Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs)
🟠 Topic 67: Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs)
📌 Introduction
Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs) are vital instruments of economic diplomacy used by countries to enhance trade and investment flows. These agreements reduce or eliminate tariffs, quotas, and other trade barriers between the signatory countries, promoting seamless trade in goods, services, and investment flows. For India, FTAs and PTAs are key to expanding export markets, integrating into global value chains (GVCs), and strengthening regional economic cooperation.
🔹 What is a Free Trade Agreement (FTA)?
📖 Definition
An FTA is a legally binding agreement between two or more countries to eliminate or reduce tariffs, quotas, and other trade restrictions on goods and services traded between them.
Features of FTAs
✔️ Comprehensive – Covers trade in goods, services, investment, intellectual property, e-commerce, dispute settlement, and more.
✔️ Ensures non-discriminatory access between parties.
✔️ Often covers rules of origin to ensure only goods from partner countries get benefits.
Examples of India’s FTAs
| Agreement | Partners |
|---|---|
| India-Sri Lanka FTA | Sri Lanka |
| India-UAE CEPA | UAE |
| India-Japan CEPA | Japan |
| India-South Korea CEPA | South Korea |
🔹 What is a Preferential Trade Agreement (PTA)?
📖 Definition
A PTA is a trade pact between countries where they agree to reduce tariffs on certain products for each other while maintaining higher tariffs for the rest of the world.
Features of PTAs
✔️ Selective – Applies to specific products/sectors, not comprehensive.
✔️ First step towards deeper trade integration (may evolve into FTA).
✔️ Does not eliminate all trade barriers.
Examples of India’s PTAs
| Agreement | Partners |
|---|---|
| Asia-Pacific Trade Agreement (APTA) | Bangladesh, China, South Korea, Sri Lanka, Laos |
| India-MERCOSUR PTA | Argentina, Brazil, Paraguay, Uruguay |
🔹 Key Differences Between FTA & PTA
| Parameter | FTA | PTA |
|---|---|---|
| Coverage | Comprehensive (goods, services, investment) | Limited (few goods) |
| Tariff Elimination | Mostly complete | Partial |
| Investment & IPR Provisions | Usually included | Rarely included |
| Depth of Integration | Higher | Lower |
🔹 Types of Trade Agreements
| Type | Description | Example |
|---|---|---|
| Preferential Trade Agreement (PTA) | Lower tariffs on select products | India-MERCOSUR PTA |
| Free Trade Agreement (FTA) | Eliminate tariffs on most products | India-Japan CEPA |
| Customs Union | Common external tariff | EU Customs Union |
| Common Market | Free movement of goods, services, capital, labour | EU Internal Market |
| Economic Union | Common market + common currency | Eurozone |
🔹 Benefits of FTAs & PTAs for India
1️⃣ Export Promotion
- Tariff-free access to high-demand markets.
- Boosts sectors like textiles, pharmaceuticals, IT services, engineering goods.
2️⃣ Integration into Global Value Chains (GVCs)
- Easier sourcing of inputs and technology from partner countries.
- Enhances India’s role in regional manufacturing hubs.
3️⃣ Investment Attraction
- FTAs often include investment protection clauses.
- Encourages FDI inflows from partner countries.
4️⃣ Job Creation
- Higher exports lead to employment generation in: ✔️ Textiles.
✔️ Gems & jewellery.
✔️ Food processing.
5️⃣ Enhanced Competitiveness
- Exposure to global competition improves product quality and productivity.
Case Study – India-UAE CEPA (2022)
- Comprehensive trade pact covering: ✔️ Tariff elimination on 90% of India’s exports. ✔️ Enhanced market access for Indian textiles, gems, engineering goods. ✔️ Mutual recognition of standards and certification.
- Boosted bilateral trade to $85 billion within a year.
🔹 Concerns & Challenges with FTAs
1️⃣ Trade Deficit
- Many FTAs (India-ASEAN) led to rising imports without proportionate export growth.
- Concerns over dumping of cheap imports.
2️⃣ Limited Utilisation by MSMEs
- MSMEs struggle with: ✔️ Compliance with rules of origin.
✔️ Lack of awareness about FTA benefits.
✔️ Costly documentation.
3️⃣ Sectoral Concerns
- Agriculture, dairy, and electronics sectors vulnerable to cheap imports.
- Farmers’ unions opposed India-EU and India-UK FTAs.
4️⃣ Quality & Standards Barriers
- Non-tariff barriers (NTBs) like phytosanitary rules restrict India’s exports.
- Compliance with labelling, testing, and environmental standards is costly.
5️⃣ Loss of Policy Space
- FTAs often lock countries into tariff commitments, reducing policy flexibility.
Case Study – RCEP Withdrawal (2020)
- India withdrew from Regional Comprehensive Economic Partnership (RCEP) citing: ✔️ Threat to dairy, agriculture, and MSME sectors. ✔️ Concerns over unrestricted Chinese imports. ✔️ No effective safeguard mechanisms.
- Shows India’s cautious approach to mega trade blocs.
🔹 Recent Developments in India’s Trade Agreements
| Agreement | Status |
|---|---|
| India-UAE CEPA | Signed (2022) |
| India-Australia ECTA | Signed (2022) |
| India-UK FTA | Under negotiation |
| India-EU FTA | Restarted talks (2022) |
| India-Canada FTA | Suspended (2023) |
🔹 Role of Rules of Origin
- Rules of Origin (RoO) ensure only genuine products from FTA partners get tariff benefits.
- Prevents third-country imports entering via FTA partners.
- India tightened RoO provisions in 2020 under CAROTAR Rules.
📊 India’s FTA Utilisation Rate
- Low utilisation by MSMEs (less than 25%).
- High utilisation in textiles, chemicals, and engineering sectors.
🔹 Future Roadmap – India’s FTA Strategy
✔️ Focus on high-value, technology-driven exports.
✔️ Deepen engagement with EU, UK, Australia.
✔️ Ensure better safeguards for sensitive sectors.
✔️ Promote FTA awareness through Export Promotion Councils (EPCs).
✔️ Develop sectoral strategies for high-potential markets.
📚 Practice MCQ
1️⃣ Which of the following correctly distinguishes between FTA and PTA?
✅ Options:
(a) FTAs cover only goods, PTAs cover goods and services.
(b) FTAs remove all tariffs, PTAs reduce tariffs on select items.
(c) FTAs apply to all trading partners, PTAs are bilateral.
(d) There is no difference between FTA and PTA.
2️⃣ India withdrew from RCEP citing concerns over:
- Threat to MSME sector.
- Dumping of cheap goods.
- Stringent rules of origin.
✅ Options:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 2, and 3
(d) 1 only
