Indian industry is hoping that the additional market access garnered by the Comprehensive Economic Partnership Agreement with Korea will provide an opportunity for India to reverse the trade imbalance in the country’s favour.
The Indian Commerce Ministry has been a hub of activity this month, signing two important trade agreements with South Korea and Asean. Of the two pacts, the former being a Comprehensive Economic Partnership Agreement (CEPA), consisting of goods, services, investment and other economic exchange and cooperation issues, is a more significant deal from the Indian perspective, and is expected to help moderate the bilateral trade imbalance, compared to the latter’s goods-only status.
Deals with a difference
The India-Korea CEPA (IKCEPA) also has the distinction of being India’s first FTA with an OECD country, and the second comprehensive agreement signed by India, after the 2005 India-Singapore CECA. From the Korean perspective, however, the FTA with India is the seventh bilateral trade deal signed since 2004, when its first FTA with Chile was implemented (the US-Korea agreement is awaiting ratification).
It is notable that for both countries, the flurry of bilateral trade action is a fairly recent phenomenon, though their motivations differ. The Korean initiative is in fulfilment of Seoul’s aspiration to become North-east Asia’s economic and transhipment hub, while for India, FTAs with the Asian countries are a part of its larger Look East policy initiative aimed at diversifying away from its traditional trade partners.
The IKCEPA will be implemented from January 1, 2010, subject to ratification by the Korean parliament; India has completed all formalities for implementation of the agreement.
That said, one needs to evaluate if the agreement is likely to deliver significant economic benefits or if its simply a symbolic gesture to indicate India’s continued commitment to trade liberalisation also having politico-strategic connotations. On paper though, the elimination/reduction of import duties on 85 per cent of Korean exports and 90 per cent of India’s sales seem impressive, notwithstanding the long implementation period of eight years.
Available data (from Korean sources) indicate that India-Korea bilateral two-way trade has increased three-fold in the past five years, up from $5.48 billion in 2004 to $15.56 billion in 2008, a little over half of which consists of trade in crude and refined petroleum products.
India has consistently had a bilateral trade deficit vis-a-vis South Korea; the non-oil bilateral trade deficit of India in the nine months of 2008-09, the period for which official data is available, is around $3.9 billion. It has been estimated that this has the potential to double the two-way trade in the next decade, albeit from a low base.
Indian industry is hoping that the additional market access garnered by the CEPA will provide an opportunity to India to reverse the trade imbalance in the country’s favour. How justified or realistic is this expectation?
Certainly, there are several clear areas of gain from the CEPA, and not only from the freer movement of service providers in the 163 professional categories negotiated. Korea’s service sector, where productivity has fallen to 60 per cent of that in manufacturing, will benefit from inflow of India’s abundant relatively cheap and high-skilled professionals, which will lend a productivity boost to the ageing Korean society in years to come.
It is also a fact that South Korean consumer electronics and auto brands have moved aggressively into India and have a high recognition value among Indian consumers.
The CEPA will encourage more Korean investments in consumer goods and physical infrastructure and construction sectors; modernisation of Railways stands out as one of the sectors where stellar Korean engineering and innovation expertise can be used to India’s benefit.
Korea has been one of the fastest-growing OECD countries over the past five years, with an annual (pre-recession) growth rate of around 6 per cent. Rapid growth reflects the country’s underlying economic dynamism, particularly in the information and communications technology (ICT) sector; Korea has the world’s highest mobile and broadband penetration. India’s telecom and IT hardware and software industries as well and the other engineering industry sectors are sure to benefit from closer cooperation with Korea’s demonstrated ability to introduce new, sophisticated and innovative products into the market.
However, there are a few factors that need to be addressed before the potential gains are realised. First, given the composition of India’s trade with Korea, with its focus on trade in intermediate inputs in electronic and automotive sectors, it is unlikely that the bilateral trade balance will turn into India’s favour anytime soon.
Unlike Korea’s trade with China, where the Chinese bilateral deficit with Korea is compensated by China’s trade surplus vis-a-vis the rest of the world, Korean exports to India are unlikely to be further exported out. Furthermore, the bilateral exchange rate (currently in Korea’s favour) will add to the competitiveness pressure. Korean investments into India are, in fact, market-seeking as opposed to efficiency-seeking FDI to China. It is the Indian middle-class consumer that is the key beneficiary in this deal, which is unlikely to be reflected in improved trade balance, an important indicator of any FTA’s success.
Second, for both goods and services, important Korean market access barriers lie in the existing regulatory, tax, corporate governance and business environment (namely, entry barriers in key service sectors) structures, and unless these are streamlined quickly, the promised gains will remain illusory.