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UNIVERSITY INSTITUTE OF LEGAL STUDIES,

PANJAB UNIVERSITY, CHANDIGARH

SUBJECT- International Trade Law

Topic- Trade Agreements

SUBMITTED BY-: Surbhi Jain

COURSE-: B.A.L.L.B (HONOURS)
ROLL NUMBER-: 139/20
SECTION-: C

SUBMITTED TO- Ms. Mahima

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ACKNOWLEDGEMENT-

Gratitude is the most cherished expression that a student can express

during his course of learning. As the completion of this project gave me
immense pleasure, knowledge as well as wisdom; I would like to whole-
heartedly express my gratitude to Dr. Shruti Bedi, (Director UILS).
Then I pay my deep sense of gratitude to Ms. Mahima who gave me the
golden opportunity to do this wonderful assignment on ‘Trade
Agreements’ and also guided me in the best way possible for the
completion of this assignment. I would also like to expand my gratitude
to all those who have directly and indirectly guided me in writing this
assignment. Through this assignment I have learnt a lot of new things
that increased my knowledge.
Lastly, I would like to thank my seniors and my friends for always
guiding me in all the ways.
Thank You.
Surbhi Jain.
139/20
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Contents

Sr.no Topic Page No.

1. Introduction 04
2. Bilateral Trade Agreements 05
3. Free Trade Agreements 06
4. Regional Trade 08
Agreements
5. Bilateral Investment 10
Treaties
6. Customs Union 12

7. Special Economic Zone 14

8. NAFTA, SAFTA and 15

ASEAN
9. Conclusion 17

10. Bibliography 18
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Introduction:

A trade agreement is a negotiation between two or more countries regarding the

terms of trade between them—tariffs, quotas, restrictions on imports and exports,
and provisions, such as trade facilitation, intellectual property rights, and
investment protection. For cross-border ecommerce retailers, trade agreements can
provide greater access to markets in partner countries, allowing them to expand
their customer base and increase their sales. It is important to be aware of trade
agreements and the advantages they offer to the countries involved, namely,
retailers and consumers exporting and importing goods. Trade agreements are
beneficial because they do the following:

• Mitigate geopolitical and trading barriers

• Encourage investments
• Improve economies
• Create jobs
• Expand the variety of goods available
• Enhance the standard of living

There are many kinds of trade agreements- Bilateral Trade Agreements, Free Trade
Agreements, Regional Trade Agreements, Bilateral Investment Treaties Customs
Union, Special Economic zone, NAFTA, SAFTA and ASEAN.
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1. Bilateral Trade Agreements:

Bilateral trade is the exchange of goods between two nations promoting trade and
investment. The two countries will reduce or eliminate tariffs, import quotas,
export restraints, and other trade barriers to encourage trade and investment.

The goals of bilateral trade agreements are to expand access between two
countries’ markets and increase their economic growth.

The United States has signed bilateral trade agreements with 20 countries, some of
which include Israel, Jordan, Australia, Chile, Singapore, Bahrain, Morocco,
Oman, Peru, Panama, and Colombia.

Advantages and Disadvantages of Bilateral Trade

Compared to multilateral trade agreements, bilateral trade agreements are

negotiated more easily, because only two nations are party to the agreement.
Bilateral trade agreements initiate and reap trade benefits faster than multilateral
agreements. When negotiations for a multilateral trade agreement are unsuccessful,
many nations will negotiate bilateral treaties instead. However, new agreements
often result in competing agreements between other countries, eliminating the
advantages the Free Trade Agreement (FTA) confers between the original two
nations. Bilateral trade agreements also expand the market for a country's goods.
The United States vigorously pursued free trade agreements with a number of
countries under the Bush administration during the early 2000s. In addition to
creating a market for U.S. goods, the expansion helped spread the mantra of trade
liberalization and encouraged open borders for trade.

However, bilateral trade agreements can skew a country's markets when large
multinational corporations, which have significant capital and resources to operate
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at scale, enter a market dominated by smaller players. As a result, the latter might
need to close shop when they are competed out of existence.

Examples of Bilateral Trade

In October 2014, the United States and Brazil settled a longstanding cotton dispute
in the World Trade Organization (WTO). Brazil terminated the case, relinquishing
its rights to countermeasures against U.S. trade or further proceedings in the
dispute. Brazil also agreed to not bring new WTO actions against U.S. cotton
support programs while the current U.S. Farm Bill was in force, or against
agricultural export credit guarantees under the GSM-102 program. Because of the
agreement, American businesses were no longer subject to countermeasures such
as increased tariffs totaling hundreds of millions of dollars annually.

