Free Trade Agreements (FTAs)

FTAs, or Free Trade Agreements, are agreements between two or more countries to facilitate trade and promote economic integration by reducing or eliminating barriers to trade. These barriers can include tariffs, quotas, and other restrictions on the movement of goods and services between the participating countries. FTAs aim to increase market access, boost economic growth, create jobs, and enhance competitiveness by fostering a more open and efficient trading environment. They typically cover various aspects of trade, including tariff reduction, trade in services, investment protection, intellectual property rights, and dispute resolution mechanisms. FTAs can be bilateral (between two countries) or multilateral (involving multiple countries).

What are the objectives of FTAs?

The objectives of Free Trade Agreements (FTAs) typically include:

1. Promoting Economic Growth: FTAs aim to stimulate economic activity by expanding market access, increasing trade volumes, and fostering competition.
2. Creating Jobs: By reducing trade barriers and enhancing market access, FTAs can lead to the creation of new employment opportunities, particularly in industries that benefit from increased trade.
3. Enhancing Competitiveness: FTAs encourage countries to specialize in producing goods and services in which they have a comparative advantage, leading to increased efficiency and competitiveness on the global stage.
4. Reducing Costs: FTAs seek to lower the costs of importing and exporting goods and services by eliminating tariffs, quotas, and other trade barriers, thereby reducing prices for consumers and businesses.
5. Attracting Foreign Investment: FTAs often include provisions to protect and promote foreign investment, providing investors with greater certainty and confidence in the business environment.
6. Facilitating Trade in Services: Many FTAs include provisions to liberalize trade in services such as banking, telecommunications, and professional services, enabling service providers to access new markets and opportunities.
7. Strengthening Economic Integration: FTAs contribute to deeper economic integration among participating countries, fostering closer economic ties and cooperation in areas such as trade, investment, and regulatory harmonization.
8. Promoting Innovation and Technology Transfer: By facilitating the flow of goods, services, and ideas across borders, FTAs can promote innovation and encourage the transfer of technology and know-how between countries.

What are different types of Trade Agreements leading to FTA?

There are several types of trade agreements that can lead to the formation of a Free Trade Agreement (FTA). Some common types include:

1. Preferential Trade Agreement (PTA): PTAs involve a limited reduction in tariffs or other trade barriers for certain products between participating countries. While not as comprehensive as FTAs, PTAs lay the groundwork for deeper trade liberalization.
2. Customs Union: A customs union eliminates tariffs and other trade barriers among member countries while also establishing a common external tariff (CET) for non-member countries. This allows for free trade within the union and a unified approach to trade with external parties.
3. Common Market: A common market goes beyond a customs union by also facilitating the free movement of goods, services, capital, and labor among member countries. In addition to tariff elimination, common markets often involve harmonization of regulations and standards.
4. Economic Union: Economic unions entail a higher degree of integration than common markets, typically including common policies in areas such as monetary policy, fiscal policy, and competition policy. The European Union (EU) is an example of an economic union.
5. Regional Trade Agreement (RTA): RTAs involve trade agreements between countries within a specific region, often with the goal of promoting regional economic integration. Examples include the Association of Southeast Asian Nations (ASEAN) Free Trade Area and the Mercosur agreement in South America.
6. Bilateral Trade Agreement: A bilateral trade agreement involves two countries and aims to reduce tariffs and other trade barriers between them. Bilateral agreements can serve as building blocks for larger multilateral agreements or FTAs.
7. Plurilateral Trade Agreement: Plurilateral agreements involve multiple countries but are not necessarily comprehensive in scope. They may focus on specific sectors or issues, such as the Trade in Services Agreement (TiSA) which aims to liberalize trade in services among a group of WTO members.

These different types of trade agreements vary in terms of their scope, level of integration, and number of participating countries. However, they all contribute to the process of trade liberalization and can ultimately lead to the formation of Free Trade Agreements.

Why are FTAs created?

1. Increased Market Access: FTAs reduce or eliminate tariffs and other trade barriers, allowing businesses to access larger markets and expand their customer base.
2. Economic Growth: FTAs promote economic growth by fostering increased trade, investment, and productivity, leading to higher GDP and improved living standards.
3. Job Creation: Expanded trade facilitated by FTAs can lead to the creation of new jobs, particularly in export-oriented industries that benefit from increased market access.
4. Lower Prices for Consumers: Removal of tariffs and trade barriers under FTAs can result in lower prices for imported goods and services, benefiting consumers through increased affordability and choice.
5. Enhanced Competitiveness: FTAs encourage specialization and efficiency by enabling countries to focus on producing goods and services in which they have a comparative advantage, leading to greater competitiveness in the global marketplace.

Why are FTAs criticised:

1. Job Displacement: While FTAs can create jobs in certain industries, they may also lead to job displacement in sectors that face increased competition from imports or outsourcing to countries with lower labor costs.
2. Income Inequality: FTAs may exacerbate income inequality within countries, as the benefits of trade liberalization are not distributed evenly across society, and certain groups may bear the brunt of job losses or wage stagnation.
3. Loss of Sovereignty: Some critics argue that FTAs constrain a country’s ability to regulate its economy and pursue policies in the public interest, as they often include provisions on intellectual property rights, investment protection, and dispute settlement mechanisms that prioritize corporate interests.
4. Trade Imbalances: FTAs can contribute to trade imbalances between participating countries if one country experiences a significant increase in imports without a corresponding increase in exports, leading to trade deficits and potential economic vulnerabilities.
5. Environmental and Social Concerns: FTAs may undermine environmental and labor standards by promoting a race to the bottom in terms of regulations, as countries compete to attract investment and export markets by lowering costs and reducing regulatory burdens.

Some key FTAs India has signed in past few years

It will be good to know some of the FTA cases for exams. Some of these are:

1. India-Sri Lanka Free Trade Agreement (ISFTA) – 2000
2. India-Thailand Free Trade Agreement (ITFTA) – 2003
3. India-Singapore Comprehensive Economic Cooperation Agreement (CECA) – 2005
4. India-Korea Comprehensive Economic Partnership Agreement (CEPA) – 2010
5. India-Japan Comprehensive Economic Partnership Agreement (CEPA) – 2011
6. India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) – 2011
7. India-ASEAN Free Trade Agreement – 2010 (Negotiated in stages from 2003 to 2009)
8. Regional Comprehensive Economic Partnership (RCEP) – Signed in 2020 (India was initially part of negotiations but withdrew in 2019)