Growth of exports through Free Trade Agreements
20 Oct 2023
We have set a very ambitious target of US $ 1000 Billion for merchandise exports and another US $ 1000 billion for service exports to be achieved by 2030. Needless to say, we need to explore all possibilities of developing exports wholeheartedly.
- In today’s competitive scenario, Market Access primarily depends on four issues:-
- Technical standards
- Tariff and Non-Tariff Barriers
- Competitive cost
Every importer of the world considers “Landed cost” as most important aspect after comparing quality. Not only this, services including documentation also play an important role.
Landed cost consist of CIF at the given port plus duties, clearance expenses, transportation and any other relevant cost for effective delivery:-
- At the importer’s factory / warehouse and
- At the hands of customer wherever he is (E-commerce transactions)
FTAs reduce the duty element. It also helps to negotiate Tariff and Non-Tariff Barriers.
Quality and technical standards are two essential aspects where no compromise is accepted by any buyer of the world. Commitment to quality and maintenance of standards are known factors and every exporter knows that he has to take care of these two aspects.
Tariff & Non-tariff barriers and competitive cost are another two critical factors for which FTAs can help tremendously.
Lets understand FTAs as a concept and as a measure:-
There are Four types of FTAs currently handled by India. They are as follows:-
- Preferential Trade Agreement (PTA):
In a PTA, two or more partners agree to reduce tariffs on small number of tariff lines which is called “positive list”. Such agreements are at the beginning of trade negotiations and normally they offer duty concessions but not duty exemptions. Example:- India MERCOSUR PTA
- Free Trade Agreement (FTA):
In FTAs, tariffs on items covering substantial bilateral trade are eliminated between the partner countries. In every FTA there is a “negative list” which covers items on which no concessions are given and a “sensitive list” on which duty concessions are given in a phased manner. FTAs are more ambitious in coverage of tariff lines (products).
- Comprehensive Economic Cooperation Agreement (CECA) and
- Comprehensive Economic Partnership Agreement (CEPA):
These terms describe agreements which consist of an integrated package on goods, services and investment along with other areas including IPR, competition etc.
Countries like EU have a better and comprehensive version called “Customs Union”, which practically abolishes the border control and customs duties e.g. if goods are to be sent from Germany to France, German seller is not supposed to file Shipping bill and French importer is not supposed to file Bill of Entry. Goods will move from Germany to France on payment of VAT, no Customs duty would be chargeable.
In all FTAs, concessions are offered on Basic Customs Duty. These concessions are based on origin criteria. For the purpose of granting benefits goods are categorized into two parts:-
- Wholly Obtained (WO):-
WO are those, which are made from originating materials e.g. in India-Korea agreement goods manufactured by using Indian and Korean ingredients would be called WO. If such goods have import content (ingredients obtained from other countries) then they would be called Partially Produced.
A certain % of ingredients which consist of non-originating materials can also be covered under the principle of de-minimis. 1% of FOB value is normally permitted as “Di-minimis”.
- Partially Produced (PP):-
Normally there are Three conditions:-
- Change in HS Code at 6 digit level
- It relates to the conversion of inputs into a new product, when change gets carried out @ Six digit level of HS Code. It is normally a process of manufacture and simple processes like job work (without changing characteristic) of a product, re-packing, re-labelling etc. are not covered.
- Definition of process of manufacture
- Simple processes and operations such as cutting, mixing, change of packing, simple assembly are not considered as “manufacturing processes/operations”, It is always defined in the agreement.
- If for some product specific processes are to be defined then they will be separately mentioned. In such cases, process plays an important role. It can be a process of manufacturing,. It may not change the basic characteristic but such product may have different uses in different industries.
- Regional Value Content (RVC):-
It means, the value addition done in the country of origin which includes cost of material, labor, other associated costs etc. etc. e.g. if a product is exported at Dollar 100 FOB, what should be % of imported material of other origins used in the manufacture of a product needs to be calculated.
- Most of the existing FTAs permit 60 to 65% imported material, thereby accepting RVC of 35 to 40% for the purpose of Preferential Certificate of Origin.
To qualify for duty concessions or exemption all the above three conditions have to be met. These conditions are explained inNon-Tariff notifications issued by respective countries.
FTAs are negotiated between countries based on their own interest. Duty concessions / exemptions are offered based on multiple economic factors and national interest is also taken into account. Such negotiations are a long process and multiple meetings take place between the governments. Each country wants to get benefit of Market access, while protecting its domestic market. Naturally, negotiations are based on proper dialogue, exchange of information, taking into account political and economic relationships etc. etc. However, such negotiations cannot be completely one sided. While negotiating FTAs certain precautions are taken, which are as under:-
- Market access at ZERO duty:-
This can be offered when agreements come into force on the basis of finalized negotiations based on HS codes. Zero duty treatment can be given at one go or annualized basis e.g. a product may attract Zero customs duty on the date of entry of agreement or a product may get Zero duty from the current rate say 5% in 5 equal annual instalments. In other words, such product will be subjected to 4,3,2,1 and 0% duty in a period of 5 years.
