In recent times, Government of India has started reworking on the free trade agreements that it has signed with various other countries. You must have came across the idea called as economic integration, economic integration means a global market which consists of various countries where they will start integrating in terms of trading, in terms of investment, in terms of movement of labour, etc. Generally, the economic integration starts with preferential trade agreement PTA, then after this, there is a free trade agreement, then after this, there is a common market, then the Customs Union and finally, economic union the final integration will be economic union after that there's a political integration. India has signed agreements with countries such as Japan, South Korea, Malaysia, Thailand, Singapore, Sri Lanka, Nepal, Bhutan, Mauritius, and even the 10 grouping nations that is ASEAN. In the last couple of months, or in last couple of weeks India signed a Comprehensive Economic Partnership Agreement CEPA in addition to this, there is also disscusion with respect to United Kingdom regarding signing an FTA. India is also negotiating with Australia and it want to sign a free trade agreement with them also.
Essentially, the concept of PTA means but before that let's understand the FTA first, then it will be easier to understand the concept of CEPA. Under the free trade agreement two trading partners or two or more trading partners will come together and they will try to reduce the tariff as well as non tariff barriers on most of the goods and services that are being traded amongst them. Imagine that there are two countries A and B and these particular two countries are trading around 100 goods and services between them. Now, if I cover let's say all the 100 goods and services, if I cover 90 percentage of them, if I cover even 65 percentage of them essentially referring to a substantial amount of a trade which is conducted between both of these countries and whenever we talk about free trade agreement that is exactly what they're trying to do. Under the PTA, they generally focus on very small volume of trade or very small part of the trade. Whereas under the context of free trade agreement, a substantial part, majority of the trade that is conducted between both of the countries let's say group of the countries will be covered under free trade agreement, that is a very important difference between PTA and FTA and before signing this particular FTA, generally the countries sign one more type of a scheme or let's say agreement which is called as early harvest scheme or early harvest agreement.
What do you mean by this? Let's take the same example. Both The A and B want to sign an agreement which covers let's say 100 goods or 100 items. Now it will take long period of time for them to negotiate and come to a conclusion about what kind of a tariff they're supposed to have regarding all of these regular 100 commodities. But out of 100 commodities, let's say, around in 15 commodities both of the countries can come to an agreement very soon and very quickly and when both of these particular countries can come to an agreement regarding tariffs or let's say non tariff barriers on these particular 15 commodities they'll generally sign an agreement which is called as early harvest agreement. It is simply a precursor to signing an FTA why because negotiating and signing an FTA takes time and there are certain low hanging fruits, easier areas for which both of the countries generally agree and these areas would be covered and will sign an agreement called as the early harvest agreement or early harvest scheme.
Now what is CEPA there are two terms here. CEPA, CCA, these are special types of free trade agreements, these are a one step further within the free trade agreements itself. Generally, in the free trade agreements, focus is on the trade of goods and services whereas in the context of CEPA or CCA the agreements rather than focusing only on the goods and services the focus will be on investments, the focus will be on intellectual property rights, human labour, etc. Again it depends from one agreement to another agreement but in simple terms under CEPA as well as CCA the scope is much broader, much wider compared to a simple free trade agreement. Now, in the recent times, India has signed a CEPA with the United Arab Emirates. In the last one and a half decade India had signed agreements with many of these particular countries and whenever such agreements are signed a simple objective of the agreement is that the trade between both of the countries should increase and both of the countries should benefit out of this particular trade but what has actually happened in the context of India trade deficit of India with the majority of these particular free trading agreements or these trading partners between financial year 11 to financial year 21 has increased. Before signing this particular agreements yes, there is a trade deficit. India signed these agreements we expected the trade between these countries to increase has it increased, yes. But what has happened is with the rise in the bilateral trade or overall trade between India and these particular trading partners India's a trade deficit also has increased during the same period of time which essentially means India's exports are not increasing at expected level to these particular countries.
Why is this happening in the context of India why our exports are not increasing, so that the trade deficit will come down? Reasons are very simple, in the context of India the cost of production is higher. Why is the cost of production higher? For example, I'm a manufacturer it is very difficult for me to find, let's say loans at a cheaper rate of interest in India, especially for the MSME sector. Even if I find a loan or a credit in the market I am forced to pay a higher rate of interest on these particular loans which will have a direct impact on what is the cost of product, so cost of production are higher, cost of electricity that is used for production is higher, cost of Logistics is higher and a result of these plus and many others factors our exports are not very competitive in the international market and that is the precise reason why we are unable to leverage these particular trade agreements.
