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Explained: Why India is trying to seal a free trade agreement with UK

While the commencement of negotiations does mark a step forward in the otherwise rigid stance adopted by the NDA government when it comes to trade liberalisation, experts point to impediments and the potential for legal challenges going ahead.

Commerce and Industry Minister Piyush Goyal and UK's Secretary of State for International Trade Anne-Marie Trevelyan during launch of Negotiations for India-UK Free Trade Agreement, in New Delhi, Thursday, Jan. 13, 2022. (PTI Photo: Arun Sharma)

India and the United Kingdom have launched formal Free Trade Agreement (FTA) negotiations on Thursday, with the aim of concluding an early harvest trade agreement over the next few months.

Both countries, according to Commerce Minister Piyush Goyal, have agreed to avoid “sensitive issues” in the negotiations. Commerce Secretary BVR Subrahmanyam said the interim (early harvest agreement) aims to achieve up to 65 per cent of coverage for goods and up to 40 per cent coverage for services. By the time the final agreement is inked, the coverage for goods is expected to go up to “90 plus percentage” of goods, he added.

India is also negotiating a similar early harvest agreement with Australia, which is supposed to set the stage for a long-pending Comprehensive Economic Cooperation Agreement that both countries have been pursuing for nearly a decade. While the commencement of negotiations does mark a step forward in the otherwise rigid stance adopted by the NDA Government when it comes to trade liberalisation, experts point to impediments and the potential for legal challenges going ahead.

What are early harvest pacts?

Early harvest agreements are used to open up bilateral trade between two countries on a restricted list of goods and services, primarily as a frontrunner to clinching a more comprehensive FTA. The problem, though, is that these early harvest schemes potentially target the low-hanging fruits, leaving the tougher goods and services for later. This strategy can lead to significant delays in wrapping up the mode broad-based FTAs, which could potentially lead to impediments. India had concluded an early harvest agreement with Thailand in 2004 but has not been able to conclude a comprehensive FTA with the country. India also has a trade agreement with Sri Lanka dealing with goods but was not able to conclude an agreement on services and investments.

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Early harvest agreements that do not graduate into full-scale FTAs are exposed to legal challenges from other countries that are members of the World Trade Organisation (WTO), an organisation that was formed on the premise that member countries should not discriminate between their trading partners. The exception to the rule are full-scale FTAs, subject to some conditions. One rider, incorporated in Article XXIV.8(b) of GATT, stipulates that a deal should aim to eliminate customs duties and other trade barriers on “substantially all the trade” between the WTO member countries that are signatories to an FTA. “For the purposes of this Agreement… a free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce… are eliminated on substantially all the trade between the constituent territories in products originating in such territories”, the Article specifically states.

Experts noted that it is often beneficial to negotiate the entire deal together, as an early harvest deal may reduce the incentive for one side to work towards a full FTA. Biswajit Dhar, professor at Jawaharlal Nehru University, said: “These agreements are not just about goods and services but also issues like investment. If you are trying to weigh the costs and benefits, it is always better to have the larger picture in front of you.” He noted that in the case of the early harvest agreement inked with Thailand, automobile industry associations had complained that relaxations extended to Bangkok in the early harvest had reduced the incentive for Thailand to work towards a full FTA. Dhar, however, noted that early harvest agreements may serve the function of keeping trading partners interested as they promise some benefits without long delays, as India had become known for long-drawn negotiations for FTAs.

Pradeep Mehta, Secretary General of CUTS International, said the government’s emphasis on interim agreements may be tactical so that a deal may be achieved with minimum commitments and would allow for contentious issues to be resolved later.

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Goyal with Trevelyan in New Delhi, Thursday. (PTI Photo: Arun Sharma)

What is the status of the trade pacts under negotiation?

India now has in place 10 FTAs and six PTAs (preferential trade agreements). In addition, India is negotiating 16 new and expanding seven existing agreements, including with trading partners such as Canada, the EU, the US, alongside Australia and the UK.

Government officials maintain that “a majority” of FTAs under negotiations are “comprehensive” and cover goods, services, investment, IPR, etc”. Non-Tariff Measures, regulatory procedures and trade facilitation are part of such negotiations. Unlike with the UK and Australia, there are indications that the proposed trade deal with the EU — restarted after a gap of six years as the two sides earlier pulled out citing disagreements over tariff rules covering the auto sector and the free-movement rights for professionals — is not aiming at an early harvest and is instead looking at a full-scale comprehensive FTA.

Meanwhile, India is also simultaneously carrying out a review of the existing FTAs with South Korea, Japan and ASEAN on the ground of India’s rising trade deficit with these trading partners. Experts noted that New Delhi may seek conditions in such FTA that trading partners import more from India.

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First published on: 15-01-2022 at 12:46:11 pm
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