This article is written by M.S.Bushra Tungekar from the University of Mumbai Law Academy. The author in this article analyses the free trade agreements and discusses the important components of the free trade agreements.
Table of Contents
Introduction
Trade wars and the theory of protectionism have dominated the global markets. Tariffs have been used as a political tool to control the imports of a country and to determine which country shall be given a favorable trading situation. Tariffs are imposed by a country to protect its domestic industries and its domestic products from “dumping” by foreign companies.
However, the theory of protectionism has decreased on an international scale due to the introduction of trade agreements. General Agreement on Tariffs and Trade (GATT). The consumers of the participating country benefit from the trade agreement as they are given larger access to a variety of goods at cheaper or lower costs.
What are Free trade agreements (FTA)
Free trade agreements are arrangements between two or more nations to minimize the number of trade barriers to imports and exports. Under the free trade agreement, the goods can be imported and exported across international borders with minimized tariff rates, or quotas, or subsidies. To make a free trade agreement comprehensive, the participating countries maintain a list of products on which the terms of a free trade agreement are not applicable.
Free trade agreements help the companies to trade and compete freely in the international markets. Under these agreements, the mutual benefit of all the participating countries is considered. So as to benefit the economies of all the participating nations.
Free trade agreements have their own pros and cons. Minimizing the tariffs on imports benefits the consumers. However, the domestic industry might suffer a little. As the price of the producer’s goods in the importing countries decreases leading to a decrease in profits. The government’s generation of revenue on tariffs from imports also decreases. On the other hand, Free trade agreements allow countries to gain access to newer markets. It encourages foreign direct investment in a country. When there are fewer barriers more companies are willing to invest in the country generating more opportunities, new investments, better flow of developed technologies in any market.
Better consolidation of markets enhances the competition. Therefore forcing the producers in the market to produce a better quality of goods. Not only that but also to keep finding innovative ways to solve the problems. The size of these factors dictates the effect of free trade agreements. The impact of FTAs can be positive or negative. Other than the FTA nations also enter into a trade agreement known as a Preferential trade agreement In this type of agreement, the participating countries give a preferential treatment of the right to entry of certain agreed-upon products. In this agreement, the traffic is not completely abolished but the tariff rates are decreased. The participating countries agree upon a list of products on which preferential access is to be given. Depending on the number of participating countries, terms, and concession of the agreement there are various types of trade agreements other than Free trade agreement.
Multilateral trade negotiations vs bilateral negotiations
What are multilateral trade rules and negotiations?
Multilateral trade agreements are agreements among three or more countries. One of the most difficult forms of trade agreements to negotiate and implement is the multilateral trade agreements. They are more complex in nature as larger the number of participants more complex are the terms of the agreement and more are the demands from the participating nations.
However, they can be very powerful and beneficial tools for signatories. They give a lot of competitive advantages as they cover a larger geographic area. Multilateral trade agreements help in strengthening the global economy.
Multilateral agreements help developing countries become globally competitive. These agreements treat all the member nations equally. Even though multilateral trade agreements take a lot of time to negotiate they help the emerging markets in the world.
The largest multilateral trade agreement is the NAFTA- North American Free trade agreement. It is signed between the USA, Canada, and Mexico.
What are bilateral trade rules and regulations?
A bilateral trade agreement is an agreement that involves only two nations and not more. It is entered into by two countries mutually agreeing to decrease the trade tariffs to expand the cross border transactions. It helps the countries increase their economic growth and their trades.
Bilateral agreements are simple to negotiate and not very complex in nature as compared to multilateral agreements. Since the agreement involves only two nations the agreement can be put into effect faster. The countries in a bilateral agreement open their markets to new and successful industries. The countries trade goods at a price that is cheaper which benefits the consumers. The largest bilateral agreement was signed between the European Union and Japan.
Brief of Multilateral governance
- The General Agreement on Tariffs and Trade (GATT) was signed with the aim of avoiding any future trade wars among the nations.
