IMC- Economic Research & Training Foundation

PAPER ON- FREE TRADE AGREEMENT

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Free Trade Agreement

A free trade agreement (FTA) is a trade treaty between two or designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. Usually these agreements aim to give each other access to markets by lowering or removing border protection measures such as border taxes on exports and imports, and other barriers (such as standards, processes). FTAs can cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc). FTAs can also cover other areas such as intellectual property rights (IPRs), investment, and government procurement and competition policy. Free Trade Agreements (FTAs) aim to remove the barriers to trade and investment so that trade can grow as a result of specialization, division of labor, and most importantly via comparative advantage . They create a freer flow of goods, services, investment and people. Unlike a customs union, members of a free trade area do not have a common external tariff. Further, to avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods.

History and Origin of FTAs The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established after World War II in the wake of other new multilateral institutions dedicated to international economic cooperation – notably the Bretton Woods institutions known as the World Bank and the International Monetary Fund. A comparable international institution for trade, named the International Trade Organization was successfully negotiated. The ITO was to be a United Nations specialized agency and would address not only trade barriers but other issues indirectly related to trade, including employment, investment, restrictive business practices, and commodity agreements. But the ITO treaty was not approved by the U.S. and a few other signatories and never went into effect. In the absence of an international organization for trade, the GATT would over the years "transform itself" into a de facto international organization.

GATT rounds of negotiations: The GATT was the only multilateral instrument governing international trade from 1946 until the WTO was established on 1 January 1995. Despite attempts in the mid-1950s and 1960s to create some form of institutional mechanism for international trade, the GATT continued to operate for almost half a century as a semi-institutionalized multilateral treaty regime on a provisional basis.

From Geneva to Tokyo: Seven rounds of negotiations occurred under GATT. The first real GATT trade rounds concentrated on further reducing tariffs. Then, the Kennedy Round in the mid-sixties brought about a GATT anti-dumping Agreement and a section on development. The Tokyo Round during the seventies was the first major attempt to tackle trade barriers that do not take the form of tariffs, and to improve the system, adopting a series of agreements on non-tariff barriers, which in some cases interpreted

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existing GATT rules, and in others broke entirely new ground. Because these plurilateral agreements were not accepted by the full GATT membership, they were often informally called "codes". Several of these codes were amended in the Uruguay Round, and turned into multilateral commitments accepted by all WTO members. Only four remained plurilateral (those on government procurement, bovine meat, civil aircraft and dairy products), but in 1997 WTO members agreed to terminate the bovine meat and dairy agreements, leaving only two.

Uruguay Round During the Doha Round, the US government blamed Brazil and India for being inflexible and the EU for impeding agricultural imports. The then-President of Brazil, Luiz Inácio Lula da Silva (above right), responded to the criticisms by arguing that progress would only be achieved if the richest countries (especially the US and countries in the EU) made deeper cuts in agricultural subsidies and further opened their markets for agricultural goods. Well before GATT's 40th anniversary, its members concluded that the GATT system was straining to adapt to a new globalizing world economy. In response to the problems identified in the 1982 Ministerial Declaration (structural deficiencies, spill-over impacts of certain countries' policies on world trade GATT could not manage etc.), the eighth GATT round – known as the Uruguay Round – was launched in September 1986, in Punta del Este, Uruguay. It was the biggest negotiating mandate on trade ever agreed: the talks were going to extend the trading system into several new areas, notably trade in services and intellectual property, and to reform trade in the sensitive sectors of agriculture and textiles; all the original GATT articles were up for review. The Final Act concluding the Uruguay Round and officially establishing the WTO regime was signed 15 April 1994, during the ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement. The GATT still exists as the WTO's umbrella treaty for trade in goods, updated as a result of the Uruguay Round negotiations (a distinction is made between GATT 1994, the updated parts of GATT, and GATT 1947, the original agreement which is still the heart of GATT 1994).[ GATT 1994 is not however the only legally binding agreement included via the Final Act at Marrakesh; a long list of about 60 agreements, annexes, decisions and understandings was adopted. The agreements fall into a structure with six main parts:

- The Agreement Establishing the WTO - Goods and investment – the Multilateral Agreements on Trade in Goods including the GATT 1994 and

the Trade Related Investment Measures (TRIMS) - Services — the General Agreement on Trade in Services - Intellectual property – the Agreement on Trade-Related Aspects of Intellectual Property

Rights (TRIPS) - Dispute settlement (DSU) - Reviews of governments' trade policies (TPRM)

In terms of the WTO's principle relating to tariff "ceiling-binding" (No. 3), the Uruguay Round has been successful in increasing binding commitments by both developed and developing countries, as may be seen in the percentages of tariffs bound before and after the 1986–1994 talks.

