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. 

Regional Trade Agreements (Basics) - PART 4

Global Trade

Trade in 20th Century:
Globalisation led to production being dispersed internationally but clustered locally (into factories and industrial districts). Co-ordination of production stages between these local units became important. It involved a continuous, two-way flow among these local units, people, ideas, and investment in machines, training and technology. Production clustered locally because proximity lowered the cost of the two-way flows.
So, the 20th century trade is dominated by goods made in factories in one nation and sold to customers in another. There are complex two-way flows of goods, people, and ideas (the double-headed arrows shown in diagram below) but primarily within local factory units.
Trade in 21st Century:
The rise in ICT revolution led to cheaper communication costs, the spectacular fall in the price of computing power (Moore's Law) and the equally spectacular rise in fibre optic transmission rates (Gilder's Law). Long-distance information sharing was revolutionised as these developments in telecoms were complemented by the rise of the internet. 


Growth of global internet and phone users, 1975 – 2011
[Note: Above figure displays several ICT indicators and also shows that there was an inflection point in the growth of internet users in 1985 and in telephone users in 1995. Which means the real impact of ICT on production stages, began sometime between 1985 and 1995.]
These developments helped trade, which meant that some production stages that previously had to be within walking distance could now be dispersed internationally. Once ICT made dispersion of production stages feasible, scale economies and comparative advantage made it inescapable(i.e. companies had to go international in its production). This is globalisation's second effect on trade – the spatial unbundling of productions stages previously clustered in factories and offices(as was seen in 20th century trade). All of this radically changed the nature of international commerce giving rise to what might be called the trade-investment-service nexus, but it did not end the need to coordinate production stages(as was required in 20th century trade) – it just internationalised it. International commerce became more complex. The result might be called 21st century trade. 
The heart of 21st century trade is composed of the following: 
1) trade in goods
2) international investment in production facilities, training, technology and long-term business relationships(through FDIs etc)
3) the use of infrastructure services to coordinate the dispersed production, especially services such as telecoms, internet, express parcel delivery, air cargo, trade-related finance, customs clearance services, etc. 
This is what is called the trade-investment-services nexus.

Rise of Regionalism

"Simple commerce needs simple rules; complex commerce needs complex rules." 
When trade meant factories in one nation selling goods to customers in another(20th century trade), international rules could be simple – dealing primarily with border measures and a few "behind-the-border barriers" such as discriminatory national taxes and regulations. 
Then came the 21st century trade, which was more complex in nature. Multinationals from advanced-technology nations were eager to lower production costs by dispersing production and technology to the most cost-effective locations(for cost advantage). Meanwhile, developing-nation governments embraced 21st century trade as a fast lane to industrialisation and growth.[How else can we account for services forming ~50% of India's GDP?]
We saw that at the heart of 21st century trade is the trade-investment-service nexus which gave rise to its own set of trade barriers, which were not there in case of 20th century trade, namely:
Governments across the world wanted these trade barriers on 21st century trade to be removed, which ultimately meant a more complex international trade rules. WTO is a multilateral organization(involving more than one country) formed in 1995 to deal with the international rules of trade between nations.One of the founding principles of WTO is non-discriminationWTO's international trade rules are competent enough, when it comes to the 20th century type of trade barriers, which it was initially designed to govern. 


So, if WTO was competent, then why did member countries go in or regional agreements bypassing multilateral systems like WTO? 
The new trade barriers of 21st Century trade, is intimately tied to the unbundling of production and requires negotiations that go far beyond those in the WTO's rulebook and most countries find it easier to deal with these issues on bilateral or regional level.
  • Large number of participants in multilateral trade negotiations, with varying aspirations, reduces the cost of non-cooperation and creates rigidity in the system. WTO was severely criticized for its inability to conclude the multilateral trade negotiations known as the Doha Round, despite 10 years of talks.
  • Failure on part of WTO to implement the promises made during the Uruguay Round agreement to expand global trade has not materialized in practice. Particularly for developing countries, the promised expansion of trade in three key areas of agriculture, textiles and services has been minimal.
  • Protectionism and lack of willingness among developed countries to provide market access on a multilateral basis has prompted many developing countries to look for regional alternatives.
  • The North-South divide which is appearing in the WTO ministerial meets is strengthening the apprehension of developing countries about the prospect of trade expansion under the WTO regime. This has induced many countries to adopt regionalism as an alternate option for expanding their markets.

So we see that the failure of WTO is giving its members, a reason to advance the WTO's liberalisation goals unilaterally, bilaterally or regionally.

Regional Trade Agreements - RTA

Regional Trade Agreements(hereafter RTA) are defined as "groupings of countries which are formed with the objective of reducing barriers to trade between member countries". RTA is a direct consequence of the phenomenon called Regionalism. One of the most striking development in the world trading system since the mid 1990s is a surge in number of RTAs. From ~50 till 1990, the number of RTAs notified to the WTO has crossed 511(319 in force) in 2012. 

