HANDOUT NO -7:

TRADE-BASICS & ADVANCE

-by Jayant Parikshit

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 ECONOMICS HANDOUT
by Jayant Parikshit
SYLLABUS:
BASICS OF TRADE
§ Some concepts & Definitions
TRADE AGREEMENTS:
1. Preferential Trade Agreement (PTA)
2. Free Trade Agreement (FTA)
3. Comprehensive Economic Cooperation Agreement (CECA)
4. Comprehensive Economic Partnership Agreement (CEPA)
5. Custom Union (CU)
6. Single Market (SM)
7. Economic Union (EU)
CASE STUDIES & EXAMPLES:
1. India-Mercosur PTA
2. India-Sri Lanka FTA
3. ASEAN India FTA (AIFTA)
4. SAFTA
5. India-Australia Economic Cooperation and Trade Agreement (IA-ECTA)
6. India-Korea CEPA
7. India-Mauritius CECPA
8. India-UAE CEPA
9. European Union (EU)
EXAM PRACTICE:
1. MCQs for Prelims
MULTIPLE CHOICE QUESTIONS (MCQs)
2. Questions & answer structure for mains
Question-1: Which of the following are considered as a component of “Trade Openness” of a
nation?
1. Exports
2. Imports
3. GDP
Chose the correct option:
a. Only1
b. Both 2&3
c. Both 1&3
d. 1,2&3

Question-2: Which of the following is/are true about Preferential Trade Agreement (PTA)?
1. In PTA, two or more partners give preferential right of entry to all the products.
2. The tariffs on selected products are abolished completely.
3. There are two lists in PTAs: a positive list & a negative list.

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4. A PTA is a stepping-stone towards better economic relations between the countries
involved.

Choose the correct answer:

a. Only 1
b. Only4
c. Both 1&3
d. 1,2,3,4

Question-3: Consider the following statements about Free Trade Agreement (FTA):
1. The tariffs on items covering substantial bilateral trade are eliminated between the partner
countries.
2. Each partner maintains similar tariff structure for non-members.
3. The members maintain coordinated trade policies with non-member countries.

Choose the correct answer:

a. Only 1
b. Only3
c. Both 1&2
d. Both2&3
e. 1,2&3

Question-4: Consider the following statements about Custom Union:

1. It has provisions to facilitate free movements of labour and capital, harmonize technical
standards across members etc.
2. The members impose a common external tariff on imports from non-members.

Choose the correct statement:

a. Only 1
b. Only2
c. Both 1&2
d. None of these

Question-5: Consider the following statements about Single Market:

1. A common market is a deeper form of Customs Union.
2. The members eliminate internal trade barriers, adopt common external trade barriers, and
allow free movement of resources, for example labour & capital, among member countries.

Choose the correct statement:

a. Only 1
b. Only2
c. Both 1&2
d. None of these

Question-6: Which of the following tools are used as an instrument to indulge in

protectionism?
1. Tariff Barriers (TB)
2. Non-Tariff Barriers (NTB)

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Chose the correct option:
a. Only1
b. Only2
c. Both 1&2
d. None of these

Question-7: Arrange the different types of Trade Agreements given below according to their
strength from low to high:
1. Free Trade Agreements
2. Customs Union
3. Economic Union
4. Common Market

Select the correct answer using the codes given below:

a. 1-2-4-3
b. 3-4-1-2
c. 4-3-2-1
d. 1-2-3-4

Question-8: Consider the following statements with reference to different levels of economic
integration:
1. In a Customs Union (CU), there is a free flow of labour and capital among member countries.
2. In a Common Market (CM), member countries abolish barriers to trade and service among
them and as a whole maintain a common external tariff barrier.
3. In an Economic and Monetary Union (EMU), the monetary and fiscal policies are
harmonized among member countries.

Which of the statements given above are correct?

a. 1 and 2 only
b. 2 and 3 only
c. 1 and 3 only
d. 1, 2 and 3

QUESTIONS FOR MAINS

Question-1: What are Preferential Trade Agreements? Why has India renegotiated the PTAs
esp. in South American countries?

Question-2: What are Free Trade Agreements? Explain its importance for a country like India.

