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India’s FTAs with ASEAN, Japan and Korea have widened trade deficit: Study

According to a study titled ‘India’s CEPAs with ASEAN, Japan and Korea’ published by Third World Network, India’s three existing Comprehensive Economic Partnership Agreements (CEPA) with ASEAN, Japan and South Korea have led to increasing trade deficits

Spotlight

  • India’s trade imbalance with ASEAN, Japan and South Korea has been steadily increasing. Trade deficit with the three countries, which stood at $4.5 billion in 2004 and $16.4 billion in 2010, rose to $29.7 billion in 2015. In 2016, it marginally decreased to $26.6 billion.
  • The report highlights a major concern that CEPAs not only resulted in rising imports but also a progressive slowdown of exports even when additional market access is being provided to India.
  • The study also observed that none of the pacts resulted in significant liberalisation in the movement of skilled professionals.
  • The study is significant, given the government is currently focussing on how to make India’s free trade agreements deliver more for all stakeholders.
  • The study will also be helpful for analysing Regional Comprehensive Economic Partnership (RCEP) negotiations.

Comprehensive economic partnership agreement (CEPA):

It is a kind of free trade agreement between two countries. CEPA is more comprehensive than an FTA in terms of coverage of areas and the type of commitments. While a traditional FTA focuses mainly on goods; CEPA offers a holistic coverage of many areas like services, investment, competition, government procurement, disputes etc. 

Unlike a customs union (the third stage of economic integration), members of a free trade area do not have a common external tariff, which means they have different quotas and customs taxes, as well as other policies with respect to non-members. To avoid tariff evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Only goods that meet these minimum requirements are entitled to the special treatment envisioned by the free trade area provisions.

"Cumulation" is the relationship between different FTAs regarding the rules of origin – sometimes different FTAs supplement each other, in other cases there is no cross-cumulation between the FTAs. A free-trade area is a result of a free-trade agreement (a form of trade pact) between two or more countries. Free-trade areas and agreements (FTAs) are cascadable to some degree – if some countries sign agreements to form a free-trade area and choose to negotiate together (either as a trade bloc or as a forum of individual members of their FTA) another free-trade agreement with another country (or countries) – then the new FTA will consist of the old FTA plus the new country (or countries).

Within an industrialized country there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.

The aim of a free-trade area is to reduce barriers to exchange so that trade can grow as a result of specialisation, division of labour, and most importantly via comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free-trade area. The theory refers only to aggregate wealth and says nothing about the distribution of wealth; in fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. The overall gains from trade can be used to compensate for the effects of reduced trade barriers by appropriate inter-party transfers.

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