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Comprehensive Economic Partnership Agreement

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Comprehensive Economic 

Partnership Agreement

A major trade deal between UAE and India 

The United Arab Emirates (UAE) and India have recently inked a major economic partnership agreement that is expected to double bilateral non-oil trade to $100bn within five years as the Gulf state ramps up its economic partnership with its second-largest trade partner. The 881-page Comprehensive Economic Partnership Agreement (CEPA), the signing ceremony of which was witnessed by Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi, Deputy Supreme Commander of the UAE Armed Forces and Chairman of the Executive Council, and Indian Prime Minister Narendra Modi, envisages making duty-free a staggering 80 percent of Indian exports to the Emirates.

The agreement will provide significant benefits to Indian and UAE businesses, including enhanced market access and reduced tariffs.
Although free trade deals remain controversial in India, and the country has long sought to guard access to large sections of its economy, Prime Minister Narendra Modi’s government has, in recent months, sought to accelerate the completion of trade deals as activity rebounds from the Covid-19 pandemic. An interesting thread in almost all these industries opened up for duty-free exports is that they are labour-intensive sectors. A potential 600,000 new jobs over the next five years are projected in India and 90,000 in the UAE. However, there is a threat and an opportunity hidden in the fine print of this agreement. While both sides have maintained that they have “robust” country of origin provisions in the trade deal, such things are difficult to quantify.

UAE’s Viewpoint
The UAE sees trade as a central part of its drive to diversify its economy away from oil as it navigates itself out of the pandemic. The Gulf monarchy is targeting a doubling of its overall economy from $381bn to $762bn by 2030. The country is also aiming for comprehensive economic partnerships with Israel and Indonesia within the next couple of months.

The CEPA is expected to boost growth, exports and job creation in both nations, according to Thani Al Zeyoudi, the UAE’s minister of state for foreign trade.

The UAE expects the deal to add $9bn, or 1.7 percent, to its gross domestic product by 2030. It also forecasts an increase of exports to India by 1.5 percent, or $7.6bn, and imports to the Gulf state rising by $14.3bn, or 3.8 percent, by the end of the decade.

It also expects the pact to deliver an additional 140,00 skilled jobs into its workforce over the same time frame.

“We will continue to encourage talented people to the UAE and there will be flexibility over visas in priority sectors for people to come and work with us,” said Zeyoudi.

The UAE has a population of 10 million, of which about 9 million are expatriates.

The elimination of tariffs on key commodities, such as aluminium, copper, steel and various petrochemicals is one benefit of the deal, he said.

Fastest FTA
Negotiated in just 88 days, the CEPA is the fastest trade deal to have been negotiated yet. The deal is also the first major trade agreement in a decade to be signed by India. The UAE is India’s third largest trading partner globally, after the United States and China. Bilateral merchandise trade between India and the UAE was worth $43.3 billion as of 2020-21 and is spread across thousands of traded items. In 2019-20, the pre-pandemic year, trade between the two countries was estimated at $59 billion.

The deal aims to boost bilateral merchandise trade to $100 billion over the next five years, and services trade to $15 billion, almost double of pre-pandemic levels.

Wide coverage
From Day 1 of the agreement coming into force, 90 percent of India’s current exports to the UAE will have immediate market access at zero duty. Duties on an additional 9 percent of India’s exports are set to reduce to zero within the next 5 to 10 years, according to CEPA provisions. This would cover electronic goods, chemicals and petrochemicals, stone, cement, ceramics, and machinery.

The CEPA is likely to benefit about $26 billion worth of Indian shipments that are currently subjected to 5 percent import duty by the UAE. The major beneficiaries of this would be gems and jewellery, apparel, engineering products, and pharmaceuticals exports.

Tariff rate quotas
As part of the CEPA, India has set lower tariff rate quotas (TRQs) for select imports from UAE, prime among which is gold, one of India’s largest imports. In essence, a TRQ allows a lower tariff rate on imports of a given product within a specified quantity and requires a higher tariff rate on imports exceeding that quantity.

For upto 200 tonnes of gold imports from the UAE, India has allowed the country a TRQ of 2 percent, which is 1 percentage point lower than the average tariff for gold imports into India from all other countries (3 percent). In 2020-21, India imported 70 tonnes of gold from the UAE. The latest move is expected to have major implications for gold smuggling. As the cost of importing gold from the UAE will fall, the incentive for smuggling is set to be reduced.

On the other hand, the legal import flows of gold are set to increase from the UAE. “The UAE, therefore, has a 1 percent price advantage as compared to the rest of the world. This is expected to help Indian jewellers easily source gold from the UAE at lower prices,” India’s commerce secretary BVR Subrahmanyam said. Considering that the UAE is the second-largest source of the yellow metal, India’s gold import bill is expected to rise as a result of the CEPA.

India has also provided similar TRQs for certain other items on which the UAE has expressed export interest. These include copper, polyethylene (the most common form of plastics), certain chemicals and metal items. These TRQs will be reviewed after 10 years.

Safeguarding Indian industry
The CEPA is also the first of its kind in India’s stable of FTAs given that it comes with an inbuilt safeguard mechanism. The government has criticised the lack of safeguards in previously negotiated FTAs that left domestic industry vulnerable to import surges. This is considered one of the main reasons why India’s trade deficit with the ASEAN nations has ballooned following the signing of the

ASEAN FTA back in 2010.
The CEPA with the UAE incorporates a permanent safeguard mechanism that can be resorted to by either nation, in case of a sudden surge in imports. Both countries have also prepared separate exclusion lists, detailing the products that they want to keep out of the ambit of the FTA, owing to sensitivities.

To protect domestic industry, India has decided to keep a range of agri products outside the deal. This includes dairy, tea, coffee, rubber, spices, sugar and tobacco products. Manufactured items such as pharmaceuticals, certain chemicals including azo dyes, aluminium and copper scrap, certain categories of steel, helicopters and aeroplanes have also been kept out.

Rules of origin
The CEPA is also the first deal signed by India with stringent rules of origin norms. The agreement recognizes that there should be strict monitoring of trade flows from both nations to prevent products from other countries from circumventing the FTA route. This is an increasing challenge for India.

A case in point is the entry of Chinese goods that are shipped to Vietnam, Thailand or Malaysia and then re-exported to India. Since these countries are India’s FTA partners, the final import duty on the goods in question remains relatively low, while the government loses revenue and the market is flooded.

Instead, the deal focuses on mandating stringent norms for value addition, or the minimum amount of economic value that has to be added to the product if it is not originally made in the UAE, for it to be allowed for export to India under the CEPA. Officials say that while value-addition provisions are usually set at 35 percent, the latest deal sets it at a high 40 percent, ensuring that goods from other nations will not be simply shipped through the UAE to India.

Importance for India
The CEPA is important for at least two reasons. The first is that UAE is a gateway not only to the MENA region, but also to other parts of Africa. The Indian government too, has recognised the advantages that UAE could offer as a “global logistical centre with technically advanced transport and storage facilities” for distribution of pharma products, a key export item for India. UAE has its sight set on becoming a pharma-distribution hub by 2030, and this would help India find more market access.

The second advantage is the possibility of India reversing its declining trade relations with a country that was its largest trading partner until 2012, with total trade at $74.8 billion. UAE was also India’s largest export destination; the value of exports having peaked in 2011 at $38.3 billion. Thereafter, exports have been steadily declined. In 2021, India’s exports to UAE were $25.4 billion—lower (in nominal terms) than the exports in 2010 ($29.3 billion).

The writer is a member of staff.

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