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India-UAE Free Trade Agreement and its significance

  • Category
    Polity & Governance
  • Published
    2nd Mar, 2022

Context

India and the United Arab Emirates have signed the Comprehensive Economic Partnership Agreement (CEPA).

Background

  • India and UAE have entered into a Free Trade Agreement (FTA) by signing the CEPA in February, 2022.
  • The above deal was signed in a virtual summit headed by Indian Prime Minister Narendra Modi and the Crown Prince of Abu Dhabi Sheikh Mohammed bin Zayed Al Nahyan.
  • This agreement will boost bilateral trade between the two countries and benefit both the economies.

Analysis

About the CEPA between India and UAE:

  • It is a Free Trade Agreement that will take effect from 1st June, 2022.

What is a Free Trade Agreement?

  • It is an agreement between two or more nations to eliminate tariffs and non-tariff barriers on a significant amount of imports from partner countries. Services, investment, and economic cooperation may all be covered by the agreement.
  • Comprehensive Economic Partnership Agreement is one of the types of Free Trade Agreement.
  • It is India’s First Free Trade Agreement in the last 10 years and first such deal after Narendra Modi became the Prime Minister of India.

The last major FTA India signed was with Japan in 2011.

  • India-UAE qualifies as an “early harvest agreement”.

Under an early harvest agreement, two trading partners significantly reduce or eliminate customs duties on a limited number of goods and relax norms for promoting trade in services.

  • This FTA is the fastest trade deal to have been negotiated (88 days) till now.
  • The abovementioned agreement not only covers goods and services traded between the two countries but also many other products. Hence this deal has been termed as ‘new-age FTA’.

This CEPA is one of India's 'new-age FTAs’, because it covers topics that have formerly been unexplored. These contain chapters on government procurement, digital trade, and intellectual property rights, all of which are extensive and separate.

It also accommodates provision for cooperation, cross-border data transfer, and harmonisation of digital standards with the focus being on digital trade.

  • For the first time in a FTA, separate chapter on small and medium enterprises has also been incorporated that recognises the fundamental role of SMEs in maintaining dynamism and enhancing the competitiveness of respective economies of both the countries.
  • Thus, this CEPA also reaffirms the importance of incorporating an SME perspective into economic and trade issues.
  • From Day 1 of the agreement coming into force, 90 percent of India’s current exports to the UAE will have immediate market access at zero duty.
  • Duties on an additional 9 percent of India’s exports are set to reduce to zero within the next 5 to 10 years, according to CEPA provisions.
  • The CEPA is likely to benefit about $26 billion worth of Indian shipments that are currently subjected to 5 percent import duty by the UAE. 
  • The major beneficiaries of this would be gems and jewellery, apparel, engineering products, and pharmaceuticals exports.
  • A separate Annex on Pharmaceuticals has been incorporated to facilitate early access of Indian pharmaceuticals to the UAE market.

    The above provision includes automatic registration and marketing authorization within 90 days for Indian products approved by developed countries such as the US, UK, European Union and Japan.
  • With respect to imports from UEA, as per the provisions of the CEPA, India has set lower tariff rate quotas (TRQs) for select imports from UAE, most important among which is gold, one of India’s largest imports.
  • This in actuality means that the TRQ will allow a lower tariff rate on imports of a gold within a specified quantity.

    UAE is the second largest source of gold for India. Lowering of tariff on gold coming from UAE will boost the gems and jewellery sector in India and also disincentives smuggling of the yellow metal into India.
  • On the interest expressed by the UAE government, India has provided such TRQs for other products also. Examples of such product are copper, polyethylene, certain chemicals and metal items.
  • Review of these TRQs will happen after 10 years.

Provision in the FTA to protect Indian producers:

  • The CEPA is also the first of its kind in India’s stable of FTAs given that it comes with an in-built safeguard mechanism.
  • It is important to note that the government has criticised the lack of safeguards in previously negotiated FTAs that left domestic industry vulnerable to import surges.
  • The CEPA with the UAE incorporates a permanent safeguard mechanism that can be resorted to by either nations, in case of a sudden surge in imports.
  • Both countries have also prepared separate exclusion lists, detailing the products that they want to keep out of the ambit of the FTA, owing to sensitivities.

    To protect domestic industry, India has decided to keep a range of agri-products outside the deal. This includes dairy, tea, coffee, rubber, spices, sugar and tobacco products.

    Manufactured items such as pharmaceuticals, certain chemicals including azo dyes, aluminium and copper scrap, certain categories of steel, helicopters and aeroplanes have also been kept out.

  • This FTA contains strict rules related to rules of origin norms.
  • Stringent monitoring of trade from both countries will be done to scrutinise the origin of product traded between the two countries.
  • Thus, other countries circumventing the FTA route by showcasing product to be originating from one of the two countries and exporting it to the second, can be stopped.

    A case in point is the entry of Chinese goods that are shipped to Vietnam, Thailand, or Malaysia and then re-exported to India. Since these countries are India’s FTA partners, the final import duty on the goods in question remains relatively low, while the government loses revenue and the market is flooded.
  • This mandates stringent norms for value addition, or the minimum amount of economic value that has to be added to the product if it is not originally made in the UAE, for it to be allowed for export to India under the CEPA. 
  • UAE is the third largest trading partner of India after China and USA.
  • The UAE has established itself as a major economic hub not just in the Middle East/West Asia region, but also globally.
  • As a part of Gulf Cooperation Council, UAE can help in finalising the FTA between Indian and the GCC.
  • India-UAE relations have become a focal point of India's Extended Neighbourhood and Look West policies in the region. This deal will further boost the relation between the two countries.

    India’s Extended Neighbourhood: In 2004 the Indian government affirmed that “the concept” of an “extended neighbourhood for India” included the region from the Suez Canal to the South China Sea and includes within it West Asia, the Gulf, Central Asia, South East Asia, East Asia, the Asia Pacific and the Indian Ocean Region.

    Look West Policy: In the year 2005, the government of India launched its Look West Policy which focused on India improving its relations with West Asian countries.

    The three main axes of India’s Look West Policy are- The Arab Gulf countries, Israel and Iran.

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