Tariff liberalisation since 1947: RTAs
[Note: Couple of stark observations from above figure. (i) Global Average Tariff cut (ii) Sudden increase in RTAs post mid 1990s (iii) Establishment of WTO and the Doha global trade negotiations did not have any effect on RTAs, which to some extent questioned the centrality of WTO in global trade rules.] 

Contrary to what the name suggests, these groupings or unions may be between countries not necessarily belonging to the same geographical region. e.g. Recently announced and much publicised India-EU FTA.

The basic principles of the GATT/WTO rules are:
  • Non-discrimination - Most Favoured Nation (MFN)
    • It means if a country opens up its market to another country(giving it MFN status), it must also open it to all other GATT/WTO member countries.
  • Reciprocity
  • Transparency
  • Enforcement
  • The impartial settlement of disputes
RTAs in the WTO have one thing in common, that is, they are reciprocal trade agreements between two or more partners. That is "I cut my tariffs if you cut yours". This principle is borrowed from GATT.

RTA represent an important violation to the WTO's principle of non-discrimination, in which countries entering into RTA can trade among themselves using preferential tariffs and easier market access conditions than what is applicable to other WTO member countries. As a result, WTO member countries that are not a part of the RTA lose out in these markets.


RTA tariff between A & B is discriminatory for C 


So, if RTAs violate the basic principle of WTO trade rules then how come so many RTAs are being notified by WTO member countries? 
That is because WTO allows for RTA between its member countries under specific conditions as follows:
1. Article XXIV of the GATT - If the RTA is for the formation and operation of customs unions and free-trade areas(we will see types of RTA below) covering trade in goods.
2. The Enabling Clause - If the RTA is trade in goods between member developing countries

3. Article V of the General Agreement on Trade in Services (GATS) - If the RTA is an agreement to reduce barriers to trade in services among a set of counties.

Why did WTO allow for RTAs, which could seriously dent its centrality in world trade?
That is because RTAs have allowed groups of countries to negotiate rules and commitments that was not possible, at that time, multilaterally(i.e. through WTO). In turn, some of these rules have paved the way for agreement in the WTO. For e.g. Services, intellectual property, environmental standards, investment and competition policies are all issues that were raised in regional negotiations and later developed into agreements or topics of discussion in the WTO.


Economic Effects of RTA

Trade Liberalization through RTAs leads to two different trade phenomenon:
1. Trade Creation occurs where due to the formation of the RTA, member countries switch from inefficient domestic producers and import more from efficient producers from other members of the RTA. This tends to improve the welfare of both the countries.
2. Trade Diversion takes place when member countries, because of the RTA, switch their imports from low-cost production in the rest of the world and import more from higher-cost producers in the partner countries. Trade diversion lowers welfare of not only the partner countries but the rest of the world also.
Hence we see that trade creation and trade diversion have opposite welfare implications and the net effect will depend upon which of these two effects dominate.

Types of RTA

Depending upon the level of integration, RTAs can be broadly divided into following categories:
1. Preferential Trade Agreements(PTA) is one in which member countries impose lower trade barriers on certain goods produced within the participating countries. e.g. PTA the EU and the 71 ACP (Africa, The Caribbean & the Pacific) countries. It enables the EU to guarantee regular supply of raw materials and the ACP countries gain tariff preferences and access to special funds.
Free Trade Agreements(FTA) is a special case of PTA where member countries completely abolish trade barriers (both tariff barriers and non-tariff barriers) for goods origination within the member countries. It should be clarified here that in most cases, countries do not abolish trade barriers completely even within Free Trade Areas. Most agreements tend to exclude sensitive sectors. e.g. NAFTA(USA/Canada/Mexico), SAFTA(India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and the Maldives)
2. Customs Union is an agreement made between countries, where the countries agree to trade freely among themselves, and also they agree to adopt common external barriers against any country attempting  to import into the customs union. e.g. Mercosur(comprising Brazil, Argentina, Urugay and Paraguay)

3. Common Market is an extension of a customs union. In common market, member countries attempt to harmonize some institutional arrangements and commercial and financial laws and regulations among themselves. A common market also entails free movements of factors of production, i.e. removal of controls on free movement of labour and capital. e.g. European Union

4. Economic Union is a common market with a common currency.The best example of economic union is the Eurozone, which includes the member countries of the EU that have adopted the EU as their currency.
[Note: Some countries in the EU have not adopted the Euro (Eg: Britain) and therefore are not part of Eurozone statistics.] 

5. Political Union is the final stages of economic integration where member countries involved would have common government and would have no control of its economic policy. There would be full monetary union and complete harmonization of fiscal policy. Political union does not exists currently.[Note: EU has common monetary policy, but individual member countries still have their own distinct fiscal policies. How else can we explain that while Germany has stacks of cash with it, Greece is craving for it, inspite of both of them being part of EU? Common monetary and different fiscal policies is one of the major problems of EU and is said to have led to the current Eurozone sovereign debt crisis.]


