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Economics for Everyone-Going Global- India Asean FTA

by Vijay Birajdar on Sunday 8 May 2011, 10:27 PM | Category: Business Environment| View: 1298 views


Economics for Everyone-Going Global- India Asean FTA


The services negotiations are taking place on a request-offer basis, wherein both sides make requests for the openings they seek and offers are made by the receiving country based on the requests.

India Infoline News Service / 11:06, Feb 08, 2010


The ASEAN secretariat, which is compiling requests from ASEAN countries for opening up of various services sectors in India, is expected to present the requests list at the meeting beginning on February 2010. India has already sent its requests to the ASEAN members. India will try to expedite negotiations on opening up trade in services with the 10-member ASEAN team in Jakarta.The services negotiations are taking place on a request-offer basis, wherein both sides make requests for the openings they seek and offers are made by the receiving country based on the requests.

According to a report by industry body CII, the services part of the India-ASEAN FTA is crucial as India seeks market access for its IT, ITES, health, education and other services in ASEAN with its rapidly growing middle-class. The ASEAN market is very important for India as the region is a net importer of services and imported over $180 billion worth of services in 2008. Services sector contributes over 55% to India's gross domestic product (GDP). While the India-ASEAN FTA in goods — which will allow duty-free trade in more than 4,000 goods in a phased manner — is operational since the beginning of January, the agreement on services and investment is still being negotiated. 

Anand Sharma, the Commerce and Industry Minister, who signed the agreement for India, remarked "This is a historic development, given rising engagement between India and ASEAN and the enhanced economic cooperation.  This agreement will open new opportunities for multi-sectoral engagement". 

Association of Southeast Asian Nations (ASEAN)

The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.

According to their DECLARATION –"The Association represents the collective will of the nations of to bind themselves together in friendship and cooperation and, through joint efforts and sacrifices, secure for their peoples and for posterity the blessings of peace, freedom, and prosperity. (The ASEAN Declaration, Bangkok, 8 August 1967)"

Objectives of Asean: 

To accelerate the economic growth, social progress and cultural development in the region through joint endeavors in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian nations, and

To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter.


The India-ASEAN Free Trade Agreement (FTA) was finally signed, on 13 August 2009 at Bangkok, after six years of negotiations, on the sidelines of a meeting of Economic Ministers of ASEAN. The agreement was only for trade-in-goods and did not include software and information technology.  Negotiations for agreements on services and investment sectors have commenced only in October 2008 and are expected to be finalised now. 

ASEAN is India's fourth-largest trading partner after the E.U., the United States and China.  Two-way trade between India and ASEAN was $ 47 billion in 2008.  Both the parties to the FTA are expecting a $10 billion increase in trade even in the first year. India's trade with ASEAN is mainly concentrated in Singapore, Malaysia and Thailand.  Singapore continues to remain the largest market in ASEAN for India's merchandise exports. 

The likely beneficiaries in India are the exporters of machinery, steel, oilcake, wheat, buffalo meat, auto components synthetic textiles, refined petroleum products, organic chemicals, pharmaceuticals, gems and jewelery. 

The FTA was effective from January 1, 2010. The FTA would eliminate tariffs for about 4000 products (which include electronics, chemicals, machinery and textiles) out of which duties for 3200 products will be reduced by December 2013, while duties on the remaining 800 products will be brought down to zero or near zero levels by December 2016.

The 489 items excluded from the list of tariff concessions and 590 items excluded from the list of tariff eliminations in the agreement pertain to farm products, automobiles, certain auto-parts, machinery, chemicals, and crude and textile products.  Tariff cuts in respect of some sensitive items like palm oil, tea, coffee and pepper will be graduated during a period of 10 years.The accord, India's first with a trade bloc; will cover 11 countries with a combined Gross Domestic Product of over $2.3 trillion. The combined population is of the order of 1.7 billion.

Free Trade Agrrement (FTA)

Free trade area is a type of trade bloc, a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all)goods and services traded between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they will choose customs union.

E.g. European Free Trade Area (EFTA)

North American Free Trade Area (NAFTA)

Trade Blocks

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

In simple terms, it is a group of countries who act together for a common purpose, united by treaty or agreement.

There are mainly five types (also stages of integration) of trade blocks.

