India's FTA And CECA With ASEAN
⇒ Cabinet recently approved Free Trade Agreement (FTA) with ASEAN group.
⇒ This particular pact was signed in Bali at the time of Ninth World Trade Organization (WTO) Ministerial Conference.
WHAT IS FREE TRADE ?
⇒ Free trade is a policy by which governments do not discriminate against imports or exports
⇒ Most governments still impose some protectionist policies that are intended to support local employment, such as applying tariffs to imports or subsidies to exports. Governments may also restrict free trade to limit exports of natural resources. Other barriers that may hinder trade include import quotas, taxes, and non-tariff barriers, such as regulatory legislation.
⇒ Pure form of free trade is not observed anywhere in the world.
⇒ There are two types of barriers that exist:
1. Tariff Barriers: A “tax” on imports that are invoked by countries mainly to protect the domestic industries from the possible consequences of greater competition
2. Non-tariff barriers: These can be in form of quantitative restrictions on imports/exports (“quotas”) or existing government regulations governing technical and safety standards for products that can have the effect of restricting imports. Another form of non-tariff barrier to free trade is found in “Domestic Content Requirements” that are regulations wherein importers are forced to import goods that contain minimum prescribed amounts of domestically produced components. Such restrictions are commonly imposed on the domestic operations of foreign firms that engage in foreign direct investment in production facilities in the regulating country.
TRADE LIBERALIZATION AND FTA’S
⇒ The trade liberalization often occurs in the form of a multilateral agreement such as the various trade negotiation rounds of the General Agreement on Tariffs and Trade (“GATT”), or an agreement among a smaller set of countries , typically with some geographical proximity.
⇒ Agreement with a small set of countries is called as “Preferential Trade Agreement” (PTA).
⇒ Forms of PTA’s:
1. Free trade area: A “free trade area” is the least restrictive of PTAs and consists of a number of countries that agree to eliminate all trade barriers among themselves while keeping intact their existing tariffs with non-member countries.
2. Customs Union: A higher level of economic integration takes the form of a “customs union” in which member countries, in addition to eliminating all trade barriers among themselves, also adopt a common tariff against non-member countries.
3. Common Market: When the cooperation among member states is extended to allow free movement of factors of production (e.g., labor and capital) across national boundaries, a “common market” is formed.
4. Economic Union: Greater levels of economic integration may take place in the case of an “economic union”, i.e., a common market in which members coordinate monetary, fiscal policies and other policies. The European Union is the classic example of an economic union.
⇒ India’s current FTA is a type of free trade area i.e. it is between some of group of countries & it discards any trade barriers but the countries can continue to have their own tariff structures with the other countries.
EFFECTS OF INDIA’S FTA
⇒ It will provide easy mobility of Indian professionals in 10-nation ASEAN.
⇒ Increase in Incomes/Growth: An FTA expands trade volumes among member countries and tends to increase incomes/growth of the members.
⇒ Achievement of Economies of Scale: An FTA, by eliminating tariffs, expands a member country’s export market thereby allowing it to expand its scale of operations and lower its average cost of production.
⇒ Reduction of Monopoly Inefficiencies: If inefficient monopolies exist in the domestic market, then increased competition from foreign products dampen domestic monopoly inefficiencies, if not eliminate them altogether.
⇒ Availability of Greater Product Variety: The opening up of free trade increases trade flows and expands the variety of products available to consumers in the home country.
POTENTIAL NEGATIVE EFFECTS OF FTA’S
⇒ Trade Diversion: Trade diversion refers to the possibility of an FTA member country switching its import supplier from a more efficient (low cost) country to a less efficient member country resulting in an inefficient allocation of resources.
⇒ Dumping: Dumping refers to the practice of a foreign country selling its product in the home market at a price that is lower than its “fair value”. While this can occur even in the presence of trade barriers, the elimination of tariffs in the home country increases the probability of this occurrence and can cause considerable harm to domestic industries that can be driven out of business altogether.
⇒ Unemployment: The reduction of tariff barriers leads to greater competition in the domestic market for the imported product leading to loss of market share and laying off of workers in that sector. In the short run, this kind of dislocation can cause considerable hardship to the affected workers.
⇒ Excessive Dependence: Free trade can result in the shutting down of a number of industries that are unable to compete with cheaper imports. This may lead to excessive dependence on foreign supplies for a number of commodities – a situation that could have adverse effects if there were a disruption in any of the foreign supplies.
MAJOR FACTORS THAT LED TO EMERGENCE OF FTA’S IN ASIA
⇒ The deepening of market-driven economic integration: Asian policymakers have realized the potential of FTAs in reducing trade barriers harmonizing rules, standards and regulations and the long term economic benefits that these can bring in and have embarked on a mission to foster greater economic integration in the region through trade pacts.
⇒ The success of European and North American economic integration initiatives: The successes of initiatives for economic integration in Europe and the Americas have proved to be a strong motivation for the region to move towards regional economic cooperation and integration.
⇒ The Asian financial crisis - The financial crisis of 1997-98 that rocked the economies of East Asia has been an eye-opener to the fact that the region needs to strengthen regional economic cooperation in order to sustain economic growth along with stability.
⇒ Slow progress of the WTO DOHA negotiations - The WTO Doha Development Round commenced on November 2001 as an initiative to promote trade-led growth in developing countries. The negotiations were primarily centered on two key areas: agriculture and non-agricultural market access. After seven years of negotiations, talks were suspended over the growing concerns that there weren’t appropriate safeguard measures to protect poor farmers in the developing nations from the rising food and oil prices. With the dim prospect of a finalized trade agreement, pro-business Asian economies started to initiate bilateral and multilateral trade treaties among themselves to further talks on liberalization of trade in goods and services.
CONCERN’S OF FINANCE MINISTRY
⇒ Finance Ministry (FM) was arguing that Commerce Ministry didn’t consult the Finance Ministry over the agreement.
⇒ FM has also prepared a detailed report on the impact of the FTA on India.
⇒ FM says that India has signed FTA in a hurry.
⇒ It can harm domestic industry especially the manufacturing sector.
⇒ It is very true that the concerns of Finance Ministry are legitimate.
⇒ But India should be going on with FTA so as to give effect to the prior commitment to ASEAN at Bali.
⇒ CECA stands for Comprehensive Economic Cooperation (CECA) between India and the ASEAN.
⇒ It was signed between India and ASEAN in 2003 & it was approved by Cabinet in July 2009.
⇒ It covers economic co-operation, trade in goods and services and investment.
⇒ The CECA would build on what has already been achieved under the ASEAN-India FTA and would be a comprehensive agreement, covering economic cooperation, trade in goods and services and investment.
⇒ CECA is going to have following things:
1. A Free Trade Agreement, which would include, trade in goods and services and investment
2. A bilateral agreement on investment promotion, protection and cooperation
3. An improved double taxation avoidance agreement
4. A more liberal Air Services agreement