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Underlying Reasons for Establishing FTAs The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy games. Five principles are of particular importance in understanding both the pre-1994 GATT and the WTO

- Non-discrimination: It has two major components: the most favoured nation (MFN) rule, and the national treatment policy. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these areas. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members, i.e. a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members. "Grant someone a special favour and you have to do the same for all other WTO members. National treatment means that imported goods should be treated no less favorably than domestically produced goods (at least after the foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards et al. discriminating against imported goods).

- Reciprocity: It reflects both a desire to limit the scope of free-riding that may arise because of the MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a nation to negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral liberalization; reciprocal concessions intend to ensure that such gains will materialise.

- Binding and enforceable commitments: The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions. These schedules establish "ceiling bindings": a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.

- Transparency: The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO. These internal transparency requirements are supplemented and facilitated by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM).The WTO system tries also to improve predictability and stability, discouraging the use of quotas and other measures used to set limits on quantities of imports.

- Safety valves: In specific circumstances, governments are able to restrict trade. The WTO's agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health.

There are three types of provision in this direction: - Articles allowing for the use of trade measures to attain non-economic objectives

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- Articles aimed at ensuring "fair competition"; members must not use environmental protection measures as a means of disguising protectionist policies.

- Provisions permitting intervention in trade for economic reasons. - Exceptions to the MFN principle also allow for preferential treatment of developing countries,

regional free trade areas and customs unions.

Why do we need FTA? Free trade occurs when there are no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations. When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows.

1. Increased production: Free trade enables countries to specialize in the production of those commodities in which they have a comparative advantage. With specialisation countries are able to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production.

2. Production efficiencies: Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.

3. Benefits to consumers: Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods and services, as well as inputs, is supplied at the lowest prices.

4. Foreign exchange gains: When one country exports overseas it receives hard currency from other countries that buy the goods. This money is then used to pay for imports that are produced more cheaply overseas.

5. Employment: Trade liberalization creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment.

6. Economic growth: The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, and efficiency and production levels. The below table1 depicts the change in macroeconomic variables across the countries since FTA has been initiated. Singapore and Malaysia gain the most in terms of all the selected macroeconomic indicators. Conversely, India benefits the least. The ASEAN countries that are beyond the scope of FTA are adversely affected, except that they all experience employment increases and falls in average prices.

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Table 1: Change In Macroeconomic Variables (in %)

Disadvantages of free trade

As every coin has two sides, although free trade has benefits, there are a few disadvantages of the free trade. These include:

1. With the removal of trade barriers, structural unemployment may occur in the short term. This can impact upon large numbers of workers, their families and local economies.

2. Increased domestic economic instability from international trade cycles, as economies become dependent on global markets. This means that businesses, employees and consumers are more vulnerable to downturns in the economies of our trading partners.

3. International markets are not a level playing field as countries with surplus products may dump them on world markets at below cost. Some efficient industries may find it difficult to compete for long periods under such conditions. Further, countries whose economies are largely agricultural face unfavourable terms of trade (ratio of export prices to import prices) whereby their export income is much smaller than the import payments they make for high value added imports, leading to large CADs and subsequently large foreign debt levels.

4. Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection policies by governments, according to the infant industries argument. It is difficult to develop economies of scale in the face of competition from large foreign transnational corporations. This can be applied to infant industries or infant economies (developing economies).

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5. Free trade can lead to pollution and other environmental problems as companies fail to include these costs in the price of goods in trying to compete with companies operating under weaker environmental legislation in some countries.