Rules of Origin & FTA

Rules Of Origin(hereafter ROOs) are criteria used to determine the “nationality” of a product. A product’s raw materials or components might come from a number of countries, but customs officials must determine the product’s origin to decide how to treat it, including what tariff to charge, as the product enters their jurisdiction. Since the preferential treatment provided for in a FTA is normally granted only to products originating from members to that FTA, ROOs are therefore an important part of any FTA.


Every country has its own way of determining ROO in its negotiated FTA. India employs the twin criteria of “value-added content” and “change in tariff heading(CTH)” to determine the ROO of the goods. 

1. The value-added content rule requires that a certain specified minimum percentage of local content be added to a product in the country where the origin is being claimed. The required value-added content percentage varies across FTAs. 
2. The change of tariff heading(CTH) rule, on the other hand, is based on a tariff shift — meaning that the product must be classified under a different tariff heading and not the tariff heading of the components used in its production. 

Let us take a hypothetical case to explain ROO. Let's assume for simplicity that India only uses value adding criteria for ROO and ignores CTH. Tariff and ROO specifications are mentioned below. In this example I have shown that India has FTA with both Thailand and Singapore. Lets also assume that there is a product A whose production stages is dispersed geographically. So while some part of Product A is manufactured in Thailand, something else gets manufactured in Singapore and then sold.(remember 21st century trade) However majority of work on that product happens in Thailand(~70%) and the finished product A ships out from Singapore.

So will this product be treated by Indian customs department under India-SGP FTA or India-Thailand FTA?   

So, what do we have for Product A value addition at two of its manufacturing units in Thailand and Singapore? 
Thailand - 70% value addition and Singapore - remaining 30%.

For the Indian customs to consider this product for ROO of India-SGP FTA, the product must have value addition of atleast 35% from Singapore(See below in picture that India-SGP FTA has ROO as 35%). If that was the case, tariff on that product would have been only 5%(see below). Its ROO for product will then fall under India-Thaliand FTA and a tariff of 15% as negotiated in its FTA will be applied.  
Rules of Origin example

The rules of origin pertaining to each FTA are different. In addition, India may have agreed to grant different levels of duty concession to a particular imported good from the same country under multiple FTAs. e.g India offers duty concessions for imports from Malaysia under the India-Malaysia FTA as well as the India-ASEAN FTA. As a result, importers may have a choice between multiple FTAs for obtaining preferential benefits when trading with one country. The rules of origin under these FTAs however differ and, therefore, though a product may originate from the partner country under one FTA, it may not satisfy the rules of origin under another.

The number of overlapping FTAs and the distinct set of rules specific to them pose a problem for importers. Furthermore, calculating whether a product satisfies the value-added content requirement of an FTA can be cumbersome.



Disadvantages of RTA

1. RTAs are discriminatory in nature(I have explained above, why its so) and the drift towards RTAs are often viewed as a serious threat to the multilateral trading system like WTO.

2. By agreeing on an aggressive trade treaties on a bilateral basis(bilateral RTAs), developed countries are weakening the power of developing countries in multilateral trade negotiations. In a RTA between a developed and a developing country, the developed country often manages to include aggressive trade liberalization clauses, investment protection clauses and extraneous issues in the treaty. Having abandoned objections about these issues on a bilateral level, the developing country cannot resist these issues on a multilateral platform.

3. “Spaghetti-Bowl” ProblemMultiple overlapping RTAs with different ROOs are difficult to monitor; may be contradictory and may not be cost effective.

4. Trade diversion may be higher than trade creation(I have explained both the terms above).

The dejection of developing countries about the functioning of WTO and the domination of developed countries in a North-South RTAs(because most of the developed countries are in Northern hemisphere), developing countries are now looking for South-South  RTAs to expand their market access. These RTAs are likely to be beneficial for developing countries because lower dependence on developed country markets will not only help these countries to resist the pressures of hegemonic economic powers but also it will help them forge and foster stronger South-South alliances at the multilateral trade negotiations. Given the fact that a clear North-South division has appeared in WTO, this is likely to have a strong impact on the multilateral trading system. 
In this context we will study the India-ASEAN FTA in the next part - PART 5.

India's Look East Policy - PART 3

India's Look East Policy(hereafter LEP) was officially defined and articulated in September 1994, by Prime Minister Narasimha Rao in his famous Singapore lecture. He had stressed the point that India's historical and cultural relations with South East Asia were very old and strong and there was nothing new in India looking towards reinforcing cooperative linkages with its eastern neighbours. He laid emphasis on building strong economic and security relationship between India and its eastern neighbours.

What necessitated LEP?

