The Hindu Business Line : After Singapore pact, focus turns to ASEAN FTA

THE conclusion of the Comprehensive Economic Cooperation Agreement (CECA) with Singapore has turned the spotlight on the next item on the agenda, the Indo-ASEAN FTA. The Prime Minister, Dr Manmohan Singh, has asked the Trade and Economic Relations Committee to come up with proposals so that the Indo-ASEAN FTA negotiations could be put on the fast track.

But when officials from India and ASEAN sit for the next round of negotiations in September, they would have a very ticklish issue to resolve. It is an issue that, at present, the two parties appear to be deadlocked on — what should be the elements of the `Rules of Origin' (RoO).

India's stand is that RoO should be based on two criteria — value addition of 40 per cent and change in tariff heading (CTH). (The concept of CTH arises out of the international Harmonised System of Nomenclature — or, common customs codes. CTH simply means that during the process of manufacture the raw material becomes an entirely different product, with the raw material and the finished product falling under different headings in the book of customs codes.) ASEAN wants only the value addition criteria and not CTH.

Both sides base their arguments on the `consistency'. ASEAN says it has consistently followed only the `value addition' criterion in all its FTA, including China. If China can accept it, then why not India, is its refrain. India, on its part, says that it has also maintained the twin-criteria in all its agreements — Nepal, Sri Lanka, Thailand and recently, Singapore. Thus, the negotiators are stuck on what officials have termed as a `clash of consistencies'.

Indian negotiators are likely to build their case on two points. First, two important economies of ASEAN, Thailand and Singapore, have in their bilateral agreements with India agreed to the two-criteria RoO. These two countries account for 35 per cent of imports and 45 per cent of exports from/to ASEAN. This is India's answer to ASEAN's `if China can, why not India' point.

Second, India is likely to argue that the comparison with China is not appropriate, because of several differences between the Chinese and Indian economies. For instance, China has an edge in terms of economies of scale. The Ministry of Commerce feels that the Chinese system has several hidden subsidies and if importing ASEAN countries do not apply appropriate anti-dumping duties, such goods could end up in the Indian market at subsidised prices and cause injury to local manufacturers.

ASEAN's major argument is likely to be that the 40 per cent value addition would take care of any problems. "If 40 per cent of value-addition happens in ASEAN, what more do you want?" is the trading bloc's point.

That appears to be a fair point, but when asked about this, officials of the Commerce Ministry say that value addition is extremely difficult to prove. Even with both the criteria in place, some trade diversion is inevitable — as was seen in case of a surge of copper imports from Sri Lanka. A CTH condition only strengthens the value addition norm.

India has also pointed out that CTH is common in international negotiations such as NAFTA, Mercosur, CARICOM, Singapore-Japan, Thailand-Australia and Europe's agreements with several African countries. It is also easy to implement. Just see if an input material has come into ASEAN from, say, China under a different tariff heading than the finished product moving from ASEAN into India.

The other hurdle is the issue of `non-qualifying operations'. Operations such as cleaning, painting and packing, are not usually taken as part of `value addition' and most agreements exclude them. India wants elaborate rules here, but the ASEAN wants them to be minimal and general. According to the Ministry of Commerce, the model of non-qualifying operations of ASEAN is "very generally worded and covers basically bulk breaking and repacking operations".

Needless to point out that behind India's stand looms the fear of China.

Meanwhile, the Commerce Ministry has been asking the industry to come up with suggestions for a `fall back' position, should India be unsuccessful in convincing ASEAN of the twin-criteria RoO. Some suggestions have been put forth. One is that in the case of some items the value addition norm could be 50 per cent. Some safeguard measures to counter any surge in imports, which may cause injury to the Indian industry, could be put in place.

At present, India-ASEAN trade is worth about $13 billion and the hope is to raise it to $30 billion by 2007. Therefore, both sides will be keen on early conclusion of negotiations. After FTAs with Thailand and Singapore, India has certainly gained confidence in entering into bilateral or regional trade agreements.

An evidence of this is the initiation of talks with a number of countries/blocks — such as with Mercosur, Egypt, Iran and even China. ASEAN too is no stranger to trade agreements. Thus, as two confident sides sit for negotiations, it is a question of who digs his heels in deeper.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page