6. Pressure to increase protection during the GFC: During the global financial crisis and recession of 2008-2009, the impact of falling employment meant that protection pressures started to rise in many countries. In New South Wales, for example, the state government was criticised for purchasing imported uniforms for police and firefighters at cheaper prices rather than purchasing Australian made uniforms from Australian companies. Similar pressures were faced by governments in the United States, Britain and other European countries.

Indian FTA India’s foreign trade has undergone a significant transformation since early-2000s. Since liberalization, the value of India's international trade has increased sharply and its involvement with both developed and developing countries have become more comprehensive in nature. India is actively engaging in regional and bilateral negotiations with her trading partner countries/blocs to diversify and is expanding the markets for its exports. As of now, India has signed 10 FTAs and 5 Preferential Trade Agreements (PTAs) and these FTAs/PTAs are already in force. Further, India is currently negotiating 17 FTAs, including review/expansion of some of the existing FTAs/PTAs.

FTAs Signed / In Effect - India-Sri Lanka Free Trade Agreement - ASEAN-India Comprehensive Economic Cooperation Agreement - Asia-Pacific Trade Agreement - India-Afghanistan Preferential Trading Agreement - India-Bhutan Trade Agreement - India-Chile Preferential Trading Agreement - India-Korea Comprehensive Economic Partnership Agreement - India-MERCOSUR Preferential Trade Agreement - India-Singapore Comprehensive Economic Cooperation Agreement - Indo-Nepal Treaty of Trade - Japan-India Comprehensive Economic Partnership Agreement - Malaysia-India Comprehensive Economic Cooperation Agreement - South Asian Free Trade Area

Agreements Signed - Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC)

Free Trade Area - India-Gulf Cooperation Council Free Trade Area

FTAs under Negotiations - India-Australia Free Trade Agreement - India-Canada Economic Partnership Agreement - India-Egypt Preferential Trade Agreement - India-European Free Trade Association Free Trade Agreement

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- India-European Union Free Trade Agreement - India-Indonesia Comprehensive Economic Cooperation Arrangement - India-Israel Preferential Trade Agreement

- India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement - India-Southern African Customs Union Preferential Trade Agreement - India-Thailand Free Trade Area - New Zealand-India Free Trade Agreement - Regional Comprehensive Economic Partnership

FTAS In The Works - Comprehensive Economic Partnership for East Asia (CEPEA/ASEAN+6) - India-Colombia Preferential Trading Arrangement - India-Russian Federation Comprehensive Economic Cooperation Agreement - India-Turkey Free Trade Agreement - India-Uruguay Preferential Trading Arrangement - India-Venezuela Preferential Trading Arrangement - People's Republic of China-India Regional Trading Arrangement

INDIA –ASEAN India announced its “Look East” policy in 1991 in an attempt to increase its engagement with the East Asian countries. Consequently, in 1992, it became a sectoral dialogue partner of the Association of Southeast Asian Nations (ASEAN). ASEAN, which is a geo-political and economic organization with 10 member countries, was formed in August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, the membership has expanded to include Brunei Darussalam, Cambodia, the Lao People’s Democratic Republic, Myanmar and Viet Nam. ASEAN’s objectives are to accelerate economic growth, social progress and cultural development among its members, protect the peace and stability of the region, and provide opportunities for the member countries to discuss their differences peacefully. India became a Full Dialogue Partner of ASEAN in 1995and a member of the ASEAN Regional Forum (ARF) in 1996. India and ASEAN signed a Framework Agreement – the Comprehensive Economic Cooperation Agreement (CECA) – on 8 October 2003 with a view to providing an institutional framework that would enable economic cooperation to come into effect. Negotiations on a trade in goods agreement between India and ASEAN were started in March 2004. The negotiations continued for six years and finally the India-ASEAN Free Trade Agreement (AIFTA) was signed on 13 August 2009 in Bangkok during a meeting of the Economic Ministers of ASEAN. The agreement, which only covers trade in goods between India and the ASEAN members, came into effect on 1 January 2010 in the case of Malaysia, Singapore and Thailand. For the remaining ASEAN members it will come into force after they have completed their internal requirements. ASEAN is a major trading partner of India and it accounted for 9.27 per cent of India’s global trade in 2008In 2008/09, bilateral trade between India and ASEAN was worth almost US$ 45 billion. India’s trade with ASEAN is mainly concentrated in Indonesia, Malaysia, Singapore and Thailand. These four countries remain the largest markets for Indian exports in the ASEAN region as well as the largest

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sources for India’s imports from the ASEAN region. Among them, Singapore is the largest destination for Indian goods (45.6% of total exports to ASEAN in 2008) and the largest source of imports for India (31.1% of India’s total imports from ASEAN in 2008), followed by Malaysia, Indonesia and Thailand. The below table2 shows the trend of export and Import since FTA pact is in place and the total share of India’s import and exports with Asean Members.

