Author: Vaibhav Tripathi, IV year of B.B.A.,LL.B(Hons.) From University of Petroleum and Energy Studies.
A free trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
FTAs are extremely beneficial for both developed and developing economies. Together, two countries strengthen their trade and lower obstacles by removing them. FTAs aid in Reducing trade barriers between parties to the agreement. As a result, businesses may find it simpler and more affordable to import or export items across nations, which may contribute to an increase in trade flows. It also provides Enhanced market accessibility by lowering or removing trade obstacles that restrict access to international markets, FTAs can amplify market accessibility for companies. By expanding their customer base and reaching new markets, firms may be able to raise sales and profit margins.
FTAs can create an international trading environment that is more predictable and transparent, which can make it easier for firms to comprehend and abide by trade laws. This may lower trade expenses and ease trade flows. It can aid in the facilitation of international investment flows, which can aid enterprises in gaining access to finance, technology, and experience from overseas investors. As a result, firms may be able to develop and create more jobs, as well as improve their operations and competitiveness.
Accessibility to New Markets - Members have easier access to each other's markets, which is a clear benefit of free trade. Economic development, productivity, a greater quality of living, more innovation, stronger institutions and infrastructure, and even the promotion of peace are all observable outcomes of trade openness.
Creation of Trade - implies that a free trade zone generates trade that would not have occurred otherwise. As a result, supply comes from a more efficient product manufacturer. This will improve the country's overall well-being. When consumption shifts from high-cost producers to low-cost producers, trade is created. The magnitude of this increase is determined by the supply and demand elasticity. If demand is elastic, consumers will benefit significantly.
Economic Growth - Openness to trade and investment has been regarded as a major driver of economic growth. Trade alone accounts for a quarter of Europe's productivity gains. Open economies grow three times faster than closed economies. However, trade is only one of many factors. To enable this growth, a wide range of policies are required, ranging from education and health to infrastructure and innovation. However, some studies show that openness has a minor but negative impact on economic growth.
Comparative advantage - The comparative advantage of modern production's increased specialization and the increased number of stages through which materials are transformed before reaching the final consumer. It is possible to increase economic welfare for all countries by specializing in goods where countries have a lower opportunity cost.
Employment - The data on industry employment supported arguments that increased exports boost employment. In a competitive environment, employment will increase in exporting industries while workers will be displaced as import competing industries close down. As prices fall, consumers' purchasing power rises in a variety of industries, resulting in job creation.
Improving the investment climate - Increased trade opportunities improve the investment climate, which encourages investment. Increased investment leads to growth, which leads to increased consumer welfare.
Monopoly avoidance - One measure for preventing monopolies is free trade. With increased trade, domestic firms will face more competition from abroad, creating more incentives to reduce costs and increase efficiency. It may deter domestic monopolies from charging excessively high prices.
Raw material exchange - Free trade creates favorable conditions for the exchange of excess raw materials. It creates opportunities for mutual benefit while also posing daunting challenges. The unequal distribution of raw materials among countries can cause international tension, but it is also the primary reason why countries benefit from trade.
Intra-industry commerce - Because intra-industry trade allows countries to benefit from larger markets, free trade inter-industry trade modifies intra-industry trade, which provides more benefits from international trade than comparative advantage.
Gains in foreign exchange rates - Imports and exports have increased rapidly in countries with stable exchange rates. The welfare ranking of fixed and flexible exchange rate regimes is determined by the interaction of exchange rate pass-through and international substitution elasticity. Flexible exchange rates in relation to the euro produce higher levels of welfare than fixed exchange rates.
Efficiency in production - Foreign competition forces a domestic industry to improve its efficiency and competitiveness. More efficient resource use leads to increased productivity and domestic output of goods and services. The increased competition encourages the use of innovative production methods, new technology, marketing, and distribution methods.
Living standards are rising - Because of higher rates of economic growth, countries participating in free trade experience higher living standards and higher real incomes. This is because industries are becoming more competitive, and productivity and efficiency are increasing. Countries that have opened their economies have seen a greater reduction in poverty.
