As the Australian Parliament approved the pact between the two countries on November 22nd, 2022, India and Australia are free to implement the free trade agreement. The free trade agreement between India and Australia entered into force on December 29, helping to nearly double bilateral trade to $45-50 billion in five years. The agreement would aid in increasing bilateral trade from USD 27.5 billion to USD 45-50 billion over the next five years.
What is free trade agreement?
A free-trade agreement (FTA) or treaty is an international legal agreement between cooperating states to establish a free-trade zone.
Trade agreements are classified into two types: bilateral and multilateral. Bilateral trade agreements are formed when two countries agree to relax trade restrictions between themselves in order to expand business opportunities. Multilateral trade agreements involve three or more countries. Such agreements are the most difficult to negotiate and agree upon.
India’s participation in FTAs has come full circle. At the turn of the century, the country negotiated several free trade agreements (FTAs), including agreements with Singapore, Malaysia, Japan, Korea, and the ASEAN countries. The Look East Policy Of India greatly encouraged these FTAs, which undoubtedly expanded India’s trade and investment ties with Southeast and East Asia.
What is India Australia Free Trade Agreement ?
In May 2011, Australia and India began talks on a Comprehensive Economic Cooperation Agreement. However, both countries decided to suspend negotiations in 2016. In September 2021, Australia and India formally re-launched the negotiations with the goal of concluding an Economic Cooperation and Trade Agreement in order to quickly liberalise and deepen bilateral trade in goods and services, and then using this foundation to resume Comprehensive Economic Cooperation Agreement negotiations.
A trade agreement between India and Australia came into effect on December 29, nearly nine months after the two countries signed it.
As part of the agreement, Australia agreed to eliminate customs duties on 98.3% of traded goods and 100% of tariff lines over a five-year period. India will eliminate customs duties on 40% of products immediately and on 70% of tariff lines over a 10-year period. Textiles and apparel, agricultural products, leather, furniture, jewellery, and pharmaceuticals are among the labour-intensive sectors in India, that will benefit from the elimination of customs duty.
After the trade agreement goes into effect, bilateral trade is expected to increase from $25 billion to $45-50 billion in five years. The next step for both countries is to move forward with a Comprehensive Economic Cooperation Agreement that will build on the interim trade agreement.
Current trade trends between India and Australia
India imports worth 17 billion US dollars from Australia, while it exports 10.5 billion US dollars to Australia. However, we must remember that 96% of India’s imports from Australia are raw materials and intermediate goods. Coal contains a high concentration of them. 74% of Australia’s exports to India are coking coal. India’s exports to Australia, on the other hand, are diverse and dominated by finished goods, i.e. consumer goods. India also spends approximately $ 4 billion per year on education for students in Australia.
Impact on business
The India Australia ECTA covers the following major areas:
- Trade in Goods
- Trade in Services
- Rules of Origin
- Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) measures
- Customs Procedures and Trade Facilitation
- Trade Remedies
- Legal & institutional Issues
- Movement of Natural Persons
Benefits under Trade in Goods
1. Access to Australian market with zero customs duty: The agreement will benefit a number of labour-intensive Indian industries that are currently subject to a 5% import duty by Australia. The agreement will result in immediate duty-free market access for 98.3% of tariff lines, accounting for 96.4% of India’s value-added exports to Australia. The remaining 1.7% of lines will be reduced to zero duty over a five-year period. Overall, Australia offers duty-free access to 100% of its tariff lines.
2. Cheaper Raw Materials, Faster Approval for Medicines: All labour-intensive sectors have immediate duty-free access. As a result, many industries will benefit from lower-cost raw materials, allowing them to compete. Under this agreement, both parties have agreed to a separate Annex on Pharmaceutical Products, which will allow for fast-track approval of patented, generic, and biosimilar medicines.
3. 90% of Australian exports by value to get zero duty access to Indian market: India is providing duty-free access to 90% of Australian products, including coal. Zero duty on 85.3% of products will be offered immediately, while zero duty on 3.67% of products will be offered gradually over three, five, seven, and ten years. India has offered Australia tariff concessions on tariff lines of export interest. Many sensitive products, including milk and other dairy products, wheat, sugar, and so on, have remained on India’s Exclusion list.
4. Collateral benefits: Immediate Duty-Free access is expected to generate one million jobs in India and $10 billion in additional exports from India to Australia over the next five years.