2. Free Trade Agreements:

A free trade agreement is a pact between two or more nations to reduce
barriers to imports and exports among them. Under a free trade policy,
goods and services can be bought and sold across international borders with
little or no government tariffs, quotas, subsidies, or prohibitions to inhibit
their exchange. A government doesn't need to take specific action to
promote free trade. This hands-off stance is referred to as “laissez-faire
trade” or trade liberalization. For example, a nation might allow free trade
with another nation, with exceptions that forbid the import of specific drugs
not approved by its regulators, or animals that have not been vaccinated, or
processed foods that do not meet its standards.
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Free Trade Pros and Cons:

Pros
• Allows consumers to access the cheapest goods on the world market.
• Allows countries with relatively cheap labor or resources to benefit
from foreign exports.
• Under Ricardo's theory, countries can produce more goods
collectively by trading on their respective advantages.
Cons
• Competition with foreign exports may cause local unemployment and
business failures.
• Industries may relocate to jurisdictions with lax regulations, causing
environmental damage or abusive labor practices.
• Countries may become reliant on the global market for key goods,
leaving them at a strategic disadvantage in times of crisis.

India has signed 13 Regional Trade Agreements (RTAs)/Free Trade

Agreements (FTAs) with various countries/regions namely, Japan, South
Korea, countries of ASEAN region and countries of South Asian
Association for Regional Cooperation (SAARC)Mauritius, United Arab
Emirates, Australia. India’s merchandise exports to all these
countries/regions have registered a growth in last ten years.
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3. Regional Trade Agreements:

Regional trading agreements refer to a treaty that is signed by two or more

countries to encourage the free movement of goods and services across the borders
of its members. The agreement comes with internal rules that member countries
follow among themselves. When dealing with non-member countries, there are
external rules in place that the members adhere to.

Types of Regional Trading Agreements:

Regional trading agreements vary depending on the level of commitment and the
arrangement among the member countries.

1. Preferential Trade Areas- The preferential trading agreement requires the

lowest level of commitment to reducing trade barriers, though member countries
do not eliminate the barriers among themselves. Also, preferential trade areas do
not share common external trade barriers.

2. Free Trade Area- In a free trade agreement, all trade barriers among members
are eliminated, which means that they can freely move goods and services among
themselves. When it comes to dealing with non-members, the trade policies of
each member still take effect.

3. Customs Union- Member countries of a customs union remove trade barriers

among themselves and adopt common external trade barriers.

4. Common Market- A common market is a type of trading agreement wherein

members remove internal trade barriers, adopt common policies when it comes to
dealing with non-members, and allow members to move resources among
themselves freely.
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5. Economic Union- An economic union is a trading agreement wherein members

eliminate trade barriers among themselves, adopt common external barriers, allow
free import and export of resources, adopt a set of economic policies, and use one
currency.

6. Full Integration- The full integration of member countries is the final level of
trading agreements.

Benefits of Regional Trading Agreements

Regional trading agreements offer the following benefits:

1. Boosts Economic Growth- Member countries benefit from trade agreements,

particularly in the form of generation of more job opportunities, lower
unemployment rates, and market expansions. Also, since trade agreements usually
come with investment guarantees, investors who want to invest in developing
countries are protected against political risk.

2. Volume of Trade- Businesses in member countries enjoy greater incentives to

trade in new markets, thanks to attractive trading conditions due to the policies
included in the agreements.

3. Quality and Variety of Goods- Trade agreements open a lot of doors for
businesses. As they gain access to new markets, the competition becomes more
intense. The increased competition compels businesses to produce higher-quality
products. It also leads to more variety for consumers. When there is a wide variety
of high-quality products, businesses can improve customer satisfaction.
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Examples of regional trade agreements include the North American Free Trade
Agreement (NAFTA), Central American-Dominican Republic Free Trade
Agreement (CAFTA-DR), the European Union (EU) and Asia-Pacific Economic
Cooperation (APEC).

4. Bilateral Investment Treaties

BITs are reciprocal agreements between two countries to promote and protect
foreign private investments in each other’s territories. In the mid-’90s, the Indian
government initiated BITs to offer favourable conditions and treaty-based
protection to foreign investors and investments.

History:

The first BIT signed by India was with the UK in 1994. The BIT regime gained
attention in the year 2010 with the settlement of the first-ever investor treaty claim
filed against India.