Variety of Products and Price Reduction - Free trade leads to an increase in the variety of products available. Consumers benefit because they now have access to a wider range of goods and services. Short-term benefits from free trade include lower import prices. Whether the impact of low prices is positive or negative depends on how you look at it. Cheap products may be beneficial to consumers, but not to those who manufacture and sell them.
Some important Free Trade Agreements
The North American Free Trade Agreement (NAFTA) - between Canada, México, and the United States is one of the most well-known FTAs. In 1994, the agreement went into effect after being inked in 1992. A trilateral FTA uses that example. It has so far removed a lot of restrictions and taxes between the three nations. The fundamental goals of NAFTA are to adopt environmental standards, safeguard intellectual property rights, and remove as many trade obstacles as is practical. NAFTA will be replaced by the United States-Mexico-Canada Agreement (USMCA) in 2020.
African Continental Free Trade Area (AFCFTA) - In 2018, the African Continental Free Trade Agreement was formed it. The agreement has been signed by 54 African nations. It aimed to lower tariff rates between the nations and remove trade restrictions. It was meticulously developed after researching the economies and levels of development of each nation. According to the United Nations Economic Commission for Africa (UNECA), the AfCFTA will boost intra-continental commerce by 52% and GDP by 4% by 2022. It provides the continent's Least Developed Countries with a much-needed boost (LDCs).
Key Agreements Boosting India-ASEAN Trade Relations
India-Singapore Comprehensive Economic Cooperation Agreement (CECA) - The bilateral commerce between Singapore and India has increased significantly. The two nations also agreed to liberalize the export rule of origin, rationalize product-specific rules, and include provisions on the Certificate of Origin to promote balanced trade. Tariff concessions will now apply to 30 more products.
India-Malaysia Comprehensive Economic Cooperation Agreement (MICECA) - In 2011, the MICECA was signed between India and Malaysia, the agreement includes concessions and reductions in tariffs for trading certain goods, services, investments, and movement of natural persons. Although the pandemic hit most parts of the world, Malaysia and India maintained their strong trade relations. As a result, the total trade expanded by 26% in 2021. The import in India from Malaysia increased by US$ 5.9 billion and the exports increased by US$ 3.12 billion.
The India-UK FTA - The FTA between India and UK is still being discussed among the ministries of the nation. The considerable positive sentiments over the potential of this trade agreement are anticipated to be of great economic benefit to both nations. This free trade pact will provide a major thrust to Indian export and labor-intensive sectors like leather, textile, jewellery, IT, ITES, nursing, education, and healthcare. The PMs of both countries are working intensively on an ambitious roadmap for 2030. The data of India’s bilateral merchandise trade with the UK was worth US$ 17.4 billion in 2021-22, higher than the previous record of US$ 16.8 billion in 2018-19.
Conclusion
Free trade agreements have significantly facilitated India's commerce with foreign countries. New trade and investment possibilities have been made possible thanks to free trade agreements that India has signed with a number of countries, including Japan, South Korea, and ASEAN. These agreements have made it easier for Indian businesses to expand their operations and reach new markets by reducing tariffs and other limitations. These agreements have also provided India the chance to increase exports, which has led to the development of jobs and economic growth. In the meanwhile, there are worries about how some sectors of the Indian economy, such as small businesses and agriculture, may be impacted by free trade agreements. Therefore, it's critical to find a balance between the advantages of free trade and the needs of regional businesses and workers.
In order to encourage international trade between countries, free trade agreements have been crucial. Since they have made it possible to do away with trade barriers like tariffs, quotas, and other restraints, productivity has increased and prices for consumers have decreased. Free trade agreements also promote economic growth, provide employment opportunities, and help businesses grow worldwide. They also encourage international cooperation, resulting in a safer and more tranquil world. Despite certain potential drawbacks, free trade agreements nevertheless play a significant role in global business and offer several advantages. By encouraging more trade liberalization, nations may benefit from free trade, improving the quality of life for their citizens and boosting their economic development.