Thursday, November 29, 2012

India-ASEAN FTA (PART 5)

Since the early 1990s, when India adopted its "Look East Policy", along with its liberalisation program and economic reforms, the economic relationship between India and ASEAN has improved significantly. It was during the same time period that East and South East Asia experienced a surge of regional trade agreements (RTAs). 
Indian Trade with major East and South East Countries
In 2003, India and ASEAN had signed Comprehensive Economic Cooperation Agreement (hereafter CECA) with following major objectives: 
  • minimise barriers and deepen economic linkages 
  • increase intra-regional trade and investment; 
  • create a larger market with greater opportunities and larger economies of scale for the businesses
[Note: It was under CECA provisions between India-Singapore, that Telenor, whose 2G licences were quashed by Hon' SC, sent notice to Govt. of India to resolve the dispute]
As part of this CECA was a commitment to negotiate and establish Free Trade in Goods, Services and Investment(Note: Remember the 21st century trade which includes trade-investment-services nexus, I dealt in PART 4. Read this part here)After six years of intense negotiations, India and ASEAN signed the Free Trade Agreement (AIFTA) of Goods (Note: FTA on services and investment is still pending) on 13 August 2009, which became operational from 1st Jan 2010. 

ASEAN-India Free Trade Agreement (AIFTA)

  • ASEAN is a major trading partner for India and accounts for about 10% of India's and ~3% of ASEAN's global trade. 
Trading partners for ASEAN (% of Total Trade)
[Note: Observe fall in US share and rise in China's share and how they compare with India's share]
  • Bilateral trade between India and ASEAN rose from under $44 billion in 2009-10 to over $79 billion in 2011-12. 
Bilateral Trade of India - Countries with which it has Trade Agreements
[Note: Observe in above figure, the negative balance of trade India has with ASEAN and how Singapore forms major chunk of the trade with ASEAN]
  • While India’s comparative advantage is in services, ASEAN has its strength in light manufacturing. The economic complementariness and the socio-cultural affiliation with the region offer an opportunity for deeper engagement. India has not only proved to be a reliable partner but a co-investor of political and economic stability in the region.
  • India-ASEAN FTA focuses on tariff liberalization on mutually agreed tariff lines from both the sides and is targeted to lower or eliminate tariffs on 80% of the tariff lines accounting for 75% of the India-ASEAN traded goods(e.g., electronics, chemicals, capital goods, textiles) in a gradual manner from Jan 2010.

Safeguard measures in FTA to protect domestic market

  • Not all product tariffs are eliminated. FTA allows for tariff concessions for few goods and elimination for others. Elimination of tariff(and hence Free Trade) does not happen at once, but over a period of time, in gradual phases. 
  • This FTA protects the interests of farmers and industry by identifying certain products as Sensitive, Highly Sensitive and Negative Exclusion List. 
    • The Negative and Exclusion list mainly contains products from agriculture sector, textiles sector, auto components and chemicals. All these products will be kept out of the duty reduction. 
    • Highly Sensitive List products are tea, coffee, pepper, crude palm oil, refined palm oil. Duties on these products will be reduced in a phased manner and brought to zero by 2019. 
    • ASEAN countries too have their own list of sensitive and negative list products.  
    • To address sudden surge in imports after the implementation of the FTA, there are provisions for imposition of safeguard duties for upto 4 yrs.
  • Through this FTA India would gain market access for machinery and machinery parts, steel and steel products, agricultural products (e.g., oilseeds, wheat), buffalo meat, auto parts, chemicals and synthetic textiles, the ASEAN, on the other hand, would stand gain market access for its non-agricultural products.

Critics of this FTA

  • Agricultural Products - India is characterized by low levels of productivity and exorbitant costs of cultivation, it will be nearly impossible for Indian farmers to compete against cheap imports. 
    • The farming community within India, protested complaining the FTA will adversely affect the interests of those farmers cultivating coconut, tea, coffee and pepper. Similarly, it will also create livelihood problems for fishermen and workers who are working in textiles and manufacturing goods industries, as the pact is feared to open the floodgates for cheap imports from ASEAN states and hurt domestic planters as well as manufacturers. The farmers complain that the safeguard duties are unrealistic as this safeguard mechanism will exist only for a period of up to four years. 
    • Pepper productivity in Kerala is around 320 kg while Vietnam produces 1.2 tonnes and Indonesia 2.3 tonnes per hectare. As a result, the cost of cultivation is much higher in India than ASEAN member countries. Under the circumstance, the reduction of tariff rates will increase import from ASEAN countries and effect steep fall in prices of agricultural crops, adversely affecting Indian farmers. 
    • Liberalization of import of palm oil has already hit oilseeds production in India. The collapse of the Groundnut economy in states like Andhra Pradesh resulted in many farmers taking away their lives. 
  • The other area of concern for Indian industry relates to auto components, but 52 of them figure in the sensitive list. At some stage, domestic producers will have to face up to international competition(whenever the tariff is brought down, as tariff are gradually reduced).
  • China Factor
    • China’s trade figures are increasing over the years, which is being argued, did not come from FTAs. Rather, China’s regional heft came from economic factors like investment in manufacturing and an almost regulatory-free environment. With so little manufacturing capacity, India can't just rely on FTAs as its primary tool for economic engagement.
    • China has FTAs pending with the same countries as India. China is working with Japan and Korea on a potential trilateral FTA, which would negate any benefit of the India-Korea FTA.

Free Trade Agreements in Services & Investments

After the signing of FTA in Goods, the next logical step as per the CECA agreement was FTA in other two components of the new 21st Century Trade(See about 21st Century trade here)

Indian PM recently announced that India is prepared to conclude the FTA in services and investment with the ASEAN by Dec 2012. Such bilateral engagement between India and the ASEAN in services, especially as the region remains relatively closed to foreign service providers (even from among its own member countries) and has accordingly made limited commitments under General Agreement on Trade in Services(GATS). 

The areas where significant mutual interests lie are: finance, education, health, IT & telecommunication, transport (including infrastructure), movement of professionals and other business services. A large number of economies in the region are emerging increasingly skill-scarce in a relative cos teffective sense, and Indian professionals could meet this gap, thereby contributing towards sustaining the overall economic growth in the region.  

It should be noted here that India and ASEAN are more in a substitution and directly competitive mode than complementing each other in a large number of services of interest and relevance. 

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