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ECONOMICS HANDOUT (Topic No. 2) by Jayant Parikshit

SYLLABUS: BASICS OF TRADE § Some concepts & definitions TRADE AGREEMENTS:

1. Preferential Trade Agreement (PTA) 2. Free Trade Agreement (FTA) 3. Comprehensive Economic Cooperation Agreement (CECA) 4. Comprehensive Economic Partnership Agreement (CEPA) 5. Custom Union (CU) 6. Single Market (SM) 7. Economic Union (EU)

ADDITIONAL CONCEPTS 1. Mini Trade Deals 2. Early Harvest

CASE STUDIES & EXAMPLES: 1. India-Mercosur PTA 2. India-Chile PTA 3. India-ASEAN FTA (AIFTA) 4. India-Korea CEPA 5. India-Mauritius CECPA 2021 6. European Union (EU) 7. Association of South-East Nations (ASEAN)

a. ASEAN Plus Three b. East Asia Summit (EAS) c. ASEAN Plus Six d. RCEP

7. Generalized System of Preference (GSP) EXAM PRACTICE: 1. MCQs for Prelims 2. Questions & answer structure for mains

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MULTIPLE CHOICE QUESTIONS (MCQs)

Question-1: Which of the following is true about “autarky” in economics?

1. They indulge in domestic trade. 2. They indulge in foreign trade.

Chose the correct option:

a. Only1 b. Only2 c. Both 1&2 d. None of these Question-2: Consider the following statements regarding “Terms of Trade (ToT)” used in the field of international trade: 1. ToT of a nation is defined as the ratio of the price of its import commodity to the price of its

export commodity. 2. If the ToT of a country increases, the country benefits. 3. If the ToT of a country decreases, the country stands to lose.

Chose the correct option:

a. Only1 b. Only2 c. Only 3 d. Both 1&2 e. Both 1&3 Question-3: Which of the following are considered as a component of “Trade Openness” of a nation?

1. Level of trade of the nation 2. Exports 3. Imports 4. GDP

Chose the correct option:

a. Only1 b. Only2 c. Only 3 d. Both 2&3 e. Both 1&3 f. 2,3&4 g. 1,2,3&4

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Question-4: Which of the following is/are true about Preferential Trade Agreement (PTA)?

1. In this type of agreement, two or more partners give preferential right of entry to all the products.

2. The tariffs on selected products are abolished completely. 3. There are two lists in PTAs: a positive list & a negative list. 4. A PTA is a stepping-stone towards better economic relations between the countries involved.

Choose the correct answer: a. Only 1 b. Only4 c. Both 1&3 d. 1,2,3,4 Question-5: Consider the following statements about Free Trade Agreement (FTA): 1. The tariffs on items covering substantial bilateral trade are eliminated between the partner

countries. 2. Each partner maintains similar tariff structure for non-members. 3. The members maintain coordinated trade policies with non-member countries.

Choose the correct answer: a. Only 1 b. Only3 c. Both 1&2 d. Both2&3 e. 1,2&3 Question-6: Consider the following statements about Custom Union:

1. It has provisions to facilitate free movements of labour and capital, harmonize technical standards across members etc.

2. The members impose a common external tariff on imports from non-members.

Choose the correct statement:

a. Only 1 b. Only2 c. Both 1&2 d. None of these Question-7: Consider the following statements about Single Market:

1. A common market is a deeper form of Customs Union. 2. The members eliminate internal trade barriers, adopt common external trade barriers and allow

free movement of resources, for example labour & capital, among member countries.

Choose the correct statement:

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a. Only 1 b. Only2 c. Both 1&2 d. None of these Question-8: Consider the following statements regarding India’s experience with trade agreements in general:

1. India had recorded a trade deficit in all major trade agreements since long. 2. Exports by India with FTA & Non-FTA countries are not very different 3. Imports in India from FTA countries far exceed Non-FTA Countries

Choose the correct option:

a. Only1 b. Only2 c. Both1 &2 d. Both 2&3 e. 1,2&3

Question-9: Which of the following tools are used as an instrument to indulge in protectionism/Trade War?

