India’s CEPA with UAE has several firsts and advantages

A free trade agreement with a country that is also a re-exporter can have one major problem, namely, circumvention of exports from third countries who would try to take advantage of the lower tariffs that India would offer to the UAE. The government has shown awareness of this problem by excluding several sensitive products from tariff cuts

India’s CEPA with UAE has several firsts and advantages

India’s recently concluded Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates (UAE) must be considered as a landmark for it has several firsts to its credit. It is the first time since walking away from the Regional Comprehensive Economic Partnership (RCEP) in 2019 that the government has warmed up to an economic cooperation agreement (ECA). The India-UAE CEPA is the first ECA that India has endorsed in over a decade after the India-Japan CEPA was signed in 2011. It is also India’s first ECA with a member of the Gulf Cooperation Council (GCC). And finally, the India-UAE CEPA could be the first of at least seven more ECAs that the government is intending to wrap up soon. This includes the proposed early harvest deal with Australia to be concluded over the next few weeks.

There thus seems to be an urgency in the government to hasten the pace of negotiations on the ECAs that are currently on the table, and to reverse the long-standing perception that India is a slow mover in such negotiations. At the same time, by including issues related to the digital economy and government procurement in the India-UAE CEPA that it had stoutly refused to include in any of the past agreements, the government is possibly giving out a signal to its prospective CEPA partners that it is willing to be more “flexible” in the negotiations. Whether this “flexibility” would extend to issues like labour and environmental standards that are high on the wish list of the European Union and the United Kingdom, India’s two prospective CEPA partners, would have to be seen.

The CEPA with the UAE is important for India for at least three reasons. The first is that the UAE is a gateway not only to the MENA (the Middle East and North Africa) region but also to other parts of Africa. The Government of India, too, has recognised the locational advantages that the UAE has to offer as a “global logistical centre with technically advanced transport and storage facilities” for the distribution of pharmaceutical products, one of India’s major export items. The UAE is making all preparations to turn into a global distribution hub for pharmaceutical products by 2030, and this, in view of the government, could help India in finding greater market access for its products.

The second advantage that the CEPA could offer to India is the possibility of reversing its declining trade relations with a country that was its largest trading partner until 2012, with total trade at US$74.8 billion. UAE was also India’s largest export destination; the value of exports having peaked in 2011 at US$ 38.3 billion. Thereafter, exports have steadily declined. In 2021, India’s exports to the UAE were US$ 25.4 billion and this was lower (in nominal terms) than the exports in 2010, which was US$ 29.3 billion. Surprisingly, the surge in exports that was seen in 2021, largely due to the pent-up demand in the wake of the Covid-19 pandemic, did not have any impact on India’s exports to the UAE. Thus, the CEPA provides an opportunity for India to carefully assess the factors that are impeding its market access to its once-largest export market.

The third advantage for India could be deeper levels of engagement with the GCC members. In fact, India signed a Framework Agreement on Economic Cooperation with this grouping in 2004 with a view to concluding an FTA. The signing of the India-UAE CEPA could provide the much-needed impetus for launching negotiations for this FTA.

The government is quite upbeat about India’s market access prospects in the UAE after the CEPA enters into force on May 1 this year. This is because the UAE is offering overall duty elimination on over 97 per cent of its tariff lines, corresponding to 90 per cent of India’s exports in value terms, on the day the Agreement enters into force. In the next 5-10 years, 99 per cent of India’s exports in value terms will attract no duty in the UAE. The expectations are that as a result of this tariff liberalization to be effected by the UAE, the trade between the two countries would increase to US$ 100 billion in the next five years, up from US$ 68.4 billion in 2021.

The government feels the sectors that are likely to benefit from UAE’s tariff cuts are gems and jewellery, textiles, leather, footwear, sports goods, plastics, furniture, agricultural and wood products, engineering products, pharmaceuticals, medical devices, and automobiles. Currently, almost two-thirds of India’s exports to the UAE comprise petroleum products, gems and jewellery, apparel, iron and steel and their products, and telecom equipment. Each of these products has a share in exports of more than 5 per cent. It is therefore interesting to note that the government is expecting a sizeable change in India’s export basket following the implementation of the CEPA.

How realistic are these expectations that the UAE’s tariff elimination would result in much higher exports? It may be argued that the realisation of the government’s expectations would be a function of two factors — one, the preference margins that Indian products would enjoy when the CEPA is implemented, and two, how effectively regulatory barriers are dealt with. As regards the preference margin, or the difference between the existing tariffs (the most favoured nation or MFN tariffs) and the preferential tariffs that UAE has offered to India, it may be pointed out that this would not be very large. According to the data provided by the WTO on the MFN tariffs maintained by the UAE, 87.2 per cent of its tariff lines attract tariffs of 5 per cent, while 11.2 per cent of the tariff lines are tariff-free. The remaining tariff lines either attract 100 per cent tariffs — these are mainly tobacco products — or are designated as “special goods” (prohibited goods). This implies that for most products, the preference margins would be no more than 5 per cent. Moreover, the UAE has already eliminated tariffs on most pharmaceutical products on an MFN basis. This, in other words, means that tariff elimination by the UAE is not likely to be a major factor for triggering the increase in India’s exports that the government expects; the key factors could be the regulatory barriers.

One positive measure in this regard is the annex on pharmaceuticals included in the CEPA. The annex is intended to facilitate increased market access for Indian products through automatic registration and marketing authorization in 90 days for products approved by the regulators in the United States, the United Kingdom, the European Union, and Japan. Similar efforts are needed in the other key areas in order to provide momentum to India’s exports.

Although the government has, until now, spoken only about the benefits that India could reap from this CEPA owing to UAE’s tariff cuts, there is no clarity about the tariff cuts that India has agreed to, and more importantly, in which areas. The Government of India knows too well that this is an important aspect of an ECA, for this determines the market access that India would provide, and whether India’s tariff cuts would worsen India’s already growing trade imbalance with the UAE.

Finally, a free trade agreement with a country that is also a re-exporter can have one major problem, namely, circumvention of exports from third countries who would try to take advantage of the lower tariffs that India would offer to the UAE. The government has shown awareness of this problem by excluding several sensitive products from tariff cuts. These include dairy products, tea, coffee, rubber, spices, sugar, tobacco products, pharmaceuticals, certain chemicals, including azo dyes, scrap of aluminium and copper, certain categories of steel, helicopter, and aeroplanes.

In addition, the government has the right to use two “defensive” instruments. The first is a permanent safeguard mechanism, which can be resorted to in a situation of a sudden surge in imports. The India-UAE CEPA is the first time that such an instrument has been introduced in an ECA involving India. The second instrument is an “effective” Rules of Origin, which in this CEPA is a “contract enforcing Country of Origin”. However, this measure must be consistently monitored to assess its effectiveness.

(Dr Biswajit Dhar is a Professor at Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University. The views expressed here are his own.)