The India-ASEAN FTA: An assessment
24 Aug, 2009 · 2956
Tuli Sinha examines the implications of the India-ASEAN FTA
The Union Minister of Commerce and Industry for India, Anand Sharma signed the much-delayed India-ASEAN Free Trade Agreement (FTA) in Thailand on 13 August 2009. As part of the Comprehensive Economic Cooperation Agreement (CECA), the FTA will integrate the two globally important economic blocks for mutually beneficial fiscal gains. ASEAN is a major trading partner for India and accounts for about 10 per cent of its global trade, this accord thus also marks the success of India’s Look East Policy on a much broader level. In the last financial year, bilateral trade between India and ASEAN was more than US$40 billion. India and ASEAN have set an ambitious target of achieving bilateral trade of US$50 billion by 2010. The current agreement, which will come into force in January 2010, will help accomplish this optimistic prognostication.
The pact, India’s first with a trade bloc, covers 11 countries with a combined Gross Domestic Product (GDP) of over US$2 trillion. It calls for gradual elimination of duties on items which account for 75 per cent of the trade between India and ASEAN. These include electronics, textile, machine and chemical goods. The agreement will also provide additional market access to Indian exporters, fuelling the growth in bilateral trade and investment, especially those dealing in machinery, steel, agriculture products, auto components, chemicals and synthetic textiles. In addition, Indian manufacturers will now also be able to source products from overseas at competitive prices from ASEAN members.
An assessment of the agreement shows that the trade pact equally crucial for India and the ASEAN, especially when global trade has and continues to shrink; the new multilateral global trade pact under the Doha round of talks remains obscure; and exports to the West from both the regions have diminished. ASEAN is already one of the world’s largest trade blocs, and an FTA with India will hopefully expand the market further. From the Indian viewpoint, the FTA will open up the US$1.1 trillion ASEAN market to its exporters, reducing their dependence on the West. Therefore, it is expected that this FTA will escalate the overall trade turnover between India and the 10-country block by over a fourth to as much as US$50 billion. As prescribed by the agreement, tariffs on most of the trade between India and ASEAN will be cancelled by 2016, while duties on 489 ‘very sensitive’ products will be retained. Trade between India and ASEAN has grown at a compounded annual growth rate of 27 per cent since 2000 which will definitely render impetus to the bilateral trade and investment linkages.
Yet, doubts remain in India as to whether or not this FTA will in fact result in improving trade relations. After the uproar over the Indo-Pak Joint Statement, the UPA government is now drawing flak from both the members of Congress and the Opposition over the controversial FTA, remonstrating the several grey shades of this FTA, for India in particular. First, even among ASEAN members, less than 5 per cent trade takes place at zero duty. Second, the complex Rules of Origin (ROO), certification requirements and paper work are so cumbersome that the importers prefer to pay the duty and expedite clearances rather than opt for duty concessions. Third, India’s trade with ASEAN is 9.6 per cent of its global trade, while ASEAN’s trade with India makes up only 2 per cent of its global trade. Fourth, the India-ASEAN FTA that proposes to drastically reduce or remove import duties on over 4,000 items of mutual trade has encountered serious opposition from the left parties in India over concerns that this will have a devastating impact on its farmers. The agreement for duty reduction will cover pepper, coffee, tea, rubber, palm oil and cashew, and is viewed in many quarters as disastrous for states such as Kerala at a time when the nation is facing an agrarian crisis. Fifth, India has thrown open its markets when most countries are taking measures to protect their economies amid global recession, and is making a meek surrender before developed countries in WTO negotiations by indicating its willingness to complete the Doha Round.