Question-3: Discuss the features which separate FTAs from PTAs? Has India benefited from
FTAs? Discuss.

Question-4: Discuss the role of FTAs in boosting India’s export. Have we succeeded in
harnessing FTAs so far?

Question-5: How can India take advantage of FTAs to improve its trade balance?

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 TRADE AGREEMENTS
Preferential Trade Agreement (PTA):

§ In this type of agreement, two or more partners give preferential right (via. reduce import
duties) of entry to certain products.
§ The tariffs are not abolished completely. Tariffs are reduced on goods traded between the
members.
§ In general PTAs do not cover substantially all trade.
§ The list of products on which the partners agree to reduce duty is called positive list.
§ Example: India and Mercosur, India and Chile

Free Trade Agreement (FTA):

§ It is more robust and improved over preferential trade agreements.

§ In FTAs, tariffs on more items are eliminated between the partner countries.
§ In general, under FTA- both goods and some services might be covered.
§ These members continue to maintain independent trade policies with non-member
countries.
§ A FTA can also have a negative list on which tariffs are neither reduced nor eliminated.
§ India-Sri Lanka FTA, India- ASEAN FTA, USMCA (earlier called as NAFTA)
Comprehensive Economic Cooperation Agreement (CECA)

§ CECA involves only tariff reduction/elimination in a phased manner on listed items except
the negative list and few other cases.
§ Items covered under CECA might be goods, services or even investment.
§ A high quality CECA with India would provide legal certainty for foreign exporters and
investors in Indian market where unpredictable policy changes make doing business
difficult.
§ Example: India-Malaysia CECA, India-Singapore CECA

Comprehensive Economic Partnership Agreement (CEPA)

§ CEPA describes agreement which consist of an integrated package on goods, services,

and investment along with other areas including IPR etc.
§ So CEPA is a wider term than CECA and has the wider coverage.
§ Example: India-Japan CEPA, India-Korea CEPA

Custom Union:

§ A customs union is defined as a group of states that have agreed to eliminate customs duties
(import taxes) on trade between themselves, as well as reduce other administrative
requirements.
§ The members impose a common external tariff on imports from non-members.
§ Example: An example is Southern African Customs Union (SACU) amongst South Africa,
Lesotho, Namibia, Botswana and Eswatini.

Common/Single Market:

§ Integration provided by a Common market is one step deeper than that by a Customs Union.

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§ In a single market, the members eliminate internal trade barriers, adopt common external
trade barriers, and allow free movement of resources, for example labour & capital &
harmonize technical standards across member countries.
§ Examples include Mercosur, East African Common Market

Economic Union:
§ This is the most advance type of trade agreement.
§ Economic Union is a Common Market extended through further harmonization of
fiscal/monetary policies and shared executive, judicial & legislative institutions. European
Union (EU) is an example.
§ The Economic Union establishes a Single Financial and Economic Space within which goods,
people and capital move freely; harmonized monetary and fiscal policies are recognised and
a common approach is in place to trade, health, education and environment, as well as a
common approach to the development of critical sectors.

EXAMPLES OF TRADE AGREEMENTS

INDIA-MERCOSUR PTA 2009:

§ MERCOSUR: It is a 4-country trade bloc with Brazil, Argentina, Paraguay and Uruguay as its
original members.

§ Founding member countries decided to remove Venezuela, which had joined Mercosur in
2012, for its failure to incorporate standards on trade and human rights into national laws,
although the country could re-join if it were to adopt the necessary norms.

§ The existing INDIA-MERCOSUR PTA was signed in New Delhi on January 25, 2004 which
came into effect from 1st June, 2009. This agreement was strengthened by increasing the
number of items covered under it in 2017.

INDIA-SRILANKA FREE TRADE AGREEMENT (ISFTA):

1999:
§ ISFTA was signed in 1999 and entered into force with effect from 2001, provides duty free
concessions to a wide range of products traded between the two countries.
§ The Indo-Sri Lanka engagements are in diverse areas including petroleum retail, IT, financial
services, real estate, telecommunication, hospitality & tourism, banking and food
processing (tea & fruit juices), metal industries, tires, cement, glass manufacturing, and
infrastructure development (railway, power, water supply).
2005:
§ India-Sri Lanka started negotiations for CEPA in February 2005 to include services and
investments to make the existing FTA comprehensive.
§ CEPA negotiations dragged on for nearly a decade in the face of increasing opposition within
Sri Lanka, particularly by the business community.

