The UAE’s Minister of State for Foreign Trade, Mr. Thani Al Zeyoudi, made an important announcement. As per his announcement, India and the UAE recently signed the historic Comprehensive Economic Partnership Agreement (CEPA) that will take effect from May 1, 2021, onwards.
The CEPA is an important milestone for both countries, and there are two reasons for it. Firstly, it’s UAE’s first strategic partnership with any nation. Secondly, this is India’s first free trade agreement in the last ten years.
The Indian export sector should receive a tremendous boost because 90 percent of Indian goods will not be subject to import duty. What will be the central focus of this partnership agreement?
Increasing non-oil trade between the two countries is the primary objective of the agreement. Experts estimate that non-oil bilateral trade between the two countries will reach $100 billion by 2027. Right now, the value of bilateral trade between India and the UAE is $60 billion.
India will gain strategic business access to the Middle East and North African region by signing this agreement. Looking at the agreement’s excellent results, other GCC countries might take the same route, which is good news.
With How Many Countries Has India Signed CEPA?
Apart from the UAE, India has also signed CEPAs with South Korea and Japan.
How Is A CEPA Different From FTA?
FTA (free trade agreements) and CEPA (Comprehensive Economic Partnership Agreement) are economic pacts signed by countries to improve bilateral trade and reduce tariffs. However, there is a difference between CEPA and FTA.
FTA is a free trade agreement. CEPA aims to reduce trade barriers between two nations but does not remove them altogether. Let us discuss the differences between CEPA and FTA in detail.
What Is CEPA?
- A CEPA is a trade agreement that includes negotiation terms regarding services and investments and other aspects of economic partnership.
- Other aspects of trade negotiation include trade facilitation, customs cooperation, competition, and IPR.
- Compared to FTAs, partnership agreements/cooperation agreements are more exhaustive.
- CEPA closely scrutinizes the regulatory features of trade and creates an agreement that includes related issues.
Other Types of Trade Agreements
1. Free Trade Agreement
In a free trade agreement, nations allow the partner countries to access their markets through preferential trade terms, traffic concessions, etc.
- Regional Comprehensive Economic Partnership (RCEP) – RCEP is a kind of FTA among ten members of the ASEAN and these countries – Australia, China, Japan, South Korea, India, and New Zealand.
2. Preferential Trade Agreement
As per the preferential trade agreement terms, partners provide a preferential right of entry to certain products. These partners provide a preferential right of entry by reducing duties on stipulated tariff lines. Under preferential trade agreements, the WTO may reduce tariffs to zero for certain goods.
3. Comprehensive Economic Cooperation Agreement (CECA)
CECA includes the negotiation aspects of trade tariff and TRQ (trade tariff quotas) rates and nothing else. CEPA is more comprehensive than CECA.
4. Bilateral Investment Treaty (BIT)
A bilateral investment treaty is one where two nations analyze and decide the terms and conditions for private investments by their citizens and companies.
5. Trade and Investment Framework Agreement (TIFA)
TIFA is a trade agreement between two nations where they develop a robust structure to boost trade and resolve pending disputes.
Benefits of India-UAE CEPA
The benefits of CEPA between India and UAE can be summarized as follows:
As per CEPA, the UAE will provide India with preferential trade access to benefit labor-intensive sectors. These labor-intensive sectors include leather, textiles, gems & jewelry, footwear, sports goods, plastics, furniture, agricultural products, engineering goods, medical appliances, and automobiles. Many experts state that this move will generate 10 lakh jobs in India.
Earlier, the Indian jewelry industry paid a 5% tax to the UAE. Still, after signing CEPA, India will get complete access to UAE’s jewelry market. As a result of this move, India’s jewelry exports to the UAE will reach $23 billion by 2023.
Bearing in mind the effect of stiff competition on livelihoods, India has placed 10% of tariff lines on the negative list that will be exempt from tariff cuts. These items include dairy, fruits, cereals, sugar, tobacco, auto components, footwear, medical equipment, etc.
India and UAE will now have access to each other’s service sector markets. What are these services?
- Business services
- Communication services
- Construction & related engineering services
- Distribution services
- Educational services
- Environmental services
- Financial services
- Health-related and social services
- Tourism & travel-related services
- Recreational, cultural & sporting services
- Transport services
India and the UAE have agreed to a distinct annex on pharmaceuticals. This agreement will allow the UAE to access Indian pharmaceutical products. Additionally, this move will also make automatic registration and marketing authorization possible within 90 days (about three months), provided the products meet the specified criteria.
To make the most of CEPA, India and UAE will have to increase their Global Value Chain participation (GVC). Boosting bilateral trade between the two countries is vital because the traded products are the same from 2018 to 2020. The commonly traded products include mechanical appliances, electrical equipment, iron & steel, precious & semi-precious metals, and mineral fuels.
The table below shows that trade diversification is quite limited, and value chain integration is restricted to the top-traded products. A comprehensive Economic Partnership Agreement should change the current trading pattern.
According to a recent study, India’s participation in GVC is 40%, plus its backward and forward participation at 22 and 19 percent. If we go by the international efficiency index, India fares poorly in that aspect. India’s Logistics Performance Index ranking is 44 out of 160 countries which hamper its global competitiveness.
Similarly, another study states that India’s top GVC export destinations are China, Singapore, the USA, Indonesia, Germany, Japan, France, Turkey, Italy, and South Korea. UAE does not feature anywhere in the list, even though it’s one of India’s top export destinations.
The CEPA also includes steps to boost investments by UAE and Indian companies within designated Indian and advanced technological zones in the UAE. Additionally, this move aims to integrate local value chains of the present and the future in sectors like logistics, pharmaceuticals, medical equipment, and industrial metals.
Moreover, the Comprehensive Economic Partnership Agreement will enhance India’s forward and backward participation. Still, it will have to adopt a comprehensive approach toward GVC participation. Merely signing the pact will not bring about massive benefits for India.
As per ICRIER, Indian authorities must implement proactive policies to boost Foreign Direct Investments (FDI) for domestic markets and significant GVC linkages. Furthermore, reducing administrative burdens related to customs clearances, product traceability, and mutual recognition of standards accompanying value chains.
In a nutshell, India must adopt a proactive and holistic approach to make the most of CEPA and ensure better value chain integration. NR Doshi & Partners is a reputed firm in the UAE that not only provides accounting and financial services but also brings you valuable industry updates and helps you implement them.
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