The ASEAN-India Free Trade Agreement: An Assessment

Figure 1: Break-up of India's Tariff Schedule for ASEAN

(number of tariff lines at HS-8 digit level)

EL, 1,297 ST, 1,805 NT-1, 7775 Source: Authors’ calculation based on India’s tariff schedule to ASEAN 5 and CLMV.

Special products, 40

NT-2, 1252

reduction commitments. About 15% of India’s tariff lines are scheduled under the “Sensitive Track” tariff reduction schedule. Tariff rates for these products are to be reduced to 5% by a certain date, which depends upon the specific-country schedules. Further redu ctions to 4.5% and 4% are also planned for specific-countries.

For India, the AIFTA allows certain “Special Products”, for which the tariff reduction schedule is spelled out in the agreement. These products are crude and refined palm oil (CPO and RPO, respectively), coffee, black tea and pepper. At HS-8 digit level, there are 40 tariff lines listed under “Special Products”. The tariff reduction schedule for these products is given in Table 1. It can be seen from the table that the tariff rates for these products will be reduced by an average annual rate of 6.8% between now (base rate) and 2019, except those for pepper and RPO, where the tariff rates will be reduced by 3.3% and 5.8%, respectively, during the same period.

The next category is the negative list or the “Exclusion List”. This has probably been the focus of most attention since the framework agreement for the FTA was

Table 1: Tariff Reduction Schedule for Special Products

signed in 2003. In a preferential or FTA, countries are allowed to keep a small number of products out of the coverage of the agreement. These are generally sensitive products where trade liberalisation can have serious negative economic impact. For these products no duty reductions are offered. This is called the “negative list” or the “exclusion list” (el).4

Initially, Indian negotiators were cautious as there were apprehensions that ASEAN countries are more competitive in sectors like agriculture, textiles, auto and auto components, and electronics, and that India will face negative consequences unless sensitive items in these sectors are protected. Consequently, India submitted a list of around 1,400 products at HS-6 digit level as the negative list. But as negotiators from ASEAN insisted on pruning of the negative list, at the end, it was decided that each signatory country of the Indo-ASEAN FTA can have at most 489 products in its negative list provided that these products do not exceed more than 5% of total bilateral imports.

An analysis of the products covered under the EL shows that India has put 1,297 tariff lines at the HS-8 digit level in the EL. This amounts to about 10.6% of tariff lines under the HS-8 digit level. Interestingly, according to our calculation, these tariff lines correspond to 496 tariff lines at the HS-6 digit level. As mentioned above, official notifications have repeatedly pointed out that countries are allowed to have 489 products under the EL. It is not clear how a “product” is defined in the AIFTA but generally it corresponds to HS tariff lines at six digit levels. In that case, there seems to be a minor discrepancy between the official notifications and the exclusion list as calculated from the tariff schedule of India by the authors.

Further analysis of these tariff lines helps us identify the sectors where India wants maximum protection. Classification

of the tariff lines according to broad HS groups shows that a large number of products in agriculture, fish and marine products and textiles and garments have been put under the EL (Table 2). This table is also illustrative of the sectoral threat perception India has from the AIFTA.

Table 2: Sectoral Distribution of Items in the ‘Exclusion List’ of India

At HS-6 digit At HS-8 digit

Agricultural products (HS 01-24, except HS 03) 268 626

Fish and marine products (HS 03) 33

Mineral oil (HS 27) 13

Organic chemicals (HS 29) 13

Plastic and rubber items (HS 39 – HS 40) 15

Textiles and garments (HS 50-63) 83 226

Machinery (HS 84 -85) 22

Motor vehicles (HS 87) 26

Others 24

Total 496 1,297

Source: Authors’ calculation based on India’s tariff schedule to ASEAN 5 and CLMV.

The present level of protection for the tariff lines covered under the EL shows wide variations. For about 160 tariff lines (at HS-8), the level of existing protection is very high (base MFN tariff rates for these tariff lines are 100% or more). However, for 568 tariff lines, base MFN rates are quite low – 10% or less. The frequency distribution is shown in Figure 2. As seen from the figure, there are four tariff lines for which the base MFN rates are reported as 0%.5 It is not clear why products with zero duty are kept out of reduction commitment for the AIFTA. But it may be the case that for these tariff lines, the government is keeping the option open to raise the applied rates in future. It should be pointed out here that the AIFTA categorically mentions that for products listed under Normal Track reduction commitments, “where the applied MFN tariff rates are at 0%, they shall remain at 0%. Where they have been reduced to 0%, they shall remain at 0%. No party shall be permitted to increase the tariff rates for any tariff line, except as otherwise provided in this Agreement”.6 Maybe

products with zero base rate are put under

the el instead of nt.

