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ASEAN-India Free Trade Area briefing

Asia Briefing | February 7, 2013

ASEAN-India Free Trade Area Part I: Introduction

By Alex Tangkilisan

Feb. 7 – The ASEAN–India Free Trade Area (AIFTA) is a free trade area consisting of the 10 member states of the Association of Southeast Asian Nations (ASEAN) and India. The initial framework agreement was signed in Bali, Indonesia, on October 8, 2003, and the final agreement was signed on August 13, 2009. The free trade area came into effect on January 1, 2010.

In the aftermath of the recent ASEAN-India Commemorative Summit in New Delhi on December 20-21, 2012, and the subsequent passing of the free trade agreement (FTA) on services and investments, economic ties and prosperity are set to blossom between the two regions.

FTAs between the two regions appear to be operating effectively and efficiently, and Indian Prime Minister Manmohan Singh has confirmed that the FTA in goods, which was concluded in 2010, has helped trade to grow by 41 percent in 2011-12. Singh also stated that the implementation of the 2012 FTA on services and investments has set annual India-ASEAN trade to grow to US$100 billion by 2015. Trade between India and ASEAN presently stands at roughly US$80 billion.

Two Intertwined Regions

ASEAN is a geopolitical and economic organization comprised of the following 10 member states: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. It covers a land area of 4.46 million kilometers and has a population of approximately 600 million people. In 2011, its combined nominal GDP amounted to US$2.2 trillion, which would rank it as the world’s 10th largest economy if considered as a single entity.

The six largest economies in ASEAN are known as the ASEAN six majors. They are as follows (including nominal 2011 GDP):

 Indonesia (US$846.83 billion)
 Thailand (US$345.65 billion)
 Malaysia (US$278.67 billion)
 Singapore (US$239.7 billion)
 Philippines (US$224.75 billion)
 Vietnam (US$123.96 billion)

Statistics for the remaining four countries are as follows:

 Myanmar (US$51.93 billion)
 Cambodia (US$12.88 billion)
 Brunei (US$12.37 billion)
 Laos (US$8.3 billion)

India is the seventh largest country in the world by area, covering 3.3 million kilometers, and it boasts a population of approximately 1.2 billion people. Meanwhile, India’s economy was actually the 10th largest in the world with a nominal GDP of US$1.85 trillion in 2011.

India imported US$461.4 billion worth of goods in 2011, including crude oil, raw precious stones, machinery, fertilizer, iron and steel, and chemicals. On the other hand, India exported US$299.4 billion worth of goods during this same period, including petroleum products, precious stones, machinery, iron and steel, chemicals, vehicles and apparel.

India’s trade with ASEAN is mainly concentrated in Singapore, Malaysia and Thailand.

For a more detailed representation of the trade flows between India and ASEAN, please see the table below:

India’s main exports to ASEAN include:

 Petroleum products
 Oil meals
 Gems and jewelry
 Electronic goods
 Cotton yarn and wool
 Machinery and instruments
 Primary/semi-finished iron and steel
 Transport equipment
 Marine products
 Drugs and pharmaceuticals
 Inorganic, organic, and agro chemicals
 Dyes and intermediates

ASEAN’s main exports to India include:

 Coal, coke, briquettes
 Vegetable and petroleum oils
 Electronic goods
 Organic chemicals
 Non-electrical machinery
 Wood and wood products
 Non-ferrous metals, metalliferous ores and metal scrap

Background on the ASEAN-India Free Trade Agreements

After six years of negotiations, the ASEAN-India FTA was signed on August 13, 2009, in Bangkok, Thailand. The agreement was only for trade-in-goods, and did not include software and information technology. Negotiations on an FTA with regards to the services and investment sectors started in October 2008 and were finalized on December 20, 2012.

ASEAN is India’s fourth-largest trading partner after the European Union, the United States and China. Trade between India and ASEAN presently stands at US$80 billion, but is likely to receive a significant boost with the finalization of the services and investment FTA.

The trade-in-goods FTA eliminated tariffs for about 4,000 products (including electronics, chemicals, machinery and textiles) between the regions. Duties for 3,200 products will be reduced by December 2013, and duties on the remaining 800 products will be brought down to zero or near zero by December 2016.

There are a total of 489 items excluded from the list of tariff concessions, and 590 items excluded from the list of tariff eliminations pertaining to farm products, automobiles, certain auto-parts, machinery, chemicals, and crude and textile products. ASEAN and India have agreed to allow between 7 percent and 9 percent of tariff lines or products to be excluded from tariff reduction commitments.

