What is a free trade agreement?

Several experts believe that Britain’s exit from the European Union in 2016 is one of the reasons for its ongoing economic crisis. Businesses in the UK lost unrestricted access to European markets which resulted in huge losses. It also led to a drop in the pound’s value and a rise in inflation.

The European Union is a shining example of free trade. Its countries have made borders almost redundant when it comes to trade. And the single currency, Euro, has made trade easier.

For quite some time now, India and the United Kingdom have been in intense free trade agreement negotiations. The agreement was supposed to be finalised by Diwali, but the deadline was missed due to some friction points, including services. With new Prime Minister Rishi Sunak, the talks are set to get a boost and Downing Street recently announced that Sunak is committed to achieving a balanced deal.

What is a free trade agreement?

But what exactly is a free trade agreement? It is a pact between two or more countries, where the objective is to remove trade barriers of imports and exports and ensure hassle-free trade relations as far as possible. Under a free trade agreement, countries offer preferential trade terms, tariff concessions to each other.

Which countries has India signed FTAs with?

India has so far signed a total of 13 free trade agreements with its trading partners like Japan, South Korea, countries of ASEAN region etc. India has signed three FTA agreements in the last five years. FTAs are also agreed between countries to boost their respective trade. For instance, under India-Japan agreement, India's exports to Japan have improved from $5.6 billion in 2011 to $6.1 billion in 2021.

Free trade agreements could be bilateral or multilateral. For instance, India has signed an agreement called South Asian Free Trade Area with South Asian countries including Nepal, Sri Lanka, Bangladesh, Bhutan etc.

Why does India need FTA?

The main objective behind India’s free trade negotiations is diversification and expansion of export markets. Some of the other factors that India considers when going for free trade agreements are cheaper access to raw materials, attracting foreign investment, boosting competitiveness and other geo-political reasons.

In addition to free trade agreements, India has also signed six preferential trade agreements. The main difference between the both is that an FTA is comprehensive covering various areas, while a PTA is limited to only trade in goods and seeks only a tariff elimination in terms of a margin of preference.