3 Does India Stand to Benefit?

The above analysis shows that for about

EPW

COMMENTARY

pected to deteriorate

391 400

and Dasgupta 2008),

300

the authors analysed

250

the tariff structure

of ASEAN countries

200

in more detail and came to the conclu

150

100

sion that India is un

50

likely to gain too

0

much market share

of the AIFTA deal.

94.7

Number of HS-8 digit tariff lines

80

60

40

20

0

Malaysia

significant tariff reduction commitments. Among these tariff lines, 74% are under the nt and 15% are under the st. Given such generous tariff reduction commitments by India, there are apprehensions whether the AIFTA agreement is favou ring the ASEAN countries more. There are a number of reasons for such scepticism. First, India runs a major trade deficit with the ASEAN countries. For the last five years, India had negative trade balance for every year vis-à-vis ASEAN.7 For example, in 2007-08, the latest complete year for which data are available, India had a trade deficit of more than $ 6 billion with ASEAN. As edible oil (HS-15) and mineral oil (HS-27) figure prominently in the trade between India and ASEAN, it is worthwhile to check how India’s trade balance with ASEAN behaves for non-oil trade. This is shown in Table 3.

tries are much more dependent on trade than India. Singapore, for example, has a trade-to-GDP ratio of more than 185% (according to 2007 data). Other ASEAN countries also have a much higher export-to-GDP ratio

than India (Figure 3). The recent financial crisis and the loss of market in developed countries have hurt these countries significantly. Consequently, it can be expected that these countries will be pursuing export opportunities in new markets quite vigorously. India, with its high growth rate and large domestic market, can be a possible alternative for these countries. The ASEAN countries are the world’s leading exporters of light manufacturing products and some agricultural items. It will not be surprising if Indian producers of these sectors come under pressure because of the AIFTA.

Table 3: India’s Trade with ASEAN 10* (billion US$)

Secondly, one of the possible benefits from Regional Trade Agreements comes from the advantages associated with economies of scale. If the domestic market size of a country is not large enough, then a bigger market accessed through regional trade agreements can help industries take advantage of economies of scale. For example, while discussing the merits of Asian FTAs, Kawai and Wignaraja (2009) say: “Increasingly, policymakers have rea lised the need for stepping up the pace of integration to improve international competitiveness by exploiting economies of scale and strengthening their bargaining power through a collective voice on global trade issues.” While this is a valid argument, it needs to be kept in mind that India already has trade agreements with Singapore and Thailand. And these two countries account for about 60% of India’s exports to ASEAN

10. Also, India has a trade agreement with Myanmar through the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) mechanism. Given these existing trade relations, the AIFTA essentially boils down to having improved market access to Indonesia, Malaysia, Philippines and Vietnam. Given the low applied tariffs in most of the ASEAN countries and also due to a much stronger trade relationship between these countries and China (which, incidentally, already has an FTA with ASEAN), it is doubtful how much incremental market access the AIFTA and the associated tariff preferences are going to bring to Indian producers. If increase in market access is limited, then the expected gains through economies of scale will also not be realised. On the other hand, if access to the Indian market further improves economies of scale for producers

EPW

COMMENTARY

from ASEAN, then Indian domestic producers may face even tougher competition from these countries.

The area where the Indian industry is likely to gain from the AIFTA is cheaper availability of intermediate goods from the ASEAN region. For some companies operating in India and ASEAN countries, this agreement will lead to improvement in their intra-firm production networks. There are reports that some major automobile manufacturing companies of this region are planning more intra-firm and intra-industry trade to take advantage of tariff reduction under the AIFTA.

4 Concluding Observations

Theoretically, trade liberalisation, which is based on comparative advantage and interindustry trade leads to winners and losers. To ensure an increase in total welfare, the government needs to redistribute some of the increased wealth from the gainers to the losers. The AIFTA shows signs of such inter-sectoral trade-offs. From the analysis of India’s commitment schedule as well as looking at the production structure of the ASEAN countries, it can be said that the agricultural sector in India, particularly plantation sectors like tea, spices, coffee and rubber will be negatively affected.8 Marine products, textiles and garments, and the auto components industry are also likely to face increased competition due to the AIFTA. Not surprisingly, responses from different sectors indicate that farmers in the southern Indian states are feeling particularly threatened by this deal. On the other hand, reactions from different chambers of commerce like Federation of Indian Chamber of Commerce and Industry and the Confederation of Indian Industries indicate that some segments of the manufacturing sector seem to be more positive about the FTA. Given such inter-sectoral trade-offs, the role of the government becomes important. The total welfare gain from such a trade agreement will critically depend upon the government’s ability to adopt policies for alleviating the burden falling on those adversely affected. As redistri butive measures are generally weak in India, it is not surprising that the AIFTA is facing opposition from sectors where Indian producers are expecting increased competition from the ASEAN countries.

