The impending review of the India-Association of South East Asian Nations (ASEAN) Free Trade Agreement will be a comprehensive exercise that involves 11 critical economies of the Indo-Pacific region. The review offers the government an opportunity to send strong signals regarding India’s attractiveness as a manufacturing destination.
After all, the inflow of imports via the ASEAN FTA has adversely impacted industries in critical manufacturing segments, including India’s copper industry. Before the signing of the FTA, India was a net exporter of copper to the ASEAN region. Since then, India has become a net importer of copper, incurring a deficit of $971 million in 2021-22. Rising imports of copper wire have been a principal contributor to India’s deficit.
Copper wire imports increased from $10 million in 2010-11 to $469 million in 2021-22 as tariffs on the importance of the product have been eliminated. Of the $469 million worth of ASEAN wire imports, Malaysia and Thailand alone account for the $454 million.
However, it is interesting to note that Malaysia and Thailand are not copper-producing powerhouses. However, the two countries are important players in the copper value chain through their mines, smelters and refineries. Exporters of copper wire in Malaysia and Thailand import refined copper rods from refineries in other ASEAN countries, namely Indonesia, the Philippines & Vietnam. The physical specification of this imported copper rod is changed, and it is then classified as copper wire. The value addition in converting copper rods to copper wire is less than 1%.
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However, due to partial cumulation norms, value added to the ASEAN region is added to the value-added in Malaysia / Thailand to measure compliance with the value addition criteria under the FTA. Copper wire exported from Malaysia and Thailand to India will likely originate from copper mines in Indonesia. The mining of copper in Indonesia enables copper wire exporters in Malaysia and Thailand to export to India at an import duty of 0%.
Indonesian copper ore is mined and subsequently processed into refined copper products such as wire. The value added across the ASEAN region is totalled up before export from Malaysia and Thailand to check compliance with the rules of origin. Norms of partial cumulation have enabled Malaysia and Thailand to ride free on Indonesia’s back.
Exporting copper ore from Indonesia was the sole benefit for India’s copper industry under the ASEAN FTA. It enabled copper smelters in India to import ore at a duty of 0%, which is less than the prevailing MFN duty rate of 2.5%. In 2021-22, India imported the US $ 637 million worth of copper ore from Indonesia.
However, Indonesia is set to ban the export of copper ore from its country in 2023. This export restriction aims to shift Indonesia from being an exporter of raw material (copper ore) to an exporter of refined copper (finished goods).
However, this goes against the spirit of the India-ASEAN FTA. Indonesia can continue to export copper wire to India at a duty of 0%. The continuance of partial cumulation will enable countries like Malaysia and Thailand to import Indonesia-origin copper cathodes/copper rods, convert them to copper wires and export them to India at a duty of 0%. Against this backdrop, India needs to consider a measure to level the playing field for its copper industry. India’s negotiators could consider excluding refined copper products made from copper ore mined in Indonesia from the FTA. This would be a proportionate response to Indonesia’s actions which violate the spirit of free trade in letter and spirit.
A proportionate response to Indonesia’s actions would provide much-needed comfort to India’s copper industry. Currently, imports of refined copper products via free trade agreements account for nearly 30% of India’s domestic market. Rising imports of refined copper due to anomalies vitiate the principle of free trade. A firm Government of India’s response to level the terms of trade for its copper industry will be in the interest of an Atmanirbhar Bharat.
It will display the Government’s intent to augment manufacturing capacities in those industries for which capabilities lie in India. It will provide a fillip to the industry’s efforts to cater to the demand generated in the domestic market. Being atmanirbhar for copper is also vital for India’s future owing to copper’s importance as a critical component in future industries.
Copper is a critical component in emerging low-carbon modes of transportation, such as electric vehicles (EVs), by playing an essential role in their batteries and control systems and charging infrastructure. It enhances the performance efficiency of renewable energy solutions such as wind and solar. Being atmanirbhar for copper can be the first in a series of milestones in India’s journey towards being a self-reliant global power.
Disclaimer: The author is Professor and program director (BA, Economics and Finance), and program chair (PhD Program) School of Management, Mahindra University. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.