06 December 2022 • 6 min read
Free Trade Agreements – Importance and Advantages
Exporters favour FTAs to multiparty trade agreements because they get preferential treatment over non-FTA member country competitors.
Nations have thrived due to the concept of comparative advantage. The resultant efficiency and specialisation have helped them to achieve higher real incomes.
Foreign Trade Agreement (FTA) is an arrangement between nations or trading blocs that have agreed to eliminate or reduce customs duties in international trade. FTAs cover everything from goods, services, investment, and intellectual property rights.
Importance of Free Trade Agreements
Trade agreements play an important role in development of commerce between nations by facilitating cooperation and providing access to each other’s industries. Free flow of goods and services enables countries to specialize in products it can produce efficiently and cheaply as compared to other countries.
As per the Ministry of Commerce, India has signed 13 FTAs with its trading partners. The economic impact assessment of FTAs has shown that there has been progress in both exports and imports with FTA partners.
The Association of Southeast Asian Nations (ASEAN) charge 20% custom duty on leather shoes but under the FTA with India the duty was reduced to zero. If other costs are equal, the Indian exporter will be more competitive than an exporter from a non-FTA member country.
Free Trade Agreements: Key Steps
Exporters and importers can the use FTAs to their advantage by following the four steps mentioned below:
1. Determination of tariff classification
2. Compliance with rules of origin
3. Claiming preferential access
4. Requesting advance rulings and export
Advantages of Trade Agreements
Benefits of FTA to exporters and importers are as follow:
1. Reduction in tariff: FTAs allow exporters access to international market at low customs duties and other incidental taxes. For example, India signed an FTA with South American trade bloc MERCOSUR, and it resulted in tariff reduction ranging from 10% to 100% on 450 listed products.
2. Diversification of trade risk: When countries have a diverse trade basket, they are in a better position to face the consequences of an international recession or adverse geopolitical event.
3. Competition and innovation: Integration with international markets leads to adoption of best practices in manufacturing and subsequently improves the competitiveness of products.
Implementation of Free Trade Agreements
The tariff concessions in an FTA are implemented through customs notifications. When the concessions are implemented in a phased manner the Central Board of Excise and Customs issues annual notifications on its website.
Some of the Indian products for which ASEAN countries have eliminated their tariffs are:
- Thailand: Textile and clothing, footwear, organic chemicals, pharmaceuticals, automobiles, etc.
- Indonesia: Fruits and vegetables, textiles, machinery, processed food, organic chemicals, marine products, etc.
- Malaysia: Footwear, processed food, vegetables and fruits, clothing and textiles, organic chemicals, etc.
Government’s Trade Promotion Measure
India’s Foreign Trade Policy (FTP) 2015-20 contains measures for export promotion for micro, small and medium enterprises (MSMEs). The policy has been extended up to 31st March 2023. The government encourages MSMEs to participate in training programmes on exports packaging, trade fairs, and international exhibitions.
The government promotes small and medium enterprises (SMEs) to get export orders by schemes such as rupee export credit, electronic filing, preferential certificates of origin, etc.
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