FTA: India-Australia Free Trade Agreement: Why the FTA is different, unprecedented
In 2020, the total goods and services trade between India and Australia was about $18 billion. India is the 6th largest export partner and 11th largest import partner as of 2020 and some of the major items of export from India to Australia include refined petroleum, telecommunications and information and communication technology services, business services while the top import items from Australia include coal and education services.
It is evident that services are an important component of India’s commercial relations with Australia and while a lot is being said about the potential outcome for trade in goods, it must be acknowledged that the architectural design of services commitments in the agreement is trailblazing. The design of services commitments has important role to play in the achievement of objectives with respect to trade in services, especially because of the uncertainties in long-term relations and the regulatory nature of barriers imposed to trade in services. A few design elements are worth discussing.
IAECTA is India’s first agreement where a mixed scheduling approach is adopted for scheduling sector-specific commitments in services, with the possibility of complete transition to a negative list approach. Agreements following the negative list approach list those sectors in the schedule of reservations, which are kept out of the scope of the agreement. These reservations are for existing non-conforming measures and future measures, which may apply to certain sectors in future or ex-post. Compared to it, the positive list approach, by listing only those sectors in which trade commitments are made, give the nations the right to impose trade barriers or regulatory restrictions over all the sectors, which are not included in the list.
For listing substantial commitments, India follows a GATS-style-hybrid approach (a type of positive list approach) and Australia follows a negative list approach. Further, there is a transition clause, according to which India has to submit a proposed schedule of non-conforming measures within five years of the date of entry into force of the Agreement providing an equivalent of liberalisation. This implies that both the parties will eventually move to a negative-list approach. This will be the first time that India will follow a negative list approach.
Australia is listed both – current and future non-conforming measures and thus, when India transitions to a negative list, it may do the same. From a contractual perspective, a negative list approach is considered more transparent. It is believed that the negative-list approach locks-in future policy changes. Generally, under positive list approach contracting parties maintain discretion with respect to inclusion of new services or sectors that have been kept out of the schedule. Thus, in general negative list is considered pro-liberalisation.
This is also the first time that India has taken binding most-favoured-nations (MFN) commitments even though it is only in select services. The MFN obligation under preferential agreements requires the contracting parties to give each other the best possible current and future commitments or treatment. To date, all of India’s trade agreements have a discretionary MFN clause. It requires that after the entry into force of the Agreement if one of the two Parties enters into any agreement on trade in services with a third country, it shall consider a request by the other Party for a treatment, no less favourable than that provided to the third party. Thus, the MFN commitment is non-binding. Compared to this, India has taken binding MFN commitment under IAECTA in 31 services sectors including architectural, engineering, higher education, banking, and financial services, among others. Thus, in the 31 sectors listed with MFN commitment, India extends the best possible current and future treatment to Australia.
Unlike India’s previous comprehensive agreements, IAECTA does not include a separate chapter on Investments. Commitments are taken only with respect to services-linked-investments. Infact, the agreement clearly specifies that any decisions or requirements under the party’s foreign investment framework shall not be subject to dispute settlement. Thus, Investments are completely kept out of the realm of institutional provisions laid out under the agreement.
As regards Mode 4 trade, like India’s all other comprehensive agreements, IAECTA has a separate chapter on Temporary Movement of Natural Persons (MNP). Australia has allowed temporary stay of up to four years for Indian intra-corporate transferees (ICT), independent executives and contractual service suppliers (CSS) in up to 26 service categories, while India has allowed up to five years to ICT and one year to CSS (27 categories) and independent executives (12 categories).
An important institutional provision included is the establishment of a working group on temporary movement of natural person that will meet on an annual basis. The purpose is to review, monitor implementation and facilitate movement of people. More importantly, provide a forum for exchange of information – this is an important aspect considering that often there is information asymmetry and new issues, or interpretational issues may emerge ex-post.
The case of India-Singapore Comprehensive Economic Cooperation Agreement (CECA) is worth mentioning here. India and Singapore signed the Comprehensive Economic Cooperation Agreement in 2005, there have been issues related to movement of natural person or Mode 4 trade in services. The Ministry of Manpower in Singapore released the Fair Consideration Framework nearly a decade into the Agreement to correct its own unemployment situation, requiring companies in Singapore to advertise for jobs locally before issuing an Employment Pass to foreign worker. While this was regarded as a violation of the commitments made under the India-Singapore CECA, however, it was clarified that trade commitments are made with respect to Work Permit and issuance of Employment Pass is a domestic policy issue. Thus, technically, this is not violating trade commitments, rather it is a biproduct of information asymmetry. This is often attributable to the lack of services data or lack of understanding of regulatory issues. In such a scenario,
Overall, it is seen that in-terms of the architectural design, the India-Australia Economic Cooperation and Trade Agreement is unprecedented, when compared with India’s previous agreements. India has made a big leap in terms of the design, especially by including a negative list approach for scheduling commitments and by binding MFN treatment. This was one of the sticking points under the RCEP for India. Finally, establishment of endogenous/information institutional structures within the scope of the agreement is a welcome step. Having a working group or treat committees for discussing issues related to MNP – an area where information asymmetry often acts as a trade barrier – is an important trade facilitation measure. In many aspects, when it comes to services commitments the IAECTA is a first of its kind and it emphasizes that India is breaking the traditional design mould, gradually and selectively.
(The writer is a consultant with the Indian Council for Research on International Economic Relations (ICRIER))
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