2015 onwards:
§ When CEPA failed to materialise, India pushed for a new trade pact called the Economic and
Technological Cooperation Agreement (ETCA).

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§ ETCA will establish an agreement on trade in services and technological exchange (which
CEPA failed to do).
§ ETCA agreement seeks to boost cooperation in technical areas, scientific expertise and
research among institutions.

ASEAN-INDIA FREE TRADE AGREEMENT (AIFTA):

2010:
§ The ASEAN-India Trade in Goods Agreement was signed and entered into force in 2010.

2014:
§ ASEAN-India Trade in Services Agreement was signed in November 2014. It contains
provisions on transparency, domestic regulations, market access and dispute settlement.
§ ASEAN-India Investment Agreement was also signed in November 2014. The Investment
Agreement stipulates protection of investment to ensure fair and equitable treatment for
investors.

SOUTH ASIAN FREE TRADE AREA (SAFTA)

§ SAFTA is a FTA between the 8 members of the SAARC (SOUTH ASIAN ASSOCIATION FOR
REGIONAL COOPERATION) group.
§ The agreement came into force on January 1, 2006, succeeding the 1993 SAARC Preferential
Trading Arrangement. SAFTA may eventually lead to a full-fledged South Asia Economic
Union.
§ SAFTA signatory countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka.

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AIM OF SAFTA:
§ Among its aims are: promoting and enhancing mutual trade and economic cooperation
by eliminating barriers in trade, promoting conditions of fair competition in the free trade
area, ensuring equitable benefits to all and establishing a framework for further regional
cooperation to expand the mutual benefits of the agreement.
§ SAFTA presupposes abolition of all kinds of trade and tariff restrictions. The SAFTA
agreement allows any states to pull out of the treaty at any time.

INDIA-AUSTRALIA ECONOMIC COOPERATION AND TRADE AGREEMENT (ECTA):

§ 2010: Australia and India begun negotiating a free trade agreement in 2010.
§ 2015: Negotiations were suspended in 2015 with neither country willing to concede
market access on politically sensitive issues. India was unwilling to grant preferential
access to Australian agricultural exports while Australia was reluctant to offer easier visas
to Indian professionals.
§ 2022: ECTA between Australia and India was signed on 2 April 2022. The ECTA is an
interim trade deal that would pave the way for a wider and deeper comprehensive
economic cooperation agreement (CECA) between the two countries. ECTA mostly
covers concessions in trade of goods & services.

BENEFIT FOR INDIA:

§ Several labour-intensive Indian exports (which currently attract 4% to 5% tariff),
including textiles, apparels, agriculture and fish products, leather, footwear, furniture
and sports goods, jewellery, engineering goods, and selected pharmaceuticals and
medical devices, are expected to gain from the immediate duty-free access.
§ Under the agreement, Indian graduates from STEM (Science, Technology,
Engineering and Mathematics) will be granted extended post-study work visas.

INDIA-KOREA CEPA- 2009, 2018

§ The India-Korea CEPA signed in 2009 had provisions for substantial reduction of both
tariffs and non-tariff barriers in a phased manner & expected to take India-Korea relations
to a higher level and enhance India’s presence in East Asia.

India-Korea CEPA – Harvest deal negotiated (July 10, 2018)

§ India & Korea signed a joint statement on July 10,2018 upgrading negotiations under
CEPA, with early harvest offers made for 35 items.
§ In addition, yoga and taekwondo instructors were included in the list of professionals
under the Sporting and Other Recreational Services category. This means Indians can now
open yoga institutes in South Korea and Koreans can open taekwondo institutes in India
under the Early Harvest Package (EHP).

