The Hindu Business Line : Doha talks failure — Giving the India-Asean FTA a new thrust

AT THE INDIA-Asean Business Summit in New Delhi in 2004... It is time to go ahead with the Free Trade Agreement with Asean, putting behind the differences over the negative list.

The deadlock in the Doha Round talks paves the way for the India-Asean Free Trade Agreement that was hobbled by the squabbling over the negative list. The list has been pruned twice, bringing down the number of items from 1,414 to 854. But the Association of South-East Asian Nations (Asean) is not impressed and wants the list pruned to a mere 60.

India has been on an FTA binge since early 2000. The first such Agreement was concluded with Sri Lanka in 2000, followed by Thailand in 2004 and a CECA (comprehensive economic cooperation agreement) with Singapore in 2005. More FTAs and CECAs are in the pipeline.

After successfully concluding the FTA with Thailand and the CECA with Singapore, the FTA between India and Asean received a jolt when the Congress President, Ms Sonia Gandhi, cautioned that the interests of the domestic farmers should not be at stake. This forced India to harden its stand on the negative list. The majority of items in the negative list relate to agriculture, followed by textiles. The negative list has now become the only contentious issue in implementing the India-Asean FTA.

Xenophobia over FTA spree

Though the FTA with Thailand was concluded without many hiccups between the two countries, it did not yield much benefit to India. In fact, the FTA with Thailand created xenophobia over India's signing spree.

Trade volumes between India and Thailand of 82 Early Harvest Items (EHI) under the FTA expanded by 39.7 per cent in 2005. But the trade gain that accrued to Thailand from the 82 EHI was five times more than that of India. While Thailand's export of EH items to India jumped 130.2 per cent, India's exports to Thailand increased by just 27.3 per cent.

The Thai FTA was seen as a threat to the growth of sun-rise industries in the country. Thailand's major exports of EHI were TV sets, air-conditioners, cathode-ray tubes, polycarbonates and auto-parts.

The fear is that the sparkling growth of Thai exports of these items was due to the Japanese firms and that India may not be capable of shielding its domestic industries from a proxy Japanese foray. Most of these products are produced by Japanese subsidiaries in Thailand and not by Thai companies. For instance, in the automobile sector, Japanese firms account for about 80 per cent of the Thai market and in consumer electronics even more.

The problem of the India-Thailand FTA is not expected to impact the India-Asean FTA. Structurally, Asean's exports to India are different from Thailand's and India's exports to Asean have galloped since 2000. There was a marked change in the export basket, in sync with the global growth trend.

For the first time, India's exports of hi-tech and hi-value products became the engine for growth, outstripping the exports of traditionally low-value and low-tech products. The current basket of India's major exports items to Asean includes auto parts, dyes and intermediates, iron and steel, electronics and machineries, besides gems and jewellery. Before 2001-02, India's major exports to Asean were mainly gems and jewellery, oil and cotton yarn.

Between 2001-02 and 2005-06, while India's exports to Asean tripled, the imports from Asean only doubled. India's exports to Asean rose by 30 per cent a year during the period and its imports by 21 per cent a year from the trade bloc.

Negative list imbroglio

In the negative list imbroglio, to say that the negotiations are "difficult" is deplorable, according to Datuk Seri Rafidah Aziz, Malaysia's International Trade and Industry Minister, the country coordinator and Chairperson of the India-Asean FTA. The negative list covers only 30 per cent of Asean trade. But among the items in the list, crucial is palm oil, which affects the interests of two member countries out of the 10-nation Asean bloc. Indonesia and Malaysia are the major exporters of palm oil to India, accounting for over 99 per cent of the total imports.

Yet, palm oil attracts a higher Customs duty of 87-97 per cent mainly to protect the interests of the few farmers in the country. Keeping in view India's low production of palm oil and the large domestic demand, there is no logic in protecting the interests of few farmers and impeding the prospect of the India-Asean FTA.

As with the WTO, the India-Asean talks are hobbled over the agriculture issue, which accounts for an insignificant share of the overall trade. The India-Asean FTA is now more of a political issue than economic.

Advantage FTAs

FTAs and CECAs have several advantages over the multilateral arrangement. The former provide a platform for quick-decision making, preference among partner countries to enhance trade within the bloc and greater control in shielding the interests of domestic industries. More important, they are the conduits for foreign direct investment (FDI). NAFTA, for instance, has helped increase four fold the US FDI into Mexico. FDI has gushed into India from the Asean Six (Malaysia, Singapore, Thailand, the Philippines, Indonesia and Vietnam) since 2002, roaring from $41.7 million that year to $80.5 million in the following years. The largest investments were from Singapore and Malaysia.

India and Asean have, however, a history of disenchantment. In the mid-1960s, when India was invited to join the forum, New Delhi refused because major Asean countries were allied with the US in the Vietnam war. In the early 1990s, when the Government evinced interest in joining the Asean with the change in the global economic power equation, the Asean bureaucrats were reticent. Since then there has been a thaw, but India-Asean economic relations have a long way to go. With the potential to create a market of 1.5 billion people with a combined GDP of $1.8 trillion, it can unleash great benefits with a little effort.

(The author is Adviser, JETRO, New Delhi. The views are personal.)