Table2: India’s Export to, and import from ASEAN members

The partnership between India and the Association of South East Asian Nations (ASEAN) comprising Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam has been developing at quite a fast pace. ASEAN countries provide considerable number of opportunities in following industry/services categories:

- Machinery, equipment, appliances apparatus and associated products - Office equipment, Computers and Supplies - Instruments and appliances, Industrial process control equipment, Optical instruments, Horological

instruments - Electrical machinery, apparatus, equipment and consumables - Pharmaceuticals and Medical Supplies - Telecommunication, Radio, Television and communication equipment and related apparatus - Manufactured goods, furniture, handicrafts, special-purpose products and associated consumables - Fabricated products and materials - Motor vehicles, trailers and vehicle parts - Consultancy Services: Architectural, Construction, Legal, Accounting and Business - Software Services - Repair, maintenance and installation services - Sewage- and refuse-disposal services, sanitation and environmental services. - Education Services - Health and social work services

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Traditionally there was low trade Integration between India and ASEAN due to - Difference in Trade policy strategy - Bigger South East Asian economies follow an FDI dependent - Exports growth strategy since the mid-1980s. - MNCs’ production network strategies led to de facto - Market-driven regional integration in East Asia. - Hence, ASEAN’s trade links greatest with: - East Asian countries involved in production sharing, or - Their major developed country markets. - India’s trade and investment policies remained relatively - Restrictive despite economic reforms and liberalisation and - Less dependent on FDI inflows.

India became a sectoral dialogue partner of ASEAN in 1992. Mutual interest led ASEAN to invite India to become its full dialogue partner during the fifth ASEAN Summit in Bangkok in 1995. India also became a member of the ASEAN Regional Forum (ARF) in 1996. India and ASEAN have been holding summit-level meetings on an annual basis since 2002. In August 2009, India signed a Free Trade Agreement (FTA) with the ASEAN members in Thailand. Under the ASEAN-India FTA, ASEAN member countries and India will lift import tariffs on more than 80 per cent of traded products between 2013 and 2016. In January 2010, Singapore, Malaysia and Thailand accepted the FTA on goods. The other seven ASEAN countries are expected to operationalise the FTA by August 2010. India and ASEAN are currently negotiating agreements on trade in services and investment. The services negotiations are taking place on a request-offer basis, wherein both sides make requests for the openings they seek and offers are made by the receiving country based on the requests. India has made requests in a number of areas including teaching, nursing, architecture, chartered accountancy and medicine as it has a large number of English speaking professionals in these areas who can gain from job opportunities in the ASEAN region. India is also keen on expanding its telecom, IT, tourism and banking network in ASEAN countries.

GRAPH A: Patterns Observed For Export Growth and Export Share

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The graph A exhibits a steep fall in exports during the years 1997 and 1998, when growth rates became negative. This could be due to the Asian Economic crisis of 1997-1999, when a number of East Asian economies, including Thailand, Indonesia, Malaysia and Philippines faced a severe financial crisis. However, once the adverse effects of the East Asian crisis subsided, India exports to the region recovered to pre-crisis levels. There has also been a gradual increase in the share of ASEAN region in Indias total exports as depicted by a gradual rise in the export share variable. The share of the ASEAN market in Indias total exports has risen from 5.68% in 1991 to 10.28% in 2008. GRAPH B Patterns Observed For Import Growth and Import Share

With respect to imports, over the period 1991 to 2008, the above graph B shows that, though the growth of ASEANs exports to India has been more volatile than the growth of Indias exports to ASEAN, there has been no erosion in the share of imports from ASEAN in Indias total imports. ASEAN‟ s import share out of Indias total imports has increased from 4.82% in 1991 to 8.88% in 2008. On the whole, the share of Indias total trade with ASEAN has shown a steady increase over the period of the analysis. ASEANs share in Indias total trade has increased to 9.42% in 2009 growing by 80% since 1991. The competitiveness of the exports of some of the key sectors of the Indian and ASEAN economies vis-à-vis other major exporters. The following table outlines the export of India and ASEAN in the sectors.

