2.1
The Australia-India Economic Cooperation and Trade Agreement (AI-ECTA) was signed on 2 April 2022. It is intended to be an ‘early harvest’ agreement in advance of negotiations for a Comprehensive Economic Cooperation Agreement (CECA).
2.2
Free trade agreement (FTA) negotiations between Australia and India began in 2011 and continued until 2016 when they were paused while negotiations for the Regional Comprehensive Economic Partnership Agreement (RCEP) were completed. While India initially participated in the RCEP negotiations, it withdrew in 2019 prior to their completion. Negotiations between Australia and India restarted in 2021.
2.3
This chapter examines the trade relationship between Australia and India, provides an overview of the AI-ECTA, and discusses the reasons to ratify, including some key outcomes, general views of participants, the consultation process, and the AI-ECTA’s initial and final provisions.
Australia-India trade relationship
2.4
The following table summarises Australia’s goods and services trade with India over the past 20 years. This is followed by graphs showing trends in Australia’s exports to, and imports from, India.
Table 2.1: Australia and India trade: 2000-01, 2010-11 and 2020-21
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|
|
|
|
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Goods exports
|
$2,086
|
$15,761
|
$13,187
|
|
Goods imports
|
$754
|
$2,083
|
$6,462
|
|
Services exports
|
$542
|
$3,328
|
$5,947
|
|
Services imports
|
$293
|
$883
|
$1,447
|
|
Balance of goods and services trade
|
$1,581
|
$16,123
|
$11,225
|
2.5
Though Australia’s trade with India has generally grown for more than 20 years and Australia enjoys a trade surplus with India, the Indian market has been characterised as a difficult one for Australian exporters.
India’s approach to trade
2.6
In 2018, Peter Varghese, a former Secretary of the Department of Foreign Affairs and Trade (DFAT) prepared a report to the Australian Government, An India Economic Strategy to 2035: Navigating from Potential to Delivery (India Economic Strategy), which discussed India’s approach to international trade. The report noted that notwithstanding successive rounds of trade liberalisation under the General Agreement on Tariffs and Trade 1994 and the World Trade Organization (WTO), India’s approach to trade was influenced by an historical distrust of the market economy and ‘an understandable concern about the effect on the poor of unmanaged economic growth’.
2.7
The India Economic Strategy stated that India:
… retains deeply protectionist instincts, wanting to keep the government’s capacity to intervene in the economy and shield domestic firms and rural communities from competition.
2.8
The frequency of intervention can have a negative effect on those who wish to trade with India. In its 2020 review of India’s trade policies, the WTO stated:
India continues to rely on trade policy instruments such as the tariff, export taxes, minimum import prices, import and export restrictions, and licensing. These are used to, inter alia, manage domestic demand and supply requirements, protect the economy from wide domestic price fluctuations, and ensure conservation and proper utilization of natural resources. As a result, frequent changes are made to tariff rates and other trade policy instruments, which creates uncertainty for traders.
2.9
These issues were also identified in the AI-ECTA Regulation Impact Statement (RIS):
… Australia’s trade with India will continue to be hampered by India’s exceptionally high tariffs, especially for imported food and agricultural products, which prevents Australian products from entering and competing in the Indian market.
… from time to time, measures such as higher tariffs, quantitative restrictions and changes to non-tariff barriers are imposed by the Indian Government at little or no notice. This creates uncertainty and disrupts trade for Australian and other suppliers.
…
Under the existing trade framework, Australian exporters and suppliers will continue to be subject to significantly high tariffs, trade uncertainties and will not be in a competitive position to tap into one of the world’s largest and fastest growing economies.
2.10
According to the India Economic Strategy, India’s desire to protect and generate employment means it focusses in trade negotiations on access to foreign labour markets; restricts the flow of goods and expertise into India; and discourages competition from outside firms.
2.11
Despite these challenges, the India Economic Strategy found the size of the Indian economy, its demographic profile, and Australia’s competitive advantage in key sectors of Indian demand (including agriculture, resources, education, and health) meant Australia could not afford to neglect its trading relationship, ‘even though it will be hard work’:
A long view is important for any strategy. For India it is essential. India is a market which requires patience, perspective and preparation. Change in India is often invisible to the naked eye.
