A free trade agreement(FTA) or treaty is a multinational agreement according to international law to form a free-trade area between the cooperating states. FTAs, a form of trade pacts, determine the tariffs and duties that countries impose on imports and exports with the goal of reducing or eliminating trade barriers, thus encouraging international trade. Such agreements usually “center on a chapter providing for preferential tariff treatment”, but they also often “include clauses on trade facilitation and rule-making in areas such as investment, intellectual property, government procurement, technical standards and sanitary and phytosanitary issues”.
Important distinctions exist between customs unions and free-trade areas. Both types of trading bloc have internal arrangements which parties conclude in order to liberalize and facilitate trade among themselves. The crucial difference between customs unions and free-trade areas is their approach to third parties. While a customs union requires all parties to establish and maintain identical external tariffs with regard to trade with non-parties, parties to a free-trade area are not subject to such a requirement. Instead, they may establish and maintain whatever tariff regime applying to imports from non-parties as they deem necessary. In a free-trade area without harmonized external tariffs, to eliminate the risk of trade deflection, parties will adopt a system of preferential rules of origin.
The General Agreement on Tariffs and Trade (GATT 1994) originally defined free-trade agreements to include only trade in goods. An agreement with a similar purpose, i.e., to enhance liberalization of trade in services, is named under Article V of the General Agreement on Trade in Service (GATS) as an “economic integration agreement”. However, in practice, the term is now widely used to refer to agreements covering not only goods but also services and even investment.
Misuse of FTA is to be controlled by Government of India :
The customs department will be keeping a close eye on imports of items such as mobiles, white goods, set-top boxes, agarbattis, cameras and other electronic products under a new verification mechanism that kicks in from September 21 to plug misuse of free trade agreements. Sources in the finance ministry said the new measures for administration of Rules of Origin under FTAs coming into force are expected to help curb the misuse of FTAs. The new mechanism requires importers to exercise due diligence before importing goods to ensure they satisfy the origin criterion for eligibility of duty concession under the FTA and declare this to the customs authorities.
Finance Minister Nirmala Sitharaman in the Budget this year had announced that undue claims of benefits under FTAs have posed a threat to the domestic industry and such imports require stringent checks. A new provision was introduced during the Budget session in February this year in the Customs Act for strict verification of rules of origin of imports under FTAs to ensure that FTA benefits are taken correctly. The rules for implementation of this provision were issued last month.
While India’s exports to FTA partner countries remain almost flat, imports rose rapidly. The trade deficit widened. In case of Asian countries, the merchandise trade gap has risen from $5 billion 2010, when the Asian FTA was implemented, to more than $22 billion now. This steep increase in trade deficit has become a serious cause of concern for the country.