The Hindu Business Line : India-Asean FTA — Limited but important gains

The Commerce Minister, Mr Kamal Nath, with the trade ministers of Indonesia and Singapore, Ms Mari Pangestu (left), and Mr Lim Hng Kiang, finalising in August the draft text of the agreement that will pave the way for liberalised trade in goods from next year.

Suparna Karmakar

“If one does not know to which port one is sailing, no wind is favourable.”

Lucius Annaeus Seneca

After six long years, India and Asean concluded negotiations on the draft for a free trade agreement. While the trade partners are committed to eventually establishing a comprehensive trade liberalisation and cooperation agreement (CECA), the present agreement will kick off with liberalised trade in goods (industrial as well as agricultural) soon after the 10 Asean member countries ratify the draft text that was finalised on August 28, 2008.

Both trade partners aim to ensure the agreement is signed at the December 2008 Asean Summit, and implemented from January 1, 2009.

While both parties expect net gains from this agreement, it is yet unclear how much of those gains would be economic as opposed to political.

Several research reports have argued that most bilateral and regional trade agreements are politically motivated with very little economic gain, and that a large part of the increased trade is trade diversion rather than trade creation; Indian FTAs are reportedly no exceptions. So what are the prospects for India from this new agreement?

A reality check

India has successfully diversified its trade destinations in the past few years in a bid to reduce dependence on the US and EU markets, and with the 2007-08 market share of over 10 per cent, the Asean 10 is an important region. India-Asean bilateral trade in 2007-08 was at $39.04 billion, having grown by 27 per cent over 2006-07. The proposed FTA is expected to add at least $12 billion to bilateral trade by 2010.

While this does not appear to be a huge gain, what gets overlooked is the fact that on full implementation of the agreement, India and Asean would have abolished customs tariffs on over 90 per cent of traded goods by value and over 95 per cent of tariff lines, which include key raw materials such as iron ore and aluminium, plastic goods and certain kinds of machinery.

The agreement on rules of origin (ROO) is one of the most lenient that India has negotiated with her preferential trade partners.

The value-addition requirement has been agreed at 35 per cent, with provisions for regional cumulation and requirement for a change in the 6-digit tariff sub-headings only.

The two partners have also agreed to whittle down the negative list of products on which there would be no tariff reduction. For both, the FTA offers are a significant improvement over their current tariff bindings and market access offers in the WTO.

Services and investment

But gains from trade liberalisation in goods is only a small part of the total envisaged gains from the India-Asean CECA.

Research undertaken by ICRIER research indicates that significant gains are likely for India once the negotiations on services and investment are concluded.

The study suggests that India expects to gain at least in the medium term (that is, until the conclusion of the AFAS negotiations in 2015); a bilateral engagement in services between India and the Asean countries would prove very beneficial as the region remains relatively closed to foreign service providers.

Negotiations should centre around both market access as well as consular cooperation for freer movement of professionals.

The goods FTA would set the right tone by promoting a feel-good environment and mutual understanding of each other’s sensitivities, which is necessary for a speedy conclusion of the CECA.

The joint statement issued by the trade partners has indicated that negotiations for trade in services and investment would begin as soon as possible and wind up by end-2009.

This, however, appears an ambitious target, especially as the onus is on Asean to start the negotiations, which are likely to be long-drawn-out as the Asean has not yet become a single market for either investment or services.

The 10 Asean members have individual sensitivities and market access interests, and they need to be calibrated carefully before the group can start negotiating with India. The group is having similar problems in its services negotiations with Australia-New Zealand.

Economic diplomacy

It is evident that the Asean needs this agreement, not only for assured market access in times of weakened economic prospects and for creating trade and investment avenues for growth, but also as a necessary corollary to the recent politico-economic developments in the Asia-Pacific. On the Indian side, the agreement fits with the country’s international political priorities and the need to build alliances with other developing countries.

However, political considerations are fluid, and other strategies and interests may take over with time.

It is important therefore for both partners to recognise that incremental convergence and economic diplomacy works best in countries whose socio-political systems until recently were fraught with non-economic considerations. The limited expected gains from the India-Asean goods FTA should not be a cause for despondency.

(The author is Senior Fellow with ICRIER. Her views are personal. blfeedback@thehindu.co.in)