It is also not clear whether it makes strategic sense to sign the TIG agreement without finalising an agreement on liberalisation of trade in services between India and ASEAN. Most projections before the AIFTA suggested that there is significant complementarity between India’s service-oriented economy and ASEAN’s light manufacturing-driven economy.9 The recommendations of these studies were that an Indo-ASEAN FTA should thrive to balance these complementarities and bring out a mutually beneficial deal covering both goods and services. One wonders whether signing of the TIG agreement will weaken India’s negotiating position while discussing opening up of trade in services.

Finally, in an increasingly integrated world, one should be careful about signing FTAs even with other developing countries. Generally, south-south FTAs tend to suffer less from problems that plague the northsouth FTAs.10 But one needs to keep in mind that the ASEAN countries are one of the first recipients of global relocated capital and foreign direct investment (FDI) has played a major role in promoting exports in these countries (Thomsen 1999). Therefore, it is possible that in many cases, the preferential tariff rates of the ASEAN-India FTA will actually help a firm from a developed country (e g, a Japanese or a US firm) based in one of the south-east Asian countries. Indian policymakers should ensure that the AIFTA does not become a conduit for firms from developed countries so that they can avoid the MFN tariff rates by deflecting their exports through the AIFTA route using their subsidiaries in the ASEAN region.

Notes

1 Press Information Bureau, Government of India, dated 13 August 2009, available at: http://www. pib.nic.in/release/release.asp?relid=51840

2 ASEAN 5 are Indonesia, Malaysia, Philippines, Singapore and Thailand. CLMV stands for Cambodia, Lao PDR, Myanmar and Vietnam.

3 HS refers to the Harmonised Commodity Description and Coding System (HS) of tariff nomenclature. This is an internationally standardised system which is used for classifying traded products. This is developed and maintained by the World Customs Organisation (WCO).

EPW

COMMENTARY

trade coverage”. This essentially means that the exclusion list in an RTA cannot be very large and the products in the exclusion list should not account for a high percentage of total bilateral trade.

5 The HS tariff lines which have zero base MFN rate but under EL are: 1001.90.31, 1001.90.39, 1005.90.00 and 9031.90.00.

6 The AIFTA Agreement, p 22. 7 Here ASEAN is treated as the group of 10 countries with which India has signed the AIFTA. 8 According to estimates, while the productivity of pepper is 380 kilograms per hectare in India, it is 1,000 kilograms per hectare in Vietnam and 3,000 kilograms per hectare in Indonesia. See “Kerala Fights Clock in ASEAN Free-Trade Deal” by Ranjit Devraj, available at: http://www.bilaterals.org/article.php3?id_article=15702) 9 See Sen et al (2004), Kumar (2002), Bhattacharya and Ariff (2002). 10 See Pal (2008) for a more detailed discussion.

ASEAN-India Trade in Goods Agreement (2009): “Agreement on Trade in Goods under the Framework Agreement on Comprehensive Economic Cooperation between the Republic of India and the Association of Southeast Asian Nations”.

Asian Development Bank (2007): “The Key Indicators for Asia and the Pacific 2008”, available at www.adb.org

Bhattacharya, B and M Ariff (2002): “Study on AFTA-India Linkages for the Enhancement of Trade and Investment”, a report submitted to the Government of India and the ASEAN Secretariat, May.

Kawai, Masahiro and Ganeshan Wignaraja (2009): “Asian FTAs: Trends and Challenges”, ADBI Working Paper Series No 144, Asian Development Bank Institute, August.

Kumar, N (2002): “Towards an Asian Economic Community: The Relevance of India”, Discussion Paper No 34, Research and Information System for Non-Aligned and other Developing Countries (RIS), New Delhi.

Statistics”, available at http://commerce.nic.in/ tradestats/indiatrade.asp?id=1

Pal, Parthapratim (2008): “Regional Trade Agreements and Improved Market Access in Developed Countries: The Evidence”, Economic and Political Weekly, Vol 43, No 48, 29 November-5December.

Pal, Parthapratim and Dasgupta Mitali (2008): “Does Signing the Indo-ASEAN FTA Make Sense for India?”, Economic and Political Weekly, Volume 43, No 46, November 15-21, 2008.

Sen, Rahul, M Asher and R S Rajan (2004): “ASEAN- India Economic Relations: Current Status and Future Prospects”, Discussion Paper No 73, Research and Information System for Non-Aligned and other Developing Countries (RIS), New Delhi.

Thomsen, Stephen (1999): “Southeast Asia: The Role of Foreign Direct Investment Policies in Development”, Working Papers on International Investment, Organisation for Economic Co-operation and Development, 1999/1.

-

--

-

--

-

-

Economic & Political Weekly