Part II: Indonesia, Vietnam & Myanmar

Indonesia and Vietnam make up two of the major six economies in ASEAN, while Myanmar is one of the four smallest economies in the region (alongside Cambodia, Brunei and Laos). Together, these three countries combine for a total GDP of US$1.07 trillion, a population of 378.5 million, and exports to India amounting to US$13.37 billion (or, about 2.7 percent of India’s total imports).

In conjunction with ASEAN’s continued emergence as a regional economic powerhouse, these figures, although still somewhat small, are poised to grow thanks to the free trade agreements (FTAs) signed between India and ASEAN.

Indonesia-India Trade

As early as 1950, the first President of Indonesia, Sukarno, recognized the importance of the Indonesian-Indian relationship, and called for greater trade ties. In November 2005, Indonesia and India signed a bilateral strategic partnership agreement in which the two countries agreed to increase bilateral trade to $10 billion by 2010. This target was actually exceeded that year with total trade amounting to roughly $12 billion, tripling the $4 billion amount set in 2005. Bilateral trade between India and Indonesia topped out at $20 billion in 2012, and is expected to grow to $25 billion by 2015.

In addition, in 2005, Indonesia and India signed a memorandum of understanding (MoU) to establish a joint study group (JSG) to examine the positive aspects that would arise from signing a Comprehensive Economic Cooperation Agreement (CECA). The CECA is to be an agreement that covers economic cooperation and trade in goods and services and investments, which would lead to a higher-level of mutually beneficial economic cooperation between the two countries. The JSG projected that CECA would raise total exports between India and Indonesia to $17.5 billion in 2020, with exports from India raising to $7.8 billion and exports from Indonesia reaching $9.7 billion.

Over the years, CECA talks have progressed with discussions covering tariff reductions and the lifting of non-trade barriers on various goods of interest, including palm oil products from Indonesia and pharmaceuticals and buffalo meat from India. The CECA, however, has yet to be executed.

In 2010, India implemented a FTA with Indonesia which cut import duties on products such as seafood, chemicals and apparel. In return Indonesia slashed import duties on Indian goods. By 2011, India and Indonesia had signed a total of 18 agreements in the mining, infrastructure and manufacturing sectors worth a total of $15.1 billion, in addition to a FTA on goods.

Vietnam-India Trade

Since India granted Vietnam “Most Favored Nation” status in 1975, trade relations have been robust. In 1978 the two countries signed a bilateral trade agreement, followed by the Bilateral Investment Promotion and Protection Agreement (BIPPA) on March 8, 1997. Then, in 2003, both nations promulgated a Joint Declaration on Comprehensive Cooperation in addition to negotiating a free trade agreement.

Bilateral trade has increased since then, and India has taken a place among the ten largest exporters to Vietnam. Two-way trade reached $4 billion in 2012, with Indian exports accounting for $2.34 billion while Vietnam’s exports accounted for $1.56 billion (up from $178 million in 2002). The two sides have set a target of $7 billion for bilateral trade by 2015, and, with the signing of the India-ASEAN FTA on trade in goods in 2010, bilateral trade is poised to grow at an even faster rate.

Vietnam continues to be an attractive investment destination for Indian companies in sectors ranging from oil and gas, steel, minerals, tea, coffee, sugar and food processing. India and Vietnam have also expanded cooperation in information technology and education, and are collaborating on their respective national space programs.

In 2010, India implemented a FTA with Vietnam to cut import duties on products such as seafood, chemicals and apparel and, in return, Vietnam slashed import duties on Indian goods.

Myanmar-India Trade

The Indian government has been cultivating ties with Myanmar since 1993 as part of a wider foreign policy to increase India’s participation and influence in Southeast Asia. Since then, India has grown to become one of the largest market for Burmese exports. India is Burma’s fourth largest trading partner, and is also its second largest export market taking in 25 percent of total exports.

The Indian government has further worked to extend air, land and sea routes to strengthen trade links with Myanmar, in addition to establishing a gas pipeline. The countries also signed a bilateral border trade agreement in 1994 for border trade to be carried out from designated points in Manipur, Mizoram and Nagaland. The two countries have primarily cooperated in agriculture, health, education, pharmaceuticals, telecommunications, information technology, steel, oil, natural gas, hydrocarbons and food processing.

In 2001, India and Burma co-constructed a 160-kilometer highway called the Indo-Myanmar Friendship Road to open up a commercial transport route connecting Northeast India and South Asia to Southeast Asia. Based on the success of this trade route, India and Myanmar have agreed to construct a new triangular 4-lane highway running 3200 kilometer through India, Myanmar and Thailand. This project, including a number of road condition improvements, is expected to be completed by 2016.