  • Fall of Soviet Union and the resultant change in geo-political context of international system had great impact on India’s foreign policy. India had to rethink its strategies and policies. India felt isolated on political front without Soviet Union.
  • In early 1990s, India went through a serious balance of payment crisis. Due to this, under the aegis of IMF, India had to restructure its socialist outlook and change that to a liberalised market economy.
  • Emerging trend of regionalism and the success of ASEAN, resumption of integration process of EU and negotiations for NAFTA and APEC made India vary of the possibility of getting isolated on global developments.
  • China’s growing relations with ASEAN countries (mid 1980s) under Deng Xiaoping (diplomatic and trade), China’s growing influence on Myanmar and growing insurgency in NE states(Naga etc), Soviet Union’s strong desire to normalize relations with China(under growing pressure in Afghanistan by US backed jihadis), India had to act fast, lest it would have been isolated.

Hence faced with multiple problems, economic and political, India adopted two radically new paths - the domestic policy path of economic liberalization globalization and the external policy path of LEP.


Let's study the LEP on following fronts:

1. Strengthening Bilateral Relations

Through various exchanges of official visits, including at the highest political levels, India tried to explain to the eastern neighbours that India was a modern, peace loving, practical and cooperative country. In bilateral discussions, India's attempt was to enhance political understanding, identify areas of mutual interests and initiate moves to harness these interests. 

(i) Customised & differentiated Foreign policy and bilateral ties with South East Asian countries
  • Newer ASEAN countries - Myanmar, Laos, Cambodia and Vietnam
    • Important features
      • All of these countries joined ASEAN in 90s
      • None of them have democratic political system
      • Economically lagging
      • Close neighbourhood of China 
    • India customised its foreign policy for these newer ASEAN states and balanced its ideological commitment to democratic forces, with that of the pressing strategic and security interests.[Note: Its in this context of change of heart in India's stance, Aang San Suu Kyi, recently commented about being saddened at "India being drawn away during their difficult times".]
    • India created a separate administrative unit, the CLMV (Cambodia, Laos, Myanmar and Vietnam) desk, in the Ministry of External Affairs. Special programmes of assistance and cooperation in diverse fields are being initiated and executed in CLMV (Cambodia, Laos, Myanmar and Vietnam) countries through this unit. [Note: Recent soaps being given to Myanmar is the latest example in this regard]
  • Older ASEAN Countries - Singapore, Malaysia, Thailand and Indonesia, Philippines
    • Greater emphasis on economic and defence ties[Note: Will cover the FTA in later section]
    • Co-operation on Terrorism, UN Reforms, global economic crisis, climate change, maritime security.[Note: Regular maritime exercise called “Milan” with Thailand, Indonesia, Singapore and Malaysia – Helps piracy in the SE Asian region]
  • In East Asia special attention is given to China, Japan and Republic of Korea. 
    • China
      • Rajiv Gandhi's famous visit to China in 1988
      • Confidence building measures - 1993 and 1996 Agreements
      • Trade and investments to continue while border disputes are being settled - appointment of Special Representatives to resolve border disputes.
    • Korea
      • Enhanced its economic cooperation with India – visible in the auto-industry and consumer durable production.
    • Japan
      • Political and strategic nuances of Japan's perceptions about India and its economic downturn did not allow very fruitful bilateral relationship to be developed.
      • India and Japan lobbied together for reforms in the UN and their seats in the Security Council as permanent members in 2005.
      • Bilateral relationship has got a fillip with establishment of "strategic and global partnership" b/w the two countries in December 2006. 
      • The first ever Two Plus Two Dialogue at the senior defence and foreign affairs officials level was held between the two countries on July 2010.[Note: Two plus Two - Defence Min & External Affairs Min - two from each country. lol  these terminologies !! :)]

2. Establishing Institutional Engagement

  • ASEAN 


  • BIMSTEC
    • In 1997, India along with some of the South and South East Asian neighbours, also established a sub-regional grouping called Bay of Bengal Initiative for Multi-sectoral Scientific, Technological and Economic Cooperation (BIMSTEC) to promote rapid economic cooperation in the areas of trade, investment, tourism, fisheries, agriculture, transportation links and human resources development.
  • Indian Ocean Rim Association For Regional Cooperation (IOR-ARC)
    • Association of 20 member states was formed in 1997 with an objective to promote sustainable growth and balanced development of the region as a whole, with a special emphasis on economic cooperation.[Note: The USA has been inducted as a dialogue partner of IOR-ARC this year] 
  • Mekong Ganga Co-operation (MGC)
    • MGC initiative is a vehicle for ‘soft diplomacy’ in countries that have had considerable cultural influence from India. Both the Ganga and the Mekong are ancient rivers and the MGC initiative is indicative of the cultural and commercial linkages between the member countries of the MGC. MGC has identified tourism, culture, education and transport & communication as priority areas. Of these, transport is most important.
    • Signatories of MGC have agreed to develop East-West Corridor and ASEAN Highway.
    • Development of transport linkages b/w India's NE States and MGC countries will lead to development of NE region of India, because increased physical connectivity increases activities related to trade and people-to-people contacts.

