Decade-long negotiations have finally come to fruition with the signature of the AI-ECTA on 2 April 2022. The AI-ECTA is an interim trade agreement within the broader negotiations between Australia and India over a Comprehensive Economic Co-operation Agreement (AI-CECA). It is intended to demonstrate a strong commitment from India and Australia to boosting trade relations with each other. However, ratification of AI-ECTA will need to await Australia’s federal election.
In 2020, two-way trade between India and Australia was valued at $24.3 billion. The AI-ECTA aims to create trade diversification opportunities for Australian producers and service providers, valued up to $14.8 billion each year. The AI-ECTA should make Australian exports to India cheaper and create opportunities for cross-border businesses.
Overview of the trading relationship
The benefits of stronger trade links between Australia and India have long been recognised. At the fifth Australia-India Joint Ministerial Commission in 1997, India’s former commerce minister noted that there was considerable scope to strengthen commercial ties through improving market access in food processing, information technology, software, pharmaceuticals and the wool industry. He also noted that India’s infrastructure and mining sectors offered several opportunities for Australian investment.
Negotiations between Australia and India over a bilateral trade agreement began in 2011. However, agreement on a trade deal long eluded negotiators, hampered in part by the complexity of each country’s respective regulatory regimes, the lack of a clear model on which to base the agreement, and sporadic tensions in the multilateral trade system. In 2018, the former Secretary of the Department of Foreign Affairs and Trade, Peter Varghese AO, recommended a three-pillar strategy for improving ties with India including economics, geopolitics and people-to-people links; and in June 2020, as part of the Joint Statement on the Comprehensive Economic Cooperation Agreement, the two countries’ prime ministers re-engaged on a bilateral AI-CECA. In the first virtual bilateral summit held in June 2020, Australia and India elevated their relationship to a so-called “comprehensive strategic partnership”, signing agreements on science, technology and research, maritime issues and defence.
What’s in the interim deal?
The AI-ECTA signed on 2 April 2022 attempts to strengthen trade and investment in the Indo-Pacific region, and give Australian producers access to a new market of around 1.4 billion consumers.
It includes the basic components of a trade in goods and services agreement, with chapters on:
- trade in goods,
- trade remedies,
- rules of origin,
- customs procedures and trade facilitation,
- sanitary and phytosanitary measures,
- technical barriers to trade,
- trade in services,
- temporary movement of natural persons, and
Meaningful agreement has not been reached on investment or on 21st-century topics such as digital services and electronic commerce, financial services, telecommunications, intellectual property, pharmaceuticals, labour, environment, government procurement, and state-owned enterprises.
What does it mean for Australian businesses?
Upon entry into force of the AI-ECTA, tariffs are set to be eliminated on 85% of Australian goods exported to India. Over the course of the next decade, the reduction in tariffs on Australian goods will ramp up to almost 91%.
Agricultural and agribusiness exporters will likely welcome the news of opportunities to diversify export flows, particularly in light of recent trade tensions with China. Tariffs will be eliminated immediately for Australian exports of sheep meat and lobsters. The AI-ECTA will also progressively reduce tariffs on wine, infant formula, certain peas and beans, macadamias, avocados, onions, cherries, berries, apricots, strawberries and pharmaceutical products. It is notable, however, that certain major exports including dairy, chickpeas, beef, and wheat have been excluded from the AI-ECTA.
Tariffs will also immediately be eliminated for LNG, coal, alumina, metallic ores (including manganese, copper, cobalt, tin ores and nickel), and critical minerals (including titanium and zirconium). Crude petroleum tariffs will be eliminated over five years. India is Australia’s fifth largest market for energy and resources exports. As Australia increases its trade with India, elimination of tariffs for the resources and energy sector will become more significant. In particular, the growing importance of India to global manufacturing means that Australia’s critical minerals and resources sector can expect greater certainty in the export of minerals required to produce mobile phones and monitors. Australia will also be in a position to supply minerals required for India to fulfil its clean energy and electric mobility ambitions, including those needed to produce wind turbines, electric cars and solar panels.
The agreement is more limited when it comes to services trade, when compared to what might usually be included in an Australian FTA. The AI-ECTA lacks the detailed commitments on digital trade and e-commerce, financial services, telecommunications services, and professional services that we have become accustomed to seeing in services agreements.
It nonetheless reflects a degree of progress, particularly noting it is only an interim agreement. Australian service suppliers in 31 sectors and sub-sectors will be guaranteed favoured treatment by India, including in higher education and adult education, business services (tax, medical and dental, architectural and urban planning), research and development, communication, construction and engineering, insurance, banking, hospital, audio-visual and tourism and travel. The AI-ECTA will support mutual recognition arrangements for qualifications, licensing and registration procedures.
Movement of people is also promising, particularly given Australia’s growing labour market shortage issues. Australia will provide new access for young Indian nationals to participate in working holidays. Australian nationals will also be able to gain professional experience in India. Former Indian students will be able to live, study and work in Australia temporarily upon completion of their studies.
What’s in it for Indian businesses?
It is estimated that 96% of India’s exports will soon qualify for duty-free entry into Australia. In particular, pharmaceutical, clothing and textiles, footwear, leather, gems and engineering goods will enter duty-free.
Australia has also agreed to amend tax regulations which, according to India, have been double-taxing Indian companies providing services in Australia.
No new protections for foreign investments
The AI-ECTA is silent on protections for foreign investors such as, for example, protection from expropriation, ensuring fair and equitable treatment, and the right to pursue claims against a State for alleged treaty breaches.
The full AI-CECA should include foreign investment provisions. However, those negotiations will be neither simple nor straightforward given India’s newfound aversion to foreign investment coverage in treaties. India’s recent trade agreements with Mauritius and the United Arab Emirates do not contain chapters on the topic. Approximately 74 countries were notified of termination of their bilateral investment treaties (BITs) with India. The Australia-India BIT signed on 26 February 1999 was terminated relatively recently, on 23 March 2017. However, in accordance with Article 17(3) of the treaty, certain provisions of the Australia-India BIT will continue to be effective for a period of 15 years from the date of termination, i.e. until 23 March 2032.
The AI-ECTA is expected to be ratified by Australia during the second half of 2022. Ratification is expected to have bipartisan support. Meanwhile, a committee of negotiators from both countries will soon begin talks on converting the interim agreement into the broader AI-CECA.
While the AI-ECTA has been hailed as historic, its scope is not as broad or ambitious as many of Australia’s other trade agreements. It represents a welcome start after a decade-long wait; however, the test remains as to whether a comprehensive agreement can be reached and the full promise of enhanced trade between the countries can be realised.