Trade Agreements in India – An Overview

Trade Agreements –

Any contractual arrangement between states or countries concerning their trade relationships – involve understanding on tariff, tax and restrictions applicable on export and import of goods and services. Trade agreements can be bilateral or multilateral—i.e., the agreement can be between two states/countries or it can be between more than two states or countries.

Bilateral trade –

The exchange of goods/services between two countries. Bilateral trade agreements help countries in facilitating trade and investment by reducing or eliminating tariffs, import quotas, export restraints and other trade barriers. It can also help in minimizing trade deficits. On the other hand,

Multilateral trade –

The exchange of goods/services between groups of countries.

Features of trade agreements:

Any trade agreement should have these 3 features:

1. Reciprocity – countries involved will agree on some mutual concessions so that they benefit in similar ways.

For Example: India in exchange for reducing tariffs on Chinese products (which benefits India’s consumers and China’s producers), will insist that China reduce tariffs on Indian made products (thereby benefiting India’s producers and perhaps China’s consumers).

2. A most-favored-nation (MFN) clause – also known as ‘price parity’ or ‘best price’ clause. It means that every time a country lowers a trade barrier with regard to any goods/services, it has to do so for all its trading partners.

For example – India agree to reduce tariffs on some goods from China in exchange for the same benefits.  Now without this MFN clause, India could reduce tariffs for the same goods from another country , let’s say –  Thailand, in return for some other benefit. In such a situation, Indian consumer would be able to purchase the goods more cheaply from Thailand because of the tariff difference, while China would get nothing from the trade agreement with India. Most favored nation helps in avoiding such situation. Under this clause, India would be required to extend/offer the lowest existing tariff on specified goods to all its trading partners.

3. National treatment of non tariff barriers – meaning that both states/countries promise not to impose any non tariff restrictions or other taxes such as discriminatory regulations, selective excise taxes, quotas and special licensing requirements. Meaning that similar goods / services (which are imported from the trading partner under the trade agreement) if are also domestically manufactured should not gain any advantage by virtue any non-tariff tax or regulation on the imported goods or a subsidy or other benefit on the domestically manufactured good / service.

Trade Agreements in India

India views Regional Trading Arrangements (RTA) as positive blocks towards the overall rationale of trade liberalization. Consequently, India is participating in a number of RTA’s including:

• Free Trade Agreements (FTA) – A free agreement among 2 countries or group of countries agreeing to abolish tariffs and quotas on most of the goods/services (if not all) between them. India enjoys FTAs with Sri Lanka and Thailand.
• Preferential Trade Agreements (PTA) – This trade agreement gives preferential right of entry to only certain products. It is done by dropping tariffs, but it does not abolish them completely. India enjoys PTA with Chile, Afghanistan etc.

Key trade agreements in India:

Source: www.commerce.nic.in

Need for Trade Agreements in India

The underlying purpose of trade agreements is to obtain access to resources and markets which help in increasing value and volume of trade. This helps in boosting both foreign currency reserves and the Gross Domestic Product (GDP) of the nation. Simply put, trade agreements between countries are an effective way of reducing entry barriers and of opening up new opportunities for increased trade. Another important aspect of why countries get into these agreements could be for non economic reasons such as national security or the aspiration to preserve or protect local culture from foreign influences.

India continues to enter into many trade agreements with many countries either bilaterally or in a regional grouping. While considering any trade agreement, it is important for the government to assess the true value of the trade. There could be a situation in which a country may be earning high on the exports of a particular product, but its net earnings from the product may be low as it has to import related inputs.  In such a case, it is important to consider the value component of the gains in trade if India plans to effectively generate income through trade expansion by engagement in trade agreements.

About Author

Rajat Sharma

See author's posts