Examining aspects of free trade pacts

With the advent of globalisation there has been increased emphasis on ensuring that competitive advantage accrues to the manufacturing and services sector in India. This has led to India looking at free trade agreements (FTAs) in a big way.

A free trade agreement (FTA) is an agreement between designated groups of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods traded between themselves. It is considered the second stage of economic integration. FTAs help strengthen business climates by eliminating or reducing tariff rates, improving intellectual property regulations, opening government procurement opportunities, easing investment rules and much more. Typically, FTAs can be: bilateral; i.e, an agreement between two countries; or multilateral; i.e, an agreement between several countries.

Some of the landmark bilateral and multilateral agreements that India has entered into are described below ""

India-Sri Lanka FTA, which was signed on December, 1998, and became operative from March 1, 2000. This was one of the first FTAs which India entered into to ostensibly promote, through expansion of trade, the harmonious development of economic relations between India and Sri Lanka.

India-Thailand FTA, which was signed on October 2003 for the elimination of tariff and non-tariff barriers with respect to trade in goods within ten years therefrom. The agreement also contained provisions enabling the two countries to introduce emergency measures to protect domestic producers against a sudden surge in imports. Pursuant to the signing of the agreement, the Government of India announced a list of 82 items, to be covered under the Early Harvest Scheme of the Framework Agreement for establishing the Indo-Thai FTA, on which the basic Customs duty was completely eliminated in a phased manned by September 2006. Presently, negotiations are underway in relation to the remaining products.

The India-Singapore Comprehensive Economic Cooperation Agreement (CECA) was signed in June 2005. This landmark agreement is the first comprehensive economic pact that India has signed with any country. CECA, which came into force from August 2005, encompasses various measures relating to strengthening and enhancing the economic relations between the two countries, liberalising and promoting trade in goods and services, and establishing a facilitative investment regime between the two countries.

The South Asia Free Trade Agreement (Safta) between India, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka came into force with effect from July 2006, it replaced the South Asia Preferential Trade Agreement (SAPTA). The operationalisation of the agreement has been seen as a major initiative of the South Asian Association for Regional Cooperation (Saarc) for augmenting trade and economic relationships within the region and removing trade barriers. Safta also provides for various measures, including the special and differential treatment to the lesser developed countries (LDCs), within the group, with a view to generating equitable distribution of benefits to all member countries.

The Asia-Pacific Trade Agreement (formerly known as the Bangkok Agreement) between India, Bangladesh, Korea, China and Sri Lanka. Besides, the Global System of Trade Preferences (GSP) is an agreement between 47 countries to enable freer global trade in goods through several facilitating mechanisms.

Typically, the countries engaged in an FTA use a system of certifying the origin of goods, commonly called the rules of origin (RoO) requirements, whereby a minimum value addition on the goods in the originating country is ensured. Goods need to satisfy these requirements so as to be entitled to the benefits envisaged in the FTA. Only those goods which comply with the RoO qualify for the Customs duty concession, which is limited to the basic Customs duty applicable on such goods, when imported into the destination country.

According to the typical RoO, products can qualify for preferential treatment under the following two broad categorisations "" Wholly produced or obtained products; and products that satisfy domestic value addition and substantial transformation criterion.

A product can be considered as a "wholly produced or obtained" product by virtue of a complete absence physically of any imported raw material or component therein. Products which have been entirely grown in or extracted from the soil of the exporting contracting country, harvested within the territory of the exporting contracting country or manufactured there exclusively from any of these products are considered as "wholly produced or obtained" products.

Products with import content of unknown origin will be eligible for preferential tariff, if such products have undergone "sufficient working or processing" or "substantial transformation" in the preference receiving contracting country. The "working or processing" is regarded as sufficient if it transforms the specific nature and characteristics of the material used to a substantial degree. The imported material parts or components are considered to have undergone "sufficient working or processing" if a given percentage of value is added to the imported inputs used for manufacture of the finished product.

In case of procurement from countries other than the contracting countries, a minimum in country value addition of a specified percentage, which is typically in the 20-40 per cent range, of the FOB value, is required so as to become eligible for tariff concessions.

Further, the FTAs incorporate provisions of "cumulative rules of origin", specifying that where the materials, parts and products originating in the territory of the contracting countries are used in the manufacture of exported products, the minimum in country value addition would be a specified percentage of the FOB value, which is typically lower than the value added requirement provided in case of procurement from countries other than the contracting countries.

The originating products would also need to typically fulfil the following additional criteria in order to qualify for preferential treatment under the FTAs:

1. Change of HSN Code requirement: The four digit HSN Code of the finished product should be different from that of the raw materials imported from any country other than the contracting country. However, the following are typically considered as "insufficient working or processing" and hence not eligible for the benefits, whether or not there is a change of classification at the four digit level of the finished goods vis-à-vis the raw materials:

a) Operations to ensure the preservation of products in good condition during transport and storage (ventilation, spreading out, drying, chilling, placing in salt, sulphur dioxide or other aqueous solutions, removal of damaged parts, and like operations);

b) Simple mixing or assembly operations

c) Simple slicing, cutting and re-packing or placing in bottles, flasks, bags, boxes, fixing on cards or boards, etc., and all other simple packing operations;

d) Changes in packing and breaking up, and assembly of consignments;

e) Affixing of marks, labels or other like distinguishing signs on products or their packaging;

2. Direct consignment "" The qualifying goods have to be directly consigned from the exporting country to the importing country. Direct consignments have been defined to include the following transactions:

a) The products are transported without passing through the territory of any country other than the contracting countries.

b) Where the transportation of the products involves transit through one or more intermediate countries, with or without trans-shipment or temporary storage in such countries, certain specified conditions are met in regards the transportation of such goods.

In conclusion, free trade agreements typically contain provisions that enable the contracting countries to limit the benefits of tariff concessions/exemptions to those goods which qualify, in terms of the criteria laid down thereunder. The intention is to ensure that only those goods which originate in the contracting countries or in relation to which there has been sufficient/adequate value addition in the contracting country are granted the benefits of the FTA. These criteria also prevent undesirable practices and any potential abuse of the FTA, to the disadvantage of the domestic industry in the contracting countries.