3. Economic Benefits


  • Increasing trade ties though /balance of trade is negative w.r.t India
    • Economically, India's trade with ASEAN has grown impressively since the pursuance of the LEP – from US$2.3 billion in 1991-92 to US$50 billion in 2009-10. Singapore is India's largest trading partner in ASEAN followed by Malaysia and Indonesia.
    • India-China bilateral trade increased from $3.5 Billion in 2001-02 to around $75 Billion in 2011-12. The two countries have pledged to increase it to $100 Billion by 2015.  Its a good development that we have set aside border disputes and have worked towards increasing our bilateral trade. India expressed concerns with China on the negative BoT and China has assured to improve it.[Note: India insisted China to import more value adding products than just raw materials.]
  • Increasing foreign investments from East Asia
    • FDI inflows into India from East Asia has been increasing in last decade, reaching a figure of US$13.15 Billion in 2008-09. Singapore's share of FDI inflow is the largest, followed by Japan.

4. Strategic Engagement

The first phase of India's Look East policy was ASEAN-centred and focused primarily on trade and investment linkages. The new phase of this policy is characterised by an expanded definition of "East", extending from Australia to East Asia, with ASEAN at its core. The new phase also marks a shift from trade to wider economic and security issues including joint efforts to protect the sea lanes and coordinate counter-terrorism activities. The foreign policy parameters, in this second phase, has been taken "beyond ASEAN" and "beyond economic interests.‟

North East India & Look East Policy (LEP)

  • North East to evolve as the primary domestic constituency for India’s LEP.
  • Only 2% of territory of NE states are contiguous with India, while 98% of its border is with one or the other foreign countries.
  • Peninsular India’s civilizational links with SE Asia has been profound but it’s the NE states with whom SE Asian countries have ethnicity, social-anthropology, botany and zoological relationship.
    • The Ahom race has its counterparts in Myanmar, China, Thailand, Vietnam and Laos. Nagas are spread across borders in Myanmar.
    • People from North east, like SE Asian states are lactose intolerant, non-hierarchical (clan and not caste based) and give uniformly high status to women in society and in property.
  • Areas of investment can be – food processing, agriculture, bamboo and rubber, handicrafts and transportation – jobs for youth and development of region.
  • BIMSTEC, MGC, BCIM – these regional initiatives are relevant to the prospects of the emergence of a cross border region bringing together the NE states and transnational areas in the east.
  • Good relations with Myanmar – economic development of NE states, suppression of anti-India activities on Myanmar soil. Insurgency in NE India can be curbed.
  • Major infrastructure project in pipeline in NE India - Timathi Hydro project, Stilwel Road, Imphal-Mandalay Bus line, India-Thailand-Myanmar Highway, Myanmar-India-Bangladesh Gas pipeline etc

Divergence of India-China on Regional Integration and India's LEP

  • There was an attempt by China to not include India into East Asia Summit(EAS) membership. When that failed, China tried to divide EAS into “core states” where China is the leader and the "peripheral states" with India, New Zealand and Australia. China Premier once commented that “East Asia is for East Asians” with “full considerations to reasonable interests in the region of non-East Asian nations”.
  • On matter of regional integration India’s stance has been (ASEAN +3(China, Japan, South Korea) + 3 (India, Australia, New Zealand) Vs China’s ASEAN + 3 with China as the main channel for East Asia Cooperation.
  • On regional security, India’s proposed for a ‘polycentric’ security concept for East Asia, disallowing any country (such as China) to dominate  the regional security architecture.
  • China’s suspicious view on Asian Economic Community(which India is supporting for) and Pan Asian Trade Bloc. For that matter, China may not support any such regional economic integration which limits its leading role. 

Limitations & Challenges of India's Look East Policy (LEP)

  • Limitations:
    • Connectivity between India and the ASEAN region is still poor. North East India has been consistently ignored in India's LEP. Development of NE states is important for a sustained and meaningful LEP – border management and security, infrastructure development and transport, connectivity with peninsular India and SE Asian countries is important. Of late India has realised this and is working toward bridging that gap in its policy.
    • Even after signing of India-ASEAN Free Trade Agreements, the trade is below potential, especially if seen in comparison with ASEAN’s trade with China or Japan. Investments in each others’ economies remain low(hence need for Free Trade Agreements in Investments for which negotiations are currently on).
    • People-to-people contacts remain at a low level. Visa restrictions continue to prevail, and tourism is below par.
    • Absence of deep engagement with Myanmar, which is not only India’s neighbour—sharing a land border with India—but also a gateway for India to ASEAN. 
    • LEP is moving on two pillars – India ASEAN and India EAS relations. Focus should shift from “policy declaration” to “functional cooperation” i.e. from “vision to action”. Quicker implementation of its various agreements is needed.[Note: There was a report in The Hindu recently that number of projects announced by India in Myanmar has not yet seen the light of the day]
    • Obama once commented .. India should not “look east”, but “engage east” .. as it will increase security and prosperity of all nations in that region.
  • Challenges:
    • Rise of China - China has much deeper economic engagements with India's eastern neighbours and these engagements are going to get stronger - India cannot match.
    • Critical strategic triangle of India-China-US relations - China is worried about growing India-US ties and believes it is aimed at constraining China's strategic presence in the region. China will, in that case, exploit the vulnerabilities and weaknesses in India's relations with its neighbours in South East Asia.