2.12
The challenges and opportunities of negotiating a trade agreement with India were discussed in evidence from DFAT when it spoke to the Committee about the logic of completing an interim agreement prior to negotiations on a comprehensive agreement:
This was something that India suggested; they said that this was something that they could do. The idea was that there were certain elements that they could do in a short time frame, but they needed more time to prepare for other elements … It's part of their new FTA policy. What we found—and we have been negotiating with India since 2011—was that there was a new sense of interest in doing free trade agreements and a real sense that, because of the complementarities between our economies, it was a good time for them to start with the Australia free trade agreement and then do other countries. For us, it was a new approach by India, which we found very interesting. We were also aware that they have a long list of countries to negotiate with, and there was a sense that, if we waited for the perfect, we'd be shuffled right back to the end and that it may take a long time. So—and this was the first time we'd done this—we did see a logic in doing a first-stage agreement and then addressing the second stage when India was more ready to deal with those issues. Certainly, because of the very high-tariff nature of the Indian economy, there were a lot of commercial advantages in moving to a first-stage agreement first.
2.13
Other commentators have also noticed India’s more recent change in sentiment towards FTAs.
2.14
Nevertheless, DFAT acknowledged the AI-ECTA was an agreement where ‘India made commitments that it wanted to make and it certainly carved out some of the more-sensitive agriculture products …’
2.15
However, DFAT assured the Committee:
… it was a first-stage agreement for us, in that we didn't give all of the things that we have in other, more ambitious, free trade agreements with other partners. So there are areas where we know India has an interest, where we can look at what we can do for them, and that would balance what we hope we will get in other areas, including agriculture and those sensitive sectors there.
2.16
As it negotiates the comprehensive agreement, DFAT assured the Committee:
Australia will seek to further reduce India’s barriers to goods and services trade as part of a broader balance of concessions that retain sufficient policy space to address public interest needs and the right to regulate.
Australia will pursue further liberalisation for goods (such as dairy, grains, horticulture and certain non-ferrous metals) and services (such as education, professional services and environmental services). CECA negotiations will also address areas not negotiated under AI-ECTA, including digital trade, government procurement and other issues.
Content of the AI-ECTA
2.17
The AI-ECTA contains 14 chapters, 11 chapter-specific annexes, and seven side letters. As an interim agreement, it does not contain a range of chapters that have been included in other recent trade agreements Australia has signed, such as the Free Trade Agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (AUKFTA), which contains 32 chapters (including chapters not in previous agreements Australia has signed), 12 chapter-specific annexes, four agreement annexes, and nine side letters.
2.18
Even in comparison to the less expansive RCEP, the AI-ECTA is absent chapters on digital trade, intellectual property, government procurement, competition policy, and small and medium-sized enterprises. It is also absent chapters on labour and state-owned enterprises and designated monopolies, found in other agreements.
Reasons to ratify the AI-ECTA
2.19
The National Interest Analysis (NIA) provided a number of reasons for Australia to pursue a trade agreement with India:
there is no single market with more growth opportunities for Australian businesses than India (to 2035)
opening new markets is important for market diversification
deepening economic links with like-minded partners would support open markets and a stable and prosperous Indo-Pacific
other countries are negotiating agreements with India and Australia risks being left behind
demonstrating the commitment of Australia and India to trade liberalisation and countering protectionist sentiment ‘during a period of geopolitical uncertainty and trade tensions’.
Outcomes in goods
2.20
With regard to trade in goods, the RIS stated ‘[l]iberalising Australia’s trade in goods with India would likely have a quantifiable impact, which has been considered in the context of specific goods …’ It suggested obtaining certainty as to tariffs would be a benefit given ‘the unpredictable way in which India imposes and lifts tariffs’.
2.21
The following table provides DFAT’s calculations of the proportion of imports entering each Party under tariff preferences prior to and following entry into force (EIF) of the AI-ECTA.
Table 2.2: Proportion of imports entering Australia and India under preference
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Indian imports from Australia
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0%
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$0.8
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90.6%
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$13,382
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Australian imports from India
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52.5%
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$2,706
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100%
|
$5,151
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Source: DFAT.
