The Hindu Business Line : PTA with ASEAN

Recently India concluded a Free Trade Agreement with the Association of South-East Asian Nations (a Framework Comprehensive Economic Cooperation Agreement was signed in October 2003 for goods, services and investments). .

The FTA with Asean was signed against the prospect of the formation of a Pan-Asian Economic Community to be followed by a common currency. The scope for enlarged trade was the overriding factor for the Trade Economic Relations Committee (TERC) to go ahead with the FTA despitean estimated loss of Rs 1,200 crore on account of tariff concessions on palm oil alone. This is sought to be addressed by the increase in the bilateral trade, from $3.9 billion in 1993-94 to $16.8 billion in 2004-05, with the balance of trade slightly in favour of Asean.

The riders

The success of any FTA depends on the selective items for trade — that is, items covered by the FTA with or without riders — and the Rules of Origin (ROO) that determine which product is from member-state, qualifying for preferential tariff.

Looked at from this perspective, the FTA with Asean has not had an easy course particularly when one understands from the TERC that the negative list (of items that would not be eligible for duty concessions) had to be pruned from 1,414 to 800. Yet, as a measure of some protection to the domestic farm sector, the Government introduced tariff-rated quotas (TRQs) on the import of palm oil from Malaysia and Indonesia; tea, coffee and pepper from Vietnam; and some manufactured goods from Thailand.

For Asean is one of the most efficient, cost-effective producers of rice and plantation crops and already many of these are coming into India despite selective tariffs. India has to be very careful in determining the selective list as the early reports of the FTA (Early Harvest Programme) with Thailand show unfavourable trends. There is a feeling that New Delhi did not do enough homework on the 82 items included in the Early Harvest Programme. The experience has been the same vis-à-vis the FTA with Sri Lanka. While India's exports doubled, Sri Lanka's increased five times.

New Delhi should impress upon Asean that it stands to benefit much from the FTA with India, with a large middle-class population and a rising GDP, and hence the Agreement must be mutually beneficial and address the concerns of both the parties. For, while demanding the scrapping of the negative list, the Malaysian delegation apparently did not show much interest in other areas of the Framework Comprehensive Economic Cooperation Agreement such as services and investments.

Rules of origin

In any trade agreement, well-defined rules of origin ensure that goods of a third country do not enter the borders of FTA countries on preferential terms. India has all along been applying twin criteria in all its trade agreements. But Asean has been insisting on a single criterion. Here, again, India showed flexibility in agreeing to a diluted ROO — Change in Tariff Sub Heading — CTSH plus 35 per cent local content. This can only be strengthened by having clearly defined stricter Product Specific Rules of Origin. Identification of items at HS 6 six-digit level that do not qualify for stipulations of tariff shifts at HS 4four-digit level of trade classification may be considered.Asean producers enjoy an advantage due to scale, technology and investment in sectors where Indian Small and Medium Enterprises would be vulnerable. While India cannot remain isolated in global trade developments, an effective mechanism must be put in place to respond quickly to any unfavourable situation. In the 1990s, China's exports expanded rapidly in labour-intensive items such as toys, garments, shoes and sport goods. With skill development and capital growth, China has moved into semi-skilled labour-intensive mode of exports. With the Self Help Group concept gaining momentum, India can fill the vacuum in the unskilled labour-intensive export that China will quit and gain on exports using the PTA platform. Currency stability and infrastructure too need attention for a healthy PTA.

(The author is a Chennai-based Chartered Accountant.)