India’s ties to Asean must look beyond trade in goods
The Nation, Bangkok
India’s ties to Asean must look beyond trade in goods
4 November 2008
After the negotiations on a Free Trade Agreement on goods between India and the Association of Southeast Asian Nations (the India-Asean FTA) were successfully concluded on August 28, consumers now expect to enjoy a wide range of duty-free imports such as textiles, capital goods, plastics and electrical machinery, among many others, from India next year.
The landmark agreement between India and the Asean states is expected to constitute a huge free-trade bloc - an enormous market of 1.5 billion people, with a combined GDP of US$1.2 trillion. The just-completed agreement covers free trade in goods whereas the issues of services and investment remain unsettled.
India’s attempts to pave the way toward duty-free trade with Asean nations were motivated by its fear that it might "miss the boat of globalisation". India has to catch up with China, which has strong ties with Asean, China ratified a similar trade pact with Asean in 2004 and has since emerged as Asean’s largest trading partner. The six years of delayed, painstaking negotiations on the India-Asean FTA have proved that India has a long way to go to match China’s engagement with Asean.
A natural question arises: Is the India-Asean FTA welfare-enhancing for both signatories? Freer trade may not always be beneficial for everyone. Answering this question will therefore shed light on a roadmap towards building a FTA trade bloc.
There are several concerns that may hinder the growth of the India-Asean trade bloc.
First, tariff cuts on five highly sensitive agricultural products - tea, coffee, pepper, crude palm oil, and refined palm oil - are going to inflict deep damage on farmers in India. By 2018 the successfully concluded FTA, will bring about substantial tariff reductions for those sensitive products: from 90 to 45 per cent for refined palm oil, from 80 to 37.5 per cent for crude palm oil, from 70 to 50 per cent for pepper, and from 100 to 45 per cent for coffee and tea.
An adjustment assistance fund, contributed probably by the signatories or international bodies like the World Bank or the Asian Development Bank (ADB), should be established to compensate those who suffer from the flood of cheap farm products.
Second, a bilateral agreement like the India-Asean FTA has often brought about the subtle, overlapping Rules of Origin (ROOs) - the rules that define products originating from partner countries. Differences in and inconsistency of ROOs increase administrative costs, add regulatory complexity, and ultimately become a non-tariff barrier to trade.
Harmonisation of the ROO is thus imperative to facilitate gains from opening up markets. In particular, the ROOs of the India-Asean FTA should go along with those of the existing multilateral agreements.
Last, and perhaps most importantly, India has a negligible stake of 1 per cent in Asean trade, and Asean nations have already imposed relatively low import tariffs. These imply that both India and Asean may fail to tap benefits from further tariff reductions. That is, the gains from trade creation are limited and hence unlikely to outweigh losses in terms of trade diversion and production adjustment.
The crux of welfare gains from India-Asean market integration does not rest on free trade in goods, but on free flows of services and investment. That is, India’s services industries - IT services, design services and call operators - have long been a hub, or a source of outsourcing and off-shoring from developed economies, especially the United States and the European Union.
The India-Asean FTA that successfully liberalises trade in services and investment will therefore provide economic opportunities for companies in Asean countries to strengthen their competitiveness in the global market by fragmenting their production and establishing industrial clusters.
"The FTA between India and Asean countries will create new opportunities for our operations in India, especially in sharing components. With the FTA, lots of components can be sourced from India and there will be a lot of possibilities for Indian vendors to supply to our global operations," said Mr Fumihiko Ike, Honda’s Asia President and CEO.
There is still a large amount of room for India and Asean nations to reap benefits from the India-Asean FTA. The recently agreed upon tariff reductions are a milestone in a Comprehensive Economic Partnership Agreement (CEPA) that goes beyond free trade in goods.
Agreements on trade in services and capital market liberalisation are where actual gains from closer India-Asean economic integration lie.