2.22
As discussed in greater detail in Chapter 3 of this report, for Australia’s most valuable exports to India, there is a split in terms of tariff outcomes between agricultural goods and other goods. Vegetables and wheat are amongst Australia’s top 10 exports to India. Tariffs for these exports would remain mostly unchanged and are relatively high. Most wheat products exported to India attract a tariff of 100 per cent. For Australia’s other most valuable exports to India, tariffs are either not applied (in the case of ferrous scrap) or are low and would be eliminated on EIF (in the case of coal and liquefied natural gas).
2.23
In contrast, on EIF, almost 98 per cent of Australian merchandise imports from India would be duty free. Tariffs on all remaining imports, including iron, steel and aluminium, would be eliminated over a period of four years.
Outcomes in services
2.24
The RIS acknowledged quantifying the advantages of liberalising trade in services is difficult; it is difficult to measure productivity in services because it is difficult to define a standard ‘unit’ for many services. In general, the RIS stated, ‘it is known’ that services liberalisation can increase services productivity by stimulating the market and this can have a flow on effect to consumer benefit. No quantification of the possible benefit is provided.
2.25
According to DFAT, the commitments in services from each Party are ‘on par with the best commitments that Party has offered to its other FTA partners,’ and Australia’s are more comprehensive.
2.26
The key benefit outlined in the RIS is ‘increased certainty’ for service suppliers due to the binding of existing market access and guarantees on access ‘broadly equivalent’ to those India has provided in other preferential trade agreements with Singapore, South Korea, Japan and Mauritius.
2.27
Through existing arrangements under the WTO General Agreement on Trade in Services, Australia can access 37 services subsectors; under the AI-ECTA, India would bind 85, some of which reflect recent broader domestic reforms in India. The value of the services outcomes is not estimated, though it is described as ‘[a] built-in agenda to improve outcomes over time’.
Modelling of expected benefits
2.28
The Australian Government has not undertaken any economic modelling of the AI-ECTA. Economic modelling from a 2009 feasibility study, based on assumptions made prior to any negotiation of actual terms, suggested welfare gains for both countries ‘could be in the range of’ 0.15 and 1.14 per cent of gross domestic product (GDP) for India and 0.23 and 1.17 of GDP for Australia.
2.29
Unlike the AUKFTA, which contains side letters on exchanging trade data to accurately analyse the implementation of the AUKFTA, the AI-ECTA does not contain a provision that would track the effectiveness of the agreement.
Views from participants
2.30
In comparison to past FTAs considered by the Committee, the AI-ECTA received comparatively few submissions. Nevertheless, key industry groups and other organisations have indicated their support for the AI-ECTA including: Australian Red Meat Industry, Amazon Web Services, Business Council of Australia, Australian Chamber of Commerce and Industry (ACCI), and the Group of Eight.
2.31
Though acknowledging there were areas of market access that needed to be addressed in the comprehensive agreement, the ACCI stated it strongly supported trade and investment relations with India:
India is an important economic partner for Australia, and AI-ECTA will be the first free trade agreement between our countries. This agreement is the start of a new important phase in Australia's relationship with one of our most significant economic partners, and it will see Australian business benefit from diversified markets and global supply chains. AI-ECTA will deliver greater market access for Australian exporters to a market of 1.5 billion consumers, and more certainty for investors in one of the world's fastest-growing economies.
2.32
Other submitters, while generally supportive of the AI-ECTA, raised a range of issues, such as the Law Council of Australia International Law Section (access to Indian legal market), Australian Grape and Wine (India’s complex regulatory and taxation settings and the market access outcome for wine), Queensland Cane Growers Organisation (Canegrowers) (Indian compliance with WTO obligations), the Australian Nut Industry Council (exclusion of certain nuts from tariff reductions), and the Northern Territory Government (independent review and analysis, and need for greater India literacy). These concerns are discussed in greater detail where relevant through this report.
2.33
Australian Grape and Wine, though disappointed with the market outcomes for wine, saw value in the AI-ECTA for the opportunities it potentially offered for market diversification:
Obviously, exports to India, the potential that India presents to us in the future, are of great interest to us …
While India is a really challenging place to do business—it has high tariffs of 150 per cent upon entry, significant regulatory divergence between states, and state taxes and charges—it's clear, in my opinion at least, that the opportunities presented by India, if we can get the right sort of economic and regulatory settings in place, are really significant. They present a significant opportunity for Australian wine exporters in the future.