1. Tariff Barriers (TB) 2. Non-Tariff Barriers (NTB).

Chose the correct option:

a. Only1 b. Only2 c. Both 1&2 d. None of these Question-10: Which of the following members are not a part of “ASEAN PLUS THREE”? 1. Australia 2. New Zealand 3. South Korea 4. India

Choose the correct option:

a. Only1 b. Both 3&4 c. 1,2&3 d. 1,2,3&4

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QUESTIONS FOR MAINS

Question-1: What are Preferential Trade Agreements? Why has India renegotiated the PTAs esp. in South American countries?

Question-2: What are Free Trade Agreements? Explain its importance for a country like India.

Question-3: Discuss the features which separate FTAs from PTAs? Has India benefited from FTAs? Discuss.

Question-4: What is RCEP that ASEAN is trying to sign since 2012? What all does it cover? What did India stand to gain from it? What were India’s concerns and challenges vis-à-vis RCEP?

Question-5: What do you mean by Generalised System of Preferences (GSP)? Why do countries pursue such a policy?

Question-6: In the context of Indo-U.S. trade, discuss the reasons for the termination of U.S. GSP for India. What would be its repercussions on both the countries? Discuss India’s response to this termination of GSP.

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TRADE AGREEMENTS Preferential Trade Agreement (PTA):

§ In this type of agreement, two or more partners give preferential right (via. reduce import duties) of entry to certain products.

§ The tariffs are not abolished completely. § In general PTAs do not cover substantially all trade. § The list of products on which the partners agree to reduce duty is called positive list. § Example: India and Mercosur, India and Chile

Free Trade Agreement (FTA):

§ It is more robust and improved over preferential trade agreements. § In FTAs, tariffs on items covering substantial bilateral trade are eliminated between the partner

countries. § These members continue to maintain independent trade policies with non-member countries. § India-Sri Lanka, India- ASEAN, USMCA (earlier called as NAFTA)

Comprehensive Economic Cooperation Agreement (CECA)

§ CECA involves only tariff reduction/elimination in a phased manner on listed items except the negative list and few other cases.

§ A high quality CECA with India would provide legal certainty for foreign exporters and investors in Indian market where unpredictable policy changes make doing business difficult.

§ Example: India-Malaysia, India-Singapore

Comprehensive Economic Partnership Agreement (CEPA)

§ CEPA describes agreement which consist of an integrated package on goods, services and investment along with other areas including IPR etc. So CEPA is a wider term than CECA and has the widest coverage.

§ Example: India-Japan CEPA, India-Korea

Custom Union:

§ A customs union is defined as a group of states that have agreed to eliminate customs duties (import taxes) on trade between themselves, as well as reduce other administrative requirements.

§ The members impose a common external tariff on imports from non-members. § Example: An example is Southern African Customs Union (SACU) amongst South Africa, Lesotho,

Namibia, Botswana and Eswatini (Swaziland).

Common/Single Market:

§ Integration provided by a Common market is one step deeper than that by a Customs Union. § In a single market, the members eliminate internal trade barriers, adopt common external trade

barriers and allow free movement of resources, for example labour & capital & harmonize technical standards across member countries.

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§ Examples include Mercosur, East African Common Market

Economic Union: § This is the most advance type of trade agreement. § Economic Union is a Common Market extended through further harmonization of

fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union (EU) is an example.

§ The Economic Union establishes a Single Financial and Economic Space within which goods, people and capital move freely; harmonized monetary and fiscal policies are recognised and a common approach is in place to trade, health, education and environment, as well as a common approach to the development of critical sectors.

EXAMPLES OF TRADE AGREEMENTS INDIA-MERCOSUR PTA 2009:

§ MERCOSUR (Southern Common Market): It is a 4 country trade bloc with Brazil, Argentina, Paraguay and Uruguay as its original members.

§ Founding member countries decided to remove Venezuela, which had joined Mercosur in 2012, for its failure to incorporate standards on trade and human rights into national laws, although the country could rejoin if it were to adopt the necessary norms.

§ The existing INDIA-MERCOSUR PTA was signed in New Delhi on January 25, 2004 which came into effect from 1st June, 2009. This agreement has a limited coverage and contains only 450 tariff lines. Both sides have now agreed to expand to cover up to 3000 tariff lines.

