Free Trade Agreement (FTA)
- An FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
- Under a free trade policy, goods and services can be bought and sold across international borders with minimal government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
- In an FTA, the countries agree on certain obligations such as investor protections, intellectual property rights, anti-dumping, etc.
- For the developed nations, the main goal of FTAs is to reduce barriers to exports, protect interests competing abroad, and enhance the rule of law in the FTA partner country or countries.
- For developing nations, the main goal is to protect against dumping and anti-competitive trade practices while promoting exports.
Trans-Pacific Partnership (TPP)
- The Trans-Pacific Partnership (TPP) was a proposed FTA between twelve Pacific Rim economies: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, NZ, Peru, Singapore, Vietnam, and the US.
- TPP was initially touted to be path-breaking for free trade but fizzled out with the withdrawal of the US.
- The remaining countries negotiated the CPTPP, which incorporates most of the provisions of the TPP.
Regional Comprehensive Economic Partnership (RCEP)
- RCEP is an FTA among the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, NZ, the Philippines, Singapore, Thailand, and Vietnam.
- While the US spearheaded TPP negotiations, China pushed for RCEP.
India’s concerns that led to the withdrawal from RCEP
- India (a protectionist nation with high tariffs) withdrew from RCEP negotiations in 2019.
Cheaper imports and Widening Trade Deficit
- India feared domestic sectors like steel, textiles, farm, dairy, etc., would be hit by cheaper alternatives from other RCEP countries that employ cheaper and more efficient industry processes.
Farm sector is not excluded
- India has excluded agriculture from import liberalisation, both in the WTO and bilateral FTAs.
- But RCEP was hell-bent on bringing even the farm sector under import liberalisation.
Why the Dairy sector vehemently opposes FTAs like RCEP?
- Global dairy trade occurs not in milk but in its solid derivatives like milk powder, butter and cheese.
- The MNC firms operating in India are forced to buy milk from Indian farmers as India’s dairy imports are low due to high tariffs, especially on milk powder (60%) and fats (40%).
- FTAs like RCEP will make milk imports cheaper, and MNC firms will prefer importing milk products from New Zealand or Australia rather than buying from India.
- 5% of New Zealand’s exports in the dairy sector is enough to flood India’s domestic market.
- While 70 million households depend on the dairy sector in India, the number is just 10,000 in New Zealand (a temperate country with ideal conditions for dairy farming).
FTAs are essential for Global Value Chain (GVC)
- A global value chain (GVC) is the series of stages in producing a product or service.
- The GVCs exploit hyper specialisation for greater efficiencies.
- They do so by breaking down the production process across countries.
- The common notion of international trade is that one country exports product X to the second country and imports product Y from the second country.
- However, due to an increased level of fragmentation and optimisation of the production process, this is not how most of the trade happens.
- Product X is never entirely made in the first country. Instead, the production cycle involves half-made goods crisscrossing a country’s borders — sometimes as exports and at other times as imports.
- The final product may be given the last touch in the first country, but the “value chain” involves trading across several national boundaries.
Example of Global Value Chain
- The mechanical parts of German-made vehicles are manufactured in Germany as German engineers are masters at the craft of efficient manufacturing.
- However, the electronics for the vehicle are imported from Chinese, Taiwanese or South Korean firms as these countries are pioneers of electronics manufacturing.
- And the software for the vehicles is designed in Indian software hubs like Bengaluru.
- The final product is assembled in Germany or any other country and exported worldwide.
Why integrating into the Global Value Chans is essential?
- Productivity and incomes rose in countries that became integral to GVCs — Bangladesh, China, and Vietnam, among others. The steepest declines in poverty occurred in precisely those countries.
- GVCs allow resources to flow to their most productive use, not only across countries and sectors but also within sectors across stages of production. As a result, GVCs magnify growth and employment.
What is India’s participation in GVCs?
- India’s integration with GVCs is among the lowest in G20 countries.
- India cannot miss out on being a part of GVCs, which can happen only if tariffs are reduced.
- It should work on reducing its dependence on agriculture for employment generation by squeezing itself into the GVCs through FTAs like RCEP to boost manufacturing.