Economics and Law-II

Topic: Economic Impact of Free Trade Agreements

NATIONAL LAW UNIVERSITY, DELHI

2023

SUBMITTED BY: MAYANK SINGH SUBMITTED TO:

ROLL NO: 93 LLB 21 DR MEENAKSHI PARIDA

Table of Contents

INTRODUCTION...............................................................................................................................3

FREE TRADE: PROS AND CONS...................................................................................................3

Challenges in Analysing the Economic Impact.................................................................................4

Free Trade between India and ASEAN.............................................................................................6

Impact on imports by India................................................................................................................8

CONCLUSION....................................................................................................................................9

REFERENCES..................................................................................................................................10
INTRODUCTION
Free Trade is a pact between two or more nations to reduce barriers to imports and exports
among them. Under a free trade policy, goods and services can be bought and sold across
international borders with little or no government tariffs, quotas, subsidies, or prohibitions to
inhibit their exchange. In the contemporary world, free trade policies are commonly executed
by establishing a formal and mutual agreement among the nations. Notwithstanding this idea
of free trade, mere absence of constraints for trade can be termed as a free-trade policy. Such
a liberalisation in the realm of businesses is called Laissez-Faire Trade. In a pragmatic sense,
International Free Trade is similar to any domestic trade that takes place within or between
states, cities, or towns. The mark of distinction which differentiates international free trade
from a domestic trade is that the exporter sells products which utilises the sources to their
maximum potential while imports the products and goods which are scarce.

FREE TRADE: PROS AND CONS

Pros

a. Provides the consumers with a plethora of choices which further helps the buyers to
analyse the different products and goods available in the market and choose
whatsoever is suitable for them. If Consumers would have more choices, they would
be able to decide the best by looking at factors like price or durability of the product.
b. Exports from abroad explicitly benefits the countries where labour is cheap or sources
are inefficient. In other words, Jurisdictions which are economically insufficient can
have access to better quality of goods through free trade and export.
c. Countries can produce more goods collectively by trading on their respective
advantages.

Cons

a. Excessive Competition may lead to the failure of local markets

b. There may be a threat to the environment or exploitation of labours since to facilitate
international trade, a lot of sources are needed, there are always chances of labour and
environmental abuse.
c. Over-Dependence on Global Market is another major issue since the consumers
would be accustomed to exported goods, they would not be able to formulate an
appropriate strategy at the time of a crisis.
Challenges in Analysing the Economic Impact
•Determining the economic impact of trade treaties is a 'difficult assignment,' according
to a Congressional Research Service analysis from the United States (US).

 Numerous variables interplay between an FTA and economic development which

inherently causes a difference of opinion among the analysts with respect to the impact of
free trade.

 Implementation often takes ten to twenty-five years, with some of the most
contentious provisions being left to the end, resulting in significant changes in a country's
wider economic and social climate by the time the FTA is settled.

 Trade and economic development are two terms which are closely inter-connected but
are not same and therefore, it is not necessary that a positive trade always influences
economic development.

 Whenever there is a reform in a policy, there is bound to be a beneficiary and at the

same time there exists someone for whom that specific policy may be a bane. The same
logic applies to Free Trade Agreements. In some sectors, it would generate employment
while bear loss in others. Therefore, it can be inferred that scholars and analysts may have
conflict of opinion due to the differential effects and external variables.

TAs are a process The ramifications of partial free trade and rule-making (against a
limited number of partners) are so disputed. Supporters argue that, like with any
liberalisation, lifting trade barriers will benefit both parties. Regulations in Free Trade
Agreements also aim to boost economic activity and investment by establishing a stable
policy environment, Binding regional schemes. As far as criticisms of Free Trade
Agreements is concerned, it is often argued that Diversion of trade or Creation of trade
may happen by virtue of FTAs. While Creation expands the scope of welfare, Diversion
reduces the scope of welfare.

 In a situation wherein abolishing trade-barrier leads to efficiency in the imports by

replacing inefficiently produced domestic goods, Trade Creation takes place. Herein,
 displaced domestic producers are at a loss but it is certainly a matter of benefit for
consumers.