§ Going in for an expanded PTA with the Mercosur is in line with India’s objective of trading more with Latin America and diversifying its trade beyond the EU and the US.

§ India-Mercosur have been trying to expand the existing PTA: a. India wants to export a wide range of pharmaceuticals, engineering goods and processed

foods. b. So far it has preferential access in the MERCOSUR for organic chemicals, pharmaceuticals,

essential oils, plastics & articles, rubber and rubber products, tools and implements, machinery items, electrical machinery and equipment.

NORTH AMERICA FREE TRADE AGREEMENT (NAFTA)/U.S.-MEXICO-CANADA AGREEMENT (USMCA) FTA (1994, 2018):

Members:

§ USMCA (earlier known as NAFTA), is a three-country accord negotiated by the governments of Canada, Mexico, and the United States that entered into force in January 1994.

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§ U.S. President Donald Trump claimed that it had undermined U.S. jobs and manufacturing, and in October 2018 his administration struck a deal with Canada and Mexico on an updated version of the pact, to be known as the U.S.-Mexico-Canada Agreement, or USMCA.

Coverage under NAFTA:

§ NAFTA’s terms, which were implemented gradually through January 2008, eliminated most tariffs on products traded between the three countries.

§ Liberalization of trade in agriculture, textiles, and automobile manufacturing was a major focus. § The deal also sought to protect intellectual property, establish dispute resolution mechanisms,

and, through side agreements, implement labour and environmental safeguards.

SOUTH ASIAN FREE TRADE AREA (SAFTA)

§ SAFTA is a FTA between the 8 members of the SAARC (SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION) group.

§ The agreement came into force on January 1, 2006, succeeding the 1993 SAARC Preferential Trading Arrangement. SAFTA may eventually lead to a full-fledged South Asia Economic Union.

§ SAFTA signatory countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

AIM OF SAFTA: § Among its aims are: promoting and enhancing mutual trade and economic cooperation by

eliminating barriers in trade, promoting conditions of fair competition in the free trade area, ensuring equitable benefits to all and establishing a framework for further regional cooperation to expand the mutual benefits of the agreement.

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§ SAFTA presupposes abolition of all kinds of trade and tariff restrictions. The SAFTA agreement allows any states to pull out of the treaty at any time.

INDIA-KOREA CEPA- 2009, 2018

§ The India-Korea CEPA signed on 7th August 2009 though delayed, had provisions for substantial reduction of both tariffs and non-tariff barriers in a phased manner & expected to take India-Korea relations to a higher level and enhance India’s presence in East Asia.

India-Korea CEPA – Harvest deal negotiated (July 10, 2018)

§ India & Korea signed a joint statement on July 10,2018 upgrading negotiations under CEPA, with early harvest offers made for 35 items.

§ In addition, yoga and taekwondo instructors were included in the list of professionals under the Sporting and Other Recreational Services category. This means Indians can now open yoga institutes in South Korea and Koreans can open taekwondo institutes in India under the Early Harvest Package (EHP).

§ South Korea also agreed to eliminate tariffs over a period of time on 17 Indian products – seven fish items, beer, jams and jellies, mango, corn, and maize, among others. In particular, South Korea will reduce the import tariff on shrimps from 20 percent to zero upfront for 15,000 tons; India’s total marine exports currently stands at 2,400 tons.

§ India will, in turn, reduce / eliminate import tariffs for 11 items, including fish fillets and marine base oil.

§ With regards to the movement of professionals, the EHP increases the visa duration for information communication technology (ICT) employees to three years from one year.

§ These changes will move some way in correcting the trade balance between the two countries.

EUROPEAN UNION (EU) EU & Trade

§ The European Union is the largest trade block in the world. It is the world's biggest exporter of manufactured goods and services, and the biggest import market for over 100 countries

§ The unique feature of the EU is that, although the Member States all remain sovereign and independent states, they have decided to pool some of their 'sovereignty' in areas where it makes sense to work together.

§ In practice, this means that the Member States delegate some of their decision-making powers to the shared institutions they have created, so that decisions on specific matters of common interest can be made democratically at EU level.