Table2: India and ASEAN Export and percentage share of World Export (2009) Billion $ Billion $ Percentage Billion $ Percentage

Commodity Worlds Commodity Export, 2009

Indias Commodity Export, 2009

Indias share of world exports

ASEANs Commodity Export, 2009

ASEANs share of world exports

Chemical & Pharmaceuticals

1433.341 18.52 1.29 60.17 4.20

Medicinal & Pharmaceutical

products

425.06 5.02 1.39 6.59 1.55

Handicrafts & Carpets Textiles

682.19 37.13 5.44 46.50 6.82

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Apparels & Accessories

Leather & Leather Accessories

Handicrafts & Carpets

80.77 13.83 17.13 6.73 8.33

Textiles Apparels & Accessories

580.82 22.62 3.90 38.99 6.71

Automotive Sector 1133.04 10.29 0.91 32.74 2.89 Machinery & Appliances

3479.91 17.78 0.51 308.84 8.87

Electrical Equipments

982.61 4.10 0.42 144.64 14.72

Energy & Resources

Power renewable & Non-renewable

petroleum & natural gas

2032.03 26.30 1.29 134.78 6.63

Market access for ASEAN Countries in India: - Access to the growing Indian market has been the most promising prospect that the ASEAN

economies want to secure. - Despite her higher tariffs, India has had an overall trade deficit with ASEAN-5 and with

ASEAN-10 during 2002-07. - Except for Singapore, the only countries with which India had a trade surplus in the recent

years were Philippines, Vietnam and Cambodia, who are not significant trade partners earlier.

Investments between India and ASEAN countries

Singapore: According to data released by the Department of Industrial Policy and Promotion (DIPP) the growing bilateral economic relationship is reflected rapidly in the trade between Singapore and India. Singapore continues to be the single largest investor in India amongst the ASEAN countries and the second largest amongst all countries with foreign direct investment (FDI) inflows into India, totalling to US$ 2.4 billion in 2009-10. The cumulative FDI inflows from Singapore during April 2000 and March 2010 were US$ 10.2 billion. Data released by the Ministry of Commerce and Industry revealed that total bilateral trade during 2008-09 was US$ 16.1 billion, an increase of 3.86 per cent over US$ 15.5 billion in 2007-08. During 2008-09, India exported goods worth US$ 8.45 billion to Singapore. During April-December 2009-10, Indian merchandise exports to Singapore totalled US$ 5.12 billion, comprising mainly of mineral fuels and oils, ships, boats and floating structures and natural pearls, gems and jewellery, according to data released by the Ministry of Commerce and Industry. According to a press release issued by the Ministry of Commerce and Industry, in May 2010, both the countries have agreed on a bilateral economic roadmap to take the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) forward in the coming five years. As per the roadmap the two countries will work towards doubling the annual bilateral trade by 2015. Moreover, they will

