Understanding Free Trade Agreements and their Impact on Foreign Businesses in India

In the ever-changing trade landscape, organizations frequently undertake numerous means and arrangements to undertake international operations to widen their reach globally. The recent times have undoubtedly witnessed a prominent surge in the presence of foreign companies in India. To influence global businesses, nations have entered into trade agreements that assist economic growth governing trade between participating countries.

Free trade agreements (“FTAs”) are referred to as arrangements undertaken between two or more nations or trading blocs that primarily agree to reduce or eliminate certain barriers to trade and investment including customs tariffs and non-tariff barriers on substantial trade. These agreements by and large capture aspects including elimination of tariffs, quotas and restrictions on imports of specific goods, investment regulations, and protecting intellectual property rights.

FTAs aim to liberalize trade between signatory nations, offering foreign businesses a multitude of benefits and shaping the dynamic business environment in India. This article delves into major FTAs India has signed and impact of FTAs on foreign companies operating within the country. Therefore, this article presents a rounded assessment of FTAs, most favoured nation treatment, rule of origin and advantages of FTAs for thriving foreign businesses in India.

Most Favoured Nation and Rule of Origin

To understand FTAs, it is essential to review the General Agreement on Tariffs and Trade ("GATT")[1] which came into force on January 1, 1948, encompassing the concept of most favored nation ("MFN") treatment[2]. This provision states that any favor or advantage given by one contracting party to a product from another country must be immediately and unconditionally extended to the same product from all other territories.

Article XXIV of GATT[3] permits formation and implementation of FTAs, provided that certain requirements are fulfilled by the participating countries which include (a) ensuring that FTA members do not impose higher or more restrictive tariff or non-tariff barriers on trade with non-members than those existing before the FTA was formed; (b) tariffs and other trade restrictions should be removed for 'substantially all the trade between the constituent territories in products originating in such territories'; and (c) duties and other trade restrictions within the FTA must be eliminated 'within a reasonable length of time', not exceeding 10 years.

MFN treatment[4] necessitates equal treatment, wherein members accord the most favorable tariff and regulatory treatment given to the product of any one member at the time of import or export of ‘like products’ to all other members. This is a bedrock principle of the World Trade Organization ("WTO”). For instance, in favour of the MFN treatment, countries can execute FTAs that apply only to goods traded within the group i.e., within the signatory nation(s) while discriminating against goods from nations other than the signatory nation(s). Through MFN, a country lowers its trade barrier, thus opening its market, but for the same goods or services from all its trading partners, regardless of the economic position of such partners.

Rules of origin (“ROO”) [5]are essential while assessing the application of preferential tariffs under any FTA. ROO is defined as the criteria that is required to determine the country of origin of a product for international trade since it is imperative to note that duties and restrictions in several cases depend upon the source of imports. ROO is used to implement measures and instruments of commercial policy such as anti-dumping duties and safeguard measures; determine whether imported products shall receive MFN treatment or preferential treatment; trade statistics; application of labeling and marking requirements; and government procurement.

Without ROO, preferential tariffs under FTA cannot be implemented. In furtherance to the same, only members of FTA receive the benefits of preferential tariffs as agreed between the FTA signatories and therefore, the countries not a party to the same are retracted from the same. ROOs are enforced through a ‘certificate of origin’ issued by authorized agencies of the trading partner to the FTA. An exporter cannot avail customs tariff preferences under a FTA without submitting the certificate of origin from the authorized agency.

Major Free Trade Agreements with India

In the recent years India has aggressively negotiated with other nations for the furtherance of international trade thereby forging accords with individual nations and several regional blocs[6] such as United Kingdom, Canada, United States and the European Union and successful execution of more such agreements would further solidify India's position globally.

Some notable trade agreements with India[7] have been discussed hereinbelow:

