Regional Value Content (RVC) in Free Trade Agreements (FTAs) - In-depth Analysis in the Context of Indian FTAs with Key Developments

[YAGAY andSUN]

Regional Value Content (RVC) is a crucial criterion used in Free Trade Agreements (FTAs) to determine whether a product qualifies for preferential treatment under the agreement. RVC defines the minimum percentage of a product's value that must be sourced from within the FTA region for it to benefit from reduced or zero tariff rates. This ensures that FTAs stimulate economic integration and regional trade by encouraging intra-regional supply chains.

1. Overview of Regional Value Content (RVC)

RVC plays a key role in determining whether a product qualifies for preferential tariff treatment under an FTA. The concept was designed to avoid trade deflection, where goods from outside the FTA region might enter a member country and then be exported to another member country with preferential duties, simply by passing through a member country.

The key aspects of RVC are:

• RVC Calculation: RVC is calculated as a percentage of the local content in a product relative to its ex-works price. Several methods are used to calculate the RVC, and these methods are defined within each FTA.
  • Build-up method: The percentage of the value of materials that originate in the FTA region is added to the price of the finished product.
  • Build-down method: The percentage of non-originating materials is subtracted from the price of the finished product.
• Thresholds for Preferential Treatment: FTAs typically establish a minimum threshold for RVC to qualify for preferential tariff treatment. This threshold may vary depending on the product and the specific FTA.

2. Indian FTAs and RVC

India has signed multiple FTAs with various countries and regions, each containing provisions related to Regional Value Content. Here’s an overview of key agreements:

A. India-ASEAN Free Trade Agreement (AIFTA)

• Implementation Date: The India-ASEAN Free Trade Agreement (AIFTA) was signed in 2010 and came into force in 2011.
• RVC Provisions: AIFTA includes specific RVC requirements for various products. For example, the minimum RVC for certain industrial goods is set at 40%, which means that 40% of the product’s value should come from ASEAN or India to benefit from the reduced tariff.
• Key Impact: AIFTA has been instrumental in boosting trade between India and ASEAN countries by facilitating duty-free or reduced-duty access for a wide range of goods, particularly in sectors like textiles, machinery, and electronics.

B. India-Japan Comprehensive Economic Partnership Agreement (CEPA)

• Implementation Date: Signed in 2011 and entered into force in 2011.
• RVC Provisions: For several products, the agreement specifies 30%-50% RVC thresholds depending on the nature of the product. For example, the RVC for automotive and electronics goods is typically higher compared to textiles.
• Key Impact: The CEPA has helped enhance bilateral trade between India and Japan by improving access to Japanese markets, especially in technology and automobiles. The RVC requirements in CEPA ensure that a large portion of the manufacturing is done within the FTA region.

C. India-South Korea Comprehensive Economic Partnership Agreement (CEPA)

• Implementation Date: The agreement came into force in 2010.
• RVC Provisions: The India-South Korea CEPA includes provisions for an RVC of around 40%-50% for certain products like machinery, electronics, and automotive parts.
• Key Impact: This agreement has significantly promoted trade in sectors like automobile parts, electronics, and textiles. The RVC provision helps ensure that the value-added in these industries remains within the FTA region, thereby increasing economic cooperation.

D. India-Mercosur Preferential Trade Agreement (PTA)

• Implementation Date: The agreement was signed in 2004.
• RVC Provisions: In the India-Mercosur PTA, RVC thresholds for various products vary from 35%-50%. This allows for significant trade between India and the Mercosur countries (Brazil, Argentina, Paraguay, Uruguay) while ensuring that value is added within the region.
• Key Impact: Although not as comprehensive as other FTAs, this agreement has facilitated trade in agriculture, textiles, and automotive sectors, especially with Brazil and Argentina.

E. India-UAE Comprehensive Economic Partnership Agreement (CEPA)

• Implementation Date: Signed in 2022.
• RVC Provisions: The India-UAE CEPA includes provisions for 40%-50% RVC across various sectors like jewelry, textiles, and chemicals. This agreement represents a significant step towards strengthening trade ties between India and the UAE.
• Key Impact: With the UAE being a major trading hub, this agreement is expected to boost India's exports to the Middle East, particularly in sectors like textiles, gems and jewelry, and chemicals, while also opening up greater access for Indian services.

3. Key Developments in the RVC Context

A. Changes in RVC Provisions Post-COVID-19

In the wake of the COVID-19 pandemic, many countries have revisited their trade agreements, and there have been calls for more flexibility in RVC provisions to account for disruptions in supply chains. Countries, including India, have been exploring options to:

• Reduce RVC thresholds temporarily in certain cases to ensure easier compliance.
• Introduce more flexible rules of origin to address the impact of the pandemic on global supply chains.

B. RVC and the India-UK FTA (Under Negotiation) India is currently in negotiations for a Comprehensive Economic Partnership Agreement (CEPA) with the UK, with discussions focusing on RVC provisions to facilitate trade in key sectors like automobiles, textiles, and technology. In such negotiations, India seeks to ensure that the RVC thresholds are balanced to promote regional value addition while facilitating increased market access for its goods.

C. Digital Trade and RVC: As digital trade becomes more significant, India is exploring how RVC provisions can apply to digital services and products. New-age products such as software, e-commerce services, and digital goods often do not fit neatly into traditional RVC calculations. This is expected to be an emerging area for RVC discussions in future FTAs.

4. Challenges and Future Directions

A. Complexities in RVC Calculation The RVC calculation methods can be complicated, especially for industries with global supply chains, making it difficult to trace the exact value-added in the region. This can create challenges for producers in India looking to meet the RVC requirements in FTAs, especially for sectors like electronics and automobiles.

B. Negotiation of FTA Terms India’s FTA negotiations will need to carefully balance RVC requirements with the global supply chain reality. For example, a strict RVC threshold might disadvantage Indian producers who rely on imported components. Therefore, there is a need for more flexible RVC provisions that acknowledge India’s position as a key player in regional and global value chains.

C. Regional Cooperation The future of RVC will depend on the deepening of regional cooperation in trade agreements. For instance, India’s future FTAs with RCEP (Regional Comprehensive Economic Partnership) nations may involve discussions on reducing RVC thresholds and including more lenient rules for digital and high-tech products.

Conclusion

Regional Value Content (RVC) continues to be a vital aspect of India’s Free Trade Agreements (FTAs). The RVC provisions in these agreements play a pivotal role in ensuring that goods traded under preferential tariff arrangements are genuinely produced in the region, promoting economic integration and regional supply chains.

India’s FTAs with ASEAN, Japan, South Korea, UAE, and others have facilitated a steady increase in trade by aligning with regional value addition. However, challenges related to complex calculations, global supply chains, and sector-specific issues remain. Future FTAs, especially with the UK and RCEP, will need to strike a balance between global competitiveness and regional cooperation to make RVC provisions more effective in boosting India’s exports.