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promote greater business and investment flows by identifying ways in which Indian businesses can leverage on Singapore as a business hub in the Asia Pacific to support their international expansion. The two countries will also explore and develop co-operation, in science and technology, intellectual property rights, and media. India-Singapore Bilateral Economic Roadmap includes: Increase two-way flow of tourists, businessmen and professionals Expedite conclusion of mutual recognition agreements (MRAs) for dentistry, medical, nursing, architecture, accountancy and company secretary professionals on priority Explore expansion of the provisions of CECA to liberalise and facilitate movement of Indian professionals to Singapore. Develop closer co-operation in tourism Moreover, according to Standard Chartered Bank, the business between India and Singapore is set to double in the next five years. Similarly, India-based business community in Singapore is likely to increase to 5,500 companies from the present 4,000 in the next two and a half years. Malaysia: According to data released by the Department of Industrial Policy and Promotion, the bilateral economic relationship between India and Malaysia has been steadily moving ahead. Malaysia has been a huge source of FDI for India. In fact, Malaysia is the 25th largest overall investor and third largest investor among ASEAN countries with a total inflow of US$ 252.97 million during the April 2000-March 2010 period. According to data released by the Ministry of Commerce and Industry, bilateral trade among the two countries amounted to US$ 10,604.75 million during 2008-09, showing an increase of 23.48 per cent over 2007-08. India exported goods worth US$ 3.42 billion to Malaysia in 2008-09. During April-December 2009-10, India’s exports to Malaysia totalled US$ 2.14 billion, comprising of ships, boats and floating structures, mineral oils and fuels, and organic chemicals, according to data released by the Ministry of Commerce and Industry. According to the Director General of Malaysia Tourism, Indians play an important role in promoting tourism in Malaysia. Following a 7.1 per cent growth in revenues from Indian tourists in 2009, Malaysia expects 650,000 visitors from India in 2010. Moreover, Indian biotech companies are increasingly looking at making investments in Malaysia. Malaysia is positioning itself as a cost-competitive country and a regional hub for global biotech companies. It is attracting Indian companies with a large number of sops including a 10-year tax holiday, duty exemptions, customised incentives for large investments, access to ASEAN markets through free trade agreements and no restrictions on equity. Thailand: As per the data released by the Ministry of Commerce and Industry Bilateral trade between the two countries touched US$ 4.6 billion in 2008-09, as compared to US$ 4.12 billion in 2007-08, registering a growth of 12.9 per cent. India exported goods worth US$ 1.94 billion in 2008-09 and

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worth US$ 1.25 billion during April-December 2009-10, to Thailand which included natural pearls, gems and jewellery, residue and waste from food industries and organic chemicals. According to data released by the Department of Industrial Policy and Promotion total FDI inflow during the period April 2000-March 2010 from Thailand was US$ 77.97 million. India and Thailand are targetting bilateral trade worth US$ 12 billion by 2012. In May 2010, the Thai Deputy Minister of Commerce, Alongkorn Ponlabhoot reiterated that “We are hoping that the increase in trade would be generated through cooperation under various agreements like the Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation (BIMSTEC), the Asean-India FTA and the proposed Thailand-India FTA." Indonesia: Bilateral trade between India and Indonesia totalled US$ 9.3 billion in 2008-09, an increase of 32.08 per cent over US$ 6.99 billion in 2007-08, according to data released by the Ministry of Commerce and Industry. During the period 2008-09, India exported goods worth US$ 2.56 billion to Indonesia. During April-December 2009-10, India exported goods worth US$ 2.3 billion to Indonesia comprising mainly of organic chemicals, mineral fuels and ships and boats. According to Indonesian ambassador to India, Andi M Ghalib, India and Indonesia have targeted bilateral trade worth US$ 20 billion by 2020. Indonesia is an important source of FDI for India. It is the 16th largest FDI investor amongst all countries and the second largest amongst the ASEAN countries. FDI inflows from Indonesia into India totalled US$ 604.28 million during April 2000-March 2010, according to data released by the Department of Industrial Policy and Promotion. Myanmar: According to the latest data by the Ministry of Commerce and Industry, during 2008-09, India exported goods worth US$ 221.64 million to Myanmar comprising mainly of pharmaceuticals and iron and steel. Bilateral trade stood at US$ 1.15 billion during 2008-09, an increase of 15.7 per cent over US$ 994.45 million in 2007-08, During April-December 2009-10, India’s exports to Myanmar totalled US$ 159.77 million, according to the latest data by the Ministry of Commerce and Industry. FDI inflows from Myanmar into India totalled US$ 8.96 million in the period April 2000-March 2010, according to data released by the Department of Industrial Policy and Promotion. Vietnam: Bilateral trade between India and Vietnam grew to US$ 2.15 billion in 2008-09 from US$ 1.78 billion in 2007-08, registering a growth of 20.38 per cent, according to the latest data by the Ministry of Commerce and Industry. Indian exports to Vietnam in 2008-09 totaled US$ 1.7 billion, while India exported goods worth US$ 1.25 billion from Vietnam during April-December 2009-10 comprising mainly of residues and wastes from food industries, animal fodder, meat and cereals, according to the latest data by the Ministry of Commerce and Industry.

