective advantages.	Countries may become reliant on the global market for key goods, leaving them at a strategic disadvantage in times of crisis.

ASEAN –
India-ASEAN FTA
India-Singapore CECA
India-Malaysia CECA
India-Thailand FTA – Early Harvest Scheme (EHS)
Japan – India-Japan CEPA
South Korea – India-South KoreaCEPA
SAFTA –
Agreement on SAFTA
India-Sri Lanka FTA
India-Nepal Treaty of Trade
India-Bhutan Agreement on Trade, Commerce and Transit
Mauritius – India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA)
United Arab Emirates – India-UAE CEPA
Australia – India-Australia Economic Cooperation and Trade Agreement (Ind-Aus ECTA)

Source: Directorate General of Commercial Intelligence and Statistics (DGCI&S)

India is adopting a more cautious negotiating strategy, temporarily pausing talks for trade pacts with smaller countries such as Oman and Peru.

The Commerce Ministry is working on developing a fresh Standard Operating Procedure (SOP) aimed at addressing the “lack of consistent and streamlined” procedures for negotiating future trade agreements.

This comes after several trade agreements, including the pact with the UAE that came into effect in February 2022 and the one with the Association of Southeast Asian Nations (ASEAN) signed way back in 2010, have resulted in significantly higher imports of goods compared to exports, and concerns over potential breaching of rules of origin by the other side.

The new SOP, designed to serve as a template for negotiation of multilateral and bilateral trade agreements, covers modern chapters in trade deals such as labour and environment, and emphasises the need for a clear understanding of “trade-offs” and “each party’s bottom line”.

The ASEAN trade deal, signed during the UPA era, has faced significant criticism due to the widening trade deficit, particularly after Covid-19. The trade deficit with the region increased by a sharp 70 per cent in FY23 compared to FY22. The goods trade deficit reached $44 billion in FY23.

Officials have stated that India faces tariff asymmetry in the ASEAN agreement and aims to complete the review by next year. Concerns over a fresh surge in imports have also arisen as ASEAN has joined the China-led RCEP trade deal.

Trade between China and ASEAN grew by 15 per cent in 2022 after the deal came into effect. India exited the RCEP negotiations in 2019 due to concerns about rising imports from China.

It aims to “streamline” the process of launching, conducting and concluding trade negotiations, and addresses issues such as human resource mobilisation, negotiation team formation, and the composition and “hierarchy of negotiating teams”.

The review of the negotiating strategy comes amid concerns over possible investment outflows, rapidly surging imports from FTA nations, and recognition of errors made when dealing with specific chapters in FTAs. These errors have led to a surge in the inflow of goods that are not even produced in the partner country.

“The pause in negotiations comes not only due to the widening trade gap but also concerns over the outflow of investment from the country. The focus is shifting to larger markets such as the European Union and the UK, where significant benefits could be gained, and to countries of geopolitical importance, such as the Maldives.

However, the problem is the lack of subject matter expertise and loss of institutional memory. Foreign negotiators are battle-hardened with years of expertise in negotiations, unlike in India where officials are rotated periodically,” an official said.

Before the Lok Sabha elections, the government had signed a trade agreement with the European Free Trade Association (EFTA) and was close to signing an agreement with Oman to expand its footprint in the West Asia region.

The deal with the UK was also near completion but could not be finalised due to several leadership changes in the UK. The government had also indicated plans to begin talks with the Russia-led Eurasian Economic Union (EEU). But the Ministry could now narrow its efforts to maximise export gains.

Notably, while India has been able to manage early harvest deals and negotiate with countries that have accommodated India’s style of functioning, trade deals with more competitive countries, such as the UK and the EU, have been stalled for years.

India had earlier decided to exit from the China-led Regional Comprehensive Economic Partnership (RCEP) after years of negotiations.

Q: ”Compared to the South Asian Free Trade Area (SAFTA), the Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation Free Trade Area (BIMSTEC FTA) seems to be more promising ” Critically evaluate (UPSC CSE GS2, 2011)