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Coup puts Indo-Thai free trade deal in doldrums

Coup Puts Indo-Thai Free Trade Deal in Doldrums

Paranjoy Guha Thakurta

NEW DELHI, Sep 27 (IPS) — An ambitious free trade agreement (FTA) between India and Thailand may have been stalled indefinitely by the Sep. 19 military coup. The two countries were meant to renegotiate the FTA after elections in Thailand set for mid-October, but this process is now shrouded in uncertainty.

’’We really don’t know when a new elected government will be in place in Bangkok and hence, we cannot predict when trade related talks can resume,’’ a senior bureaucrat in the Indian government’s commerce and industry ministry told IPS, asking to remain anonymous under standard briefing rules.

He added that the political impasse is unlikely to affect inflow of Indian tourists to Bangkok. Even the volume of trade may not fall in the short run because it is conducted between private firms in the two countries.

Incidentally, New Delhi has so far avoided commenting on the coup in Thailand, that ousted prime minister Thaksin Shinawatra - who has been criticised for recklessly and secretively pursuing a brace of bilateral FTA deals with major countries such as China, Australia, the United States and India.

"I hope negotiations between India and Thailand on revising the FTA can resume soon," said T. S. Vishwanath, advisor with the trade chamber, Confederation of Indian Industry (CII). He told IPS that he "would like the talks to take place with government officials in Bangkok so that the changes that are made in the FTA are durable and sustainable."

For some years now, Indian businesspersons have been complaining that certain provisions in the India-Thailand FTA have worked against the interests of local industry. Thailand too has been unhappy with India because of the number of items in the ‘negative list’ — currently around 1,000 — that are excluded from the FTA. Bangkok wants this number slashed.

India originally signed an FTA with Thailand in October 2003 which came into effect in September 2004 and expires in 2008. Under the agreement, entrepreneurs from India and Thailand can freely import and export 82 "early harvest" items. It was agreed that tariffs would be reduced by 50 percent in 2004, by 75 percent in 2005 and completely eliminated in 2006.

Trade between the two countries in these 82 items consequently doubled to 430 million US dollars in 2005 from 217 million dollars in 2004, with Thailand recording a trade surplus of 253 million dollars.

R. V. Kanoria, industrialist and chairman of the CII’s World Trade Organisation (WTO) and Other Trade Agreements Committee, told IPS that the automotive components industry in India was hit the hardest by the India-Thailand FTA.

"Toyota, Honda and Proctor & Gamble are the three multinational corporations that have benefited the most from the Indo-Thai FTA," said Sharif D. Rangnekar, economic analyst and editor of the website.

He told IPS that "these three companies find the logistics of doing business with India rather attractive because they have major manufacturing units in Thailand and find it easy to launch their products in India." Indian products, on the other hand, "don’t have a large market in Thailand, even if they have the required certification," said Rangnekar, explaining that it is partly a consequence of the fact that Indian market is much bigger than Thai.

India’s 1.1 billion people make it the second most populous country in the world while Thailand is a far smaller country with 65 million people.

The existing FTA has been under fire from various industry groups, independent research think tanks and columnists. A survey by the Federation of Indian Chambers of Commerce and Industry (FICCI), one of the largest apex industry associations in India, together with the CII, found in 2005 that whereas imports from Thailand were rising phenomenally after the FTA was signed, exports from India to Thailand actually declined.

A number of independent experts have been critical of the Indian government for rushing into bilateral trade agreements as part of its "Look East" foreign policy. "The initial homework on the FTA with Thailand was never done by India," says Prof. Biswajit Dhar, who heads WTO studies at the Indian Institute of Foreign Trade in New Delhi. He said the Indian government never takes along representatives of trade and industry associations before entering into negotiations with governments of other countries. "This is why so many problems have arisen with the India-Thailand FTA," he remarked.

An association representing power cable manufacturers in India recently sent a communiqué to the commerce ministry, through the Associated Chambers of Commerce and Industry (ASSOCHAM), urging the government to retain the "harmonised system" codes relating to power cables in the negative list of the India-Thailand FTA.

Even as Thailand wants to increase the number of items on the FTA list by hundreds, industries in India are clamouring for protection and arguing with the government that what is required is a level-playing field. Indian industry associations have in recent months been repeatedly claiming that the India-Thailand FTA would result in the ruin of many businesses in India.

When the previous right-wing Bharatiya Janata Party government, led by Atal Behari Vajpayee, signed the original FTA in 2003, it seemed as if foreign policy enthusiasm had prevailed over economic sense and market compulsions. In July 2004, two months after assuming power, Prime Minister Manmohan Singh said that he would take a re-look at the free-trade pact with Thailand although the FTA on the existing 82 items that was part of an "early harvest scheme" would go on as scheduled. More recently, India’s junior minister for commerce Jairam Ramesh publicly conceded that FTAs that bring macro-economic gains could also result in considerable "micro-pain".

There is considerable evidence that exporters in Thailand have benefited disproportionately from the FTA in comparison to Indian exporters. In 2004-05 (year ending March), Thai exports to India grew by 36.87 percent whereas India’s exports to Thailand grew by a meagre 5.76 percent.

In 2005, FICCI published a report, ‘India-Thailand FTA - Emerging Issues’, which said that the cost of production for Indian companies manufacturing the 82 items placed in the early harvest scheme was too high for them to compete effectively with Thai ones. Based on a survey conducted in April-May 2005, the report said that amongst the hardest hit by the FTA were companies making colour-picture tubes for television sets, colour TV sets and auto components. Thai companies had the advantage of substantially cheaper electricity and interest rates, the report pointed out.

There are still other reasons why the FTA has been opposed. In 2004, immediately after the agreement had come into force, an economic think tank, the National Council for Applied Economic Research, said that the FTA "creates more problems than it solves" because of complicated "rules of origin" (ROO). It was stated that complexities in the ROO make the functioning of FTA expensive because these lead to misunderstanding, misinterpretation and possible corruption.

Indeed, the ROO seem to be a major reason why negotiations between India and Thailand about expanding the items in the FTA list are at present stalled. Thailand wants the ROO norms relaxed, which is completely unacceptable to the Indian side. New Delhi is already on the back-foot having agreed to an early harvest scheme in the first place and further relaxation of the ROO could lead to imports from third countries via Thailand that would, in turn, further antagonise Indian industry.

The doubts expressed over the ROO are not without basis. Earlier this year, ASSOCHAM released a report saying that China, the Philippines, Malaysia, Indonesia and even Taiwan were using neighbouring Thailand as a conduit to route into India a wide variety of products such as textiles, engineering items, processed food products and electronic goods.

The fact is that Thailand is not among India’s top 20 trading partners and that its market is one-tenth the size of India’s. Troubled times seem to lie ahead for the India-Thailand FTA even after the political situation normalises in Bangkok.

 source: IPS