In 2011, India suffered its first adverse award in a dispute arising out of the
Australia-India BIT (White Industries v Republic of India) where the Indian
government was ordered to pay USD 4.1 million by the International Chamber of
Commerce.

By 2015, India faced 17 known BIT claims, notably including one with Cairn
Energy Plc, a British oil and gas company, resulting in a USD 1.2 billion award
against the Indian government.

Given the burden that was being levied on the public exchequer, the government
was compelled to revisit the 1993 BIT model. This led to the adoption of the 2016
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model BIT resulting in the government terminating 68 of the 74 treaties it had

executed until 2015 with a request to renegotiate terms based on the revised text.
The adoption of the 2016 BIT model was seen more as a knee-jerk protectionist
measure rather than a nuanced and calibrated approach to encouraging foreign
investment.

Challenges with 2016 Model BIT

▪ Narrowing Definition of Investment:

Model BIT narrowed the definition of investment that needed to qualify for BIT
protection. Model BIT indicates that India proposes a narrow ‘enterprise-based’
definition for investment, whereby only direct investments are protected under the
treaty.

▪ Exhaustion of Domestic Remedy Clause:

Model BIT contains a clause mandating exhaustion of domestic remedy prior to

initiating international arbitration proceedings. The 2016 model BIT provided that
an investor must exhaust local remedies before taking recourse to international
arbitration. This surely does little to increase confidence in foreign investors.

Impact on FDI

FDI equity inflows in India declined 24% to USD 20.48 billion in April-September
2023. The total FDI — which includes equity inflows, reinvested earnings and
other capital — contracted 15.5% to USD 32.9 billion during the period under
review against USD 38.94 billion in April-June 2022.
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Way Forward

India can revisit its BIT regime to ensure it aligns with global best practices while
balancing the interests of both foreign investors and the domestic economy. This
may involve incorporating provisions for fair and equitable treatment, most
favoured nation status, and robust dispute resolution mechanisms.

The recommendations made by the Parliamentary Standing Committee on External

Affairs in 2021, such as promoting pre-arbitration consultations and negotiations,
should be implemented to facilitate the timely settlement of disputes and ensure
effective representation in investor-state disputes.

5. Customs Union

A customs union is an agreement between two or more neighboring countries to

remove trade barriers, reduce or abolish customs duty, and eliminate quotas. Such
unions were defined by the General Agreement on Tariffs and Trade (GATT) and
are the third stage of economic integration.

Purpose of Customs Unions

The purpose of a customs union is to make it easier for member countries to trade
freely with each other. The union reduces the administrative and financial burden
of barrier trading and fosters economic cooperation among nations.

Advantages of Custom Unions

Customs unions offer the following benefits:

1. Increase in trade flows and economic integration- The main effect of a free-
trade agreement is that it increases trade between member countries. It helps
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improve the allocation of scarce resources that satisfy the wants and needs of
consumers and boosts foreign direct investment (FDI).

2. Trade creation and trade diversion- The effectiveness of a customs union is

measured in terms of trade creation and trade diversion. Trade creation occurs
when the more efficient members of the union sell to less efficient members,
leading to a better allocation of resources.

Trade diversion occurs when efficient non-member countries sell fewer goods to
member countries because of external tariffs. It gives less efficient countries in the
union the opportunity to capitalize on their position and sell more goods within the
union. If the gains from trade creation exceed the losses from trade diversion, that
leads to increased economic welfare among member countries.

3. Reduces trade deflection- One of the main reasons a customs union is favored
over a free trade agreement is because the former solves the problem of trade
deflection. This occurs when a non-member country sells its goods to a low-tariff
FTA (free trade agreement) country, which then resells to a high-tariff FTA
country, leading to trade distortions.

Disadvantages of Customs Unions

Along with the advantages, customs unions also come with a few drawbacks:

1. Loss of economic sovereignty- Members of a customs union are required to

negotiate with non-member countries and organizations such as the WTO. This is
necessary to maintain a customs union; however, it also means that individual
member countries are not free to negotiate their own deals.

2. Complexity of setting the tariff rate- A common problem faced by customs

unions is the complexity of setting the applicable tariff rate. The process is very
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costly and time-consuming. Member countries often find it hard to forgo the trade
of certain goods or services because another country in the union is producing it
more efficiently. The problem is usually faced by developing countries and is a
major issue that the UK is dealing with during Brexit.

6. Special Economic Zone:

A special economic zone (SEZ) is an area in a country that is designed to

generate positive economic growth. An SEZ is normally subject to different and
more favorable economic regulations compared to other regions in the same
country, including tax incentives and the opportunity to pay lower tariffs. SEZ
economic regulations tend to be conducive to—and attract—foreign direct
investment (FDI). FDI refers to any investment made by a firm or individual in
one country into business interests located in another country.