India, UAE Comprehensive Economic Partnership Agreement, CEPA is a step further or step above the concept of a simple FTA and when you talk about CEPA you're focused on goods, you're focused on services, you're focused on other areas such as investment, intellectual property rights, digital trades, right etc. First and foremost what has been proposed under the agreement, so as per the agreement United Arab Emirates UAE will be reducing the tariff or eliminating the tariffs on around 90 percentage of the goods that are exported from India and in return India would be reducing the tariff on 65 percentage of the goods that are imported from UAE so, there is a reciprocity, there is a reciprocal reduction in the tariff, elimination in the tariffs by both of the countries. Now, what is the advantage of this, the advantage of this is initially to begin with in the next five years, we will try to increase the bilateral trade that is conducted between both of these particular countries and the investment target or to be more precise, here, the bilateral trade target has been set at $100 billion in the next five years. In addition to this because of this particular agreements 10 lakh jobs would be created only in India and over a period of time UAE has stated that we will reduce or we will eliminate the tariffs on most of the imports that we do from India and in the next 10 years, India would be reducing and eliminating the tariffs on around 90 percentage of the goods that are imported from United Arab Emirates.
We will be importing 200 tonnes of gold from UAE and whatever imports we are going to do from UAE under this up to 200 tonnes we are going to reduce the tariff on this by one percentage that is whatever is the tariff we are importing on let's say the gold imports whatever it is, on this particular import from UAE we will apply one percentage less on that but this particular limit is only applicable up to 200 tonnes of import of gold. So what will happen if I import more than 200 tonnes in that particular case we'll simply increase the tariff and apply whatever is the normal tariff applicable on the import of gold.
Now why this agreement makes a lot of sense for India. This is the first comprehensive trade agreement that the current government of India has signed in the last six to seven years. Under this agreement there is a very strict rules of origin will be applicable. What do you mean by strict rules of origin, understand this concept with a very simple example, imagine trade is being conducted between A, B and A and C. So, from C certain exports are entering into A from B same exports are entering into A imagine one product let's mobile phone, so C is exporting this mobile phone to A and B is also exporting the same or similar mobile phone to A. Now, let's say A and B enter into an agreement and as a result of this, we will reduce the tariff on the mobile phone to let's say 0%. Now, earlier imagine it was 15% now, it has been reduced to 0%. So, if this particular mobile phone is exported from B to A what will be the tariff applicable 0% and a similar mobile phone exported from C to A the tariff would be 15%. So, there is always a danger that a manufacturer from C will export these particular mobile phones to Country B and from country B he will simply route it and send these particular exports from country B to country A to enjoy this particular benefit of the exemption of tariffs which is 0%. Now, the whole objective of agreement between A and B was that both of the country should benefit but in this particular case a manufacturer from some other countries or third country is getting the benefit of this agreement between A and B. To overcome this particular issue, government has introduced the concept of rules of origin and this is not a new thing, in 2020 government of India introduced something called as CAROTAR rule 2020, this particular rule is basically connected to the concept of Rules of Origin and it was there in the context of RCEP it has been there in the context of many of the trade agreements that India has been signing or has been implementing this concept
The argument here is whenever this particular mobile phone, imagine this particular mobile phone will move from country B to country A now the government of India before allowing the mobile phone to land will ask for proof of documentation which will simply say that certain value addition has happened in the country B and it has not been merely imported from country C to B and then exported to country A. Imagine if it is manufactured in country C it doesn't have to undergo any kind of manufacturing to country B as such, it will be simply imported then routed to Country A like this, but what if there is certain value addition, certain manufacturing which has happened in Country B, will that product be allowed to enjoy this particular 0% tariff rate definitely yes, but for that the government simply says in this particular agreement, Country B will have to prove that 40% of value addition has actually happened in Country B and how does the exporter from country B will prove, that the government of Country B will provide a certificate to him, a document will be provided this particular document will be submitted by this exporter to the government of A and only and only then, the tariffs which is a 0% in this case will be applied on this, otherwise government of A would simply apply 15% tariff even though it is coming from country B. So, strict rules of origin, 40% valuation addition.
Chapters on digital trade, government procurement and intellectual property rights have been included for the first time ever in the agreement. Imagine government of India introduces certain government procurement policy and the UAE says that it is against this particular chapter in this particular agreement. Can United Arab Emirates file a complaint against India under WTO? As per the agreement no. Right now, as per the agreement, the other trading partner is not allowed to file a complaint against India under WTO if they violate or if their policies are against any of these particular provisions as such and finally, India impose a tariff of 10% to protect the sensitive sectors, what is the importance here? There are certain sensitive sensitive sectors in India, sensitive sectors includes your vegetables, fruits, dairy cereals, automobiles, auto parts, etc and government of India feels that we cannot allow the imports from UAE to come at zero rate to write or at 0% tariff as such, because these are very important areas for us, a lot of livelihoods depend from production activity happening in these particular areas so we will not allow duty free imports to come into India under these particular sectors. So, Government of India has continued to keep these particular sensitive sectors in mind and has imposed 10% tariffs on these particular items.