- It was originally meant to be a temporary body to help boost the economy post world war II.
- GATT was introduced to minimize trade barriers among the nations, by lowering the tariffs and quotas.
- It was intended to curb trade based on favoritism of nations.
- International trade organization was supposed to take over trade policies as a permanent body however, it was never ratified.
- GATT came into effect on 1st January 1948, which eventually led to the formation of the World Trade Organization (WTO).
- The GATT had eight rounds of negotiations, these rounds were held between 1947 to 1993. Each round addressed a different set of issues and achieved significant results.
Countries had exploited the international markets by using the General Agreement on Tariffs and Trade (GATT) or the World Trade Organization (WTO) framework. However preferential trading agreements in the form of FTA’s have been on the rise.
Article XXIV GATT 1994, takes the need or desire of the participating countries to enter into voluntary free trade agreements into consideration. However such agreements should be entered into only for the purpose of facilitating trade among the member nations and not to create barriers or non-trade barriers for non-partner countries.
Article XXIV provides only the general rules which are to be followed by the participating nations. These rules do not cover all the issues. The Doha round was the latest round of negotiation held in November 2001. It was realized that with the increasing number of FTA’s among the nations, there was a need for improvement in the FTA rules.
The trade rules and negotiations for a Free Trade Agreement
Essentially no country should discriminate between its trading nations. A fundamental objective of an FTA is to ensure trade among the nations without any barriers to trade.
The basic components of an FTA are as follows:
Trade-in goods
The basic rule governing the FTAs is the non-discriminatory rule which is found in the GATT Article XXIV. Under this Article, the signatories to an FTA must remove the tariff on trade between them regarding products originating in any of the participating nations, within a rational amount of time. Hereunder this Article, a rational amount of time is 10 years. The FTA must provide a comprehensive list as to which goods are to be included for the elimination of tariffs and which are to be excluded from the liberalization.
As per GATT Article XXIV. the traffic should be removed from materially all traded goods. The value of the FTA decreases if a major or a significant sector of the trade is left out of the list for the elimination of tariffs.
Removal of tariffs may be done immediately, gradually, or considerable removal in the first year, and then moving on to gradual removal. The success of an FTA also depends on the industry of exports. FTAs are more likely to succeed in cases where the participating nations do not expand in the same industries. For example trade of manufactured goods for agricultural products. An FTA should try to include all goods obviously there might be certain exceptions such as sensitive products but these exceptions must be limited in number. The effect of these exceptions should also be taken into consideration.
Trade-in services
Similar to GATT, Article V of the GATS (general agreement for trade in service), provides for corresponding rules for Trade in Services. The GATS does not define what are services, but it defines the various modes of services. They are namely cross-border supply, consumption abroad ( foreign holidays), commercial presence, and movement of a natural person.
Trade-in goods or products are relatively upfront due to the tangible nature of the goods. They can be stored and transported. On the other hand, services are of intangible nature and therefore cannot be traded the way goods or products are transported. As compared to the Trade of products there are different challenges to trade in services such as removal of tariffs is not the solution but removal of regulatory barriers is. Many restrictions are imposed on foreign service providers such as licensing, regulatory restrictions, technical or qualification requirements.
These restrictions can be more rigorous toward foreign service providers as compared to domestic service providers.
Preference may be given to the participating nation by the removal of the discriminatory restrictions. One of the major benefits of the removal of barriers to Trade-in Service is that it does not cost the loss of tariff revenue.
Rules of origin
Rules of origin in simpler words are a set of norms or standards which are used to determine the national source of any product. Rules of origin play an important role in an FTA. It is important to distinguish products that are qualified for tariff privileges and which products are not. It would not be possible to distinguish with the help of Rules of Origin.
Rules of origin are a crucial part of any free trade agreement as it sets the yardstick by which the origin of a product is taken into consideration. Depending on this a product may be qualified for access to a privileged market.
