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Southeast Asia Research Prog ramme (SEARP)Institute o f Pea ce and Conflic t Studies, New Delhi

developing an alternative framework for peace and security in the region

SEPTEMBER 2009

India-ASEAN FTA

A Critique

The India -ASEAN Free Trad e Agreement (FTA) w assigned in Bang kok on 13 August 2009. The signingtook p lac e o n the sidelines of the ASEANEconomic Ministers Meeting. The a greement,which only deals with trade in goods, is Indias firstFTA w ith a trad e b loc . ASEAN is India s fourthlargest trad ing pa rtner. The eleven mem berec onom ies of the FTA ha ve a c ombined GrossDomestic Product (GDP) of over US$2 trillion anda population of 1.6 billion. Indias trade withASEAN, which w as worth US$9.7 billion in 2002-2003, increased to a va lue o f US$40 b illion in 2007-08. The FTA a ims a t further enha nc ing this trad erelationship through the elimination of tariffs onabout 80 percent of the traded goods, that isab out 75 percent of the tota l trad e be twee n the

two reg ions. The ta riff libera liza tion schedule is tobegin in January 2010 and is to be fullyimplemented by 2013 and 2016 in respect of theitems on the two norma l trac ks .

A timeline has also been agreed upon for thesensitive list items, with 489 items excluded fromthe list o f ta riff c oncessions. The item s thusexcluded pertain to farm products, automobiles,some auto parts, machinery, chemicals andtextile products. In respect of the sensitive itemslike crude and refined palm oil, tea, coffee andpe pp er, ta riff conc essions will be g rad uate d overa p eriod of ten yea rs. There is huge pote ntial forfurthering India-ASEAN ec onomic relat ions andthe FTA is expe c ted to open new o pp ortunities inthis direction. However, several elements of theFTA c a ll for a m ore c autious conc lusion in thisreg ard, when more c arefully ana lyzed .

I

FTA: PROLONGED NEGOTIATIONS

It is well known tha t the India-ASEAN FTA wassigned a fter a six yea r period of neg ot iations. The

framework agreement was signed in 2003 and thenegotiations were expected to be completed by2005. An Early Harvest Programme (EHP) had beenenvisaged as part of the framework agreement.However, as negotiations progressed it soonbecame clear that the initial deadlines would notbe achieved . The EHP wa s d rop ped from theimp lementa tion schedule.

Two content ious elements of the FTA, whichcontributed to the protracted negotiation process,were the rules of origin (RoO) and the size andcompo sition of the nega tive list. In respe c t o f b oth,India seems to have compromised its initial stand.As regards the RoO, India has traditionally specified

these in te rms of two c riteria. These a re c hange inta riff head ing (CTH) and va lue add ition (VA). Similartwin criterion based RoO were however rejectedby ASEAN. The fina l ag reeme nt has Ind ia a greeingto a mere 35 per cent value addition criterion forRoO . The d ilution is significa nt in light o f both thetwin criterion and the 40 per cent VA rule that isop erative in the cases of the Ind ia-Singapore andInd ia-Tha iland FTAs as both are mem ber co untriesof ASEAN. It is ha rd to com prehend the rea sonsbehind Indias contradictory stand in the twoinstances.

In terms of the negative list, the original 1410 items,wh ich Ind ia presente d to ASEAN fac ed out rightrejec tion and exposed India s lac k of p rep arednessto negotiate on the negative list items. However,the final number of 489 is a huge climb down forInd ia. The Indian go vernment justifies the red ucedsize of the final list by saying that the concerns andsensitivities of Ind ian fa rme rs have be en taken no teof b y the inclusion of agricultura l items, textiles andchemicals and the extended schedule for items likepe pp er, coffee , tea , oil and rubb er. The

government adds that duties on these items willonly be reduced in 2019. However, the number of

Dr Amita Batra

Associate Professor, School of International Studies, Jawaharlal Nehru University, New Delhi

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items from the ASEAN side, tho ugh not yet publiclyavailable, is stated to be the same as thatspec ified for the ASEAN-China FTA, which mayactually be much larger. If this is true, thed isproportiona te size o f the ASEAN list would behard to justify, especially when the negotiationshave been prolonged for so long only so that

India would reduce the number on its list inde ferenc e to ASEAN dema nds and theirirrec onc ilab le stand on the issue.