• Free-Trade Zone: Free-trade zones are specially secured areas that are
designated for the processing of imported and exported goods. Also
called commercial-free or foreign-trade zones, these areas involve special
customs procedures and duty-free treatment.
• Export Processing Zone: These zones are generally meant for
commercial and industrial exports. The goal is to encourage economic
growth through foreign investment. Export processing zones offer certain
benefits, such as tax and import duty exemptions, and little to no barriers.
• Industrial Park: As the name suggests, industrial areas or parks are
designed to be used for industrial instead of commercial or residential
purposes. Tax-related incentives are common benefits for those that use
these special zones.
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• Specialized Zone: Some of the most common uses for these areas
include technology hubs, airport-based zones, and logistics parks.

While many countries have set up SEZs, China has been the most successful in
using SEZs to attract foreign capital. The first four SEZs in China were created
in 1979 in the Southeastern coastal region: Shenzhen, Zhuhai, and Shantou in
Guangdong province, and Xiamen in Fujian province.

7. NAFTA:

NAFTA was an agreement that created a free trade area between the three
major countries in North America: the United States, Canada, and Mexico. The
deal was signed by the three parties in 1992 and went into effect two years later.

Main goals-

• Reduction of trade barriers

• Creation of trade rules
• Improvement of working conditions
• Establishment of a safe market for North American goods and services
• Expansion of global trade and cooperation

8. SAFTA:

The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the
South Asian Association for Regional Cooperation (SAARC). The agreement
came into force in 2006, succeeding the 1993 SAARC Preferential Trading
Arrangement. SAFTA signatory countries are Afghanistan, Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
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The primary objective of the agreement is to promote competition in the region

while providing proper benefits to the countries involved. The agreement will
benefit the people of South Asia by bringing transparency and integrity among
the nations by reducing tariff and trade barriers. Ultimately it establishes a
robust framework for regional cooperation

9. ASEAN:

Association of Southeast Asian Nations or ASEAN is an organisation formed

by the governments of Malaysia, Indonesia, the Philippines, Thailand, and
Singapore in 1967 to promote economic growth, peace, security, social progress
and cultural development in the Southeast Asian region.

Purpose of ASEAN-

• Promoting peace and stability in the region by incorporating respect for

justice and the rule of law in the relationships between nations and
adherence to the United Nations principles.
• Promoting active collaboration and mutual assistance in subjects of
common interest in social, economic, cultural, administrative, scientific,
and technical domains.
• Assisting member countries via training and research facilities in the
educational, administrative, technical, and professional domains.
• Cooperating for better usage of agriculture and industries, trade
expansion (including studying the problem of international commodity
trade), improving communication and transportation facilities, and
improving living standards among the people.
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Conclusion

Trade agreements are contractual obligations between two or more countries, in

which countries seek to have better trade terms within their region referred to as a
free trade area between them. They seek to eliminate the barriers to trade that
governments enforce in regular trade. These barriers include tariffs, export
licenses, import quotas, and government subsidies. Trade agreements result in
trade areas that are covered by the trade agreements. As of 2013, there were more
than 350 trade agreements worldwide.

Trade agreements are very beneficial for many countries because they present
opportunities for economic growth and increased job opportunities. India is the
largest member who has signed FTA in the South Asia region, including the FTAs
under the proposed negotiation stage. Changing the focus on major trade partners
such as the FTAs currently discussed with Australia, UK, EU, UAE, etc will bring
out major changes. The issues must be resolved such as with the EU and the deal
must be struck with the main trading stakeholders which can bring noticeable
changes in India’s trade volumes.
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Bibliography

1. https://zonos.com/docs/guides/country-guides/trade-agreements
2. https://researchfdi.com/resources/articles/everything-you-need-
to-know-about-trade-agreements/
3. https://www.investopedia.com/terms/b/bilateral-trade.asp
4. https://blog.ipleaders.in/indias-relations-free-trade-agreements/
5. https://byjus.com/free-ias-prep/asean/
6. https://www.investopedia.com/terms/n/nafta.asp
7. https://www.worldbank.org/en/topic/regional-
integration/brief/regional-trade-agreements
8. https://pib.gov.in/Pressreleaseshare.aspx?PRID=1843902#:~:tex
t=India%20has%20signed%2013%20Regional,FTAs)%20with
%20various%20countries%2Fregions