The Hindu Business Line : India-Asean FTA — Small step for a big stride in world trade

An FTA with Asean will give India an opportunity to look beyond trade. This will undoubtedly bring India closer to its target of achieving 2 per cent share in global trade.

THE New Foreign Trade Policy announced on August 31 has set a target of 2 per cent share in world trade for India by 2009. This may be possible to achieve given that exports have been growing at the rate of over 20 per cent in the last few years and India's share in global trade has been increasing.

But to actually achieve this target India may have to take certain bold steps, including signing free trade agreements. Though India has been a campaigner of multilateralism and acted as a responsible member of the World Trade Organisation, regionalism as a reaction to the multilateral process has gained ground recently. However, the foreign trade policy has adopted a cautious approach to bilateral and regional FTAs when these have emerged as an essential means for protecting and expanding trade in today's world.

Many developed and developing countries have actively formed regional groupings to enhance their trade and development objectives, and India certainly needed to take some proactive steps in this direction. One such laudable measure is the signing of the India-Asean (Association of South-East Asian Nations) comprehensive cooperation agreement on October 8, 2003 in Bali, Indonesia.

This FTA is expected to create a large market of 1.5 billion people, with a combined present GDP of $1.2 trillion, and will cover investment and services, in addition to trade in goods. The India-Asean two-way trade grew 30 per cent from $7.6 billion in 1999 to $10 billion in 2002. Asean's trade to India is still at a very low level, accounting for only 0.9 per cent of its global trade in 2002, while India's trade to Asean countries still hovers around 7 per cent of its global trade.

Similarly, Asean's share in India's foreign trade rose marginally from around 6 per cent in 1991 to 9 per cent in 2002, but India's share in Asean's trade was a negligible 1 per cent. The volume of trade is still small, considering the vast potential for trade that exists among countries of over 1.5 billion people, and it is hoped that the target of $30 billion will be reached by 2010.

Several reasons can be cited for the less-than-potential trade with Asean especially when India's exports are growing steadily. First, India has not made an earnest attempt to look beyond its traditional trading partners such as the US, the UK, Europe and Japan. Further, the preferential tariffs enjoyed by Asean members among themselves have made India's exports to this region uncompetitive. Moreover, the intra-Asean trade has been growing at 10 per cent annually, constituting nearly 25 per cent of the bloc's total trade.

In this situation, the India-Asean comprehensive agreement offers several alternatives. An FTA with Asean will give India an opportunity to look beyond trade and to areas such as science and technology, information technology, biotechnology, space technology, tourism, and human resource development. This enhanced trade will undoubtedly bring India closer to its target of achieving 2 per cent share in global trade.

India has offered to eliminate tariffs for five Asean members — Singapore, Malaysia, Indonesia, Thailand and Brunei — by 2011. The new Asean members — Cambodia, Laos, Myanmar and Vietnam — will get time till 2016 to set up FTAs with India. However, there are a few problems that India needs to address before this comprehensive cooperation agreement with Asean reaches the implementation stage.

India's import duties are moving towards Asean levels, but the pace has been tardy, dragging the bilateral trade volumes. The $30-billion trade target cannot be achieved if India's Customs duty rates remain at around 25 per cent when they are merely 8 per cent in Indonesia and 16 per cent in Thailand.

Further, sectoral FDI caps, as in telecom and aviation, are affecting investments from Asean. These could come in the way of India actively pursuing its Look East Policy for expanding trade destinations. Though multilateralism has witnessed a huge victory in recent months with the signing of the WTO framework agreement resulting in the strengthening of the multilateral trading system, there is no denying that RTAs (Regional Trade Agreements) offer quick gains which are much needed for a developing economy such as India looking to making its mark on the global markets and cementing its place in Asia as an economic superpower after China.

Moreover, realising the importance of RTAs for increased trade liberalisation and the gains from trade, countries that have traditionally not been party to regional pacts are now negotiating and entering into RTAs. For instance, Japan, which was not part of any RTA for many decades, has joined the bandwagon by singing an FTA with Singapore in January 2002.

One of the important features of the India-Asean Cooperation Agreement is the Early Harvest Programme (EHP) which is an integral part of the Asean-India FTA. The progressive tariff reduction under the EHP shall commence from November 1, and elimination shall be completed by October 31 2007 for Asean-6 and India and October 31, 2010 for the new Asean member-states.

In the first phase of the EHP, India has agreed to exchange tariff concessions on 105 common products with Asean. India has also agreed to accord non-reciprocal tariff concessions to Cambodia, Laos, Myanmar and Vietnam on 111 products. Tariffs at 25 per cent or above are to be reduced to 15 per cent, tariffs between 10 per cent and 25 per cent are to be reduced by 10 per cent; and 10 per cent or less are to be reduced to 4 per cent by the first year of implementation and all the tariffs have to be progressively eliminated by 2007.

Products covered by the EHP shall qualify for tariff preferences in accordance with the rules of origin. However, all the agreements that India has signed so far have been an issue for debate because of the rules of origin problem. Such rules of origin are important to ensure that goods manufactured in neighbouring countries, such as China and Korea in the case of Asean, do not enter India by using Thailand or Singapore as a base merely to benefit from concessional duties.

It is here that the value-addition criteria come into play. The value-addition criterion says that goods exported from a certain destination must have a minimum value addition in the country of origin. However, there has been no progress on what is the right percentage of value-addition criteria. Moreover, the Government is also debating the huge revenue losses that it would incur due to the reduction in tariff rates on these 105 items in the EHP.

Clearly, there are several obstacles that India will have to tackle in the implementation of these FTAs with its South-East Asian partners. It has to persist with its efforts and sort all differences through negotiations if it has to benefit from the agreements. There is no doubt that the world trading system is getting increasingly regionalised and the world's two most important economic powers, the US and the EU, have taken giant leaps in strengthening their regional linkages.

In this backdrop, it becomes imperative for India to forge ahead in its ties with Asean so that the adverse impact or trade diversion resulting by the creation of NAFTA (North American Free Trade Area) and the EU can be combated by enhancing growth within the Asian region. There is no doubt that China will always remain more closer to Asean because of its strong historic, cultural and ethnic ties with the region, but Asean definitely cannot ignore India. After many years, the idea of an Asian Economic Area seems to be closer to reality.

The Asian Economic area will benefit the region immensely and act as a good counter balance to regional groupings such as NAFTA and the EU. But everything depends on the new Government and how it pursues these FTAs and brings them to their fruitful conclusion. India has no choice but to go ahead with FTAs if it is serious about achieving that 2 per cent share in world trade and doubling its share in global merchandise trade by 2009.

(The authors are on the faculty of the Indian Institute of Foreign Trade and the Institute of Economic Growth, Delhi, respectively.)

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