26/06/2021 - Indian Economy

KEY POINTS

·        The thrust on FTAs with large developed markets like the US, Canada and the European Union has been gaining momentum for some time.

·        FTA creates an extended market by including access to the FTA partner countries’ market, a positive relationship between FTAs and FDI would emerge.

·        Due to tariff eliminations, the markets of the FTA partner countries can be served from a single unified location. This effect allows some firms to grow beyond what they would have been able to achieve in the national market of a single country.

·        A country with a modest market size but FTA access to large markets is likely to score over a large country with a big standalone market, especially if it can offer other incentives and create a more conducive environment.

·        For example, Vietnam, which in itself is not a very large market, has successfully leveraged its preferential tariff access to many large Western and Asian markets through its trade agreements.

·        Another example is Bangladesh, which has duty-free access to the EU, UK and Canada in textiles under their GSP (General System of Preferences) for LDC countries, thereby making Bangladesh a preferred destination for FDI in textiles and a competitor for Indian textiles.

·        Finding FTA partners in large Western markets would indisputably be a boost in the arm for the manufacturing industry in the country and would allure many more.

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