Breakthrough with Asean

The FTA should be extended to services, investment

After many delays and glitches, the free trade agreement (FTA) between India and the 10-member Association of South East Asian Nations (Asean) is finally expected to be inked in August, on the sidelines of the Asean trade ministers’ meet, or in October during the Asean summit. This pact is as important for India as it is for the Asean, especially when global trade has shrunk and continues to shrink, and when a new multilateral global trade pact under the Doha round of talks is nowhere in sight. Exports to the West from both India and the Asean have fallen. Asean is already one of the world’s largest trade blocs, and an FTA with India (next in importance only to the Asean-China FTA, signed in 2007) would expand the market further. From the Indian viewpoint, this FTA would open up the $1.1 trillion Asean market for its exporters, reducing their dependence on the West. The linkages with East Asia will get stronger still when a similar FTA between India and South Korea, which has been concluded, gets formally signed.

These trade treaties mark the success of India’s “look east” policy even as it goes ahead with trade and economic cooperation pacts with countries in other regions. Negotiations for FTAs or comprehensive economic partnership agreements (CEPAs) are currently in progress with 15 other countries and trade blocks, including the European Union.

The protracted FTA negotiations between India and the Asean have followed a chequered course. Beginning in 2003 and scheduled originally to conclude by 2005, the talks broke down several times. India initially included a rather long negative list of 1,414 products which it wanted exempted from the tariff cuts; it also resisted the sharp reduction in tariffs on palm oil and its products demanded by Indonesia and Malaysia, besides the rules for value addition. These issues were ultimately resolved, as were the differences over some fresh demands put forth by the Asean after the postponement of the FTA signing opportunity in December 2008 due to the cancellation of the Asean summit in Thailand following unrest in that country.

The way is now clear for the Indo-Asean FTA to become a reality. But that is not the end goal. The present agreement covers only trade in merchandise, and does not apply to services which is India’s strong point, or even to the flow of investments. India would, therefore, want a fresh round of negotiations to start immediately for either extending this FTA to services and investments, or have an add-on agreement to cover these issues. The balance of merchandise trade between India and the Asean region is tilted towards the Asean. This is likely to remain unchanged even after the expansion of mutual trade, post-FTA. The imbalance can be corrected only when services and investments are incorporated into the treaty.