- Market access for sensitive products:-
If the item is included in sensitive list duty concessions would be given but normally Zero duty access is not given and duties are reduced in equal annual installments. For. E.g.; if BCD is 10% and item is covered in sensitive list, India may offer duty concession upto 5% and may agree to further negotiation at a later date.
- Concept of exclusion list:-
These are lists of those products which may have adverse impact on local industry if import duty is reduced. It is also an important aspect for protecting national interest. It should be remembered when item is included in the exclusion list, duty concessions are not considered. Exclusion list is that list where Government is not prepared to negotiate the duty concessions.
Apart from duty concessions cross border trade is also subjected to Tariff and Non- tariff barriers (NTBs). Tariff barriers means goods are subjected to higher duties and NTBs mean goods are subjected to entry barriers. Both together result in denial of Market Access. Every Government tries to negotiate reduction / exemption in duties to reduce Tariff barriers as well relaxation in entry barriers i.e. NTBs.
Common NTBs are as under:-
When a product is subjected to import licensing Market Access is governed be the Government. Unless the Government grants import license, industry cannot import the goods. This automatically limits Market Access.
- Quantitative restrictions:-
In this arrangementgovernment allows import but limited to quantity e.g. if government says particular chemical (A) HS code (X) is allowed for import only to the extent of 10,000 MT p.a. then market access is available only for 10,000 MT annually. Further quantities can not be imported. This arrangement is normally taken into account for sensitive items.
- Technical barriers to Trade:-
Import of goods is also governed by compliance with technical standards, such standards at times work as entry barriers.
All these issues are considered while negotiating FTAs.
Negotiations for New Free Trade Agreements (Proposed):-
We are currently negotiating following FTAs:-
||India-Gulf Cooperation Council (GCC) Free Trade Agreement (FTA) negotiations*
||India-SACU Preferential Trade Agreement (PTA) negotiations
||India - New Zealand Comprehensive Economic Cooperation Agreement
||India-Canada Comprehensive Economic Partnership Agreement (CEPA)*
||India - Israel Free Trade Agreement FTA Negotiations
*likely to be concluded in 2022
We are also likely to enter into discussion with entire African Continent as they are likely to create “Customs Union”, which means there won’t be customs duties for African countries to transact with each other and customs border will also be abolished for trade within the continent. With a combined population of almost 1.2 billion people, it offers great marketing opportunity for India. Not only this, it would enhance the possibilities of entering into Joint Ventures.
Our approach towards FTAs was more protective in nature. Now we need to adopt an aggressive mode for enhancing our global footprint. To ensure this we need to critically understand the following points-
- FTAs need to be a win-win situation. No country would like to offer unconditional market access. Hence, we must know our strengths, capabilities and negotiation skills to achieve desired results.
- India with population over 130 Crores is an attractive market for any country of the world. On the other hand, we need to study markets-country wise, with reference to their population, per capita income etc. etc. For example, a country like New Zealand has a population of 51 lakhs and per capita income of $48,800/-. Such a country may not buy a lot of goods but is capable of investing in India.
- Climate change is going to be another critical issue. Countries like UK, Canada, and EU are expected to incorporate conditions related to carbon emissions in their negotiation of FTAs. We should be ready to study and accept such conditions which will help us to get better market access.
It’s an old saying “Everything is fair in love and war” FTA negotiation is not a love affair but more like an arranged marriage. Though “happy marriage” is expected, it is better to understand Mother-in-law and Father-in-law along with Mother and Father. Proper understanding between both parties can definitely enhance the happiness. Same principle can be applied for happiness in business as well.
Introduction @ Mr. Sudhakar Kasture
Mr. Sudhakar Kasture
is a leading consultant in International Trade, since last 40 plus years. He is consultant and advisor to many National & Multinational Corporations, Public limited and private limited companies. He has been associated with CHEMEXCIL in the capacity of Consultant since last 17 years. He is a Director of Helpline Impex Pvt. Ltd. and a Partner in Generation Next Business Consulting. These are reputed consultancy firms offering various advisory services on international trade related issues.He is a well-known speaker on the topics related to International Trade, such as Foreign Trade Policy, Import/ Export documentation, Free Trade Agreements, WTO Agreements, Trade Facilitation Agreement, Authorized Economic Operator, and Special Economic Zones etc. etc.
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