EUROZONE:

§ The euro was launched on 1 January 1999. At the same time, the euro area came into operation, and monetary policy passed to the European Central Bank (ECB), established a few months previously – 1 June 1998.

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§ The euro coins and banknotes were launched on 1 January 2002 and the biggest cash changeover in history took place in 12 EU countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain).

§ Since the introduction of euro notes and coins in 2002, 19 EU countries have joined the euro area. 340 million Europeans use the euro every day – it is the second most-used currency worldwide. While the UK decided to leave the EU, all EU-27 Member States are legally committed to joining the euro at some stage, with the exception of Denmark.

§ December 1, 2009: The Treaty of Lisbon came into force, having been ratified by all European Union member states.

§ The Treaty of Lisbon amended the Treaty on European Union to explicitly recognize for the first time the member states' right to withdraw from the union. UK invoked Article 50 of Treaty of Lisbon to initiate the exit process.

ASSOCIATION OF SOUTH-EAST NATIONS (ASEAN)

Background:

§ ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. It was then joined by Brunei Darussalam, Vietnam, LAOS, Myanmar and Cambodia making up what is today the ten Member States of ASEAN.

§ AIM: To accelerate the economic growth, social progress and cultural development in the region, promote regional peace and stability etc.

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ASEAN Plus Three § ASEAN Plus Three" was created to improve existing ties with China, Japan, and South Korea. § This was followed by the even larger East Asia Summit (EAS), which included ASEAN Plus Three

countries as well as India, Australia, New Zealand, the United States, and Russia.

EAST ASIA SUMMIT (EAS) § EAS is a regional leaders' forum for strategic dialogue and cooperation on key challenges facing

the East Asian region. § Membership (18) of the EAS comprises the ten ASEAN countries (Brunei, Cambodia, Indonesia,

Laos, Malaysia, Burma, the Philippines, Singapore, Thailand, Vietnam) + Australia, China, India, Japan, New Zealand, Korea, United States and Russia.

§ The 18 EAS member countries represent collectively 55 per cent of the world’s population and account for around 55 per cent of global GDP

ASEAN Plus Six § At the second EAS held on 15 January 2007, the Leaders of ASEAN and six other nations (China,

India, Japan, S Korea, Australia and New Zealand, agreed to launch a study on a Comprehensive Economic Partnership in East Asia (CEPEA) among EAS participants.

§ An underlying ambition was the establishment of an ASEAN + 6 FTA.

To achieve the objectives of CEPEA, the Study Group recognizes the scope of CEPEA as: a. Economic cooperation b. Facilitation of trade and investment c. Liberalization of trade and investment

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ANSWER WRITING POINTERS: for self-practice Question-1: What is RCEP that ASEAN is trying to sign since 2012? What all does it cover? What did India stand to gain from it? What were India’s concerns and challenges vis-à-vis RCEP?

Answer:

§ RCEP is a free trade agreement between the: 1. Ten member states of ASEAN (Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos,

Malaysia, the Philippines, Singapore, Thailand, Vietnam) 2. Five states with which ASEAN has existing FTAs (Australia, China, Japan, South Korea and New

Zealand).

§ The RCEP negotiations were launched in November 2012 during the ASEAN Summit in Phnom Penh, Cambodia.

§ The mega trade pact aims to cover goods, services, investments, economic and technical cooperation, competition and intellectual property rights.

§ Regional Comprehensive Economic Partnership (RCEP) is gigantic in size and scope. It aims to create a free trade zone of 15 nations. This means a zero-customs duty zone.

POTENTIAL GAINS FOR INDIA IF INDIA WOULD HAVE JOINED:

1. It will be a boon to India’s “Look East Policy”. 2. It will diversify our trade partners and not just restrict us to North America and Europe. 3. With proper checks and measures, our manufacturing and industry in general would benefit too. 4. India would have an opportunity to enhance our exports to new markets. It will add to our GDP

and also create jobs.

