Indonesia, Malaysia develop cold feet over India-Asean free trade

Written by Rituparna Bhuyan | Huma Siddiqui | New Delhi | Updated: Aug 6 2009, 07:22am hrs
Prime Minister Manmohan Singhs Look East policy flagship, the India-Asean free trade agreement (FTA), could hit a fresh external roadblockAsean members like Malaysia and Indonesia are unwilling to ratify the pact just yet, thanks largely to the global economic slowdown. For Singh, this would be more trouble after he countered dissent from some of his Cabinet colleagues on the agreement.

The key problem: elected representatives of the two Southeastern nations are not be satisfied with the duty cuts offered by India on commodities like palm oil, even though officials had thrashed out an agreement on this after protracted talks last August.

Officials in Indonesia and Malaysia will have a hard time selling the deal to their legislatures. An Indonesian government official told FE that in the current format, it may be difficult to get ratification of the free trade pact from the 550-member Dewan Perwakilan Rakyat (Peoples Representative Council) of the country.

Biswajit Dhar, director general of Research & Information System on Developing Countries, said; Implementation of the FTA is contingent upon ratification by Asean members. Therefore, the implementation may take some time,

Indonesians are still unhappy with a host of issues related to the trade pact, including the tariff rates on palm oil. Palm oil remains a concern for Indonesia. There could be problems before (the pacts) implementation, for which Parliament nod is needed, the Indonesian official said.

With even the US turning protectionist in recent months, politicians in developing economies will find it hard to offer unfettered market access to other countries without a significant trade-off.

In the FTA, India has committed not to increase duties on Asean crude palm oil beyond 37.5%, while on refined palm oil, it would be 45%. These duty thresholds have to be reached over a period of 10 years after the FTA is operationalised.

India imports 70% of its total edible oil requirement from Malaysia and Indonesia. Though India was initially unwilling to cut duties on palm oil, it eventually conceded some reduction to resolve a stalemate.

Trade experts involved in the Asean-India talks over the years also expect Asean countries like Malaysia to take their time in clearing the pact. There are some concerns on agricultural and processed items in some Asean countries. This could lead to ratification problems, delaying the full-scale implementation of the trade pact, said another trade economist.

India does not need parliamentary clearance for signing free trade dealsa Cabinet nod is enough and was secured on July 23.

In Asean, member countries parliaments need to ratify trade pacts before they become operational.

If the political leaders in Indonesia and Malaysia dont ratify the FTA, Indias bilateral trade with the two wont enjoy the duty benefits under the Asean pact. The final call in this regard will be of the respective parliaments. Till the ratification is done, the nation will not be able to enjoy the duty benefits, a senior government official pointed out.

Though the date for signing the pact hasnt been finalised yet, the Asean summit slated to take place at Thailand in the last week of October could be a possible venue for inking the pact. Members like Singapore, however, do not see any problem with the FTA.

The India-Asean FTA will be an excellent development for us. The number of Indian companies setting up their base in Singapore has gone up. Trade will increase, which in turn will increase the number of tourists to Singapore, said Eng Keat, regional director, Economic Development Board of Singapore.

Meanwhile, India and Asean members are negotiating a services and investment pact, which along with the FTA, will culminate into a comprehensive economic partnership agreement (CEPA). Significantly, India is also engaging bilaterally with the Asean members, which include Thailand, Malaysia, Indonesia, Brunei, Laos, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

While a CEPA-type agreement has been signed with Singapore in 2005, negotiations are underway for a free trade pact with Malaysia, and a joint study group has been set up to consider a similar deal with Indonesia. India and Thailand already allow duty-free trade of 82 goods, as part of an early harvest package while a bigger trade agreement nears finalisation.

The 10-member Asean accounts for nearly 11% of Indias exports and 9% of imports. From $8.42 billion in 2004-05, Indias exports to Asean have risen to over $17 billion in 2008-09 at a compounded annual growth rate of nearly 19%. In the same period, imports from Asean grew at annual 26% and have touched $24 billion in 2008-09.

Slippery path

Indonesia, Malaysia unhappy with duty cuts on palm oil

Two countries will find it hard to sell deal to legislatures

India has agreed to limit crude palm oil duty to 37.5%

India imports 70% of edible oil needs from two nations

FTA implementation depends on ratification by members