After prolonged negotiations, Australia and India have agreed to enter into an interim trade agreement while they continue negotiations on a more comprehensive agreement. As an interim agreement, the range of products the subject of tariff reductions is less than would be expected under a full free trade agreement. It also means that the provisions of the agreement may not be as fully developed as with a standard FTA. Customs brokers and traders will need to exercise more care than with a comprehensive free trade agreement.
What is an interim agreement
India has a history of entering into “early harvest” agreements while it negotiate a comprehensive free trade agreement. Such agreements offer early wins for both countries while the more difficult issues are being negotiated. Essentially, it is a chance for the negotiating parties to pick the low hanging fruit.
Given that negotiations for the comprehensive FTA commenced in May 2011, the attempt to capture the early and easy wins might have been expected much earlier.
An interim agreement is great if it is genuine stepping stone to a full agreement. However, it is not always the case that an interim agreement leads to a full agreement. Sometimes locking in the early wins can reduce the motivation to conclude a full agreement. It is likely to be case of diminishing returns.
There is also an argument that an agreement that is not comprehensive does not satisfy the WTO requirements around an FTA. Only a comprehensive FTA permits Australia to grant India lower tariff rates than it offers other WTO members.
Certificate of origin
This FTA is not likely to be the easiest agreement to use. Unlike most modern FTAs, this agreement does not currently contain provisions for declarations of origin. Rather, in all cases, the origin of the goods must be proved by a certificate of origin issued by an issuing body or authority.
There are plans to move to a system of using declarations of origin. This review will be commenced 2 years after the agreement enters into force. By the time the review is conducted and any changes made you would hope that the interim agreement has been replaced by the comprehensive agreement.
Rules of origin
The rules of origin are another area that needs further development. Usually an FTA has comprehensive rules that deal with which goods are granted origin status and enjoy the reduced duty rates. These rules are still being developed for the Australia India Agreement.
For instance, the rules that apply where there is some third country content are incomplete. These rules are call products specific rules and usually exist for each tariff heading. However, there are no product specific rules for goods in many tariff chapters, including chapters 84 and 85. Instead, these goods must satisfy a general rule with the following requirements:
· all non-originating material must have undergone a change in tariff sub-heading;
· satisfy a qualifying content requirement (35-45% depending on the test); and
· the final production process of the good is performed within the territory of the exporting party.
The parties will start negotiations to produce a complete product specific rules schedule.
The parties will also produce a schedule that would confer originating status on goods produced entirely in either Australia or India (or both of them) exclusively from originating material.
While it could be expected that not all tariff reductions would be included in an interim agreement. It is very surprising that the agreement does not include relatively common and complete rules of origin. A failure to include detailed rules of origin for all manufactured or processed goods will generally reduce the practical impact of the interim FTA.
Winners and losers
Generally most the tariff reductions are on Australia exports to India as Australia’s import tariffs for most goods are either 5% or o%. As such, 96% of Indian imports will be duty free on entry into force.
Australian exports that are subject to higher duty tend to be agricultural goods. For instance, Australian sheep meat is currently subject to a 30% tariff that is reduce on entry into force of the agreement.
India remains a very protectionist country and the domestic opposition to open trade resulted in no change for key commodities such as beef, dairy and chickpeas.
There are thousands of tariff lines and no assumptions should be made as to which products will and will not be subject to a duty reduction. Information on specific outcomes can be found on the DFAT website.
While an interim FTA, the agreement will nevertheless have to go through the usual legislative process. This will include review by the Joint Treaties Committee. It will be interesting to see what impact a possible change of Government will have on the approval of the interim FTA. While it is not expected that there would be any objection to a comprehensive FTA, the interim FTA has a number of holes that may require closer review.
Traders and customs brokers should not expect the interim FTA to be implemented in 2022.
However, now is the time to plan. Traders and customs brokers can assess their level of Indian related business and assess the tariff impact of the proposed interim agreement.
Please contact us if you would like to discuss how this trade agreement will affect your business.