  • Preferential Trading Area
  • Free Trade Area
  • Customs Union
  • Common Market
  • Economic Union

The aim of a free trade area is to so reduce barriers to easy exchange that trade can grow as a result of specialisation, division of labour, and most importantly via (the theory and practice of) comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area.Many governments, throughout the world have either signed FTA, or are negotiating, or contemplating new bilateral free trade and investment agreements.

The agreements are like stepping stones towards international integration into a global free market economy. Unlike a customs union, members of a free trade area do not have a common external tariff (same policies with respect to non-members), meaning different quotas and customs. To avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don't cover these minimum requirements are not entitled for the special treatment envisioned in the free trade area provisions.

SAFTA- South Asia Free Trade Association

The origin of the present vision dates back to The 13th Summit of SAARC (South Asia Association of Regional Cooperation) in Dhaka (2005). It took two groundbreaking decisions. One, it decided to admit Afghanistan as its eighth permanent member, and USA,South Korea,China and Japan as ‘observers'. Two, it declared to set up a Free Trade Area (FTA) by January 2006. The Free Trade Agreement was signed during the Islamabad summit of January 2004.

The region is home to world's one-fifth population, some of them among the poorest of the world. The summit that has dedicated the next decade to poverty reduction in the region has sought to employ FTA to achieve the goal. The then Sri Lankan President Chandrika Kumaratunga mentioned in her speech, "I sincerely hope that the South Asia Free Trade Area (SAFTA) comes up from January 01, 2006." "It will represent only a modest beginning of our goal of a regional economic union," said Indian Prime Minister Dr. Manmohan Singh in his speech.

Dr. Manmohan Singh, in his opening speech at the 13th summit, expressed the hope that South Asian countries would "provide each other with transit facilities, not only to connect one another, but also to link up with the larger Asian neighbourhood, the Gulf, Central Asia and South-east Asia". The FTA comes at a time when most economies in the region are strengthening and trade balances are improving, making them well placed to take advantage of new markets.

SAARC (South Asia Association of Regional Cooperation)

The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia. In terms of population, its sphere of influence is the largest of any regional organization: almost 1.5 billion people, the combined population of its member states.[citation needed] It was established on December 8, 1985 by Bangladesh, Bhutan, Maldives, Nepal, Pakistan, India and Sri Lanka. In April 2007, at the Association's 14th summit, Afghanistan became its eighth member.

In the late 1970s, Bangladeshi President Ziaur Rahman proposed the creation of a trade bloc consisting of South Asian countries. The idea of regional cooperation in South Asia was again mooted in May 1980. The foreign secretaries of the seven countries met for the first time in Colombo in April 1981. The Committee of the Whole, which met in Colombo in August 1981, identified five broad areas for regional cooperation. New areas of cooperation were added in the following years

The objectives of the Association as defined in the Charter are:

  • To promote the welfare of the people of South Asia and to improve their quality of life;
  • To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential;
  • To promote and strengthen collective self-reliance among the countries of South Asia;
  • To contribute to mutual trust, understanding and appreciation of one another's problems;
  • To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields;
  • To strengthen cooperation with other developing countries;
  • To strengthen cooperation among themselves in international forums on matters of common interest; and
  • To cooperate with international and regional organisations with similar aims and purposes.
  • The SAARC Secretariat was established in Kathmandu on 16 January 1987 and was inaugurated by Late King Birendra Bir Bikram Shah of Nepal.The SAARC Secretariat and Member States observe 8 December as the SAARC Charter Day1.

Analysis (Challenges): 

According to experts, the proposed India-ASEAN FTA, has "macro benefits but micro pains".To protect farmers and textile producers, a negative list of tariff items was originally included for exemption from free trade with ASEAN. Such a list is currently being pruned down as it drew polite rebukes from Malaysia that wants India to liberalise import of palm oil. Asean had earlier unilaterally called off the scheduled meeting with india.Discussions between the two sides are stuck on two issues — Asean wants India to reduce its negative list of 991 items, while India wants a Tariff Rate Quota (TRQ) for items like palm oil, tea, coffee and pepper. India is not willing to reduce import duty on these items, which are sensitive for its domestic industry.