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Philippines: Data collated by the Ministry of Commerce and Industry, bilateral trade between India and Philippines was worth US$ 998.54 million in 2008-09 as compared to US$ 824.87 million in 2007-08, an increase of 21.05 per cent, Indian exports to Philippines during 2008-09 totalled to US$ 743.77 million. During April-December 2009-10, India exported goods worth US$ 534.38 million to Philippines, comprising chiefly of meat, iron and steel and vehicles other than railways. Cambodia: According to the latest data by the Ministry of Commerce and Industry during 2008-09, bilateral trade between the two countries stood at US$ 49.61 million. India exported goods worth US$ 46.90 million to Cambodia in 2008-09. During April-December 2009-10, India exported goods worth US$ 30.53 million, chiefly comprising pharmaceuticals, cotton and tobacco.

Impact of ASEAN FTA on India India’s welfare gain appears to be negative at the initial stage due to both negative allocative efficiency and negative terms of trade. The loss in allocative efficiency is due to a loss of import tax resulting from tariff reduction/elimination, while the negative terms of trade is explained by a larger fall in India’s export prices relative to its import prices. However, the country’s welfare improves as liberalization expands and the markets of the rest of ASEAN open up substantially. However, this gain is possible only when India is able to arrest the negative ToT effect through better usage of the benefits derived from large allocative efficiency. A scale economy effect will further ensure this. Thus, with the availability of better quality imported intermediary goods, India needs to invest in technology with a proper redistribution of the factor of production to achieve a sustained benefit through the India-ASEAN FTA. India’s total bilateral trade with the ASEAN region increases considerably, with its imports from ASEAN rising more than its exports to ASEAN members. This is true under all the scenarios, including the scenario where some of India’s manufacturing sectors exhibit imperfect competition and increasing returns to scale. India gains the largest market accesses in Cambodia, the Lao People’s Democratic Republic, Malaysia, the Philippines, Thailand and Viet Nam. The Indian exports that register the biggest increases are wearing apparel, textiles, food products, other crops, wood and wood products, fisheries, minerals, meat and meat products, some other manufactured products, beverages and tobacco, and leather and leather products. The biggest increases in imports by India from ASEAN are from Indonesia, Malaysia, the Philippines, Singapore, Thailand, Viet Nam and the rest of ASEAN. The sectors in India showing the biggest imports from ASEAN include meat, metals, food products, oil and gas, machinery, wearing apparel, other manufactured products, chemicals, transport equipment, ferrous metals, other crops and coal. These products would be available in India at much lower prices compared with prices prior to trade liberalization. Although increased imports of these goods lowers their domestic production in India, in general, gross domestic output in India increases; this creates increased demand for most of the factors of production and their prices. The only factor for which demand falls (by 0.62%) is skilled labour. Although the country’s GDP rises with IRS in the manufacturing sectors, the level of labour employment worsens considerably – unskilled labour unemployment rises to 4.9% and skilled labour employment shows a 7.6% decline. The country’s GDP price index also raises compared to the earlier scenario of CRS.

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Economic Research & Training Foundation

Impact on AESEAN FTA on ASEAN countries Malaysia, Singapore and Thailand experience positive welfare gains, with the largest gain accruing to Singapore. This is due to the fact that Singapore’s schedule of tariff commitments only comprises six items; as such, the FTA is tantamount to a unilateral liberalization by India for Singapore. These countries gain substantial market access in India, with Thailand experiencing the largest increase. Malaysia enjoys the largest welfare gain if there is full liberalization. The other countries, except Cambodia, the Lao People’s Democratic Republic and the Philippines, enjoy positive welfare. The gains accruing to all these countries are due to large positive terms of trade gain. This is because the prices of their exports to India fall much less than India’s export prices to their markets. This is explained by their relatively smaller market sizes compared to the Indian market. The welfare losses experienced by Cambodia, the Lao People’s Democratic Republic and the Philippines are also due to large negative terms of trade. Despite increased imports from India, total domestic production rises in Malaysia, Singapore and Thailand, causing their input demand and input prices to rise. However, in the smaller markets, increased imports from India lower total domestic output in all of them except the Lao People’s Democratic Republic and the Philippines. Demand for mobile factors and their prices in all these countries still register increases, except the Lao People’s Democratic Republic which registers a fall in factor prices.

