Contents

INTRODUCTION ..................................................................................................................... 2

How Does The Free Trade Agreement Work?....................................................................... 3

Advantages And Disadvantages Of FTA ............................................................................... 3

Advantages of FTA: ........................................................................................................... 3

Disadvantages of FTA: ....................................................................................................... 4

Trade Creation And Diversion ............................................................................................... 4

FTA’S OF INDIA ...................................................................................................................... 5

India Bhutan trade agreement ................................................................................................ 5

India South Korea CEPA ....................................................................................................... 5

India Japan CEPA .................................................................................................................. 6

South Asian Free Trade Agreement (SAFTA)....................................................................... 6

Asia Pacific Trade Agreement (APTA) ................................................................................. 7

India-ASEAN Comprehensive Economic Cooperation Agreement ...................................... 7

India MERCOSUR Preferential Trade Agreement ................................................................ 7

TRADE COMPLEMENTARITIES INDEX ............................................................................. 8

IMPACT OF ASEAN ................................................................................................................ 8

Trade Impact On Member Countries ..................................................................................... 9

Trade Impact On India ......................................................................................................... 10

INDIA’S WITHDRAWAL FROM RECP ................................................................................ 9

POLICY RECOMMENDATIONS ......................................................................................... 12

REFERENCES ........................................................................................................................ 13

2|Page
 INTRODUCTION
“A free trade agreement is a pact between two or more nations to import and export goods and

services without the constraint of tariffs, duties and quotas. It lets nations concentrate on

manufacturing their specialities which are typically products other nations cannot make or

produce. With revenues from selling such goods, nations can buy products from other nations

that they need”.

How Does The Free Trade Agreement Work?

In today's world, free trade policies are implemented by a formal and mutual agreement

between the countries concerned. A government doesn't take specific action to promote free

trade which is referred to as trade liberalization. Governments that have implemented free-

trade policies do not completely eradicate all protectionist policies. Only a few FTAs lead to

total free trade.

For instance, a country may allow free commerce with another country with the exclusion of

certain medicines that have not been licensed by its regulators or processed foods that do not

match its requirements. Alternatively, it may have laws in place that exclude particular items

from tariff-free status in order to safeguard domestic manufacturers from foreign competition.

Advantages And Disadvantages Of FTA

Advantages of FTA:

1. Customers benefit because they can buy more, higher-quality items at a reduced cost,

and it fosters innovation.

2. Increased Economic Growth: The FTA will have a favourable influence on Net

Exports, shifting the AD curve to the right and raising output/GDP, resulting in

increased economic growth.

3|Page
 3. Government spending is reduced because many governments support local industry.

Following the removal of subsidies under the trade agreement, that money may be put

to greater use.

4. Foreign Direct Investment will flock investors to the country. This provides funding

for local industries to flourish and domestic firms to grow.

Disadvantages of FTA:

1. Increased Job Outsourcing: Lowering import tariffs encourages businesses to

expand into new markets. Imports from nations with a low cost of living cost less

without tariffs.

2. Theft of Intellectual Property: Lowering import tariffs encourages businesses to

expand into new markets. Imports from nations with a low cost of living cost less

without tariffs.

3. Reduced Tax Revenue: Lowering import tariffs encourages businesses to expand

into new markets. Imports from nations with a low cost of living cost less without

tariffs.

4. Poor Working Condition: Lowering import tariffs encourages businesses to expand

into new markets. Imports from nations with a low cost of living cost less without

tariffs.

Trade Creation And Diversion

A scenario in which an increased flow of commodities occurs between members of a trading

arrangement as a result of a reduction in tariffs is known as trade creation. In the importing

country, this takes the place of domestic production.

Trade diversion, on the other hand, occurs when trade flows are redirected from a cost-effective

partner to a less efficient one. When a less efficient nation joins a free trade agreement, its

goods become cheaper for partner countries but more expensive for non-partner countries.

4|Page
 Fig 1: Trade Creation Fig 2: Trade Diversion

FTA’S OF INDIA

India Bhutan trade agreement

This deal was signed in 2006 for a

ten-year period, and a new bilateral

agreement was inked in 2016. As

seen in the graph, India has

transitioned from a net importer to Fig 3: India-Bhutan trade agreement (USD million)

a net exporter of trade since the adoption in 2006.

India South Korea CEPA

In 2009, the Comprehensive

Economic Partnership Agreement

(CEPA) was signed and

implemented. Since the

agreement was signed, commerce Fig 4: India-South Korea CEPA (USD billion)

between the two countries has grown significantly, primarily in favour of South Korea. When

it comes to the categories of commodities that have grown, we discovered that imports of

5|Page
capital goods and industrial supplies have remained relatively stable, but imports of consumer

products have increased dramatically.