• Asia-Pacific Trade Agreement (“APTA”): This agreement, formerly known as the Bangkok Agreement, signed in 1975, is the longest operational trade agreement that facilitates preferential trade between India and other Asian economies including Bangladesh, China, the Republic of Korea, Sri Lanka, Lao PDR and Mongolia.
• Agreement on South Asian Free Trade Area (“SAFTA”): The SAFTA came into force in the year 2006, while succeeding the SAARC Preferential Trading Arrangement of 1993. SAFTA was initiated to encourage common contracts amongst the countries such as medium and long-term contracts concerning trade operated by states, supply and import assurance in respect of specific products. SAFTA includes contracting countries such as India, the People’s Republic of Bangladesh, the Kingdom of Bhutan, the Republic of Maldives, the Kingdom of Nepal, the Islamic Republic of Pakistan, and the Democratic Socialist Republic of Sri Lanka.
• ASEAN-India Free Trade Area (“India-ASEAN TIG”): India and other nations including Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam, signed this India-ASEAN TIG agreement for Trade in Goods under the broad framework of Comprehensive Economic Cooperation Agreement (“CECA”) between India and ASEAN on August 13, 2009.
• CECA or Comprehensive Economic Partnership Agreements (“CEPAs”) are the most comprehensive agreements, encompassing not just tariffs but also investment, services, intellectual property rights, competition policy, and trade facilitation measures. India has CEPAs with countries like Japan, South Korea, Singapore, and the United Arab Emirates.
• Preferential Trade Agreements (“PTAs”) offer limited benefits in comparison to CEPAs or FTAs. PTAs focus on reducing tariffs on a specific list of goods or may be applicable solely to developing countries, for instance, the Asia-Pacific Trade Agreement (APTA) and the India-Afghanistan PTA. India-Mercosur Preferential Trade Agreement, which has been recently signed trade agreement in June of 2024, between India and the South American trade bloc Mercosur (Argentina, Brazil, Paraguay and Uruguay).
• Further, India has also entered into the India-EFTA Trade and Economic Partnership Agreement (“TEPA”), which has been established as a free trade zone between India and the European Free Trade Association (EFTA) which includes Iceland, Liechtenstein, Norway and Switzerland, in March 2024, thereby expanding trade opportunities for India with European nations.

Analysis of the Trade Agreements on Foreign Businesses

India's economic landscape is undergoing a significant shift, with increasing attention towards FTAs to strengthen its position in the global market and ensure consistent and stable supply chain allies affiliated with the objective of robust supply chains and integrating domestic and foreign businesses. As a result, foreign businesses are presented with a dynamic environment benefiting from the requisite FTA and forging a robust presence in the Indian market. For instance, ASEAN nations have removed tariffs on a number of product categories that are of export interest to India in accordance with the terms of the India-ASEAN TIG agreement. By reason of booming prominence of FTAs, India has opportunities to collaborate with the United States, United Kingdom, United Arab Emirates, European Union and Canada and thereby become one of the leading exporters in the vibrant import-export landscape.[8]

FTAs offer several advantages such as reduced tariffs on imported products which results in increase in profitability for foreign businesses in India, enhanced market access due to ease in customs and import-export procedures, fair treatment and liberalized investment policies.[9] Foreign businesses must also deliberate upon potential challenges. Increased market access through FTAs triggers more competition from foreign companies in other signatory nations. Further, FTAs often encompass specific rules of origin requirements and compliances that determine the place of manufacturing of a product to qualify for preferential treatment.

Transparent investment regulations grant signatory nations ease in investments with respect to the other signatories. However, non-tariff obstacles like intricate rules and administrative roadblocks might still present difficulties for foreign companies operating in India, even in the event tariffs are reduced/eliminated. Foreign businesses must keep themselves informed of the ongoing negotiations for potential FTAs. By understanding particulars of each FTA, businesses can overcome probable obstacles and strategically position themselves to take advantage of the increasing number of FTAs signed by India. To prevent forthcoming concerns and obstacles, foreign businesses must ensure adherence to the regulatory compliances outlined under the FTAs along with the legal framework applicable to foreign businesses in India.

[1] https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#articleI;

[2] Article 1 of the General Agreement on Tariffs and Trade;

[3] https://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#articleXXIV;

[4] https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm;

[5] https://www.trade.gov/identify-and-apply-rules-origin;

[6] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1843902;

[7] https://commerce.gov.in/international-trade/trade-agreements/;

[8]“FTAs and new markets will increase India's export to USD 1 trillion by 2030”, Economic Times, March 29, 2024, <https://bfsi.economictimes.indiatimes.com/news/industry/ftas-and-new-markets-will-increase-indias-export-to-usd-1-trillion-by-2030/108872352?utm_source=copy&utm_medium=pshare>;

[9]“What’s the status of India’s Free Trade Agreements?”, The Hindu, March 15, 2024, <https://www.thehindu.com/news/international/watch-trade-diplomacy-whats-the-status-of-indias-free-trade agreements/article67955228.ece>.