India - South East Asia Relations - PART 2

India is an old civilisation of sun worshippers. It has, therefore always been looking east :). Therefore India's engagement with the South East Asia, can be divided into four different waves - historical or pre-colonial, colonial, post-colonial and contemporary(which includes India's Look East Policy).


First Wave: Historical

  • Lasted from 1 AD to 12th Century AD. During this period, the first Hindu Empire (later became the Indo-China region) flourished based entirely on cultural and philosophical contacts with India.
  • The expansion of Hinduism(from India) was followed by the spread of Buddhism to the east. Religious and cultural messages travelled directly from India and China. This led to the emergence of a cultural synthesis of these two major systems of faith and belief. The popularity of the Ramayana(with varying nuances from one country to another) in the Buddhist heartland of South East Asia is a good example of this synthesis.           

  • During this period, Commerce also contributed in a significant in spread of culture from India to South East Asia. 
  • The spice trade route from West Asia and the Persian Gulf stretched over to Indonesia and even beyond, bringing in traders and travellers from one part of Asia to the other.
  • This commercial link also facilitated the spread of Islam in South East Asia. In India, Orissa's annual festival of Bali Jatra commemorates the adventures of innumerable traders who braved rough seas across the Bay of Bengal, Straits of Malacca and South China Sea to carry commerce and culture to the eastern shores of the Indian Ocean.

Second Wave: Colonial Rule - Mughals and then British

  • In this period strategic interests were brought upfront along with the commercial interests, at the cost of cultural and civilizational links.
  • Advent of Islam after the 12th century and then the colonial expansion that followed Muslim rule in India disrupted the cultural and commercial links established before that.
  • During their rule, British established India as a strategic bastion of their power and influence over Asia, as far in the east as possible - upto Hong Kong. 

Third Wave: Post Independence Period

1. Nehru's Early Eastward Policy
  • Policy had an emphasis on geography and culture, with an aim to build Asian solidarity.
  • India was on the forefront of mobilising international support on wide ranging issues - Indonesia's freedom struggle, Burma's internal security and stability, integration of China into the international community etc.
  • Indian policy makers and diplomats forcefully articulated the cause of decolonisation and development of Asian countries in all possible international forums. The first Afro-Asian Conference was held in Bandung, Indonesia, in 1955.
  • Failure: Nehru's policy had a strong political content to back them but was lacking much tangible substance i.e. of commerce and economy, as was there during the first wave period. Therefore, India's efforts and initiatives with regard to Asian resurgence and Asian solidarity could not be sustained as desired. Moreover the Cold War powers ensured that such solidarity between Asian countries did not succeed. 
2. Cold War Period - Since 1960(India-China war) to about mid 1980s there was a big hiatus in India-ASEAN relationship, and was in a way co-terminus with the Cold War. Let's analyse the relationship during that time on three fronts:

(i) Foreign Policy
  • India followed the policy of non aligned (while titling a little towards Soviet Union). During Indira Gandhi times, India had even signed a friendship treaty with USSR.
  • South East Asian countries had formed ASEAN with the "non-interference" principle and focussed mainly on nation building.  
(ii) Outlook towards each other
  • India's impression of ASEAN states: During the Cold war days, India considered ASEAN as the Trojan horse of the US.
  • ASEAN impression of India: Firstly South East Asian countries were apprehensive of India’s strategies and considered its decision making process as slow, cumbersome and too bureaucratic, which ultimately affect development.[Note: Check the third point(above) under colonial period. This was one of the reason for the distrust.India’s support of Vietnam in Cambodia-Vietnam war did not go well with ASEAN states.] Secondly South East Asian countries considered Indians as too much ideologically oriented and less pragmatic.  Lastly South East Asian countries feared inclusion of India into any of their institutional arrangements would bring South Asian problems(Pakistan, Afghanistan, Srilanka etc) in their own region.
(iii) Economic Relationship
  • Not much trade happened in pre 1970s as both South East Asian and Indian’s trade policies were west oriented.
  • Towards end of 1970s ASEAN countries started organizing Preferential Trade Agreements among themselves.
  • South East Asian nation had FDI driven, export led growth strategy since the mid-1980s while India’s trade and investment policies were largely conservative. So the market driven economy ensured that ASEAN countries have trade links with those other South East Asian countries with which they had production sharing arrangements.[Note: sourcing raw material is very important] or with western countries that were their markets. India did not follow production n/w driven export growth strategies, until recently. Hence trade relations between India and ASEAN couldn't flourish during that time period.