On a more positive note however, it has been ascertained by the Government that the agreement provides for safeguard mechanisms to protect bilateral trade in case of a sudden surge in imports in future, where measures like imposition of safeguard duties may be put in place for up to 4 years. On a bilateral basis, India’s trade with Thailand alone may step up to around US$10 billion by the end of 2010 from the present level of US$6 billion. Moreover, in addition to the anticipated advantages, the domestic industrial bodies hope that this FTA will open up the market for exporters and eventually cover the services and investment sectors as well. Indian professionals and service providers will be able to have greater market access in the ASEAN region once the FTA in services is brought into force. However, it is quite early to predict the success of the agreement as the balance of merchandise trade between the two regions remains tilted towards the ASEAN, which can be compensated only when services and investments are incorporated into the treaty.
The pact, India’s first with a trade bloc, covers 11 countries with a combined Gross Domestic Product (GDP) of over US$2 trillion. It calls for gradual elimination of duties on items which account for 75 per cent of the trade between India and ASEAN. These include electronics, textile, machine and chemical goods. The agreement will also provide additional market access to Indian exporters, fuelling the growth in bilateral trade and investment, especially those dealing in machinery, steel, agriculture products, auto components, chemicals and synthetic textiles. In addition, Indian manufacturers will now also be able to source products from overseas at competitive prices from ASEAN members.
An assessment of the agreement shows that the trade pact equally crucial for India and the ASEAN, especially when global trade has and continues to shrink; the new multilateral global trade pact under the Doha round of talks remains obscure; and exports to the West from both the regions have diminished. ASEAN is already one of the world’s largest trade blocs, and an FTA with India will hopefully expand the market further. From the Indian viewpoint, the FTA will open up the US$1.1 trillion ASEAN market to its exporters, reducing their dependence on the West. Therefore, it is expected that this FTA will escalate the overall trade turnover between India and the 10-country block by over a fourth to as much as US$50 billion. As prescribed by the agreement, tariffs on most of the trade between India and ASEAN will be cancelled by 2016, while duties on 489 ‘very sensitive’ products will be retained. Trade between India and ASEAN has grown at a compounded annual growth rate of 27 per cent since 2000 which will definitely render impetus to the bilateral trade and investment linkages.
Yet, doubts remain in India as to whether or not this FTA will in fact result in improving trade relations. After the uproar over the Indo-Pak Joint Statement, the UPA government is now drawing flak from both the members of Congress and the Opposition over the controversial FTA, remonstrating the several grey shades of this FTA, for India in particular. First, even among ASEAN members, less than 5 per cent trade takes place at zero duty. Second, the complex Rules of Origin (ROO), certification requirements and paper work are so cumbersome that the importers prefer to pay the duty and expedite clearances rather than opt for duty concessions. Third, India’s trade with ASEAN is 9.6 per cent of its global trade, while ASEAN’s trade with India makes up only 2 per cent of its global trade. Fourth, the India-ASEAN FTA that proposes to drastically reduce or remove import duties on over 4,000 items of mutual trade has encountered serious opposition from the left parties in India over concerns that this will have a devastating impact on its farmers. The agreement for duty reduction will cover pepper, coffee, tea, rubber, palm oil and cashew, and is viewed in many quarters as disastrous for states such as Kerala at a time when the nation is facing an agrarian crisis. Fifth, India has thrown open its markets when most countries are taking measures to protect their economies amid global recession, and is making a meek surrender before developed countries in WTO negotiations by indicating its willingness to complete the Doha Round.
On a more positive note however, it has been ascertained by the Government that the agreement provides for safeguard mechanisms to protect bilateral trade in case of a sudden surge in imports in future, where measures like imposition of safeguard duties may be put in place for up to 4 years. On a bilateral basis, India’s trade with Thailand alone may step up to around US$10 billion by the end of 2010 from the present level of US$6 billion. Moreover, in addition to the anticipated advantages, the domestic industrial bodies hope that this FTA will open up the market for exporters and eventually cover the services and investment sectors as well. Indian professionals and service providers will be able to have greater market access in the ASEAN region once the FTA in services is brought into force. However, it is quite early to predict the success of the agreement as the balance of merchandise trade between the two regions remains tilted towards the ASEAN, which can be compensated only when services and investments are incorporated into the treaty.
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