India’s concerns in joining RCEP:

1. Trade Deficit & China Factor 2. Industries & China Factor 3. Auto-Trigger Mechanism 4. Rules of Origin & China Factor 5. Agriculture & RCEP 6. India’s Past Experience with FTA 7. Data Protection 8. Investor-State Dispute Settlement

INDIA AND ITS EXPERIENCE WITH FTA

Question-2: Why has India been unable to get benefits out of its FTAs?, or Enumerate the reasons for limited gain from FTAs.

Answer:

Introduction:

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Body of the answer:

4. India’s past experience with FTAs not good à India had recorded a trade deficit in all major trade agreements

5. Exports by India with FTA & Non-FTA countries are not very different 6. Imports in India from FTA countries far exceed Non-FTA Countries 7. Multiple Regional Trade Agreement 8. Poor negotiations of FTAs è led to a distorted trade balance

Example of poor negotiations and implementation: India-Sri Lanka FTA (ISFTA) 2000

a. ISFTA specifies that customs shall not keep goods for more than 3 days. In reality, samples testing & clearance takes 20—40 days.

b. Packaging and labelling issues are also not well-defined under ISFTA c. Currently, any food item exported either from India or Sri Lanka is tested twice —once at the

port of origin, and again at the destination port—which unnecessarily increases trading time. d. Issue related to Certification

Conclusion:

§ India needs to take the right lessons suited for our kind of economic system. (Focus on both import + domestic industries).

§ The future FTA deals è post Covid realities

GENERALISED SYSTEM OF PREFERENCE (GSP):

Question-2: What do you mean by Generalised System of Preferences (GSP)? Why do countries pursue such a policy?

Question-3: In the context of Indo-U.S. trade, discuss the reasons for the termination of U.S. GSP for India. What would be its repercussions on both the countries?

Question-4: Why did U.S. terminate the GSP for India? What are its effects? Discuss India’s response to this termination of GSP.

Question-5: Discuss U.S.- India withdrawal of GSP in the context of Trade war.

Answer structure for questions 2 to 5:

Definition:

§ The Generalised System of Preferences (GSP) is an instrument by which industrially developed countries extend tariff concession to goods originating in developing countries.

§ In simple terms, it involves reduced tariff or duty free treatment of eligible products exported by developing countries like India, to the markets of developed countries, like US or European Union. The preferences offered are, however, unilateral and non – discriminatory.

Objectives:

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The aim is to help developing countries:

a. In increasing their export earnings b. Reduction or removal of import duty on the products of developing nations makes it more

competitive in the developed foreign markets c. In accelerating their rates of economic growth

The U.S. GSP: § In U.S. it was established by the Trade Act of 1974, GSP and eliminated duties on thousands of

products when imported from one of 120 designated beneficiary countries and territories.

Benefit to US:

1. GSP supports U.S. jobs and 2. It helps keep American companies competitive.

U.S.- India Trade and GSP

§ Under Generalised System of Preferences (GSP) scheme, U.S. offers duty free access to over 3,000 Indian products.

§ India was the largest beneficiary of the programme in 2017 with $5.7 billion in imports to the US given duty-free status

§ The US Trade Representative’s office had announced in March 2019 that the US planned to terminate India and Turkey’s designations as ‘beneficiary developing countries’ because they no longer complied with the statutory eligibility criteria. Accordingly, U.S. terminated India's designation as a beneficiary developing country effective June 5, 2019.

EFFECT ON INDIA

§ As per India, the US government's move to withdraw duty concessions on certain products under the GSP programme will not have a significant impact on exports to America as the benefits were only about USD 190 million annually.

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§ India has explicitly said that, despite the fact that India was working on an "extensive and reasonable" trade package, the US decided to go ahead with its decision to scrap the preferential trade benefit.

INDIA’s RESPONSE

§ In March 2018, US had imposed 25% tariff on Steel and 10% import duty on Aluminum. India was one of the major exporters of these items. India had repeatedly postponed the imposition of retaliatory tariffs of $235 million on import of US goods worth $1.4 billion since they were first announced on 20 June 2018.

§ India has taken the following action so far in retaliation: 1. Personal Data Protection Act 2. India imposed retaliatory tariffs on 28 American products from June 16, 2019 -a decision it

had put off for almost a year.