Despite the fact that a differential timeline hasbeen specified for the sensitive commodities, it isdoubtful if the underlying differential inproductivity and competitiveness between Indiaand ASEAN c ount ries in the respec tive sec to rs canbe e limina ted in ten year period . This is particularlytrue of the plantation sector which is likely to bethe hardest hit given the relative advantage that

the ASEAN c ount ries have in co mm od ities like tea ,pepper, coffee and palm oil. Productivity ofpepper is 380 kilograms per hectare in India whileit is 1,000 kilograms per hectare in Vietnam and3,000 kilograms per hec ta re in Indonesia . Simila rly,coffee productivity in India stands at 765 kg/hawhile Vietnam produces 1.7 tonnes/ha. Higherwage and input costs in India further aggravatethis differential. Fisheries and marine products arethe other sectors that are likely to suffer as aconseq uenc e o f the agreeme nt. The threat fromTha iland , the w orld s largest exporter of fa rmed

shrimp and Vietnam which is the worlds eighthlarge st sea food expo rte r is imminent.

II

FTA AND/ IN INDIA S LOOKEAST POLICY

The expec ted ga ins from the FTA have b een c itedin terms of taking India s Look East polic y a stepforwa rd. Undoubted ly, the FTA he lps institut iona lizethe growing economic relationship between thetwo regions. It is in line with Indias growing

integration with the world economy throughincreased trade liberalization. Moreover, while

Ind ia c ont inues to rem ain a World TradeOrganiza tion (WTO) loya list, the FTA reflec ts therealization that regional and bilateral deals needto be accorded their rightful role as importantinstruments in the countrys economicenga gem ent with the wo rld.

With the West still not being out of the woodsregarding the economic slowdown is concerned,the East Asian countries may just be able toprovide the right stimulus as a substitute exportmarket for India in place of the traditional EU andUS markets. The FTA p rovides India with a ccess toa market of an additional 600 million people.However, before we eulogize the trade pact asan instrument of furthering Indias trade withASEAN the gains need to be put into pe rspe c tive.

Indias share in ASEANs trade is very small. Itc onstitutes abo ut 2 pe r c ent o f ASEANs to ta ltrad e. Ove r the last few yea rs Ind ia s impo rts fromASEAN have b een inc rea sing at a fa ster rate tha nIndias exports to the regional bloc. Furthermore,Indias tariff levels today are such that theconc essional trea tment on offe r in the FTA w illimply definite advantages for the ten countryregional bloc, as will the 1 billion large Indianma rket tha t will be o pe ned up to the ASEANme mb er co untries as a c onseq uenc e of the FTA.

ASEAN ta riffs on the other hand have b een low forsom e t ime a nd the FTA c onc essions ma y notmean much for India in terms of additional gains.The m ea ge r gains that the current d ea l istherefore likely to yield for India in terms of goodstrad e have app arently been acc epted bec auseof the larger ga ins tha t India envisions will co me inthe future through the yet to be negotiatedservices and investment component of theco m p r e h e n s i ve e co n o m i c p a r t n e r sh i p / cooperation pact between the two regions.Indeed, the potential for services trade and

investment opportunities is large. India is amongthe top ten services exporting nations globallywhile ASEAN is a major importer. At US$150 billion,ASEAN's imports in this sector are almost half aslarge a s those o f the USA. How eve r, given that thego od s arrang ement ha s ta ken so long to a tta in itsfinal shape, the gains through services andinvestment m ay not b e c ertain or imm inent. Thesensitivities of the ASEAN c ountries with reg ard to afreer flow of labour further reinforce thisapprehension.

Several other conc erns also come to the fo re withreg ard to the FTA. Is it really a g ood strategy totrade future gains for present costs, especiallywhen those who bear the burden in the present

With the West still not being out of the woods

regarding the economic slowdown is concerned,

the East Asian countries may just be able to

provide the right stimulus as a substitute export

market for India in place of the traditional EU

and US markets. The FTA provides India withaccess to a market of an additional 600 million

people.