2.34
Other participants raised a range of concerns including the Australian Fair Trade and Investment Network (AFTINET), which commented on a range of issues, including the quality of consultation, non-conforming measures in Chapter 8, regulations concerning temporary workers, and the absence of chapters on labour rights, environmental standards, gender rights and Indigenous rights. The Australian Council of Trade Unions (ACTU) drew the Committee’s attention to the lack of enforceable provisions on labour rights and the environment, the narrow definition of public services, non-conforming measures in Chapter 8, regulations concerning temporary workers, and transparency in consultation and negotiation.
2.35
In particular, the ACTU stated:
We think this is a missed opportunity for the government to really have an honest dialogue with India about lifting its performance on labour standards. It has not ratified fundamental conventions on freedom of association, the right to organise, the right to collective bargaining. To take it to its extreme, that means there is no international commitment for India to even let an organisation like the ACTU or its affiliated unions actually exist.
2.36
On the question of considering trade arrangements from a First Nations perspective, raised by Senator Cox, DFAT commented:
We raised a number of cooperation areas with India at the end of last year to put into this interim agreement, but the response was that they would be interested in looking at those items in the context of this full CECA negotiation that we're undertaking now. So, there's a sort of a marker such that we will be looking at a whole range of areas, including Indigenous trade issues, in the CECA negotiations that are just getting started now.
Consultation
2.37
According to the NIA, DFAT began public and stakeholder consultations on a comprehensive agreement with India in May 2011. Negotiations were suspended and then relaunched in October 2021. Groups listed as consulted include industry and worker representatives (peak bodies and trade unions), businesses, individuals, and ‘other entities’. State and territory governments have also been consulted. Almost 100 entities are listed in the NIA as being consulted between 2011 and 2022.
2.38
The NIA, however, does not provide any detail on the nature of the consultation. During the inquiry, the Committee heard that while some groups were satisfied with the level of consultation, others regarded consultation as unsatisfactory.
2.39
The ACCI told the Committee that business played a key role in the negotiations:
This has ensured that AI-ECTA is a commercially sound agreement. The agreement is more comprehensive than we anticipated at the commencement of the negotiations, and this is a credit to the negotiators. We must recognise that this is an interim agreement, and we look forward to working with the negotiating team on the comprehensive economic cooperation agreement, or AI-CECA.
2.40
The ACTU, however, stated:
… this agreement was very much negotiated in secret, without input from unions and from civil society. We have a lot of trusted allies and trading partners that have much better processes that respect the input of unions and civil society that we'd urge the committee to consider in its recommendations. It could be the UK [United Kingdom], the US [United States], the EU [European Union] or Canada, for example.
…
Our main engagement has been to see a press release and a final text, and there was no way to have any real input into that. Having spoken to friends and colleagues across industry and the private sector, they have had much more intense discussion, engagement and negotiation with DFAT because they have particular commercial interests around access and so there is naturally more back-and-forth.
…
We hear nothing about the agreement; it's dumped on us in secret and then the question is, 'Do you want to take it or leave it?'
2.41
Similarly, AFTINET expressed dissatisfaction with the consultation process:
We were only invited to one briefing, which was held in December 2021, and we were just told that there were negotiations going on for an interim agreement and the government wanted to finish it fairly quickly. And there was a very rough indication of some topics of negotiation. That is not consultation. What we need is detailed discussion of what is actually being discussed in the text of negotiations, especially in those areas of interest to, for instance, civil society organisations. That's what industry gets. You heard from the wine industry that they had very detailed discussion of what was under negotiation and they had multiple chances to make detailed comments about that. If you don't get the detailed information of what's in the text then you can't make the detailed comments about it.
Implementation
2.42
The following legislative changes would be required to implement commitments in the AI-ECTA:
Customs Tariff Act 1995—amended to incorporate the preferential tariff rates that would apply to goods imported from the India under the AI-ECTA
Customs (International Obligations) Regulation 2015 and Customs Tariff Regulations 2004—amended to allow for refunds of excess customs duty paid
Customs Act 1901—amended and a Customs (Australia-India Economic Cooperation and Trade Agreement Rules of Origin) Regulation created establishing rules for determining the originating status of goods imported from India for the purpose of determining eligibility for preferential tariff treatment
creation of a legislative instrument under section 140GBA of the Migration Act 1958 to give effect to Australia’s international trade obligations
creation of a legislative instrument under the Migration Regulations 1994 may be needed to give effect to commitments on bound occupations
Foreign Acquisitions and Takeovers Regulation 2015—amended to incorporate the new thresholds for screening investment proposals by services investors from India
International Tax Agreement Act 1953, Income Tax Assessment Act 1997 and/or Income Tax Assessment Act 1936—may require amendments in relation to matters under the Australia-India Double Tax Avoidance Agreement, which are required to be effected in a similar time to the AI-ECTA.
