logo logo

The India-UAE CEPA: India’s renewed love for FTAs

ORF | 14 March 2022

The India-UAE CEPA: India’s renewed love for FTAs

by Nilanjan Ghosh

The inking of the India-UAE Comprehensive Economic Partnership Agreement (CEPA) on 18 February 2022 is slated to open up a host of opportunities for both the economies. The trade pact is envisaged to increase the bilateral trade in goods from the present levels of US$60 billion to US $100 billion over the next five years, and also achieve services trade worth US $15 billion. Claims by the Ministry of Commerce suggest creation of 10 lakh jobs in India in labour-intensive sectors such as textiles, pharmaceuticals, gems and jewellery, plastic products, auto and leather, processed agriculture and dairy products, handicrafts, furniture, food and beverages, engineering, etc. The tariffs are supposed to be brought down to zero for 90 percent of Indian exports to the UAE. While this comprises almost 80 percent of the tariff lines, the list will entail around 97 percent of the tariff lines over the next five years.

There are gains for the UAE also. There will be an immediate relief on import duties on about 65 percent of tariff lines on imports from the UAE that is slated to increase to 90 percent of tariff lines in 10 years. There will also be a tariff-rate quota of 200 tonnes of gold imports from the UAE, with the proposed import duty being one percentage point less than the tariff with other trading partners. While “gains from trade” are easily perceptible, there remain further possibilities of increased repatriation from the UAE, given that services and human capital movement will be eased out further.

The India-UAE trade agreement has another critical connotation from the perspective of bilateral political relations. This is only the second free-trade agreement (FTA) that has been signed under the present Indian dispensation, the first one being with Mauritius in February 2021. Recently, India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP) has met with a host of criticisms. There were voices within and outside India that felt that that India has missed out the bus by not being a member of the mega-trade deal, though there were concerns that India is not adequately prepared to face the sectoral competition to be posed by ASEAN and Australia in various contexts. However, one of the reasons for the Indian exit seems to be geopolitical/ geostrategic, and that is with the presence of China in the bloc.

Post India’s withdrawal from the trade bloc, India has been contemplating to sign a series of bilateral trade agreements. Apart from the already signed India–Mauritius CECPA (Comprehensive Economic Cooperation and Partnership Agreement) and India-UAE CEPA, trade agreements with Australia, the UK, and Canada are in advanced stages, and there are serious talks on inking FTAs with the EU and Israel. What explains this sudden spurt of signing FTAs? Is India looking at FTAs only for the economic benefits that follows, without a holistic consideration including the costs? It should be appreciated that India’s FTA-signing is a “two-level” game with its implications at both the international and the domestic levels. At the international level, it has to negotiate with the negotiating nation/s, while at the domestic level, it has to negotiate with various contending constituencies.

Assessing FTAs through impacts on value chain

While exploring the domestic component, we see that there is the domestic constituency that is slated to have its winners and losers with the FTAs. This can be found sectorally, or across the value-chain of a commodity. Again, if an FTA leads to import of cheaper factors of production making the domestic industry more competitive, it can lead to an increase in “producer surplus” by boosting the bottom lines of an organisation. However, the same is not true with the imports of final products that pose a direct competition to domestically produced goods.

In a large number of cases of India’s trade agreements—especially with those of Southeast Asia—Indian trade deficits increased after the FTAs came to effect. This is because the demand for imported commodities increased with decline or complete elimination of tariffs and non-tariff barriers, thereby, making these products cheaper for the Indian consumer, when compared with similar Indian products. This is true for palm oil, where a low tariff regime by around 2014–15 resulted in a massive spurt in palm oil imports from Malaysia and Indonesia. It has been allegedly stated that with the dominance of the imported palm (from Malaysia) and soya (from South America) oils in the consumption basket, processing margins diminished substantially thereby, posing a threat to the very existence of the domestic oil processing industry.

Despite the above, these FTAs have actually helped the consumers. The reason for increasing consumption of imported palm oil in the last decade was precisely because of lower prices helping consumers’ cause. Larger volumes of cheap imports increase the “consumer surplus” as also consumers’ choice basket. With constant advocacy from domestic industry groups, the government raised the import tariffs of both crude and refined edible oils over time from the zero-tairff regime of crude oil during the middle of the last decade. An ORF publication already created the mathematical and econometric frameworks to assess the impacts of FTAs on the commodity value-chain. Such a framework on the basis of a scenario analysis can help both ex ante (pre-implementation) and ex post analysis (post-implementation) analyses.

Even in the context of the recently concluded India-UAE CEPA, and other upcoming FTAs, such analyses across chosen commodity (for instance, wine, dairy products, for Australia-India FTA) value chain/s will be useful. This can provide with the impacts of trade agreements on consumers, retailers, intermediaries in the marketing chain, processing units, and primary producers. This renders another dimension to the analysis of FTAs, especially when there has been a tendency amongst many analysts to assess FTAs only through the lens of simple macro-economic parameters of trade surpluses/ deficits, which is largely a reductionist and narrow perspective.

The geostrategic and geoeconomic gains from FTAs

The FTAs also need to be assessed from a geostrategic viewpoint. Many have perceived India’s withdrawal from RCEP as “protectionist” and “conservative”. However, many were apprehensive about RCEP due to the Chinese presence in the bloc. Therefore, India’s getting into the FTAs with the friendly nations can send across message of shedding off the conservative “protectionist” image. This also has critical geoeconomic implications from the perspectives of trade and investment in the Indo-Pacific region. One needs to appreciate that the India-UAE CEPA has geopolitical implications from the perspective of the western QUAD (consisting of Israel, India, the UAE, and the United States), a regional force convened last October. The western QUAD and the India-UAE CEPA can be construed as the UAE’s post pandemic recovery plans through revival of its trade links from the Mediterranean coast to Turkey on one hand, and taking advantage of the burgeoning factor market of India and South Asia. This provides India also the bandwidth to develop closer ties with the western neighbours that augurs well with vision of getting into trade agreements marked by absence of China. Further even, the India-UAE CEPA can also be a step ahead towards having an India-GCC (Gulf Cooperation Council) FTA that will also have its geoeconomic and geopolitical implications. In a similar way, FTAs are emerging as important tools for economic diplomacy in the Indo-Pacific for deeper levels of engagement with friendly nations like Australia and others.

Concluding remarks

Therefore, in this entire penchant for signing FTAs, it becomes imperative that there should be a more comprehensive impact analysis conducted. This should entail understanding the impacts on the economy through a value chain analysis, and the geoeconomic and geopolitical repercussions. The value chain analysis, ex ante or ex post, turns out to be beneficial on two grounds. Firstly, it provides the Ministry and policymakers an opportunity to assess the changing natures of bottomlines/ well-being of the various stakeholders of the commodity value chain, as also provide an aggregate value of the surplus/ loss generated in the chain, and take a more informed decision rather than going by sheer assumptions posed by trade theory. Secondly, this also helps the policymakers to design their negotiation strategies across stakeholder groups on one hand and incentive strategies, on the other, to compensate for the losses that might occur to some of the concerned stakeholders in the value-chain. India’s decade-long caution against FTAs have often been attributed to reaching conclusions on successes/failures of FTAs through FTA utilisation rate, market penetration, integration with regional or global production networks, and trade deficits. This essay adds alternate two layers of criteria to assess FTAs.

 source: ORF