Fourth Wave: India's Look East Policy(LEP)

Dr Manmohan Sign had commented that LEP "..is not just external economic policy but, it also marks a strategic shift in India’s vision of the world and its place in the evolving global economy."

I have discussed India's Look East Policy in detail in my next part of this South East Asia series. Read it here.

ASEAN - Formation & Challenges - PART 1

Recently India promised to ASEAN countries that it will soon finalise the Free Trade Agreement (FTA) in services and investment.

Read the complete news item - (18th Nov, The Hindu) & (20th Nov, The Hindu
-------------------------------

News Analysis - PART 1



Member Countries of ASEAN

Formation of ASEAN

  • ASEAN - Association of South East Asian Nations
  • ASEAN was established with the signing of ASEAN Declaration(Bangkok Declaration) in Thailand on 8th August 1967.
[Note: There is no need to remember the date of joining(mentioned here because I had to plot them on MS Visio). Just remember the founding countries and the latest entrant]. 
  • ASEAN was the first truly viable regional association of South East Asian countries.
[Note: Why regional grouping? Geographical proximities, policy co-ordination, economic complementarity  political commitments and infrastructure developments stimulate the formulation of regional groupings.]
  • ASEAN region's vital importance is because of its strategic location in midst of important sea lanes and its border with key states of China and India. 
[Note: The South China Sea (SCS) joins the South East Asian states with the Western Pacific, functioning as the throat of global sea routes. More than 50% of the world's annual merchant fleet tonnage passes through this sea and 1/3rd of all maritime traffic. The oil transported through the Strait of Malacca from the Indian Ocean, en route to East Asia through the South China Sea, is more than 6 times the amount that passes through the Suez Canal and 17 times the amount that transits the Panama Canal. Roughly two-thirds of South Korea's energy supplies, nearly 60% of Japan's and Taiwan's energy supplies, and about 80% of China's crude-oil imports come through the South China Sea. Read my entire article on SCS here]
  • Founded during the Cold War, ASEAN primary aim was to prevent the region’s involvement in the great power rivalry between USA and erstwhile USSR and enable ASEAN member states to focus in their internal affairs. Hence rather than creating a military alliance, South East Asian countries established an organization based on the principle of ‘non-interference’ in order to prevent unwanted foreign intervention in the members-states’ domestic affairs. ASEAN’s primary objective was political and security considerations rather than economic integration. 
[Note:Why "non-interference" principle?
(1) ASEAN states(except Thailand) gained independence post World War-II and they were more concerned with nation-building than with promoting democratic rights. The "non-interference" policy enabled countries to concentrate on domestic matters, avoiding interference and criticism from other states that would have been obstacle to nation-building. 
(2) ASEAN states(except Thailand) had colonial past and realising frequent attempts by China to export communism, they attached lot of importance to state sovereignty. They believed that State Sovereignty is the key element in ensuring regional as well as domestic stability. I think, something similar must have gone into the minds of our Indian leaders while formulating the foreign policy in its early post independence days, which resulted in Bandung Spirit (1955) and NAM (1961)] 
(3) There were lot of conflicts going on between the ASEAN states like Konfrontasi(Indonesia Vs Malaysia), Singapore secession from Malaysia etc. and the founding members were concerned that some states might use the organisation(ASEAN) to revive the disputes they had. Hence "non-interference" principle suited well, for the organisation's interest is more for "conflict avoidance" among its members than "conflict resolution". 
(4) During Cold War period, neither USA nor USSR wanted any of the third world countries to stay neutral. They were implicitly asked(or rather forced) to choose side - either Capitalist or Communist. One of the prime example is US involvement in Vietnam against Communist regime.]
What's Cold War? Cold war(1945-1991) of ideologies was fought between Democratic Capitalism(led by USA) and Communist Socialism(led by USSR) which had, at that time, divided the world into First world (USA, Western Europe and all other Capitalist allies); Second World(USSR and all Warsaw Pact Satellites, Cuba, China) and the Third World(all others, including India).] 
  • It was not until end of cold war (1991), then the Asian financial crisis of 1997-98 and the wave of globalization, which changed the inclination of ASEAN to that for economic integration. 
  • ASEAN had developed norms and values for itself called the ‘ASEAN Way’ - diplomatic norms that encourages the member countries of ASEAN to seek an informal and incremental approach to co-operation through lengthy consultation and dialogue (consensus, least common denominator, non-interference, etc.) 
  • ASEAN Charter came into force in 2008 which gives legal personality to ASEAN and is enforceable. 
    • This charter includes mechanism to address issues related to human rights, migrant workers, women and children.
    • It gives recognition to civil society - the right to participate

