INDIA’S TRADE AGREEMENTS – Potentially unutilized tool to reduce trade tariffs

Trade Agreement is an arrangement between two or more countries or regions to boost trade through the following steps:

1. Reducing or eliminating tariffs and duties on various products; and
2. Removal of non-tariff barriers between the parties  

Trade Agreements generally cover trade in goods, trade in services and other areas such as intellectual property rights, investment, government procurement and competition policy, etc. Many economists believe that trade agreement is the first step towards economic integration.

India has entered into trade agreements with various countries and regions of the world to boosts its external trade. At present, India has signed agreements with a lot of countries in South East Asia and also with other countries/regions. The government is at negotiation level for around 14 agreements while around 13 agreements are under consultation and study.

Government of India has entered into various types of trade agreements. The basic characteristics of the different types of trade agreements are mentioned below:

Government of India has been continuously monitoring the agreements to boost trade.      Recently, there have been several changes under various agreements in relation to tariff rate cuts, rules on country of origin etc.

India’s Low Utilization Rate

Trade agreement is a two-way street. In order to avail any advantage, the partner country also have to roll out a similar nature of benefits to another country/region.

India is one of the leading country in signing trade agreements with many countries/regions to gain preferential market access. However, the scenario has changed a bit in the past few years due to the growing trade imbalance. India has not signed any new Preferential Trade Agreements / Free Trade Agreements in the last 3-4 years.

The worrying factor is the utilization rate of trade agreements by Indian exporters and importers. There are several reasons why major part of international trade is outside the umbrella of trade agreements; out of which two primary reasons are 1) Lack of information about trade agreements among Indian entities and 2) Higher cost and delays related to compliances under trade agreements.

To tackle the compliance cost & delay and for other administrative reasons, the Government has taken several initiatives including the appointment of two independent agencies to prepare the template to negotiate future free trade agreements. Further, to create awareness amongst Indian entities about the benefits under trade agreements, the government, its agencies and trade bodies have been organizing many events across the country.

However, one area where government agencies/trade bodies need to extend more support to companies is to help them understand the yardsticks mentioned in ‘Rules of Origin’ under various trade agreements. The unfortunate part about trade agreements is that the rules of origin are not only very complicated, but also not consistent under all trade agreements. Further, exporters also face a massive challenge in collecting information about raw materials (especially for imported raw material).

Mitigation of the abovementioned challenges will make Indian entities more proactive in utilizing the benefits under trade agreements, which in turn will make international trade more competitive.

Unlike many other countries, the difference between most-favoured-nation tariffs and the preferential tariffs in India is much higher. Therefore, it is always worthwhile to examine whether an imported article fulfills the eligibility criteria under the trade agreement. In cases where the answer is affirmative, Indian importers should follow the procedures to avail the benefit of preferential tariff under trade agreements.  

This article is co-authored by Mr. Palak Gangar. He is a consultant at Tradewin India.