Under the trade pact, India has included 489 items from agriculture, textiles and chemicals in the negative list, meaning these products will be kept out of the duty reduction.The current agreement addresses concerns of domestic planters, black tea, coffee, pepper and rubber have been included in the sensitive list, which could mean duties will be cut by 2019 only. Farmers in South India, especially Kerala, fear lower duty on plantation crops like coffee and pepper would lead to a deluge of imports from ASEAN members like Indonesia, Malaysia, which could leave domestic farmers vulnerable to competition.These low import tariffs are hurting coconut farmers in Kerala. Similarly, tariffs on tea and coffee are being reduced from 100 to 45 per cent, and that for pepper from 70 to 50 per cent, and the government claims that these items are protected as a result. But the difference in productivity of these crops between Kerala and the ASEAN bloc is vast, and even 50 per cent tariffs are not sufficient to overcome this.

A negative list refers to those items on which there will be no tariff cuts under an FTA.Under a TRQ, India will marginally reduce the import duty on products like tea or coffee up to a specific quantity. The commerce and agriculture ministries are yet to finalise the quantum of duty cuts under TRQs.

Few years back the then Finance Minister, P Chidambaram himself expressed concern over the revenue losses that would arise from the proposed FTA agreement.Mr. Chidambaram wrote to the Prime Minister's Trade and Economic Relations Committee and the commerce ministry in this connection, stating that losses on account of just one possible duty cut on palm oil would amount toRs 1400 crore annually.Mr. Chidambaram cautioned against the perils of an inverted duty structure and asked the commerce ministry to keep revenue considerations in mind while finalising tariff cuts under the FTA.He pointed out that if India were to reduce import duty on palm oil by 50 per cent, the revenue loss from that alone would be Rs. 1400 crore. The import duty on crude palm oil is around 80 per cent at present, while it is 90 per cent for refined palm oil. Earlier even the Congress President, Ms Sonia Gandhi's expressed her reservation over the fallout of the proposed free trade agreement (FTA) between India and the Association of South-East Asian Nations (Asean), particularly on domestic agriculture and manufacturing activities.

But, doubts still remain with regard to participation of all member countries, with regard to market demands and product diversity in the region, and about cooperation among members. Its success will decide if the region's squabbling partners can bury their political hatchets for business for people. On the face of it, FTA looked like good news as it promises to open the markets of seven developing countries to each other, bolstering regional trade, and firing economic growth. However, there are a number of issues to be settled for the FTA to take off. Serious differences over issues such as tariff cuts, mechanism to compensate poorer members for loss of revenue, or protection to certain industries have not yet been completely addressed.

Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives all constituents of  SAARC currently export pretty much the same types of goods. The region's biggest players compete to export textiles, garments, and agricultural commodities like tea, coffee, and sugar to other parts of the world. SAARC's bigger players look to the United States, which takes nearly a quarter of all exports from India and Sri Lanka.Yet another reason for a likely poor response to FTA in the region is the low level of business among the member countries. Intra-regional trade in SAARC forms a paltry 5 percent of the total trade by SAARC nations. By contrast, European Union (EU) members do 60 percent of their trade with each other. The neighbouring Association of South East Asian Nations for instance is busily founding the world's largest common market with China and Japan a powerful incentive for SAARC to make its own zone work. On the other side, Pakistan has linked FTA to the resolution of Kashmir issue; other countries too have their apprehensions. Tension between India and Pakistan, regional economic heavyweights who have long standing dispute over Kashmir, has played a big role in stalling regional trade. Clearly, a lot of hard talk is needed for the FTA to succeed in this region.

India already has free trade agreement with Sri Lanka and China, and uses the growth in its bilateral trade with these nations to push for FTA in SAARC. Research shows that the bilateral trade between India and China jumped many-fold since the agreement, which is still less than five years old. Two-way trade between India and Sri Lanka has increased one-and-a-half-times since they signed the bilateral free trade pact two years back.

With his vast experience in various economic ministries and international institutions such as the South Commission, Dr Manmohan Singh is an expert on trade issues and his positive stance on a pan-Asian FTA should reassure the stakeholders in the Asian region.Integration of the region is undoubtedly a sensible policy to make a lasting impact on poverty and unemployment; if this can be accomplished through appropriate trade policy and economic development.


AICAR Business School

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