Benefits under Trade in Services
1. Indian students in Australia to benefit from post-study work visa: Australia’s commitments under Trade in Services are the best. It has made in trade agreements to date, matching its recent FTA with the UK. Australia has committed its schedule to the negative list and has made broad commitments in approximately 135 sub-sectors, with Most Favoured Nation (MFN) status in approximately 120 sub-sectors. More than 100,000 Indian students in Australia will benefit from this. Along with this, the agreement provides for a Work and Holiday Visa for young professionals.
2. Australian services to get Negative List Treatment after 5 Years: After 5 years of the Agreement’s entry into force, India has agreed to negative listing for the first time. What exactly is negative listing? Under the negative listing approach, a country treats imported and locally produced goods and services equally in all areas, and areas where this is not done are listed as exceptions – in the negative list. In this case, India would grant this treatment to Australian services exports after a five-year period. India is also committing to Australia in approximately 103 Service Sub-Sectors with Most Favored Nation status.
Protective Features to guard against Unintended Consequences
The agreement also includes certain “protective features” designed to protect both countries from unintended trade consequences.
1. As on date five point safeguards have been put in place to address any concerns about the leakage or diversion of products manufactured in a third country to India via Australia. This includes :
a) Stringent Rules of Origin
b) In calculation of Value Addition, 2 different values agreed to (35% or 45%) depending on method of calculation (based on whether profit is excluded or included)
c) Product Specific Rules negotiated for 807 products
d) Requirement of ‘melt and pour’ for iron & steel products included in the Product Specific Rules for these products.
e) Strict Operational Customs Procedures
f) A specific clause included to ensure only items made in Australia count for value addition, and no other country products
- A Bilateral Safeguard Mechanism will be available for 14 years in case of surge in imports.
3. A special clause on Review has been agreed upon to enable, either country to request a review for parts of the Agreement which may be a cause of concern, after 15 years
a) Review compulsory if requested (That means, it shall happen)
b) Must be completed in 6 months
End to Double Taxation
There is no domestic provision in Australia for charging tax on royalties, fees, and charges paid to parent companies by firms. This remittance was taxed using a provision in the Double Taxation Avoidance Agreement, or DTAA. However, as a result of the Indo-Australia ECTA, Australia has changed its tax laws, removing this disparity. This will end double taxation on April 1, 2023. As a result, the IT sector will be able to earn higher profits and become more competitive.
An Agreement Meeting the Specific Needs of the Indian Economy
The agreement has been negotiated with great care to accommodate the unique characteristics of the Indian economy. Here are some of its advantageous characteristics:
1. India has not provided access to Australia on certain lines of product. Agreement has excluded milk and other dairy products, wheat, sugar, iron ore, apple, and walnuts from its offers. This is normally impossible because these are Australia’s main exports.
2. Australia hopes to gain market share for its products such as coal and wine, as well as a few quotas in agriculture and horticulture products (almonds, cotton, lentils, pears, oranges, and so on) that are already imported.
3. Australia has offered zero duty access to 100% of its lines and trade, whereas India has only offered duty free/ reduced duty access to Australia on 70% of its lines.
4. India has a lot to gain in the pharmaceutical industry. Drugs approved in other developed countries will receive faster approval in Australia as a result of the Agreement. This will make it easier to enter the Australian medical market. India accounts for only 3%.
5. Significant gains are expected in India’s labour-intensive sectors. They will gain duty-free access comparable to Vietnam and other countries, allowing them to compete.
6. Work visas for students, employees/workers, and agricultural workers are granted liberally.
7. This agreement aims to persuade other developed countries, such as the United Kingdom, Canada, and Europe, to sign similar agreements with India.
8. The agreement allows India to recoup any losses incurred as a result of withdrawing from RCEP, which was essentially an FTA with China.
India – Australia trade expected to cross US $ 45-50 billion by 2035
The entry into force of the India-Australia ECTA is expected to consolidate and aid in the growth of Indian products and services’ market share. New markets for Indian goods are also likely to emerge in Australia. With the easing of Australian regulatory processes, there is expected to be an increase in pharmaceutical products. With the increased presence of higher value advanced technology products, there is expected to be a vertical movement in value chains. Exports are expected to grow by $10 billion by 2026-27, resulting in the creation of approximately 1 million jobs. By 2035, total bilateral trade is expected to exceed US $ 45-50 billion. It is expected that job opportunities for Indians in Australia will improve, as will remittance and investment flows from Australia to India.
The governments of India and Australia collaborated to achieve this milestone, and they are optimistic about the implications not only for bilateral trade but also for further strengthening bilateral relations.