Efficacy of India-Asean FTA far from clear

EXIM MATTERS

The negotiations for a free trade agreement (FTA) between India and Asean (Association of South East Asian Nations) were concluded in August this year, but the FTA may not come into effect from January next year, as some of the Asean member countries may delay its ratification.

This delay may not matter much as the trade talks that started in 2002 and had got stalled over tariff cuts on sensitive farm products such as palm oil, tea, coffee and rubber envisage tariff reductions over a period of 10 years. Under the pact, India and Asean will eliminate import duties on 71 per cent of products by the end of 2012 and another 9 per cent by 2015. Within 10 years, India will open its market to about 96 per cent of its products that are traded with Asean. By then, tariffs may come down sufficiently to erode the preferences.

Whether this FTA will result in more trade is far from clear as even among Asean members, less than 5 per cent trade takes place at zero duty. The complex rules of origin, certification requirements and paper work are such that importers prefer to pay the duty and expedite clearances rather than opt for duty concessions. India’s trade with Asean is 9.6 per cent of its global trade, while Asean’s trade with India makes up only 2 per cent of its global trade. The ten Asean countries have a combined gross domestic product (GDP) of almost $ 1.1 trillion.

Economists are divided over the benefits of FTAs. One view is that FTAs encourage high-cost producers in the contracting countries whose goods do not suffer duty. Goods of low-cost producers in other countries/regions might suffer higher duty before they enter the contracting countries. In the process, the consumers may not benefit but the governments lose out on revenue. Jagdish Bhagwati, the noted expert on globalisation calls them ‘termites in the trading system’. Yet, there are over 350 trade agreements in the world. Advocates of FTAs say that in the context of failed multilateral trade talks at the World Trade Organisation, FTAs offer best options to increase trade.
 

INDIA'S TRADE WITH ASEAN (in $ billion)
	Exports	Imports
2003-04	5.82	7.4
2004-05	8.42	9.11
2005-06	10.41	10.88
2006-07	12.60	18.08
2007-08	16.37	22.66

Apprehensions have been expressed about the impact of the India-Asean FTA, especially by plantations in Kerala. So, coconut, spices, wheat, maize, rice, processed food and rubber are in the 288-item negative list which will remain outside the purview of the FTA. Besides, India will maintain a highly sensitive list for crude palm oil, refined palm oil , black tea, pepper and coffee. On pepper, duty will be reduced to 50 per cent by 2018 and duties on tea and coffee would come down to 45 per cent by 2018. By that time, the Indian plantations must become more competitive.

In fact, India commenced negotiations with a proposal to keep 1,400 items out of the pact but, finally, whittled the list down to 288 items. In palm oil, after hard bargaining, India proposed a tariff of 37.5 per cent which was accepted by Indonesia and Malaysia, the two key producers of the crop. Currently, the duty on crude palm oil and refined palm oil is less than the duty rate negotiated but once the agreement comes in, the option to raise the import duties and protect Indian oilseed producers will not be available.

tncr@sify.com