With signing of Comprehensive Economic Partnership Agreement (CEPA) with the UAE on February 18, 2022, India seems to have entered into a new phase of free trade agreement (FTA) negotiations after a break of about a decade. This is the first major FTA — barring the one with Mauritius — inked under the NDA government.
It’s true that most of the trade agreements have not delivered the expected results in terms of FTA utilisation rate, market penetration, integration with regional or global production networks, etc. In fact, India has been very cautious when it comes to FTAs. In this context, the India-UAE CEPA has been concluded in a record time with 90 per cent coverage of bilateral merchandise trade between the two economies. This is a positive signal to the prospective FTA partners like the UK, Australia and EU.
Given the complementarities in economic structures of the two countries, the India-EU CEPA could be a win-win for both economies. India is highly dependent on oil imports and is an agriculture surplus economy, whereas UAE is an oil rich and agriculture deficit economy.
The UAE being an entrepot economy, the CEPA enhances India’s export prospects not only to the UAE but also to West Asia and even Africa regions. The CEPA may help labour intensive exports such as gems and jewellery, textiles, leather goods and also software exports to these regions through UAE. There are opportunities for both the trading partners in aviation, hospitality, logistics, investment, building and construction, financial services and digital trade.
India also expects to enhance bilateral investment in potential sectors such as infrastructure, food processing, renewable energy, digital economy, etc. The UAE, on the other hand, sees this as an important opportunity to diversify its oil dependent economy by attracting more investments from India. Both countries anticipate that the CEPA will give a boost to the bilateral merchandise trade, from the pre-Covid level of about $60 billion to $100 billion in the next five years.
Key trading partner
For India, the UAE is not only the largest trade partner in West Asia but the third leading in the world after China and the US, and the second biggest export destination globally. For the UAE, on the other hand, India is the second largest trade and export partner in the world. However, the size of bilateral trade between the two economies has not shown dynamism over the last 10 years.
In the pre-Covid year of 2019, India-UAE goods trade stood at $59.8 billion which was not only slightly lower than the trade value realised during 2018 but significantly lower than the level of bilateral trade in 2012, which was valued at $73.6 billion. While India’s exports to the UAE were at itheir peak in 2011, the imports were at maximum in 2012. During the last five years, India’s exports to the UAE have remained stagnant. It is hoped that with the implementation CEPA the situation will improve.
However, given that the UAE is a low tariff economy, the scope of tariff reduction is limited and hence the gains to Indian exporters. For instance, the simple average MFN applied tariff in the UAE was just 4.6 per cent in 2020 while that in India was 15 per cent. In most of the labour-intensive sectors like textiles, clothing, leather, footwear, etc., while the maximum tariff rate is 5 per cent, the average tariff rate is either 5 per cent or less.
In other manufacturing sectors such as non-electrical machinery, electrical machinery, transport equipment, which constitute a significant proportion of Indian export basket to the UAE, the maximum tariff rate is again 5 per cent and the average tariff rate is less than 5 per cent. Hence, if we assume that tariff is completely eliminated from all these sectors, the maximum benefit in terms of price competitiveness that will accrue to the Indian exporters is 5 per cent.
However, this margin is still not too bad given the fact that the number of UAE’s FTAs is still limited to the Arab countries, most of which do not compete with India in the sectors of its interest. To enhance the utilisation of CEPA it is also important to ensure that the cost of compliance remains at minimum level.
Another issue for India is the possibility of surge in imports from the UAE. This is mainly on account of the fact that it is an entrepot economy and re-exports form a large proportion of its gross exports. In the last 10 years, for instance, the share of re-exports in UAE’s global exports has been in the range of 23-55 per cent. The proportion of re-exports in its merchandise exports to India has ranged between 48 per cent and 65 per cent. It is imperative for India to not only have strong rules of origin provision under the CEPA but also it must enforce them.
It is important to note that to get duty-free access to the Indian market under the CEPA, the required value addition in the UAE has been kept at 40 per cent, which is significantly higher than other FTAs where value addition requirement is generally 30-35 per cent. Hopefully, the CEPA would also have an effective enforcement mechanism in place.
The writers are with IIT Kanpur and Institute of Economic Growth, Delhi, respectively