Free Trade Agreements (FTAs) are becoming more common around the world. Countries sign them to boost trade and investments, lower tariffs, and improve access to each other’s markets. In this explainer, we will break down what FTAs are, how they work under global rules, and how they differ from other trade arrangements.
What Are Free Trade Agreements (FTAs)?
A Free Trade Agreement (FTA) is a deal between two or more countries. The goal is to lower or remove taxes (called tariffs) and other trade restrictions. This makes it easier and cheaper to trade goods and services between the countries.
What FTAs Cover:
- Trade in goods (like food, clothes, machinery)
- Trade in services (like banking, construction, education)
- Other areas like investments, intellectual property, and government contracts
How Do FTAs And WTO Rules Work Together?
The World Trade Organization (WTO) promotes equal treatment in trade. It follows the “Most Favoured Nation” (MFN) rule, meaning if a country gives special treatment to one nation, it must give the same to all WTO members.
But There’s an Exception:
FTAs are allowed even if they break the MFN rule. WTO rules permit FTAs if certain conditions are met:
- Don’t harm outsiders: FTAs should not increase trade barriers for non-members.
- Cover most trade: The FTA should include almost all trade between the members.
- Act fast: Tariff removal should be done in about 10 years.
Special Rule for Developing Nations:
The “Enabling Clause” lets developing countries make easier trade deals (preferential agreements) even if they don’t meet all the above rules.
Why Do Countries Prefer FTAs?
Countries sign FTAs for many practical reasons:
- Easier access to markets: With lower tariffs, it’s cheaper to sell goods and services to each other.
- Competitive advantage: Exporters get special treatment compared to non-FTA countries.
- Example: ASEAN gives India zero duty on leather shoes under an FTA, while Canadian shoes still face a 20% tariff.
- Attracts foreign investment: Companies from other countries may set up factories in one FTA country to sell in another partner country.
- Covers more than just tariffs: FTAs may also include common rules and standards that make trade smoother.
- Faster than WTO talks: Global trade talks often move slowly. FTAs offer a quicker way to boost trade.
Types of Trade Agreements: How Do They Differ?
| Type | Key Features | Example |
|---|---|---|
| Preferential Trade Agreement (PTA) | Reduces tariffs on select products. Limited scope. Uses a positive list of items. | India–MERCOSUR PTA |
| Free Trade Agreement (FTA) | Removes tariffs on substantial trade. Each country keeps its own tariff rules for others. Uses a negative list for excluded items. | India–Sri Lanka FTA |
| Comprehensive Economic Cooperation Agreement (CECA) | Covers trade in goods, services, and investments. May include other areas like IPR and competition. | India–Malaysia CECA |
| Comprehensive Economic Partnership Agreement (CEPA) | Similar to CECA but with deeper commitments, especially in regulatory areas like MRAs. | India–Japan CEPA |
| Customs Union | Zero duty among members and a common external tariff for non-members. | Southern African Customs Union (SACU) |
| Common Market | Customs union + free movement of labour, capital, and aligned regulations. | European Common Market |
| Economic Union | Common market + shared monetary/fiscal policies and institutions. | European Union (EU) |
How Are CECA and CEPA Different from Regular FTAs?
Wider Scope:
- CECA and CEPA include goods, services, investment, IPR, etc.
- FTAs focus mostly on goods.
Deeper Commitments:
- CECA/CEPA include regulatory cooperation and Mutual Recognition Agreements (MRAs).
- MRAs let countries recognize each other’s standards — even if rules are different, the end result is similar.
What Are Rules of Origin?
Why They Matter:
Rules of origin determine where a product actually comes from — so that countries can stop others from misusing the FTA benefits.
How It Works:
- Exporters must get a Certificate of Origin from a government-approved agency.
- Without this document, importers can’t claim tariff benefits under the FTA.
India’s Free Trade Agreements & Preferential Trade Network
India has signed several Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs) with countries and groups around the world. These deals help reduce or remove tariffs, open up markets, boost exports, and strengthen economic ties.
India’s Active Free Trade Agreements (FTAs)
- SAFTA (South Asian Free Trade Area) – Started in 2006 between SAARC countries to cut tariffs on trade.
- India–Sri Lanka FTA (ISFTA) – In place since 2000 to support two-way trade.
- India–Nepal Trade Treaty – Allows duty-free access for many primary products.
- India–Bhutan Trade Agreement – Removes tariffs on several goods to boost bilateral trade.
- India–Thailand FTA – Launched in 2004 with select items under the Early Harvest Scheme.
- India–Singapore CECA – Covers trade, investment, and services.
- India–Malaysia CECA – Signed in 2011 to cover goods, services, and investment flows.
- India–Japan CEPA – Active since 2011, removes tariffs on most goods.
- India–South Korea CEPA – Supports tariff reduction and promotes bilateral trade.
- India–ASEAN FTA – In force for goods since 2010, extended to services in 2014.
- India–Mauritius CECPA – Signed in 2021, India’s first FTA with an African country.
- India–UAE CEPA – Launched in 2022 to enhance trade and cooperation.
- India–Australia ECTA – Started in December 2022; focuses on key sectors like agriculture, minerals, and education.
Generalized System of Preferences (GSP)
Under GSP schemes, Indian exports enjoy reduced or zero tariffs in certain developed countries. These schemes are designed to support developing nations like India by giving their goods preferential access to foreign markets.
India’s Preferential Trade Agreements (PTAs)
- SAPTA (SAARC Preferential Trading Arrangement) – Includes India, Pakistan, Nepal, Bhutan, Bangladesh, Maldives, and Sri Lanka.
- APTA (Asia-Pacific Trade Agreement) – Signed in 1975, includes India, China, South Korea, Bangladesh, Laos, and Sri Lanka.
- India–MERCOSUR PTA – Signed with South American countries (Brazil, Argentina, Uruguay, and Paraguay); active since June 2009.
- India–Afghanistan PTA – Signed in 2003 to encourage bilateral trade.
- India–Chile PTA – Enhances trade ties with Latin America through tariff concessions.
Upcoming and Proposed Trade Agreements
- BIMSTEC FTA – A plan to connect South and Southeast Asian countries (India, Bangladesh, Bhutan, Nepal, Sri Lanka, Myanmar, Thailand) for deeper regional trade.
- India–SACU PTA – A proposed agreement with the Southern African Customs Union (South Africa, Botswana, Namibia, Lesotho, and Eswatini) to improve trade links.