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Siam's aversion to EU-FTA

The industry body argues against tariff reduction in the auto sector

T S Vishwanath 

T S Vishwanath

The pressure owing to India's imminent opening up of trade in the automobile sector, thanks to the India-EU Bilateral Trade and Investment Agreement (BTIA), is evident in the Society of Indian Automobile Manufacturers (Siam's) white paper on India's free trade agreements (FTAs).

The timing of the publication is significant. It was released before Prime Minister Manmohan Singh left for Germany, where tariff reduction for the automobile sector under BTIA is an important agenda for bilateral discussions. In recent press statements, German Ambassador to India Michael Steiner has said without tariff reduction in cars and the opening up of the insurance sector in India, the bilateral FTA would not move forward.

Industry's aversion to tariff elimination/reduction under different FTAs is well known. But no industry association has in the recent past given a detailed paper with some forceful thoughts against it. However, what the Siam paper lacks is its ability to look at the positives that BTIA or any FTA may create. Surely, enough areas, from technology development to good manufacturing practices, exist, where the two negotiating partners can gain from each other's experiences. The paper focuses on tariff cuts, and no other area of bilateral engagement.

Interestingly, it points to the protective measures adopted by Japan, Germany and the US to safeguard their auto industry, leading to a strong auto sector in these countries. One compelling argument that Siam puts forward is on the employment creation and investment potential of the sector in the country. It also points to countries such as Australia, which have lost out on both investment and employment generation owing to the opening up of the sector without due consideration. It has also pointed out to "subsidies" provided by the Italian, German and French governments to auto manufacturers during the downturn in 2009 - helping the EU companies compete globally on "unfair" terms.

A point raised by the Siam paper that needs to be noted by other industry players is the treatment of "non-new goods" on a par with new goods that the EU is supposedly pushing. If true, this would be back-door entry for remanufactured goods, which has been strongly opposed by industry in India at both multilateral and bilateral levels. Certainly, tariff cannot be the same for new and remanufactured goods.

One area that needs some clarification from Siam is the Automotive Mission Plan, or AMP (2006-2016) for the continuation of tariff protection under all FTAs. Siam is categorical that any tariff reduction would adversely impact the AMP objective. But what needs clarification is whether after 2016, the Indian auto industry will be open to an opening up, albeit in a slow fashion. Even in the best-case scenario, India-EU will take at least another one-and-a-half years for the roll-out. Even if the agreement is signed before the end of this year, it will take a year or more for the EU to get clearances from the council and member states to roll it out. This means the agreement will be in place at the earliest from January 2015 onwards.

This will leave only a year more for AMP to be completed. So, the question that Siam should consider answering is whether the Indian auto industry will be competitive and open to a gradual opening up of the sector starting 2018 or anytime later?

A significant argument that lacks depth in the paper is the inverse relationship between tariffs and technology flow. It is important to look at more data before forwarding such an important argument. This is because an equally compelling argument can be given - tariff protection leads to lack of technology development.

Now, what the government needs to consider is whether gains in other sectors outweigh the potential loss in the auto sector as envisaged by Siam. Two sectors that are expected to gain owing to BTIA include textiles and clothing and information technology.

It would be good for an all-industry association like the Confederation of Indian Industry or the Federation of Indian Chambers of Commerce and Industry to illustrate gains and losses in different sectors under FTAs.

The writer is Principal Adviser at APJ-SLG Law Offices

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First Published: Wed, April 10 2013. 21:46 IST