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are not likely to be beneficiaries of the gains thatma y ac c rue some t ime in the future? The state srole assumes importa nc e in th is respec t. It is for thesta te to red istribute these inter-tem po ra l ga ins in amanner that ensures that nobody is a loser as aconseq uenc e o f the FTA in the long run. Will theIndian state be able to do this, and is there any

evidenc e o f p rog ress in this a rea ?

Government of India has launched few schemesto improve productivity and competitiveness inthe p lantation sec tor. The Dep artment ofCommerce has launched a Rs14 billion schemefor improving social infrastructure in tea gardens.The te a ga rdens of Tripura, the Cac ha r va lley a ndTam il Nad u have been ide ntified unde r thisschem e. The G ove rnme nt o f Ind ia ha s a lsoannounc ed a Rs4.9 b illion Spec ial Purpose TeaFund (SPTF) as a 15 year prod uc tivity b oosting

programm e. Last year the Coffee Boa rd propo seda Rs1.05 billion scheme to replant 45,000 hectaresof c offee p lanta tions. Simila r schemes, are sa id tobe in the pipeline for coffee and pepper.However, the implementation or the performanceon the ground of these schemes is not yet known.Had the last six years, when negotiations wereprotracted on account of contentious discussionson the composition and size of the negative list,been utilized for enhancing productivity, or eveninitia tion o f refo rm in the agricultural sec to r the FTAde al ma y have rec eived a more p ositive respo nse

from a ll sec to rs.

III

THE CHINA FACTOR

The ASEAN-China FTA ha s a lrea dy bee nimplemented. It is therefore useful to considerwhether China s p rior entry into ASEAN ha s anadverse impac t on the Ind ia-ASEAN FTA. Theadverse impact would have been limited, had itnot been for the fa c t tha t the Ind ia-ASEAN FTA ha s

come a fter a long d elay. The time that ha selapsed may have actually given China the timeto catch up or even take over in some sectorswhere the existing co mp arative ad vanta ge w as infavour of India.

India and China are not really in a competitiveframework at either the global or the regionallevel. It has been amply documented that Chinais a rising e conom ic po wer and that India rema insan emerging economic power. Chinascontribution to world growth and trade over the

last decade has been in double digits and istherefo re much larger than India s. The tw oeconomies have followed differential paths ofgrowth particularly with regard to the

manufacturing sector. China has experiencedactive growth in its manufacturing skills,specialization pattern and consequently exportstructure. Chinas manufacturing sector accountsfor 41 per cent of its GDP. Exports from themanufacturing sector constitute over 93 per centof its exports. Indias manufacturing sector on theother hand is about 17 per cent of its GDP and

com prises a muc h sma ller frac tion o f its expo rts.

After specializing in unskilled labour intensive (ULI)sectors like toys, footwear, apparel and lightmanufactures in the 1990s, China has sinceadvanced to office machinery, electrical andelec tronic equipm ent and a pp lianc es. Tod ayChina is the m anufa c turing hub of the wo rld. Indiaon the other hand has continued to specialize inULI and does not really compete with China in theglob a l or reg ional ma rket. Sec tors whe re we ma yhave some advantage but where China is clearly

ahead of us such as organic chemicals, cottonand a rticles of a ppa rel and accessories, not knit orc roc het , are known losers for Ind ia.

However, there are other sectors where for somecommodities India does have a comparativead vantag e b ut will lose out purely on ac count ofthe period that has elapsed because of itsdelayed ent ry into ASEAN. These c om mod ities a reidentified in sectors like organic chemicals, rubber

and a rtic les thereo f and a rticles of iron o r stee l.

IV

CONCLUSIONS: TOWARDS REGIONAL INTEGRATION

The c laim tha t the India-ASEAN FTA takes us a stepcloser to the Asian Economic Community (AEC), isa c oncept tha t we c herish, but that m ay yet be ad ista nt goa l. It is true, tha t the FTA p uts us in thesam e league as the other plus three ec onom ies ofChina, Korea and Japan and Australia and NewZealand, all potential members of the compositeide ntity tha t we hop e w ill emerge a s the AEC.