 FTAs are a process in partial free trade and rule-making Trade diversion can occur
when the items in question are already being imported, particularly from a globally
efficient source. Because of lower tariffs, these 'efficient' imports from outside the FTA
are being supplanted by less efficiently created commodities from within the FTA. As a
result, even from a liberal standpoint, showing that commerce between parties has
increased is insufficient to assess the FTA's impact. It is also critical to understand how
much growth is "created" and how much is "diverted." FTAs are a process of partial free
trade and rule-making. When trade diversion exceeds output, it can be harmful rather than
advantageous to economic well-being and GDP. Liberals have their detractors for FTAs
who argue that Governments must have the authority to protect select domestic producers
from import competition, and excessive limitations limit governments' policy flexibility.
They are concerned, for example, that the adjustment to greater imports would
disproportionately affect the poor and vulnerable, who have the fewest alternative
employment opportunities. The more detailed and extensive the FTA rule book, the more
restricting it is to future policy endeavours.

• An evaluation of FTAs is a process in partial free trade and rule-making Six EU FTAs were
found to have a "strong impact on trade wherein initially tariffs were excessive and where
these tariffs were quickly and substantially removed across all types of goods." When "tariffs
were already low, little effects were found," Free Trade Agreements "with long phasing-in
provisions... are found to have insignificant effects," albeit this may alter as execution moves
forward.

 TAs are a process in partial free trade and rule-making. The Korea-Chile Free Trade
Agreement was deemed to have failed to reduce duties on several of the nation's "major
export items." In situations wherein "tariffs were abolished immediately after the FTA
went into effect," such as vehicles, mobile phones and TVs, however, "exports increased
sharply right after the agreement became effective." According to the same source, the
ASEAN pact 'listed over 200 products as ultrasensitive' and barred them from the
Agreement.
 The impacts of Euro-Med accords are shown to be lower when partner nations
gradually cut tariffs.

 FTAs are a process in partial free trade and rule-making. According to a review of the
Canada-Chile Free Trade Agreement, trade expanded the fastest in two categories, one of
which was commodities with a ten-percentage-point or more tax decrease, and the
slowest in products with a smaller tariff drop. Unfortunately, the fact that duty-free
products were the second fastest-growing group before to the FTA dilutes the clarity of
this message. The report also fails to provide essential data to explain why moderate tariff
reduction have such a small impact on trade. The limited liberalisation might be attributed
to the maintenance of protective measures. It might possibly be because relatively low
pre-FTA tariffs limited how many points could be taken off.

Free Trade between India and ASEAN

In the year 1991, India came up with “Look East” policy. The preliminary purpose of the
Look East policy was to intensify interaction with the East Asian Countries. In the year
1992, It emerged as a sectoral dialogue partner of the ASEAN i.e., Association of South
East Nations. The objectives of ASEAN Include:

i. To increase the pace of economic growth

ii. To encourage Cultural Development
iii. To fasten social growth
iv. Maintain Peace and Harmony
v. Act as a platform to discuss and negotiate in case a contention arises

Members of ASEAN

a. Malaysia
b. Indonesia
c. Philippines
d. Thailand
e. Singapore
f. Brunei
g. Cambodia
h. Lao People’s Democratic Republic
 i. Myanmar
j. Vietnam

In the year 1995, India turned into a Full Dialogue Partner of ASEAN. Followed by this,
India also got the membership of ASEAN Regional Forum (ARF) in the year 1996. On 8 th
October, 2003, India and ASEAN had inked a framework agreement known as CECA which
is the abbreviation for Comprehensive Economic Cooperation Agreement. It was done in
order to provide an institutional framework which would simplify the process of economic
cooperation. In March 2004, Negotiations for trade in goods agreement had begun between
ASEAN and India which lasted for six years and came to an end after the agreement was
signed on August 13, 2009. It was signed during a meeting of the Economic Ministers of
ASEAN that was held in Bangkok. The agreement was finally implemented on 1 st January
2010.

India's major exports to the ASEAN are. Meat, edible vegetables and fruit, grains, cotton,
tobacco, petroleum, salt, sulphate organic chemicals, drugs, metals such as steel and iron,
copper, electrical and electronic equipment, and machinery were shipped to the ASEAN area.
Mineral energy sources, animal and vegetable fats, chemicals, pharmaceutical products,
rubber products, wood products, iron and steel, clothing, electrical and electronic equipment,
machinery, ships, boats, and floating structures, optical and photographic equipment, and
musical instruments were the most important ASEAN imports for India. If the trade in goods
agreement is implemented, the majority of these commodities will be given tax-free entrance
into the markets of ASEAN member nations as well as India.

Impact on bilateral trade between India and ASEAN

Post implementation of the FTA, the access to the Indian market for ASEAN members and
vice-versa. But, access of ASEAN region to India is significantly high when compared to
India.

