Impact of Foreign Trade Agreements on India’s trade (some history too)

Rekha Misra and Sonam Choudhry of RBI in this paper (in RBI’s Sep-2019 Bulletin) research India’s foreign trade agreements.

The impact of trade agreements (TA) is more on imports than exports:

The present study attempts a quantitative assessment of the impact of the recently signed TAs on India. The study utilises difference in difference approach to estimate the increment of trade flows of India with partner countries and how trade has grown compared to the Non-TA partner countries. After the conclusion of the TA, growth in trade flows was witnessed between India and the partner countries. However, the increase in exports could not keep pace with the spurt in imports. One possible reason for this could be that India’s tariffs were much higher than the trade partner and hence the effective reduction on tariff for the partner countries was greater thus resulting in higher inbound shipments.

One positive impact of TA has been in the form of increased shipments of capital goods and industrial supplies from trade partner economies. This indirectly would have contributed in enhancing the productive capacity in the country. Moving ahead there is a need to focus on TAs which would enable increased integration in global value chains. The TAs should also enable access to newer markets for the products where the country enjoys competitive edge over its peers. However, to provide definitive conclusion on the impact of Tas, future research needs to extend the analysis to the services sector liberalisation by individual partner countries. Another critical aspect that needs analysis is India’s relative position in the TAs which includes changing trade patterns, competitiveness, compliance cost and ease of doing business.

History of Trade agreements started with Europe:

TAs originated primarily among European countries. At the start, TAs had restricted presence and were mainly confined to the geographic influence of the colonial empires and generally took the form of bilateral commercial treaties. The surge in cross-border movement of goods in the nineteenth century led to greater openness and liberalisation and simultaneously altered the nature and scope of bilateral trade treaties. The Cobden-Chevalier Treaty between Britain and France in 1860 may be considered as the pioneer in this regard as for the first time it contained most favoured nation2 (MFN) clause and led to significant reciprocal tariff reductions between two countries. The Cobden-Chevalier Treaty triggered a spate of bilateral negotiations among other European economic powers. This proved to be a precursor to the competitive trade liberalisation among countries which followed later. Since this new network of treaties was both reciprocal and inclusive (via the MFN clause), it was also essentially interlocking – creating an early form of plurilateral preferential trade agreement (i.e., unconditional MFN treatment among all treaty-signers) and foreshadowing the basic structure of the multilateral system that took shape a century later (Brown, 2003). These bilateral agreements laid the foundations for much of the GATT system after the Second World War.

With the formation of the GATT in 1947, the idea of a wider multilateral agreement moved to the forefront of international trade relations. Nonetheless, the initial signatories to GATT system were just 23 countries. This later evolved to the near universal membership of the WTO. However, the emergence of a multilateral system in the form of GATT did not diminish the significance of bilateral or regional agreements to further international trade relations. Notwithstanding the presence of a multilateral system, the impetus for bilateral/plurilateral agreements outside its purview, especially in Europe, resurfaced within a short span of time. The upshot of this development was concurrent advancement witnessed in both regionalism and multilateralism.

History of India’s TA:

India has entered into bilateral and regional trading agreements over the years. These agreements, besides offering preferential tariff rates on the trade of goods among member countries, also provide wider economic cooperation in the fields of trade in services, investment, and intellectual property. Few of these TAs have gone beyond tariff cuts in trade in goods and encompass other components like liberalisation in services and investment. The first TA of which India became a member was the Bangkok Agreement in 1975. In 2005, this regional initiative between developing economies was re-incarnated as Asia Pacific Trade Agreement (APTA). India’s first bilateral TA, the India-Sri Lanka FTA (ISFTA) was signed in December 1998 and came into force in the year 2001. Subsequently India implemented South Asian Free Trade Agreement (SAFTA) in 2004, Comprehensive Economic Cooperation Agreement (CECA) with Singapore in 2005, Indo- ASEAN FTA in 2010, Indo-Korea Comprehensive Economic Partnership Agreement (CEPA) in 2010, Indo-Malaysia CECA and Indo-Japan CEPA in 2011. SAARC Preferential Trading Agreement (SAPTA) is a preferential agreement between India and other South Asian Association for Regional Cooperation (SAARC) countries.

In the past decade India’s trade policy has seen a marked shift towards regionalism. India has preferential access, economic cooperation and FTAs with about 54 individual countries6. India has signed bilateral trade deals in the form of CEPA/ CECA/ FTA/ Preferential Trade Agreements (PTAs) with around 18 groups/countries7. The preferential arrangement/ plans under which India was receiving tariff preferences are the Generalised System of Preferences (GSP) and the Global System of Trade Preferences (GSTP)8. Presently, there are 43-member countries of the GSTP and India has exchanged tariff concessions with 12 countries on a limited number of products (Chart 2).

India and several Asian countries have signed a CECA, which is an integrated package of agreements encompassing trade in goods, services, investments and economic co-operations in education, science and technology, air services and intellectual property. These agreements prescribe rules of origin that must be fulfilled for exports to be eligible for tariff preference. Table 1 provides a broad overview of India’s major trade agreements.


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