India Japan CEPA

The India-Japan Extensive

Economic Partnership Agreement,

implemented on August 1, 2011,

is the most extensive free trade

agreement India has ever signed.

Since the agreement was Fig 5: India-Japan Trade (USD billion)

implemented, commerce between India and Japan has decreased from 16.81 billion dollars in

2011 to 13.64 billion dollars in 2016. However, India mostly imported industrial supplies,

capital goods, and transportation equipment, which may be a positive sign because these items

are utilised as inputs in the production of final goods and hence may have contributed to an

increase in the economy's productive capacity.

South Asian Free Trade Agreement (SAFTA)

It was implemented in 2006. Post

implementation, India’s Export to

share has increased considerably in

comparison to import share from

regional member countries. Trade Fig 6: India-SAFTA Trade (USD billion)

compatibility is currently poor but progressively improving.

6|Page
Asia Pacific Trade Agreement (APTA)

It came into effect 1976. It is India's

first free trade agreement. It is the

only agreement comprising of

world’s most fast paced developing

economies such as China, India and Fig 7: India-APTA Trade (USD billion)

the Republic of Korea . Post implementation India's imports have grown at a fast pace but it

does have a silver lining that a major share of imports is raw materials that are converted to

final goods and add to the country's GDP in the long run.

India-ASEAN Comprehensive Economic Cooperation Agreement

It came into effect in 2010 and led to

an increase in India's trade with

smaller Asian nations. But post

implementation trade deficit with

ASEAN has also widened. The Fig 8: India-ASEAN Trade (USD billion)

ASEAN FTA has the highest impact on Indian economy because of substantial reduction in

Indian import tariffs. Quality of trade has also deteriorated under India ASEAN FTA. Analysis

shows that trade balance has worsened for 13 out of 21 sectors.

India MERCOSUR Preferential Trade Agreement

It was implemented in 2009, after which the

trade grew rapidly, although only for half a

decade. The MERCOSUR countries

continue to benefit from trade surplus.

India's imports and exports with Mercosur

Fig 9: India-MERCOSUR Trade (USD billion)

7|Page
countries is limited and concentrated in a few goods. Future commerce has a lot of potential, but it

appears that inclusion of the service sector is critical to attaining greater integration.

TRADE COMPLEMENTARITIES INDEX

Trade Complementarities Index (TCI) represents how well the exports offering of one country

match with the imports requirement of the other. It serves a tool to predict the effectiveness of

trade agreement between two countries. The values range from 0 to 1 corresponding to

complete mismatch and perfect match. One of the reasons for low effectiveness of these FTAs

is the low average values of complementarities index between the member countries.

Table 1: APTA TCI

Table 2: SAFTA TCI

Table 3: ASEAN TCI

Table 4: MERCOSUR TCI

8|Page
 IMPACT OF ASEAN

Trade Impact On Member Countries

ASEAN-India free trade area

(AIFTA) causes a lot of trade

deviation in India and the

ASEAN countries. The south

asian nations such as bangladesh,

Shrilanka and China, all countries

lose a significant percentage of

their market. ASEAN nations Fig 10: ASEAN Import Vs Export

would benefit from a greater Term of trade (ToT) impact, whereas India will benefit mostly

from reallocation of resources and changes in domestic production activities, as measured by

allocation efforts. India's need for a variety of intermediate products will remain high, and

ASEAN will have the benefit of delivering these commodities at higher prices that are still

lower than India's average import costs. As a result, India's ToT effect will continue to be

negative. India's export demand is increasing across the board. Wearable, food, wood , Seafood

products, mineral resources, drinks and tobacco, crops and Animal products are among the

industries that have seen significant gains in exports to the ASEAN area. The motor vehicle

manufacturing industry, as well as primary industries like rice and sugar, have had strong

export development since complete liberalization.

To sum up, the India-ASEAN FTA would deliver many of the desired outcomes towards

countries, such as improved welfare for the majority of countries, increased trade meeting, will

help to improve market penetration with other countries and trade deviation in Indian-ASEAN

region. The somewhat bigger ASEAN countries, on the other hand, will reap more gains in

9|Page
terms of GDP and welfare growth. Only after the accord is completely implemented is India

anticipated to reap more benefits.

Trade Impact On India

Because of non-favourable allocation efficiency and adverse trade terms, India's welfare

benefit seems to be undesirable at first. The decline in allocation efficiency is attributed to an

import tax loss due to tariff reduction/elimination. In contrast, the adverse trade term is

explained by a more significant drop in export prices comparative to import prices. But, as

liberalization progresses and the rest of ASEAN's markets open up, the country's well-being

increases. However, India will only be able to achieve this advantage if it can stop the negative

ToT impact by better using the benefits of high allocative efficiency. The scale economy effect

will reinforce this. As a result, given the accessibility of best-quality imported intermediary

products, India must have technology advance resources while ensuring correct factor

redistribution to reap long-term benefits from the India-ASEAN FTA.

