ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Negotiations Adrift

Negotiations Adrift Despite prime minister Manmohan Singh

May 27, 2006 E L L WEEKLY
Negotiations AdriftDespite prime minister Manmohan Singh’s steadfast promotion of the free trade agreement (FTA) between India and the Association of Southeast Asian Nations (ASEAN), the negotiations are proving to be increasingly intractable. ASEAN has now refused to come to the negotiating table for further talks on May 29, citing India’s long negative list as the reason. This means that the deadline of concluding negotiations in June 2006 and thus the time frame for implementation would be missed. The prime minister has expressed time and again his commitment to a “look east policy”. The Indo-ASEAN FTA constitutes an important part of this move towards “an eventual free trade in Asia covering all major Asian economies”. This might explain why India has taken the more expedient route and has been more accommodating on a number of issues. Thus, though India insisted on a minimum value addition of 40 per cent in the originating country and a change in the tariff heading at the four-digit level in the South Asian Free Trade Agreement (SAFTA) as well as on the early harvest scheme with Thailand, it has agreed with ASEAN to relaxing the former to 35 per cent and the latter to change at the six-digit level. A fairly extensive negative list of 1,400 items has been pruned to 991, though India is finding it difficult to accommodate ASEAN’s interests in specific agricultural products such as palm oil. The compromise offer of tariff rate quotas or TRQs (imports of specific quantities at lower customs duties) for 16 agricultural items such as crude palm oil, pepper, tea and coffee, which was made at the prime minister’s intervention, has not satisfied the trade group. The difficulties and challenges posed by the FTAs have already entered the political sphere. The recent exchange of communications between Congress president Sonia Gandhi and prime minister Manmohan Singh on the risks and benefits of such trade agreements is surely the first of such debates. The problems that have cropped up in relation to some of the bilateral free trade agreements India has already entered into might be instructive in regard to the ASEAN deal and, possibly, other such pacts in the future. For one, the Indo-Thai FTA has demonstrated not only the importance of selecting the right items for early harvest schemes (EHS), but the need to redress the inverted duty structures resulting from multiple trade agreements. Gains have largely been on the Thai side and between January and December 2005, India’s exports on account of 82 EHS items to Thailand declined by nearly 39 per cent while its imports rose by 71 per cent. Auto parts manufacturing and electronic goods companies, which already face stiff competition from Thailand, have been hard hit by the resulting inverted duty structure. The same problem has cropped up in the Indo-Sri Lankan FTA, as crude palm oil is imported into the country at over 80 per cent duty while the finished product is imported duty free. Vanaspati imports through this route surged from 0.10 lakh tonnes in 2004 to 1.70 lakh tonnes in 2005. Second, and equally worrying, is the difficult issue of rules of origin (RoO). Already there have been disconcerting reports of spices and plantation products from ASEAN member countries – such as cloves and areca-nuts from Indonesia – finding their way into the country by presenting forged documents claiming they are of Sri Lankan origin. This brings us to the question of the seemingly easy manipulation of RoO criteria as well as the problems in monitoring and compliance. In which case, especially because it involves sensitive agricultural products, it makes sense to continue to press for a stringent RoO regime. In fact, India’s concession to ASEAN on this count has prompted Thailand to press for more relaxed RoO criteria in the bilateral deal as well. Third, there is the question of how to protect the agricultural sector when countries entering into free trade agreements with India are able to export at low prices and therefore want more market access in India. A similar problem cropped up when India put on its negative list in SAFTA textile and clothing products, a major item in Bangladesh’s export basket; it was subsequently allowed some market

access through TRQs. Indonesia and Malaysia are key exporters of palm oil to India; Vietnam is an efficient producer of pepper, rubber and coffee and wants to export them to India duty free. Apart from TRQs, seeking phased tariff reductions spanning a greater length of time and building adequate safeguard measures would be important. It goes without saying also that these are temporary measures and simultaneously domestic policies must work towards raising crop yields and lowering the cost of production.

All said and done, it might be prudent at this juncture to let India’s “look east policy” slip to second place and allow ASEAN to reconsider, rather than for India to offer more concessions in these areas. m

Economic and Political Weekly May 27, 2006

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