To avoid the abuse of rules of origin by the participating nations, the rules of origin should be impartial, transparent, uniform, unrestrictive, reasonable, and should mention what confers origin.
Protection of Intellectual property
The intellectual property rights under an FTA should be in line with the guidelines laid down by the TRIPs agreement, TRIPs plus, and other international conventions. Regulating and negotiating the protection of intellectual property is sensitive. Developed countries are at an advantage as they have better intellectual property protection mechanisms in place. The developed countries put up a strong ground on negotiating Intellectual property rights due to the access to the market opportunities that the developed country shall be offering to the developing country.
Foreign direct investment
Investment-related procedures must be discussed in the FTA. This is done to ensure proper and equal treatment in the host country. FTAs should include liberalized schemes that will help in facilitating foreign investment.
Antidumping
Anti-dumping procedures and penalties should be discussed in an FTA. According to Article VI of GATT, countries are permitted to penalize imported products sold in the domestic market for a cost that is less than the normal value of the products.
Antidumping rules are enforced as they cause a loss to the competing domestic industry. Therefore for the safeguard of the domestic industry, it is vital to discuss antidumping rules as well as dispute resolution procedures.
Competition policies
Competition policies are largely used in FTAs. Competition policies should not be such that it puts the other participating nation at a disadvantage.
Competition policies under FTA usually include clauses such as no abuse of power by the monopolies, cooperation from authorities, a forum for registering complaints regarding unfair trade practices, commitments to ensure anti-competitive business practices.
Technical barriers to trade
As tariffs are reduced under an FTA, regulations are used as non-tariff barriers. Such regulations are measures other than quotas. Technical Barriers to Trade (TBT Agreement) by the world trade organization tries to ensure that technical negotiations do not act as barriers to trade.
The technical regulations must be based on international standards. The technical regulations must be transparent and clear. Not only that upon request by a member technical assistance must be provided on agreed terms.
Future of multilateral trade rules and negotiations
In the year 2012, member nations of the Association of Southeast Asian Nations (ASEAN) and other trade partners proposed a free trade agreement, Regional Comprehensive Economic Partnership (RCEP). However, India chose to withdraw itself from what would have been the largest trade agreement.
Official Spokesperson (Ministry of External Affairs Govt of India), Shri Raveesh Kumar, in a press briefing stated the reasons for India’s withdrawal from RCEP.
The reason given by Prime Minister Narendra Modi was that the outcome of RCEP was not “fair and balanced”. Furthermore, there were other issues as well such as the rule of origin, commitments related to the tariff, and investments.
It has been seen that India faces the issue of trade deficits with a lot of countries. A trade deficit occurs when a country’s imports exceed its exports. India hasn’t gained much from the free trade agreements that it has entered into, in fact, the trade deficit between India and its trade associates seems to worsen.
At present India has Free trade agreements with 13 countries. India has FTAs with Korea and Japan, with ASEAN, negotiation talks with Australia and New Zealand are also underway.
The rising difference in trade deficit poses a threat to India. The increase in the trade deficit will lead to a balance of payments (BOP) for India. India should review the existing FTAs and focus on reducing trade deficits with its existing partners.
Future after Covid-19 Pandemic
Covid- 19 Pandemic has affected the world and the nations facing new economic challenges. According to the International monetary fund (IMF), India’s real projected GDP is expected to grow -10.3 % and the global growth is projected at -4.4%, both of which are contractions.
FTAs in the Asia Pacific region (APAC) have seen immense growth however the covid 19 pandemic has caused a critical change of focus of the countries.
The nations now are focusing on minimizing internal economic damage rather than focusing on the international economy.
Small and Medium-sized Enterprises (MSME) have been tremendously impacted due to the worldwide lockdowns and will be in need of financial assistance to not end up bankrupt. Furthermore, due to the risk of the spread of the virus, international trades have been restricted to only essential goods and healthcare.
References
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