The Australia-India Economic Cooperation and Trade Agreement: A possible step towards a full Free Trade Agreement

After more than a decade since negotiations first began, the Australia-India Economic Cooperation and Trade Agreement (AI ECTA) was signed on 2 April 2022. The AI ECTA is an interim agreement and is a step towards a full Comprehensive Economic Cooperation Agreement where negotiations between both countries are expected to conclude by the end of this year.

Entering into force in the second half of 2022, the AI ECTA will eliminate tariffs on more than 85% of Australian goods exported to India (valued at more than A$12.6 billion per year), with the potential to increase to almost 91% over the next 10 years. From the Indian perspective, 96% of Indian goods imported into Australia will be duty-free.

The announcement is a major step in Australia diversifying its export markets and will create significant opportunities for Australian workers and businesses.

India as an export market

The Australian Government is aiming for India to become one of Australia's top three export markets by 2035 and to make India the third largest destination in Asia for outward Australian investment.

For context:

• India is the world's largest democracy and has a consumer population of approximately 1.4 billion;
• India is the world's fastest-growing major economy, with GDP projected to grow at 9% in both financial years 2021-22 and 2022-23 and then 7.1% in financial year 2023-24;
• India was Australia's sixth largest goods and services export market in 2020 (valued at A$16.9 billion); and
• India was Australia's seventh largest trading partner in 2020 (valued at A$24.3 billion).

The AI ECTA is expected to further strengthen Australia's relationship with India while making Australian exports to India cheaper and providing a number of domestic employment opportunities.

The AI ECTA's implications for goods – inbound and outbound investment

Upon the AI ECTA's entry into force, 96% of Indian goods imported into Australia will be duty-free. This will benefit Australian households and businesses by introducing new goods to the domestic market and reducing costs. The AI ECTA will remove barriers to trade between both countries across various industries, with the immediate elimination of more than 85% of tariffs on Australian goods exported to India.

This is particularly relevant to the following industries:

Barley and Oats: current 0% tariff will be locked in on entry into force.

Coal: elimination of current tariff on entry into force, or over 5 years.

Cotton: immediate access to duty free quota of 300,000 bales on entry into force.

Horticulture: elimination of tariffs of up to 30% on foods such as avocados, cherries, berries, certain peas and beans, onions and macadamias over 7 years, and reduction of tariffs on foods such as almonds, lentils and strawberries. This will create opportunities for Australia's horticulture industry to supply India's growing food demand.

Infant formula: elimination of current 50% tariff over 7 years.

LNG: current 0% tariff will be locked-in on entry into force.

Pharmaceuticals and medical devices: elimination of current 10% tariffs on pharmaceutical products and certain medical devices over five and seven years.

Resources: elimination of current tariffs on entry into force for alumina, metallic ores, including manganese, cobalt, tin, copper and nickel, and critical minerals including titanium and zirconium.

Seafood: elimination of current 30% tariffs on entry into force for fresh rock lobsters, and elimination of tariffs over 7 years for other fresh, frozen and processed seafood products including Atlantic salmon, tuna and frozen rock lobster.

Sheep meat: immediate elimination of current 30% tariffs on entry into force, which is noteworthy given Australian exports account for almost 20% of India's market.

Wool: immediate elimination of current 2.5% tariffs on entry into force, which is particularly valuable given India is Australia's second-largest market for wool products.

Wine:

• immediate reduction of current tariffs on wine with a minimum import price of US$5 per bottle from 150% to 100% on entry into force and subsequently to 50% over 10 years; and
• immediate reduction of current tariffs on wine bottles with a minimum import price of US$15 from 150% to 75% on entry into force and subsequently to 25% over 10 years.

Notably missing from this list is the dairy and beef sectors.

The AI ECTA's implications for implications for services and other major sectors

India is Australia's third largest services export market. The value of the export of services to India has almost doubled over the last 10 years to $6.9bn in 2020. Through the AI ECTA, India is committed to provide increased certainty for Australian service providers by extending to Australia any future services market access improvements that India agrees to give any future FTA partner in 31 sectors and sub-sectors. Therefore, Australian service providers supplying to India will always be on par with new international competitors.

The 31 sectors and sub-sectors that India has guaranteed to provide Australia with the best treatment when compared to any future free trade agreement partner include:

• business services such as tax, medical and dental, architectural and urban planning;
• communication and audiovisual;
• construction and engineering;
• research and development;
• insurance and banking;
• hospital,
• tourism and travel; and
• higher education and adult education.

In addition, both countries have agreed upon the following measures:

Mobility: the AI ECTA includes a mobility outcomes that will foster people-to-people links, support trade and business and contribute to cultural exchange between the two countries. In addition to the agreement will support access for a range of Australian and Indian skilled service providers, investors, and business visitors and facilitate investment.

Professional services: Professional services bodies in both Australia and India will recognise professional qualifications, licensing and registration procedures, which makes it easier for skilled professionals to work in both countries.

Working holidays: In a move expected to assist with workforce requirements and increase tourism in support of Australia's post-COVID recovery, 1,000 young Indians will be given the opportunity to participate in Australia's Work and Holiday program each year. Australia will have two years to implement this measure.

STEM and ICT workforces: Indian students with a bachelor’s degree with first class honours will now be able to stay in Australia for three years post study in science, technology, engineering or mathematics (STEM) and information and communications technology (ICT) sectors.

Agricultural trade: Australia and India have agreed to undertake co-operation to promote agricultural trade as part of the AI ECTA and will work towards concluding an enhanced agricultural Memorandum of Understanding.

Timeline, next steps, and a major outstanding question

Both countries are committed to bringing the AI ECTA into force in the coming months.

To do so, consistent with Australia’s treaty making process, the AI ECTA will be tabled in both of Australia’s Houses of Federal Parliament and any legislative changes required to implement the treaty domestically must pass both Houses of Parliament. This is expected to take place after the upcoming federal election. Once the domestic procedures have been completed in Australia and India, each country will provide the other with confirmation of the same completion through an exchange of diplomatic notes, and the agreement will enter into force 30 days later, or on any other date that is mutually agreed.

The AI ECTA must also be registered with the World Trade Organisation.

Whether the AI ECTA will lay the foundations for a full free trade agreement is unclear. Negotiations for a full free trade agreement between both countries first began in 2011 and it has taken more than a decade for an interim agreement to be agreed upon. A key issue still to be considered is whether India will be classified as an “FTA partner country” for the purposes of Australia’s Foreign Investment Review Board,  which would give Indian investors into Australia the benefit of a higher monetary threshold for foreign investment screening.