Trade Impact on Other Countries Of The World AIFTA results in much trade diversion occurring in India and the ASEAN members. All countries lose a substantial share of their market in India – especially the South Asian countries of Bangladesh and Sri Lanka, and China – as well as in some of the ASEAN members. However, the extent of their losses is much less in the ASEAN region than in India. The market loss is virtually none in Singapore and highest in Cambodia. However, the relatively larger ASEAN members will derive more benefits in terms of GDP and welfare growth. India is expected to enjoy higher benefits only when the agreement has been fully implemented. India’s exports to smaller ASEAN markets are expected to grow faster as the agreement enters its final stage. ASEAN members will gain from a higher ToT effect while India’s gain will mainly be from resource reallocation and change in domestic production activities reflected through allocative efficiency. India’s import demand for several intermediate goods will remain high and ASEAN will have the advantage of supplying such goods at higher prices that are still lower than the average prevailing import prices in India. As a result, India will continue to experience a negative ToT effect. However, the situation will change significantly if IRS is assumed for some sectors in India. With this assumption, the fall in ToT slows down and, together with other effects such as scale effect’ and ‘profit sharing’, helps the Indian economy to boost production efficiency and increase overall welfare. This indicates that India’s benefit lies in its attempts to link allocative efficiency to further investment and production efficiency gain in export-oriented sectors . Through this approach, India can increase its exports to ASEAN and specifically in the rest of ASEAN, and neutralize the net negative effect of terms of trade. The situation becomes further strengthened if the Indian economy is able to leverage positive scale effect through investment and upgrading of technology.

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IMC-ERTF

Economic Research & Training Foundation

Recent Trends in India’s Trade Policy: India’s merchandise exports reached a level of US $ 251.14 billion during 2010-11 registering a growth of 40.49 percent as compared to a negative growth of 3.53 percent during the previous year. India’s export sector has exhibited remarkable resilience and dynamism in the recent years. Despite the recent setback faced by India’s export sector due to global slowdown, merchandise exports recorded a Compound Annual Growth Rate (CAGR) of 20.0 per cent from 2004-05 to 2010-11. World Trade Scenario: As per IMF’s World Economic Outlook October, 2011, world trade recorded its largest ever annual increase in 2010, as merchandise exports surged 14.4 per cent. The volume of world trade (goods and services) in 2011 is expected to slow down to 7.5 per cent compared to the 12.8 per cent achieved in 2010. Growth in the volume of world trade is expected to decline in 2012 to 5.8 per cent as per IMF projections. The IMF has moderated its growth projections of world output to 4 per cent in 2012. The advanced economies are expected to grow at 1.9 per cent in 2012 while the emerging and developing economies to grow at 6.1 per cent. The projected growth rates in different countries are expected to determine the markets for our exports. As per WTO’s International Trade Statistics, 2010, in merchandise trade, India is the 20th largest exporter in the world with a share of 1.4 per cent and the 13th largest importer with a share of 2.1 per cent in 2010. The year 2011 has been a difficult year with Japan facing a major earthquake and tsunami, the swelling of unrest in the Middle East oil producing countries, the slowing down of US economy and the Euro area facing major financial turbulence. The current global economic slowdown has its epicenter in the Euro-region but the contagion is being witnessed in all major economies of the world. As a result, India’s short-term growth prospects have also been impacted. According to experts, linkage chain of ASEAN business community would create value chains among the regions with the key role played by regional businesses, surmounting trade barriers and assisting businesses with access to new markets and protecting trade. It is therefore clear that policies to liberalize trade should be encouraged and remove protectionist government policies will help the Indian economy in the long run by making Indian industries more efficient and productive, by providing the Indian consumers access to cheaper and larger variety of products and generate employment for the rapidly expanding labor force. However, there are possible downsides to FTAs as well. Evidence from across the globe suggests that there is a very real chance that FTA will result in domestic job losses as industries tend to resort to layoffs in an attempt to cut costs and compete effectively with the industries in other FTA countries. Moreover, FTAs can adopt create significant diversions from important issues such as environmental concerns, human rights conditions for workers and workplaces as well as other social issues like child labor and decline in overall levels of education.