‘Regional grouping will boost mutual gains’

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: In the latest Association of Southeast Asian Nations (Asean) economic ministers or AEM—the India consultation that was held on August 28, 2008 in Singapore, the ministers declared that the Asean India-FTA negotiations have been concluded and the agreement will be signed during the summit meeting in December 2008. The FTA in goods is likely to be implemented early next year.

India’s engagement with Asean started with its ‘Look East Policy’ in the year 1991. Asean’s political and strategic importance in the larger Asia-Pacific region and its potential to become a major partner of India in the area of trade and investment has encouraged India to seek closer linkages with these countries.

A joint study on ‘AFTA (Asean Free Trade Area)-India Linkages for the Enhancement of Trade and Investment’, was conducted by the Indian Institute of Foreign Trade (IIFT), and the Malaysian Institute of Economic Research (MIER). In its report in May 2002, the study drew the roadmap for closer economic relationship between India and Asean and suggested a number of steps to increase the trade and investment flows between India and Asean, which emphasised the need for having a regional trade and investment agreement (RTIA) between India and Asean as its long-term objective.

In the first Asean Economic Ministers (AEM)—India consultations were held in September 2002 in Brunei Darussalam Asean-India Economic Linkages Task Force (AIELTF) was established for preparing a framework agreement to enhance the Asean-India trade and economic cooperation. The framework agreement on comprehensive economic cooperation between Asean and India was signed on October 8, 2003 during the second Asean-India Summit in Bali, Indonesia.

The framework agreement prescribed for starting negotiations for FTA in goods and agreements on services and investment. It also suggested having economic cooperation on several areas of mutual interest, including trade facilitation and harmonisation of customs procedures. The framework agreement prescribed that there should be reciprocity between India and Asean—six (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand), but India should provide special and differential treatment to the remaining four members of Asean—Cambodia, Lao PDR, Myanmar and Vietnam (new members of Asean).

It was agreed that India will eliminate tariffs for Asean (except Philippines) in five years, Asean—five will also do it in five years, however, India and Philippines will eliminate tariffs for each other in 10 years. The arrangement with Philippines was due to the insistence of Philippines that it cannot bring its duties to zero in five years for India. The new members of Asean were given additional five years timeframe to eliminate the duties for India.

A trade negotiating committee (TNC) was constituted to carry out the negotiations. The Asean side was led by Malaysia. The framework agreement prescribed that the negotiations on goods be concluded by June 2005, however due to the differences on the issues relating to rules of origin, modalities for tariff reduction or elimination and listing of items in India’s exclusion and highly sensitive lists the negotiations got delayed.

The differences on modality were on account of India maintaining a large list of items in its exclusion list initially. Initially, India wanted an exclusion list of around 20% and Asean wanted no exclusion list.

Apart from that India was not agreeable to eliminate tariffs on items like crude and refined palm oil, coffee, tea and pepper and they were kept in the highly sensitive category where a limited preference was offered. These items were of greater export interest to Malaysia, Indonesia and Vietnam. India had also objected to Asean’s offer where items were kept in a category, which did not give any effective market access to India as the MFN tariffs and preferential tariffs were kept at the same level of 5%. This meant that India’s offer on tariff liberalisation was much better than the combined offer of Asean.

After more than three years of negotiations Asean and India could agree to the following modalities: duty-free treatment to be given on 80% of total tariff lines within three-six years. The tariffs to be reduced to 5% in six-seven years. Also, items on which no tariff concessions would be offered—that list would not have more than 490 items and would not cover more than 5% of the trade value. While India will maintain only one common list for Asean, each Asean member will maintain separate list.

Another important feature of the deal is that while India shall maintain one single exclusion list for Asean as a group, each Asean member shall maintain its own exclusion list for India.

Since the start of negotiations, the trade between India and Asean have also seen a quantum jump. While India’s exports saw an average annual growth of 34% between 2003-07; its imports from Asean rose by about 45% during the same period.

India’s adverse balance of trade (BoP) with Asean for the period 2005-06 to 2007-07 saw a rise from $472 million to $5.5 billion. This was due to rise in imports from Brunei, Malaysia, Indonesia and Singapore. The sudden rise in imports was due to increased imports of petroleum oil from Brunei—edible oil (palm), petroleum oil, coal briquettes, copper ores and concentrates from Indonesia; and petroleum oils and gases, automatic data processing machines and edible oil (palm) from Malaysia on MFN basis.

The rise in imports from Singapore, however, could be attributed to India’s bilateral FTA with Singapore, which was implemented in August 2005. With the delayed outcome of Doha negotiations, this agreement will provide ample opportunity to Indian industry and that of Asean to explore each others’ markets on preferential basis.

Due to its autonomous liberalisation of tariffs, India has almost reached the Asean level (in some sectors, the duties of some of the Asean members are higher than India’s tariffs) and therefore, the fear that trade deflection may take place from third countries appears remote. Secondly, since the duties on certain sectors are more or less at the same level the effects of trade creation can be more than trade diversion. This agreement will provide an opportunity to the industry.

The framework agreement prescribed for negotiations to be held in services, investments and other areas of cooperation and to conclude them by 2007, however, discussions could not be held on them in the TNC as most of the time was devoted on goods. India wanted to start the dialogue on these issues. Asean, however, was keen to conclude the agreement on goods first and then discuss services as India is likely to benefit from them.

Now that the deal on goods is finalised, it would be important that the TNC takes over the task of negotiating other agreements and concluding them in a time bound manner. India will be the likely beneficiary in services and getting investment inflows due to the comprehensive agreement.

Although there are several trade and investment linkages between India and the Asean, these links are relatively weak. This engagement would expand the scope and depth of the trade and investment relationships and would forge closer economic linkages between their industries. Given the increased regionalisation of world trade, the coming together of India and Asean to form a regional grouping will be mutually advantageous, both strategically and economically.