Different Types of Trade Agreements

Two or more nations can go for economic integration by partial or full abolition of tariff and non-tariff barriers taking place among them. The objective of this integration is to increase the combined economic productivity of the countries by economic cooperation, allowing free trade among the firms of them. This leads to welfare of the people of the integrating economies. Other by-product of integration is competitiveness. The member countries stay regionally and globally competitive, as the goods of the states outside economic blocks become more expensive.

There is a gradient in degrees of cooperation in the Economic Integration among the countries. I have tried to divide them into some stages, based upon the complexity of the agreements.

Stage – I : The least complex integration →Removal of disputes

In the first stage, we can discuss TIFA and BITs, which are basically focused on removal of disputes and protection of investments.

Trade and Investment Framework Agreement  (TIFA)

TIFA is a trade pact between two or more countries which establishes a framework for expanding trade and resolving outstanding disputes between countries. TIFA is the first step towards an FTA. The best example of a TIFA is the one reached by ASEAN and the United States in 2009.

Bilateral Investment Treaty (BIT)

It is a bilateral agreement in which two countries sit together and decide the conditions for private investments by citizens and firms of the two countries. The investment discussed under BIT is obviously FDI. Pakistan and Germany had signed world’s first BIT in late 1950s. Today most countries have signed BITs to other countries and the number of BITs is more than 2.5 thousand around the world.

Another term used for BIT is Bilateral Investment Promotion and Protection Agreement. At present, India has around 83 BITs or BIPAs.

Stage II: Approaching Towards Freedom

In stage-II, we can discuss on PTA and FTAs.

Preferential trade area or Preferential trade agreement (PTA)

In PTAs, the participating countries give preferential access to certain products among themselves. So, the tariff barriers are reduced and non-tarrif barriers are made less stringent. PTA is called the first stage of economic integration among countries. Please note that you cannot distinct PTA and FTA by just saying that the former has fewer barriers and later has no barriers at all. FTA does not mean everything is free.

FTA and PTA have obscure distinctions. However, we can say that almost every PTA has a main goal of becoming a FTA. Some of India’s bilateral PTAs are as follows:

• India – Afghanistan (2003)
• India – Mauritius
• India – Nepal (2009)
• India – Chile (2007)
• India – MERCOSUR (2009)

One example of transition from a PTA to FTA is that of SAPTA to SAFTA. SAPTA was a bilateral PTA (signed in 1994) in which India is a party. SAPTA is now SAFTA or South Asian Free Trade Area. SAFTA was signed in 6 January 2004 and came into force on January 1, 2006. It was for gradual elimination of most tariffs and other trade barriers on products and services passing between Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Afghanistan and Sri Lanka.

Here we need to discuss one important concept under WTO that is GSP or Generalized System of Preferences. Under GATT, we know that every country which is the recipient of MFN (Most Favoured Nation) treatment must, nominally, receive equal trade advantages as the “most favoured nation” by the country granting such treatment. But this rule is not all-encompassing. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions. The GSP is one such system of exemption from the more general rules of the World Trade Organization (WTO) such as MFN. While the MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them, etc., the GSP exempts WTO member countries from MFN for the purpose of lowering tariffs for the least developed countries, without also lowering tariffs for rich countries.

Free Trade Agreement / Free Trade Area (FTA)

Whenever some countries sit together and decide to eliminate tariffs, import quotas, and preferences on most (if not all) goods and services traded between them, they are creating a FTA. The aim of a free-trade area is to reduce barriers to exchange so that trade can grow as a result of specialization, division of labor, and most importantly via comparative advantage. A Free trade agreement can be an agreement between two countries (bilateral ) or many countries (multilateral). For example, Canada – United States Free Trade Agreement between the U.S. and Canada was signed in 1988. Please note that every customs union, trade common market, economic union, customs and monetary union and economic and monetary union also has a free-trade area. NAFTA is one such trade block. An FTA covers extensive reduction or elimination of tariffs on substantially all trade allowing for the free movement of goods and in more advanced agreements also reduction of restrictions on investment and establishment allowing for the free movement of capital and free movement of services.

Stage III: Comprehensive Cooperation

When the countries go beyond FTA and agree for a greater degree of economic integration which includes improving the attractiveness to capital and human resources, and to expand trade and investment, it would result in CECA or CEPA. The CEPA / CEPA are similar to a free trade agreement (FTA), with a comprehensive coverage of trade in goods and services and investments, as well as intellectual property rights. I had mentioned earlier also that CEPA is a wider term than CECA, still not much clear distinction is there except some wider objectives in CEPA and more elimination of barriers. The objectives of two important CECA and CEPA signed by India are as follows:

Objectives of CECA:

The official document on India-Singapore CECA has mentioned the following objectives:

• Liberalize and Promote trade in Goods in accordance with Article XXIV of the General Agreement on Trade and Tariffs;
• To liberalize and promote trade in services in accordance with Article V of the General Agreement on Trade in Services
• To establish a transparent, predictable and facilitative investment regime;
• To explore new areas of economic cooperation
• To build upon their commitments at the World Trade Organization

Objectives of CEPA

The official document on India-Korea CEPA mentions the following objectives among the parties:

• Liberalization of trade in goods
• Liberalization of trade in services
• Expansion of Investment
• Establishment of a cooperative framework
• Promote conditions for fair competition
• Explore new areas of economic cooperation
• Expand the cooperation agreement to other countries.

In fact, CECA and CEPA are a wider term than FTA. For example, the goods package under the India- Malaysia CECA took the tariff liberalization beyond the India-ASEAN FTA commitments on items of mutual interest for both the countries. Then, in CEPA, a wider degree of economic integration is achieved. Under the India-South Korea CEPA, India will eliminate duties on 75 percent of products imported from South Korea on a custom-value basis during the eight years after the CEPA becomes effective. South Korea will remove duties on 93 percent of products from India during the same period. So, the hierarchy of these agreements is as follows:

PTA →FTA→CECA→CEPA

Stage IV: Complex Integration:

Common Market

A common market is a type of trade bloc which is composed of a free trade area (for goods) with common policies on product regulation, and freedom of movement of the factors of production (capital and labour) and of enterprise and services. The goal is that the movement of capital, labour, goods, and services between the members is as easy as within them. The physical, technical and fiscal barriers among the member states are removed to the maximum extent possible.

First Example of a Common Market was European Economic Community. Today, Every Economic union and Economic and monetary union has also a Common market. the examples are :

• European Free Trade Association (EFTA)
• European Economic Area (EEA)

SAFTA is still not a full common market, but is in the process of becoming so.