India receives the most market access in Cambodia, Thailand, , the Philippines, Vietnam and

Malaysia. Wood products, Wearing clothing, textiles, crops, wood and, fisheries, minerals,

meat and meat products, some other manufactured items, drinks and tobacco, animal products

are among Indian’s exports that have seen the most growth. Although rising imports of these

commodities reduce local production in India, its gross domestic product rises overall,

increases demand. Skilled labour is the sole element that causes demand to diminish (by 0.62

percent). Although the country's GDP grows as a result of IRS in the industrial sector, the state

of labour force in the country deteriorates significantly - joblessness climbs to 4.9 percent for

unskilled labour. In comparison, employment falls by 7.6 percent for skilled. In contrast to

CRS's previous scenario, the country's GDP price index also grows. When the FTA is

implemented for all ten ASEAN nations, welfare of India has improves marginally related to

the existing scenario, but the welfare losses have suffered adversely.

10 | P a g e
 INDIA’S WITHDRAWAL FROM RECP
Regional Comprehensive Economic Partnership (RCEP) is the largest regional free trade

agreement, that was originally being negotiated between 16 countries, 10 of them being the

ASEAN members and remaining are their FTA partners. The negotiations are focused on the

Trade in goods and services, intellectual property, investment and e-commerce. India’s

demands in the negotiations were to implement auto trigger, which would protect it from the

import surges; and rate of origin, which would prevent the RPCs from leveraging FTAs that

India already has, to export more goods in India.

The three provisions that might have hampered economy in India are asset-based definition of

investment, that facilitates participation by foreign companies to be recognised as investment;

indirect expropriation, which empowers foreign investors to challenge public policy initiatives

and investor-state dispute settlement (ISDS) mechanism which allows foreign investors to

settle disputes in private international tribunals.

The concept of e-commerce was also ambiguous. This means that the areas of the economy

that e-commerce may have an influence on are difficult to predict. The prospect of unrestricted

data flow across international borders is also another problem. This produced a slew of

difficulties, including sensitive data flows from the standpoint of the country's security,

information relating to the economy's operation.

The agreement would have reduced import tariffs on 80 percent to 90 percent of the

commodities, as well as simplified service and investment restrictions. Some in Indian business

anticipated that lower tariffs would result in a flood of imports, particularly from China, with

whom India has a significant trade imbalance. India's trade imbalance with other RCEP

members was also increasing, and it was already at 64%.

11 | P a g e
India’s accession to the RCEP would have resulted in severe confrontations with the

autonomous policies that the GOI had recently adopted in a number of areas. Such a step would

also be detrimental to the domestic producers and service providers.

POLICY RECOMMENDATIONS
 India should analyse and evaluate its current FTAs in terms of benefits to various

stakeholders.

 India may profit in the long run from negotiating bilateral FTAs with nations whose trade

complementarities and margins of preference are strong.

 Higher compliance costs cancel out the benefits of the margin of preference, so lowering

compliance costs and administrative delays is critical for increasing FTA usage.

 Appropriate safety and quality standards should be established to prevent the importation

of low-quality dangerous items into the Indian market.

 Authorities should prosecute anyone who violates the norms of origin.

12 | P a g e
 REFERENCES

[1]. Dhar, B., 2019. India’s withdrawal from the regional comprehensive

economic partnership. Economic & Political Weekly, 54(45), pp.59-65.

[2]. Saraswat, V.K., Priya, P. and Ghosh, A., 2018. A note on free trade

agreements and their costs. NITI Aayog.

[3]. Smith, A., Creating Jobs and Growth by Specializing to Exports in Network

Products.

[4]. Bajaj, P. and Sharma, A., 2015. ASEAN-India Free Trade Agreement: Issues

and Contentions. SCMS Journal of Indian Management, 12(4), p.70.

[5]. Gupta, D., 2019. An Analysis of Indian Foreign Trade in Present Era. An

Analysis of Indian Foreign Trade in Present Era (April 2019).

[6]. Ratna, R.S. and Kallummal, M., 2013. ASEAN–India Free Trade Agreement

(FTA) and its impact on India: A case study of fisheries and selected agricultural

products. Foreign Trade Review, 48(4), pp.481-497.

[7]. Singh, Rohit & Sharma, S. (2018). India's Free Trade Agreements (FTAs):

Dynamics and Diagnostics of Trade Prospects. 10.13140/RG.2.2.11114.98245.

[8]. Amadeo, K., 2009. NAFTA Pros and Cons.

[9]. Barone, A., 2020. How a Free Trade Agreement (FTA) Works.

Investopedia. Investopedia, March, 2.

13 | P a g e