LEVERAGING FREE TRADE AGREEMENTS FOR COMPETITIVE ADVANTAGE; IDENTIFYING THE ROAD BLOCKS
With the proliferation of FTAs globally in its various avatars covering trade in goods, services, and investments. It is imperative for every industry exposed to global production and supply chains management networks to include FTAs as a key component in its growth/survival strategy. The quality and depth of commitments under FTAs is typically WTO plus i.e. surpassing the commitments offered under the WTO commitments. Hence, factoring the FTA landscape by the industries would be a worthwhile endeavor, as it can lead to significant reductions in import duties thus enhancing the cost competitiveness. Further, Exporting Industries can use FTA’s to enhance their competitiveness in terms of smart pricing.
India is party to various FTAs which include the Asia-Pacific Trade Agreement with Bangladesh, Korea, Sri Lanka and China (‘APTA’), the Global System of Trade Preferences with 48 countries (‘GSTP’) the Comprehensive Economic Cooperation Agreement with Singapore (‘CECA’), the Agreement on South Asian Free Trade Area with Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka, Maldives (‘SAFTA), the India-Thailand FTA, Preferential Trade Agreements with the Association of South East Asian Nations (‘ASEAN’) and South Korea etc. As of 2015, India has notified the WTO of 15 trade agreements and is currently negotiating another 11 agreements in various forms.
Trade agreements are a means to promote trade but Indian Industry appears to have underutilized these trade agreements. The percentage of India’s international trade through the preferential route/FTAs is very low. According to the Asian Development Bank, the utilization rate of India’s FTAs varies between 5% and 25%, which is one of the lowest in Asia.
A major reason consistently pointed out in various studies across developing countries for low utilization rates of FTAs remains the lack of information and education campaigns focused on FTAs. Compliance and administration costs related to ROO (rules of origin) requirements also represent a major hurdle in the decision of firms to utilize an FTA. All too often, firms are severely discouraged by the administrative costs of securing COO certificate. Preparing the origin documents entails work that creates fixed expenditure, thus only those firms (one can safely exclude SMEs from this category) who can absorb this cost are inclined to use an FTA scheme. In order to qualify for preferential duty rates, a company must comply with the rules of origin for that particular FTA. These rules have varied criteria (e.g. regional value content or shift in tariff classification) which apply differently to products depending on the FTA. Complex rules of origin criteria, lack of information on FTAs, higher compliance costs and administrative delays dissuade exporters from using preferential routes. Failure to properly track the country of origin of imported goods can jeopardize eligibility for FTAs and other preferential trade programs. Incorrect or false country of origin claims can also result in severe customs penalties or violations of civil and criminal statutes. When applying for a certificate of origin, firms also have to submit documents with specific information on source, components, and raw materials to prove origin. Firms rightly perceive this process as requiring the disclosure of confidential information, concern about the continued confidentiality of the information so submitted, is also a major dampener.
Industries are already facing difficulties comprehending and utilizing existing FTAs, this has implications for India’s negotiation of RCEP/FTA with EU, Australia etc., as it would imply as yet another trade agreement for industries to comprehend. The RCEP, along with other mega RTAs – the TPP (Trans Pacific Partnership) etc, are expected to alter the framework and standards for trade relations among nations. These agreements /negotiations are also focused on compliance of technical, intellectual property and environmental standards. In these circumstances Industries have no option to ignore the emerging web of trade agreements, a very concerted effort is required to enhance their capacity to understand and utilize these trade agreements. This won’t be possible especially in context to the SME segment, without government support. The utilization rate of FTAs would certainly improve as the government steps up its efforts in information and education campaign.
In its Foreign Trade Policy statement, issued in March 2015, the Commerce Ministry (GOI) has talked of a relative lack of awareness about the potential benefits from free trade agreements (FTAs). A web portal on FTAs has been developed and can be accessed at http://indiantradeportal.in. However, The data available in the portal require interpretation and enhanced levels of understanding which is certainly beyond mid-sized & small firms .In any case this effort can at the most qualify as baby step in the right direction.
In this scenario merely focusing at the policy level of FTAs won’t resolve the issue of low utilization and survival of the Industries affected by the global supply chain. A concerted effort focusing at the administrative issues , especially in ROO administration is required, in terms of creating a Binding Origin Information (BOI) Authority ; enhancing the capacity of the Industry to comply with technical standards, leverage their intellectual property which remaining vigil for not violating the agreed upon IPR regime. What is essentially required is a comprehensive outreach programme, which not only educates but also enhances the capacity of industries to avail the benefits of FTAs.
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