Challenges faced by ASEAN

  • Challenge 1: Changes in ASEAN "non-interference" outlook
    • Founded during Cold war days, ASEAN was well suited in its "non-interference" principle by not allowing Communism to take its roots and by allowing its member states to concentrate on nation building. But with the end of Cold War there was need for an organisation that could accommodate broader issues. As a result difference of opinion began to emerge. With the expansion of ASEAN membership, came the inevitable dilution of the organisation's cohesion. During the same time(end of cold war), Western countries foreign policy was increasingly characterized by the promotion of democracy and respect for human rights("Sau chuhe khake billi haj ko chali" type promotion)(In IR terminologies it's called Cosmopolitan norms). This had a significant impact on ASEAN’s relations with the European Community and the US. The West demanded that ASEAN be more compliant with those cosmopolitan norms. ASEAN's "non-interference" claims were diluted when it forced Vietnam(over idea of exporting Communism to other countries) and Cambodia(on its degrading human rights state) on toeing its line, before it could be inducted. 
[Note: (1) There were distrust in ASEAN w.r.t Vietnam for exporting Communism to other countries. Hence it forced Vietnam in 1991 to adhere to Treaty of Amity and Co-operation(1976) before its membership request was considered. 
(2)ASEAN was critical of poor human rights and slow democratic reforms in Myanmar and openly advocated for Aung San Suu Kyi and other political prisoner's release. 
(3)Pol Pot had committed numerous atrocities on innocent Cambodians during his rule. Later things were corrected by outside interference and a court was established to try senior members of Khymer Rouge(Pol Pot and others). There was a question in GS Paper II(2010) on Extraordinary Chambers in the Courts of Cambodia.]
    • Asian financial crisis (1997-98) drew attention to the new settings of a globalized world and it seemed that the cooperation model structured around "non-interference" and prioritization of national sovereignty was not proving to be very effective. In the same year as the financial crisis, widespread atmospheric pollution resulting from the Indonesian forest fires, drew widespread protests from other ASEAN members because of the environmental problem it was having on the entire region. Such developments further questioned the "non-interference" principle and to what extent can ASEAN countries be mute spectator to things which are not in interest of the region.
[Note: In light of increasing interdependence among the member-states and the growing realization that norms of good governance(human rights, civil society rep) should be taken into account in order for the association to regain relevance and credibility among the region’s own citizens as well as on the broader global scene, a new approach of "enhanced interaction" under the aegis of its "non-interference" principle. In "enhanced interaction" approach, member-states are individually allowed to comment on the domestic affairs of neighbouring states when these have regional repercussions.]
  • Challenge 2: Diverse political structure of ASEAN members - ASEAN is a grouping of states that have very diverse political systems. The member states have such diverse political systems that until they have some kind of common norms and values in their domestic social and political systems its very hard to co-operate regionally and internationally in any profound way. This is because the different nations sees the world in different ways, and its citizens are unable to relate from the basis of common understandings about how societies and political systems are organized.
Democracy – Indonesia, Thailand, Singapore
Military Authoritarian – Myanmar (slowly moving to parliamentary democracy under military leadership)
Socialist Authoritarian (Communist) – Vietnam, Laos 
Absolute Monarchy – Brunei
[Note:ASEAN Vs European Union(EU) 
European Union has fairly strict requirements for potential members in terms of social and political systems. [Note: It's one of the reason for such low representation of Eastern European nations in EU.
ASEAN on the other hand, allowed in every nation, irrespective of their domestic political system, just on the basis of geographical proximity. This led to such anomaly  situation like when Myanmar(non-democratic state) was brought into ASEAN, and on other hand we were seeing birth of the process of democratisation taking place in Indonesia.]
  • Challenge 3: Growing influence of China
    • China has number of core interests that it considers non-negotiable and is even willing to use military force to protect them. These core interests include Chinese Sovereignty, its Socio-Economic Development, and Territorial Integrity with respect to Taiwan, Tibet, and Xinjiang. For ASEAN the worrying core interest of China is the socio economic development. This core interest suggests that China reserves the right to use force to protect the economic conditions and would have Chinese regime legitimacy.Given the high economic value of the South China Sea and the Mekong River, ASEAN is concerned over the possibility that China could use force to seize economic assets of its member states to help insulate its own regime from domestic instability, especially during periods of exceptional domestic crisis. 
    • Military modernization of China is also a growing concern within ASEAN member states and hence they have tried to align with USA and India to balance the growing influence of China. 
    • China’s growing influence was also evident in this years ASEAN summit(Chaired by Cambodia). In ASEAN history of 45 yrs, it was the 1st time when a joint communique was not issued as there was disagreement over the inclusion of text containing China’s disputes with ASEAN member states over South China Sea. 

Major ASEAN future plans

  • ASEAN has plans to setup ASEAN Community by 2015. Community consists of political-security, socio-cultural and economic community (called ASEAN Economic Community AEC, an attempt by ASEAN to create a third pole of the world after NAFTA and EU). 
  • Chiang Mai Initiative for Multilateralism (CMIM) with ASEAN+3 (China, Japan, South Korea) for currency swap agreements – shock absorbers during recessionary times.