In 2012, India and Myanmar signed 12 MoUs extending cooperation on border development, defense and analysis and joint trade and investment. Bilateral trade between India and Burma is expected to more than double by 2015, growing from $1.28 billion in 2011 to $3 billion.

Part III: Cambodia, Brunei, Laos and the Philippines

While the Philippines is part of the ASEAN six majors, Cambodia, Brunei and Laos are the three smallest economies in the region. Together, these four countries combine for a GDP of US$258.30 billion, a population of 115.85 million and exports to India amounting to US$1.33 billion (or, about 0.27 percent of India’s total imports).

Cambodia–India Trade

India-Cambodia relations picked up in 1981 when India officially recognized Cambodia’s new government and opened up an embassy in Phnom Penh. In contemporary times, there has been an effort to expand their cooperation through institutional capacity building, human resource development, infrastructure development and security and defense. Furthermore, India and Cambodia have enhanced bilateral cooperation through increased interactions at regional and international forums.

Positive relations were built upon during the first India-Cambodia Trade and Investment Business Forum, Exhibition and Buyer/Seller Meet in 2009, which sought to enhance economic engagement between the two countries. India extended duty free tariff preference schemes to Cambodia that same year. Indian businesspeople in Cambodia have also established an Indian Chamber of Commerce to promote bilateral trade and investment ties.

India and Cambodia ties were further bolstered in 2011 when they held the first round of Foreign Office Consultations (FOC). These consultation were in regard to trade and bilateral cooperation, with a focus on policy, economy, security, education and vocational training, culture, IT and agriculture.

Brunei-India Trade

The discovery of oil in 1929 brought a substantial number of Indians seeking their fortune to Brunei. Bilateral diplomatic relations between India and Brunei, however, were not formally established until 1984.

In 2008, India-Brunei relations were enhanced in sectors ranging from agriculture and defense during the Sultan of Brunei’s visit to India. During his visit, five agreements were signed, such as the Bilateral Investment and Protection Agreement (BIPA) and the memorandum of understanding (MoU) on Cooperation in Information and Communication Technology.

India also signed a free trade agreement (FTA) on goods with Brunei in 2010, which effectively slashed import duties on products ranging from seafood to chemicals and apparel. In return, Brunei also reduced import duties on various Indian goods.

The main export from Brunei to India has been crude oil, while Brunei predominately imports textile products and vehicle parts from India. However, with relatively high shipping costs between the two countries and limited connections between Indian and Brunei business communities, coupled with the limited needs of Brunei’s smaller population, bilateral trade has been somewhat inhibited.

Plans to further strengthen bilateral and economic ties have lead India and Brunei to explore the possibilities of joint ventures in hospitality and infrastructural development in addition to joint ventures in the energy sector.

Laos-India Trade

Due to having many common views on major international issues, a mutually beneficial bilateral trade relationship has developed between India and the Lao People’s Democratic Republic.

In recognition of the close ties between the two countries, the Lao Government established the Lao-India Friendship Association in 1997. An FTA has also been implemented, which has seen both nations slash import duties on thousands of products.

In 2010, trade relations were further bolstered as the Indian Chamber of Commerce in Laos signed multiple agreements and MoUs with organizations such as the Lao Chamber of Commerce, the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry.

Metals, ores, machinery and electronic equipment account for most of the products imported and exported between India and Laos. In 2011, Indian entrepreneurs committed a combined US$950 million in a plantation, iron ore and agarwood project, which skyrocketed India from 22nd to 6th in terms of foreign direct investment in Laos. India has previously invested in Laos’ hydro-power, IT, human resource development and mining sectors.

The Philippines-India Trade

Business relations between India and the Philippines began to prosper when a trade agreement was signed on May 29, 1979. Adding to this, in 1995, following the first Philippine Trade Mission to India, a Joint Working Group and a Joint Business Council were set up to assess and identify potential avenues for trade, and to identify new areas for collaboration.

The agreement to establish a Joint Commission on Bilateral Cooperation was signed during President Gloria Macapagal Arroyo’s state visit to India on October 5, 2007, with an aim to further strengthen and develop cooperation in the fields of trade, economic, science and technology. Its inaugural session was held on March 15, 2011, in New Delhi, during which both sides agreed to continue with and expand on cooperative initiatives in various sectors such as trade, agriculture and defense.

India and the Philippines have also been negotiating to revise and clarify certain aspects of their double taxation avoidance agreement (DTAA), with regard to the taxation of income derived from professional services. The newly revised DTAA is set to be signed sometime this year.

Indian business interest in the Philippines primarily lies in the mining, information and communication technology, and business process outsourcing sectors.

Part IV of this series will explore the impact of the ASEAN-India Free Trade Area on Thailand, Singapore and Malaysia.

 source: Asia Briefing