This year, India is commemorating its two decades of economic partnership with the Association of Southeast Asian Nations (Asean). The relationship —that coincided with India’s look east policy—began with India joining the grouping as a dialogue partner, a step that culminated in the Free Trade Agreement (FTA) that became operational in 2010.
FTA with Asean marked a major step in the evolution of the country’s integration with the global economy. Its engagement with Asean marked a departure from its earlier position regarding bilateral and regional trade agreements. Until the start of its close association with the grouping in 2003, India was almost unequivocally wedded to the multilateral trading system. The only exceptions to this being bilateral deals that it had concluded with its immediate neighbours in South Asia. Since then, India has aggressively pushed for concluding FTAs/Preferential Trade Agreements with its major partners. Not only has it reached out to most of the East Asian Summit members, it has actively engaged with several members of Asean to deepen and widen its economic engagement and conclude comprehensive economic partnership agreements.
The FTA negotiations were initiated as a part of the Framework Agreement on Comprehensive Economic Cooperation between India and Asean. The framework agreement set out the road map for deepening economic cooperation between the two sides through the establishment of an India-Asean Regional Trade and Investment Area (RTIA). RTIA was to be realized through progressive elimination of tariffs and non-tariff barriers in substantially all trade in goods and by progressive liberalization of trade in services. At the same time, the partners agreed to establish a liberal and competitive investment regime that facilitates and promotes investment within RTIA.
The process of negotiating an FTA in goods, that took nearly six years to complete, raises the crucial question about its outcome and the prospects it holds for trade between the two sides. FTA, when fully functional by 2016, will eliminate tariffs in a phased manner on 80% of the items traded. Import tariffs will not be eliminated for 10% sensitive items, while the tariffs on the remaining 10% items will be brought down to 5%. In the third category of products, the reductions will be completed by 2019. This tariff reduction plan is expected to give a fillip to India’s merchandise exports to Asean region, which has stagnated around 11% of its total exports in the past years.
It must be said in this context that the level of trade between the two partners hardly justifies the long standing economic relations that exists between the two. While at the turn of the century, Asean absorbed 6.5% of India’s total exports, after nearly a decade of intense trade policy dialogue, mostly centring on FTA; this share had barely crossed double-digits.
One of the problems that can clearly be seen in the trade ties is the narrowness of the product basket on both sides. At the same time, the major products in terms of value (on both sides) have remained largely unchanged over the past few years. There is, thus, no gain saying that the only way in which this trade can attain the desired buoyancy is through a diversification of the trade basket. Over the past several years, petroleum products have been the single most important item in the exports of Asean members taken as a whole and India. More recently, electrical and non-electrical machinery have gained prominence in India’s imports from the region, which indicates a shift towards non-conventional items. India will have to consider ways in which it can diversify its exports to its partners in the East, in particular, by joining the production networks that have so successfully provided dynamism to the region as a whole.
One may argue that the conclusion of FTA with Asean will not result in the realization of all potential gains for India unless the country does the necessary homework to exploit markets in one of the fastest growing regions in the world. It needs to be recognized that substantial reduction or even elimination of import tariffs does not automatically ensure larger market access since “behind the border measures” are becoming ever so important. These measures include various forms of standards, the more prominent ones being the technical barriers to trade and food safety (sanitary and phytosanitary) measures. In order to maximize the gains from FTA, Asean and India must find mutually agreeable solutions to address the issue of standards. At the same time, the two partners must consider taking facilitation measures that would help in reducing the cost of doing business.
In today’s world, economic relations cannot be strengthened without adequate focus being given to trade in services and investment. Over the past two years, Asean and India have tried to resolve the issues that will help fast-track negotiations on services and investment. An early conclusion of agreements in both these areas can provide the wherewithal for getting the trade in goods off the ground.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi. Comments are welcome at firstname.lastname@example.org