As a result, following the implementation of the FTA, Under the current scenario, Thailand
has the highest demand for Indian exports in the ASEAN area, followed by Cambodia when
all nations adopt the FTA. Smaller nations like Vietnam, the Lao People's Democratic
Republic, the Philippines have grown into key markets as well. If commerce is entirely
liberalised, Indonesia has the possibility to become a massive market. Malaysia has grown
steadily as a significant market among the major countries.

Impact on imports by India

Among all the ASEAN countries which have witnessed a considerable rise in exports to
India are- Thailand and Malaysia. When any country enacts a free trade agreement, the
ASEAN generally register pretty high in their export to countries like India, Philippines,
Malaysia and Singapore and Thailand on the Contrary records moderate rise. With the onset
of liberalisation, Myanmar and Indonesia’s export to India has grown widely. Lao and
Cambodia on the other hand did not get access to the Indian market despite the agreement.
Following are the key-areas in the ASEAN region that record colossal increase in shipments
to India.

A. In terms of commercial activities such as trade, liberalization efforts between ASEAN

members and India’s economy there are three scenarios worth considering: meat
products; metals; food items; oil or gas; machines; clothes; other manufactured
commodities; chemicals; transport equipment/ironic metal or alloys.
B. Moreover, should additional countries embrace Free Trade Agreement policies it will
be sectors involved with producing crops like coal/memory foam goods that suddenly
become incredibly relevant for exporting into Indian markets. Upon full scale
implementation of these policies still further sectors like Rice, dairy products, sugar,
drinks, tobacco, and vegetable oil exports to India are expected to skyrocket.
C. Turning attention now towards some of the broader effects of this FTA initiative:
one major change involves import pricing for certain types of goods being shipped
into India from outside sources. Specifically, India is now lowering tariffs on those
products which fall under both the "normal" and "sensitive" categories. As a direct
result of such tariff reductions prices for these specific items are likely to fall within
Indian markets. This means that ASEAN exporters will now enjoy an advantage over
domestic suppliers in the country because their goods can be sold more cheaply
despite any potential quality differences. The decline in import prices for goods
originating from ASEAN countries has not translated into an equivalent decrease in
Indian import composite costs for identical products. The underlying factor behind
this phenomenon is smaller market shares held by such nations within India's overall
imports of said items.
Overall, the examination of various FTAs reveals showed they had a significant influence on
commerce when initial tariffs were high and were quickly and significantly decreased across
all commodity categories. However, when tariffs were already low, no effect was observed,
and FTAs with extensive phasing-in provisions were shown to have insignificant effects;
however, this may alter as implementation progresses. As a result, FTAs are a kind of partial
trade liberalisation and rule-making and their implications are contested, since external
variables and unequal affects produce a rift among scholars and observers.

CONCLUSION

A global trend in free trade policies has seen countries work towards reducing impediments
to trade by enacting free trade agreements (FTAs). This initiative aims to promote seamless
trade between nations by removing or easing government-imposed barriers like tariffs,
quotas, or subsidies while creating an environment that fosters economic activity and foreign
investment. The proponents of these FTAs argue that liberalizing trade would ultimately
benefit all parties through increased welfare gains. Others see possible pitfalls- such as excess
competition potentially destabilizing local industries- or concerns over issues around labour
rights or environmental protections going without consideration when partial executions are
made. The dynamic nature of external variables at play further complicates the impact
analysis in a way that scholars and analysts can't always agree on its effects uniformly.
Opponents of the liberal case for FTAs say that governments must be able to protect specific
domestic industries from import competition, and that severe restrictions limit governments'
policy flexibility. The poor and disadvantaged would bear the brunt of the import adjustment
since their alternative job possibilities are most limited. The more precise and broader the
FTA rule book, the more limited future policy initiatives will be. The significance of free
trade agreements may be quantified in terms of how much growth is 'produced' vs how much
is 'diverted.' Economic well-being and GDP suffer when trade diversion outweighs creation.

REFERENCES

 https://www.investopedia.com/terms/f/free-trade.asp#:~:text=In%20a%20free
%20trade%20agreement,access%20to%20one%20another's%20resources.
 McDonald, S. and Walmsley, T. (2003) ‘Bilateral Free Trade Agreements and
Customs Unions: The Impact of the EU Republic of South Africa Free Trade
Agreement on Botswana’, GTAP Working Papers 28. Lafayette, IN: Purdue
University.
 Jean, S. (2012) ‘Assessing the impact of the EU–Chile FTA on international trade’,
draft and incomplete version, 30 April. Paris: Centre d’Etudes Prospectives et
d’Informations Internationales.

 Sikdar C and Nag B [2011] Impact of India-ASEAN Free Trade Agreement.