Seve ral a spec ts of this proc ess howeve r need p riorresolution. It is evident that the process is likely tota ke shape in the form o f an ASEAN-centric

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India and China are not really in a competitive

framework at either the global or the regional

level. It has been amply documented that China

is a rising economic power and that India

remains an emerging economic power.

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these agreements have not been able toaccomplish what is desired for the northeastreg ion, how the India-ASEAN ag reeme nt wo uldnow ma ke it possible c alls for som e introspe c tion.

The many benefits tha t could ha ve resulted fromthis FTA have b een lost largely on a ccount of theunusually long time taken to negotiate the India-ASEAN FTA a gree me nt. This time could have, forexamp le, been utilized to ma ke Indian a griculturemore c ompe titive. It is time that India a ccep ts thefac t that regional and b ilateral trad e a greementsneed to be integrated in Indias tradeliberalization strategy and that with careful priorpreparation these agreements can be designedso as to be potentially gainful for all membernations

References

Batra, Amita , Ind ia s Northeast and Southe ast Asia:Strengthe ning an Integ rate d Ec onom ic Spa c e IPCSIssue Brief 107, June 2009.

Ba tra, Amita , 2007, Asian Ec ono mic Integration -ASEAN+3+1 or ASEAN+1s? ASEAN Ec ono mic Bulletin,Aug ust, Vo l.24, No.2.

Ba tra, Amita, 2007, The Structure o f Co mp arativeAdvantage of China and India: Global and RegionalDynamics, China &World Economy (Blackwell) Vol.15.

No. 6 Nove mb er 15.

Ba tra, Amita , 2007, Sou th Asia s Free Trad e Agree me nt:Strateg ies and O p tions , Ec ono mic and Politica l Weekly,

Vo l. XLII, No.38, Sep tember 22-28

group ing. While the Ind ia-ASEAN FTA c an be apotential contributory factor to this grouping,ASEAN first ne ed s to complete its own integ rat ionprocess. As of now ASEAN remains an a ssoc iat ionof ten d iverse na tions. The p rocess of ASEANintegration was given a reasonable push forwardat the ASEAN 2007 summit when the ASEAN

Charter issued a declaration for theimp lementa tion of the ASEAN Ec onomicComm unity by 2015. The Cha rter is a b lueprint forthe ASEAN Econom ic Com munity aimed attransforming ASEAN into a single market andproduction base. However, it needs to be realizedtha t the Cha rte r is a imed at an ASEAN integrat ionprocess.

Therefo re, even thoug h the ASEAN Plus Six may bean optimum mechanism for realizing gains forec onom ic coop eration and signaling to the rest of

the world that Asia can create inclusive forums toenhance its voice in global affairs, it is not yet apart of the forma l ASEAN vision. To c ite the g a insof the India-ASEAN d ea l as a step wh ich furthersthe idea of a composite grouping and establishesour c red entia ls therein thus seems prem ature.

Even if we were to b elieve tha t the six ASEAN PlusOne agreements can be ingredients of the finaloutcome in the form of the AEC, an essentialprec ond ition is the compat ib ility o f these ASEANPlus One agreements. Compatibility requires agreater focus on harmonization and consistency,for example with respect to the RoO that atpresent may be scattered and inconsistent withone another.

Finally, can the Ind ia-ASEAN a greem ent , as hasbe en often sugg ested , be the ap propriate vehicleto take forward the process of developing Indiasnorthe ast? There is a possibility tha t grea te r linkswith Southea st Asia, w hich may be fac ilita tedthrough the FTA, will help the northea st reg ion tha t

shares its borders and several potentialcom plem enta rities with Southea st Asian c ount ries.While this may be seen as an important by-prod uc t o f the India-ASEAN FTA, the a dvanta ge sof the po tential co nnec tivity offered by the FTAwill only contribute positively to the regionsgrow th p roc ess if it is first lifted out of its current lowec onom ic equilibrium.

Prior development of Indias northeast is aprecondition to its ability to exploit the benefits ofconne c tivity with the ASEAN c ount ries. There have

been earlier agreements the BangkokAgree ment and BIMSTEC, which have mem bernations from across the two regions and for whichconnectivity has been a special focus area. If

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