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FTA With ASEAN:MORE PAIN THAN GAIN FROM, by Dr P K Vasudeva,5 October 2009 Print E-mail

Events & Issues

New Delhi, 5 October 2009

FTA With ASEAN

MORE PAIN THAN GAIN FROM

By Dr P K Vasudeva

After six long years India and the Association of South East Asian Nations (ASEAN) finally managed to get their act together and sign a Free Trade Agreement (FTA) as part of the Comprehensive Economic Cooperation Agreement. This is no doubt an important landmark in relations between the two sides since it will be instrumental in freeing the bilateral trade exchange, which was worth around $40 billion in 2008-09 and is targeted to hit $50 billion by 2010.

But the process leading up to the signing of the FTA has been a tortuous one, the pressures during the final lap perhaps being serious enough to bring forward the signing by a couple of months. According to one school of thought, New Delhi has been somewhat impatient to get on with its ‘policy of engagement’ with the eastern world so much so that the signing was advanced (it was earlier scheduled to be timed with the October ASEAN summit.)

The fact is that the India-ASEAN FTA stipulation on some plantation items has raised the hackles of the farm community, specially in the South, wherein Prime Minister Manmohan Singh himself has been forced to take the initiative to allay their fears by deputing senior Central Ministers to look into their problems. Apart from crude palm oil, items such as auto parts, textiles, electronics, food processing and milk products have been put on the zero-duty list, which will result in cheaper imports from ASEAN.

Consumers on this end of the Bay of Bengal might appreciate this but manufacturers have reason to worry. The Government is aware of this and has consequently approached the ADB for an Asian Integration Adjustment Assistance Facility for protection of the affected manufacturers. Some may find it difficult to understand why items (around 5,000) which had been put on the negative list in both the India-Singapore and India-Thailand free trade agreements have been put on the zero-duty list with ASEAN, indicating a difference in treatment not justified by ground realities.

Since ASEAN import duties are already on the low side compared to India’s — more than 75 per cent of Indian exports already enter the ASEAN market duty-free — the former stands to gain more from the FTA than India. Seen another way, while the ‘macro gain’ will be ASEAN’s, the ‘micro pain’ will be felt by India’, as is in fact being widely apprehended.

The good news, however, is the opening up of the services and investments sectors, negotiations on which are expected to be concluded by year-end. After all, ASEAN services imports were worth $180 billion in 2007, and India is well placed in terms of cost and expertise to exploit it effectively.

The moot point is that does the FTA in goods — agriculture and manufactured — with ASEAN promise gains to both the parties? While it will definitely provide greater market access to ASEAN of the biggest market in India, the same does not hold good for India vice versa in ASEAN markets of 10 countries in different stages of development.

The agreed modalities between the two parties and the interaction with trade policy analysts suggest that under the India-ASEAN FTA, New Delhi has offered to bring down the Customs duty on more than 7,300 tariff lines by end-December 2013. This would constitute over 71 per cent of the imports from ASEAN to India. Each tariff line is just a category of related products and might contain more than one item. Indian Customs tariff contain over 11,000 individual tariff lines.

The impact of such duty-free import regime on the Indian industry can be gauged by contrasting the items India deemed sensitive and opt not to offer any duty cut under the FTA individually with Singapore and Thailand with that of ASEAN now.

Since the Customs duty is being whittled down to zero on more than 70 per cent of products by end-December 2013, India’s list covers thousands of items being manufactured by its small and medium industries. They include many tariff lines from the sectors such as food processing, milk products, agricultural items, paper products and pharma items, besides light manufacturing goods, electronics, motorcar equipment, and textiles.

Trade policy experts cite reports of India’s move to approach the ADB for loan assistance to compensate industries that are likely to be hit by the FTA. In fact, the former Minister of State for Commerce, Jairam Ramesh, sought from the ADB last November for such an Asian Integration Adjustment Assistance Facility to help countries contracting FTA that gives “macro gains but also inflicts micro pains”.

Industry people quip that the macro gain would go to the ASEAN and the micro pain is what they are left with. They state that the product on which zero duty regime is scheduled to be ushered covers over 55 per cent of India’s global imports (2007-08 figures), offering ASEAN large scope of trade expansion at the cost of other efficient suppliers to India. Thus, imports from ASEAN would replace imports from other countries, even as the cheap imports from ASEAN countries would affect most domestic segments of industry, besides agriculture by entering here duty-free.

On the negative list by which no duty cut is proposed, both the parties resolved that while India had to maintain one consolidated negative list of 489 items for all the ASEAN countries, individual ASEAN country would hold negative list of 489 tariff lines as per individual country sensitivity to Indian imports. Effectively this implies that India has less than 50-60 items in its negative list for each ASEAN country, a patent asymmetric pact from negotiation angle, leaving legions of domestic industries vulnerable to dumping and material injury.

While India-ASEAN trade has boomed from $7 billion in 2000-01 to $39 billion in 2007-08 with a compounded annual growth rate of 28 per cent, so too has India’s trade deficit with the ASEAN members from a level of $3.5 billion to $14.5 billion in 2007. This was at a time when India was having a high tariff wall.

India and ASEAN are currently negotiating Agreements on Trade in Services and Investment, which are to be concluded by December 2009. New Delhi looks forward to access the vast services market of ASEAN. India’s total trade in services was $ 137.50 billion in 2006. The corresponding figure for ASEAN is $ 280.90 billion. Similarly, Foreign Direct Investment (FDI) attracted by India in 2007-08 was $ 24.60 billion, whereas ASEAN member countries attracted FDI totalling $ 60.50 billion in 2007.

Perhaps, all is not lost as the imbalance in goods trade could be surmounted by beginning negotiations on services with ASEAN under the Comprehensive Economic Cooperation Agreement (CECA) since India is the 10th largest exporter of services and ASEAN is a net importer. --INFA

(Copyright, India News and Feature Alliance)

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