The Preferential Trade Agreements (PTAs) or Free Trade Agreements (FTAs) between nations have been as old as history of nations. Under these agreements two or more contracting countries agree to reduce the Customs Duties on a few or on the entire tariff lines for trade among themselves for the goods manufactured in these countries. The reduction could be incremental (5% or 10% or 50% etc. ) covered under Preferential Trade Agreement or there could be complete elimination of import duties usually termed as Free Trade Agreement.

With coming into being of Multilateral institutions- where substantially large number of countries agree to bring down their duties simultaneously, such as under WTO, it was expected that PTAs/ FTAs would loose their sheen. However, the number of PTAs/ FTAs have skyrocketed since the birth of WTO due to several reasons. The EU, NAFTA, ASEAN and SAPTA are the examples of such PTAs/FTAs. Whether PTAs/FTAs are more beneficial than the multilateral systems as WTO, is a hotly debated issue globally.

Why should companies bother about these agreements ?
There is a general perception that international agreements concern those who are in international trade either importing or exporting. This is far from truth. The PTAs/ FTAs affect all kind of businesses and their impact is seen on :
a. On the competitiveness of domestic industry
b. On the accessibility of markets

Take for example one country is good in manufacturing steel and the other is good at manufacturing machine. If one requires steel at competitive prices to manufacture machine and the other requires machine at competitive prices, it makes economic sense that one lower import duty on steel and the other on machines. It increases competitive strength of both nations. However, the country that requires steel, keeps the import duty on steel at same level but reduces the import duty on machine, it will lead to reverse tariff escalation. More duty on steel and less duty on machine. It would make the country un-competitive and it would be more economical to import machine in that country than to manufacture locally.

Therefore, PTAs and FTAs are both present the opportunity and threat.

What should you look for in an PTA/ FTA ?
Every company should check :
a. Present Import Duty on its product and the duty after the PTA/ FTA
b. Present Import Duty on the inputs ( major raw materials) and after the PTA/ FTA

After an PTA/ FTA, if import duty on your product gets reduced and there is no corresponding reduction on your inputs, you lie in danger zone.

Learn more on major PTA/ FTA signed by India :
a. ASEAN-India
b. India-Thailand
c. SAFTA