INDIA-UAE CEPA
§ India-UAE CEPA was signed in 2022.
§ Highlights: Goods, Services, Investment, Digital Trade, Government Procurement,
Pharmaceuticals

Digital Trade:
§ It discusses provisions like paperless trading, domestic electronic transactions
frameworks, online consumer protection, cross-border flow of information, access to and
use of internet for digital trade, cybersecurity and cooperation.

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Government Procurement:
§ Under the India-UAE CEPA, India has granted UAE-based companies treatment on par with
domestic companies. This is the first instance of India including government
procurement in a Free Trade Agreement (FTA).
§ India has previously been unwilling to discuss government procurement in bilateral or
multilateral trade agreements to protect domestic firms which rely on it.

§ Under the agreement, only government procurement contracts worth over about Rs
200 crore will be open to UAE-based companies on the same terms as Indian firms.
§ The move is aimed at protecting the interests of MSMEs that supply goods and services
to the government.
§ The list of 34 ministries and departments for which government procurement would be
open to UAE-based companies includes the ministries of power, health, and education.

Benefits to India:
§ Overall, India will benefit from preferential market access provided particularly to labour-
intensive sectors such as Gems and Jewellery, Textiles, leather, footwear, sports goods,
plastics, furniture, agricultural and wood products, engineering products, pharmaceuticals,
medical devices, and Automobiles.
§ As regards trade in services, Indian service providers will have enhanced access to around
111 sub-sectors from the 11 broad service sectors.
§ Also, for the first time in any Trade Agreement, a separate Annex on Pharmaceuticals has
been incorporated to facilitate access of Indian pharmaceuticals products.

EUROPEAN UNION (EU)

EU & Trade
§ The European Union is the largest trade block in the world. It is the world's biggest exporter
of manufactured goods and services, and the biggest import market for over 100 countries
§ European Union members have coordinated economic and fiscal policy and follow a
common monetary policy. 19 out of 27 members use Euro as their national currency as of
now.

EUROZONE:
§ Currently, the euro (€) is the official currency of 19 out of 27 EU member countries which
together constitute the Eurozone, officially called the euro area.
§ Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia,
Spain

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ANSWER WRITING POINTERS: for self-practice
Question: Why has India been unable to get benefits out of its FTAs?, or

Enumerate the reasons for limited gain from FTAs for India.

Answer:

Introduction:

Mention 2/3 lines about how India aims to promote export and FTA can be important tool for
that.

Body of the answer: Causes of India’s limited gain from FTAs:

§ India’s past experience with FTAs has not been good à India had recorded a trade deficit
in all major trade agreements except for SAFTA. In other words, our imports have been
higher than our exports to these economies.
§ In certain cases, domestic manufacturers were the worst affected as FTA made imports
cheaper.
§ Complex rules of origin, lack of information on FTAs, higher compliance costs and
administrative delays dissuade exporters from using preferential routes.
§ Poor negotiations of FTAs is another problem for India.

India vs China:
§ China’s signing of FTAs with countries and regional blocs around the world, together with
its policies like One Belt One Road (OBOR) have played a significant role in the country’s
ascendancy and continuing supremacy in global trade.
§ On the other hand, as per CRISIL report-2021, lack of FTAs is a key reason for decline in
India’s textile exports between 2011 and 2020.

So, India needs to sign the right kind of FTAs to harness the potential benefits of such deals.

Corrective measures to be taken by India to reap benefits from FTAs:

§ India should actively pursue FTAs with major export destinations like the EU and the US, to
bring similar tariff concessions to Indian exporters that are enjoyed by countries like
Bangladesh and Cambodia.
§ Our focus should also be on minimising the compliance costs involved in getting benefits
under FTAs. India needs to eliminate or reduce the hurdles exporters face and ensure that
FTAs focus on ease of doing business and expanding trade opportunities for exporters.
§ India needs to ensure that technology transfers are included in our FTAs or general trade
agreements with countries or blocs like Germany, Japan, Taiwan, Korea and even the USA.
§ Our future FTAs or trade agreements must enable access to raw materials from resource
rich countries like Australia, New Zealand, South Africa, Brazil, Chile, Argentina, Indonesia,
Malaysia, USA and Canada.

Conclusion:

A balance needs to be maintained between what we get and how much to concede in FTAs.

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