India’s trade foray into the Middle East

After only 88 days of negotiations, India and the United Arab Emirates (the UAE) signed the Comprehensive Economic Partnership Agreement (the CEPA) in February 2022. While a number of others are on the horizon, notably with the UK, Australia, and the EU, this is the first comprehensive free trade agreement that India has concluded in the past decade, perhaps reflecting the importance of the parties’ trade relationship (with the UAE being India’s third-largest trading partner in 2021).

The CEPA is significant for numerous reasons. It is expected to boost bilateral trade from $60bn to $100bn within the next five years and is expected to generate 1 million jobs in India. Greater economic cooperation with the UAE may also open the doors to greater economic cooperation between India and other Gulf countries, with whom India has recently witnessed an exponential increase in bilateral trade. A trade pact will further improve trade and investment between the two regions.

The agreement covers a wide array of subjects of mutual interest, from free trade to digital economy. It comes with rules of origin requirements (most products require a value addition of 40 per cent in the exporting country to qualify) and a special safeguard mechanism to protect domestic producers.

Free trade of goods and services

Under the CEPA, the UAE is set to eliminate duties on 97 per cent of its tariff lines accounting for 99 per cent of India’s exports to the UAE by value, which includes immediate elimination of tariff on 80 per cent lines.

The agreement covers a number of different goods and services:

• India will particularly benefit from the UAE’s duty-free and preferential market access in labour-intensive sectors such as gems, jewellery, textiles, leather, engineering goods, and footwear.
• The Indian pharmaceutical sector is also expected to benefit from the CEPA as the UAE has agreed to the automatic registration and market authorisation in 90 days of Indian pharmaceutical products that have been approved by certain developed countries.
• Many UAE exports to India, including prepared food, petrochemicals, copper and aluminium, glass and glassware, will substantially benefit from duty-free treatment.

The CEPA also secures open and non-discriminatory access for trade in services, covering 11 sectors including telecommunications, tourism, finance, and construction. While Indians will have improved access to 111 sub-sectors for business and professional services, UAE service sector companies looking to expand to India and export services abroad will also benefit from increased access.

Through the CEPA, India and the UAE also intend to strengthen their cooperation in digital trade, including paperless trading, digital payments, online consumer protection, personal data protection, etc. Both countries will endeavour to adopt or maintain a legal framework for the protection of personal data of the users of digital trade. This is especially relevant since a federal data protection law has been introduced in the UAE whereas India has not yet enacted specific legislation on data protection (at the beginning of August 2022 the government of India withdrew a bill on data protection that had first been proposed in 2019). Nevertheless, it is important to note that the provisions on digital trade are mostly applicable on a “best endeavours” basis and are not subject to the dispute settlement mechanism under the CEPA. Moreover, the provisions do not offer much clarity on how the parties will promote secure digital trade.

Government procurement

Both countries have agreed to open government procurement opportunities to players from the other country. India has for the first time diluted its stance on government procurement by allowing UAE entities to bid for government tenders worth over INR 2bn. The inclusion of this provision paves the way for potential inclusion of government procurement in other FTAs that India is currently negotiating.

Investment promotion and protection

India and the UAE have affirmed “their desire to promote an attractive investment climate and expand trade in products and services”.

The CEPA does not, however, include specific provisions on investment protection in its “Investment and Trade” chapter. Rather it notes the existence of the India-UAE BIT in force since 2013, which provides, among other things, for investor-state arbitration in the event of a dispute arising out of an investment. However, both countries undertook to renew their commitment to replace the existing BIT, and to finalise a new agreement by June 2022. The countries appear to have missed the proposed target date, which means that the India-UAE BIT continues (for now) to be in force. This BIT is one of the few Indian BITs that remains in force following India’s move to terminate 58 of its BITs in 2017. Accordingly, arbitration presently remains a possible means of resolving investor-state disputes as between India and nationals of the UAE, and vice-versa, even though India has otherwise sought to minimise its exposure to investor-state arbitration.

The CEPA’s safeguard mechanism

The Indian government’s position was that significant trade deficits accrued to it following the implementation of previous FTAs with counterparties such as Korea, Japan, and the ASEAN countries; a lack of stricter safeguard mechanism to prevent an unforeseen surge in the imports of the eligible items and a failure to push exports were characterised as the main culprits. Experts and commentators were divided on the veracity of the claim. However, the government’s concerns were evident in India’s proposal to include a safeguard mechanism in the Regional Comprehensive Economic Partnership (RCEP) agreement that would have kicked in automatically if there was a certain level of imports from the RCEP countries. When India ultimately decided to opt out of negotiations, failure to obtain agreement from the other RCEP members to the auto-trigger safeguard mechanism was cited as one of the main reasons.

The CEPA does not contain the kind of safeguard mechanism that India sought in the RCEP. Rather it contains a standard bilateral safeguard mechanism to protect India’s industries, especially Micro, Small and Medium Sized Enterprises (MSMEs) from sudden surges in imports from the UAE due to tariff concessions. The safeguard mechanism entitles a party to suspend the reduction of customs duty or increase a customs duty on an originating good if a sudden surge in imports of that product causes injury or threat of injury to its domestic producers. The party may restore the applicable duty to the MFN applied rate on the date of the application or on the day immediately preceding the date of entry into force of the CEPA. A party can apply a definitive safeguard mechanism only after an investigation by its competent authorities and after providing adequate opportunity for consultations with the other party.

The CEPA also contains a consultative mechanism to address concerns regarding other countries routing their dumped goods to India through the UAE. This is aimed at safeguarding India’s anti-dumping measures against third countries.

Relationship with India’s historical practice and position on international trade

In the late 2010s, India was vocalising a shift away from economic internationalism and towards the primacy of domestic interests and industry. This manifested in different ways, including the above-noted move by India in 2017 to terminate 58 of its bilateral investment treaties. The termination came in an effort to renegotiate the terms according to India’s newly adopted Model BIT, which introduced narrower protections for investors. On the trade side, in 2019, it walked away from negotiations for the RCEP agreement. In the same year, the government launched negotiations with South Korea to amend the existing comprehensive FTA and also announced that it would review the FTAs with ASEAN and Japan. Additionally, in the wake of the pandemic, the government announced the “self-reliant India” campaign, which promoted the use of domestically produced goods over imports.

As the Indian economy showed signs of improvement in 2021, the government committed to negotiations for several comprehensive trade agreements. India initiated negotiations with several countries, including the UK, Russia, Canada, and the EU. In April 2022, India entered an interim economic cooperation and trade agreement with Australia, which was intended as a step towards a comprehensive trade agreement. This is pursuant to India’s broader strategy to enter more balanced trade partnerships with key players in the global economy and improve its international trade.

This strategic shift is also reflected in India’s stance under the CEPA, as it states that India’s self-reliant approach would focus not just on boosting domestic manufacturing but also on making the country a part of the global value chain. The CEPA may therefore represent an attempt to reconcile India’s inward focus with its appreciation for the need to be integrated in the global trade market – this approach might also explain India’s positions at the twelfth WTO Ministerial Conference earlier this year.

Gateway to the Gulf

The UAE is home to approximately 3.5 million Indian nationals and is therefore a major market for Indian goods and services. Yet Indian exports to the UAE steadily declined between 2011 and 2021. The CEPA is an essential step to reverse that decline. This effect was seen immediately after its implementation. India witnessed a 16.22 per cent increase in its exports to the UAE in May-June 2022, as reported by the Press Trust of India. Buoyant Indian exports under the CEPA could add momentum to discussions for broader FTAs with other Gulf countries. The CEPA is therefore a valuable tool in the hands of Indian businesses.