Costs
2.43
The NIA estimated a loss of $483 million over the forward estimates (to 2025–26) mainly due to the loss of tariff revenue on goods imported from India, but also a loss of taxation revenue associated with changes to double taxation arrangements, costs associated with mobility outcomes, incentives for audiovisual co-productions, and a reduction in fee revenue for foreign investment applications.
2.44
The NIA stated, however, there would be a net gain for the Australian economy because the Australian Government expects exporters to save approximately $2 billion over forward estimates (to 2025-26). This figure was calculated on the basis of reduced tariffs on current trade levels. A separate Treasury estimate put the figure at $482 million.
Initial and final provisions in the AI-ECTA
Initial provisions
2.45
The initial provisions in the AI-ECTA contained in Chapter 1 establish a free trade area for Australia and India, provide general definitions for terms used across chapters, and establish the relationship between the AI-ECTA and other agreements in the event of any inconsistency.
2.46
Chapter 1 also establishes a number of objectives for the AI-ECTA, including:
establishing a framework to strengthen and enhance the economic, trade and investment relationship between Australia and India
liberalising and promoting trade in goods and services
improving the efficiency and competitiveness of the Parties’ manufacturing and services sectors
expanding economic cooperation.
Final provisions
2.47
Amongst other things, the final provisions in Chapter 14 address how the AI-ECTA comes into force, might be amended, and terminated. The final provisions chapter also provides for reviews to be undertaken of the entire agreement and specific chapters. Provision is made for negotiations with a view to transforming the AI-ECTA into a CECA.
Status of documents
2.48
The AI-ECTA contains several annexes, appendices and footnotes—these constitute an integral part of the AI-ECTA. The AI-ECTA also contains side letters. Where a side letter explicitly provides that it is an integral part of the AI-ECTA, it shall constitute an integral part—that is, they are not extrinsic materials. Only the side letters with regard to Australia’s work and holiday visas are not an integral part of the AI-ECTA.
Amendments
2.49
If any international agreement referred to or incorporated in the AI-ECTA is amended, the Parties are to consult, at the request of either Party, on whether to amend the AI-ECTA.
2.50
The Parties can agree, in writing, to amend the AI-ECTA. Amendments would enter into force 60 days after the exchange of written notification confirming that domestic requirements have been completed, or on such other date as the Parties may agree.
Reviews
2.51
The Parties, through the Joint Committee, are to conduct a general review (at ministerial level) of the AI-ECTA within one year of the date of EIF and every two years afterwards, or as agreed by the Parties. Provisions detail what the review is to take into account.
2.52
After 15 years from the date of EIF, at the request of a Party, the Parties are to undertake a review of Chapter 4 (rules of origin), Annex 4A (minimum information requirements), Annex 4B (product specific rules of origin), Chapter 2 (trade in goods) and Annex 2A (tariff commitments). It would be jointly undertaken by the Subcommittee on Trade in Goods and the Joint Technical Subcommittee on Rules of Origin and Customs Procedures and Trade Facilitation.
Comprehensive Economic Cooperation Agreement
2.53
According to the provisions in the AI-ECTA, a Negotiation Subcommittee would be established, composed of government representatives of the Parties. Within 75 days after signature of the AI-ECTA, the Negotiation Subcommittee is to commence negotiations on amendments to the AI-ECTA to transform it into a CECA. Amendments made for this purpose would be in accordance with the amendment provisions at article 14.3.
2.54
The NIA stated these negotiations would to be concluded by the end of 2022.
Termination
2.55
A Party may terminate the AI-ECTA by giving the other Party notice in writing. Termination would take effect six months after the date of the notification, or as the Parties agree.
Entry into force
2.56
The AI-ECTA would enter into force 30 days after the exchange of written notifications confirming the Parties have completed their respective domestic requirements, or on a date the Parties agree.