24 Apr What is the new FTA between India and Australia and what does that mean to Australia?
Australia and India launched negotiations for a Comprehensive Economic Cooperation Agreement in May 2011. After nine rounds of negotiations, both countries decided to suspend negotiations in September 2015. In June 2020, as part of the Joint Statement on a Comprehensive Strategic Partnership between India and Australia, Prime Ministers Morrison and Modi decided to re-engage on a bilateral Comprehensive Economic Cooperation Agreement (CECA). As a part of it, both countries were able to sign an Interm FTA on 2 April 2022.
What is FTA: FTA stands for Free Trade Agreement signed between two countries for boosting their trade relationships. When someone imports goods from a country, there is a pre-set percentage of tax being collected by the government from the importer. This tax is called custom duty tax and it’s being billed on the value of goods. The custom duty tax can vary anywhere from 1% to even 200%. When two countries sign an FTA, importers from one country can import goods from their FTA partnered country without paying customs duty to their respective governments. Sometimes there is a blanket of duty-free on all goods and sometimes there will be a list of products/goods included under the Free Trade Agreement.
What does this mean: Whenever there is a customs duty on a good or product, your landing cost of the goods will increase making the product expensive to sell to your end customer. Let’s say John has imported 10,000 Cotton T-shirts from India. The total value of the t-shirts is $30,000. There is a 5% customs duty that which Australian Government charges on the invoice value. This means John has to pay 5% of $30,000 which is $1500 to the government before his goods are released from the port making the total cost of the goods(COGS) of the t-shirts to be $31500. With FTA coming in the act, John will save $1500. Let’s reverse the story. Sheep meat importers in India have to pay a 30% customs duty to the Government of India on their imports from Australia. Under the new agreement, sheep meat is duty-free under certain conditions. So instead of paying $9000 as custom duty charges for a $30,000 worth of sheep meat, the importer in India will save that $9000 if he is importing from Australia. This is a massive boost for sheepmeat producers in Australia.
Who is the winner: Definitely Australian business owners, farmers, and manufacturers. India is one of the biggest consumer markets in the world with a 1.3billion population. This will give Australian exporters access to one of the biggest markets and attract buyers/importers from India because
- The products listed under FTA are carefully chosen which will benefit Australian farmers and manufacturers with a key focus on sheep meat, wool, wine, farming, and mining industries.
- Because most of these products are eliminated from attracting custom duty, our products will be 5% to 30% cheaper compared to other countries.
This attraction will keep Australian producers and export industry as a favorite, thus boosting our production, and promoting more investments towards manufacturing, production and farming which in turn will create more jobs in the country.
On the other hand, Australian importers will enjoy a duty-free for their imports from India which will make the products 5% cheaper. Most importers keep their profit margins between 5% to 10%. India has been very competitive in terms of prices against China but the 5% customs duty was a killer. If there is any country that has the potential to compete with China and beat them in the coming years, it’s India.
- The Indian market can easily beat China with prices but the 5% customs duty adds up to the landing cost for Australian importers making it hard to move their production from China. Thanks to FTA, now Australian importers and e-commerce businesses have an option to move their production to the 5th biggest manufacturing market in the world.
- The Australian market, majorly SMB importers has suffered a lot by laying all its eggs in one basket for almost all of its imports. This dangerous practice has kept Australian businesses venerable to the geopolitical relations between Australia and China. Now Australian importers won’t be dependent on one country anymore.
We can conclude here by saying that the growing relationship between India and Australia will help both the countries in their trade & commerce and extend support to each other for mutual growth. Australia’s new trade agreement with India has been described as “opening the biggest door of one of the biggest economies in the world” by Prime Minister Scott Morrison. The major winner here is no doubt Australia and its trade market.