Key Concepts: Types of Trade Agreements
Context:
The government is in active dialogue for Free Trade Agreements (FTAs) with several key partners, including the U.S., the European Union (EU), and Oman.
Recently the government implemented pacts with Australia, the UAE, and the European Free Trade Association (EFTA).
India is also looking to expand its existing Preferential Trade Agreement (PTA) with Brazil to enhance its market access in South America.
WTO and Most Favoured Nations (MFN):
At the top, WTO rules govern global trade rules and provides for multilateral framework for global trade.
Under Article I of the General Agreement on Tariffs and Trade (GATT), WTO members are required to follow the Most-Favoured-Nation (MFN) rule.
Most Favoured Nation (MFN)
This is a core principle of the World Trade Organization.
It states that any trade advantage or privilege granted by one member country to another must be immediately and unconditionally extended to all other WTO members.
WTO rules allow certain exceptions to the MFN principle for the creation of regional or bilateral trade agreements like FTAs and CECAs.
Types of Trade Agreements
Preferential Trade Agreement (PTA)
In a PTA, partners agree to reduce tariffs on an agreed-upon list of products, known as a "positive list".
These agreements generally do not cover a substantial portion of the trade between the countries
Free Trade Agreement (FTA)
An FTA is more comprehensive than a PTA.
Member countries agree to eliminate tariffs on substantial bilateral trade.
Instead of a positive list, FTAs use a "negative list," which specifies the items on which tariffs will not be reduced or eliminated.
Each member maintains its own tariff structure for non-member countries.
Comprehensive Economic Cooperation/Partnership Agreement (CECA/CEPA)
These agreements are more ambitious and holistic than a standard FTA.
They create an integrated package covering not just goods but also services and investment.
They often include other areas like Intellectual Property Rights (IPR) and competition.
Customs Union
In this arrangement, member countries trade at zero duty among themselves.
They maintain common external tariffs against the rest of the world.
The Southern African Customs Union (SACU) is an example
Common Market
A Common Market is a deeper level of integration that builds on a Customs Union.
In addition to free trade and a common external tariff, it facilitates the free movement of labor and capital and harmonizes technical standards among members
Economic Union
This represents the highest level of economic integration.
It is a Common Market that is further extended through the harmonization of fiscal and monetary policies and shared executive, judicial, and legislative institutions.
The European Union (EU) is a prominent example.