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The ASEAN-India Free Trade Agreement: An Assessment

Signing the trade in goods agreement with the Association of South-East Asian Nations has evoked mixed reactions in India. The plantation sector, the marine products industry and some light manufacturing industries are feeling threatened by this deal. This is not completely unexpected as some of the south-east Asian countries have a much higher level of efficiency in these sectors as compared to India. This article studies the tariff schedule of India and does a preliminary evaluation of the ASEAN-India free trade agreement.

COMMENTARY

The ASEAN-India Free Trade Agreement: An Assessment the tariff schedule of India and does a preliminary evaluation of the Aifta. 2 India’s Tariff Commitments The TIG agreement between India and ASEAN takes a number of measures to
Parthapratim Pal, Mitali Dasgupta improve trade flow between the regions.

Signing the trade in goods agreement with the Association of South-East Asian Nations has evoked mixed reactions in India. The plantation sector, the marine products industry and some light manufacturing industries are feeling threatened by this deal. This is not completely unexpected as some of the south-east Asian countries have a much higher level of efficiency in these sectors as compared to India. This article studies the tariff schedule of India and does a preliminary evaluation of the ASEAN-India free trade agreement.

The authors benefited from discussions with C P Chandrasekhar and Jayati Ghosh.

Parthapratim Pal (parthapal@iimcal.ac.in) is with Indian Institute of Management Calcutta and Mitali Dasgupta (mitalig@teri.res.in) is with the Energy and Resources Institute.

Economic & Political Weekly

EPW
September 19, 2009

1 Introduction

A
s a part of its “look east” policy, India has been pursuing closer economic and strategic ties with the countries of south-east Asia. In August this year, India signed a free trade agreement (FTA) for goods with the ten-member Association of South-East Asian Nations (ASEAN). The ASEAN-India FTA (AIFTA) can be considered as a major foray by India into a formidable regional trade block. This agreement will see tariff liberalisation for a large number of products traded between India and the ASEAN countries. According to official notifications, the trade in goods (TIG) agreement focuses on tariff liberalisation on mutually agreed tariff lines from both the sides and is targeted to eliminate tariffs on 80% of the tariff lines accounting for 75% of the trade in a gradual manner starting from 1 January 2010.1 The agreement also provides some flexibility to India and ASEAN countries to exclude some of the products from the tariff concessions or eliminations. India has excluded 489 items from the list of tariff concessions and 590 items from the list of tariff elimination. India and ASEAN are currently negotiating agreements on “Trade in Services and Investment”. It is expected that these agreements will be signed by the end of 2009. India has a significant stake in these negotiations as it is expected that better access to the services market in ASEAN will be beneficial to Indian business and industry.

However, signing the TIG agreement has evoked mixed reactions in India. Particularly the plantation sector, the marine products industry and some light manufacturing industries are feeling threatened by this deal. This is not completely unexpected as some of the south-east Asian countries have a much higher level of efficiency in these sectors as compared to India. This paper studies

vol xliv no 38

According to the agreement, the involved countries will not institute or maintain any non-tariff measure on the importation of goods from other members of the FTA. They have also pledged to reduce tariff rates on a large number of tariff lines. These reductions will be done according to the country-specific schedules. India has two tariff reduction schedules for the AIFTA. There is a tariff

2

reduction schedule for ASEAN 5+CLMV.But India has a different schedule for the Philippines. Here we study the general tariff reduction schedule of India, which is relevant for the nine ASEAN countries.

The ASEAN-India FTA or AIFTA classifies the tariff lines into four broad heads. These are:

  • Normal track (NT): The applied MFN rates will be reduced and subsequently eliminated. This is divided into 2 subcategories called Normal track 1 (NT-1) and Normal track 2 (NT-2). The difference between the two is that NT-2 has a longer implementation period (till 2021) than NT-1 (till 2018).
  • Sensitive track (ST): For the first stage of implementation, applied most favoured nation (MFN) rates that are above 5% will be reduced to 5% in accordance with the country-specific reduction schedules.
  • Special products: These refer to some select products for which India has decided to reduce tariff rates at a much more gradual pace than either the normal track or the sensitive track.
  • Exclusion list (EL): For these products no reduction commitments have been made. But it has been mentioned in the agreement that the exclusion list shall be subject to an annual tariff review with a view to improving market access.
  • India, in its general tariff schedule (the one for ASEAN+CLMV), has listed 12,169 tariff lines at HS-8 digit level3 under the aforementioned four heads. On the basis of this categorisation,

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    COMMENTARY

    Figure 1 shows the break-up of India’s tariff schedule for the different reduction schedules mentioned above. From the figure it can be seen that about 74% of India’s tariff lines will be under the “NT”

    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

    Tariff Line AIFTA Preferential Tariffs

    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

    Not Later than 1 January it is because of this clause that some of the

    Base Rate 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 31 December2019

    products with zero base rate are put under

    CPO 80 76 72 68 64 60 56 52 48 44 40 37.5

    the el instead of nt.

    RPO 90 86 82 78 74 70 6662 58 54 50 45

    Coffee 100 95 90 85 80 75 70 65 60 55 50 45

    3 Does India Stand to Benefit?

    Black tea 100 95 90 85 80 75 70 65 60 55 50 45

    The above analysis shows that for about

    Pepper 70 68 66 64 62 60 58 56 54 52 51 50 Source: India-ASEAN Trade in Goods Agreement signed on 13 August 2009. 89% of its tariff lines, India has made

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    Figure 2: Frequency Distrubution of MFN Tariff Rates for Tariff Lines in the Exclusion trade balance is ex-List (at HS-8 digit level)

    pected to deteriorate

    400 due to the AIFTA. In

    391 400

    144
    119
    49 41
    4 20 8 1 6 6 18 19 26 14 1318
    another paper (Pal 350

    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

    0 5 75 10 15 20 25 30 40 45 50 60 70 75 80 85 100 150 Base MFN tariff rates (ad valorem rates in %) in the ASEAN because Source: Authors’ calculation based on India’s tariff schedule to ASEAN 5 and CLMV.

    of the AIFTA deal.

    On the other 100 hand, ASEAN coun-

    Figure 3: Export GDP Ratio of Select ASEAN Countries and India

    94.7

    Number of HS-8 digit tariff lines

    68.4 61.5 47.3 34.2 27.3 22.6 14.5 Vietnam Thailand Cambodia Philippines Indonesia Lao PDR India Source: Asian Development Bank, based on data for 2007.

    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

    Total Trade 2004-05 2005-06 2006-07 2007-08 2008-09
    (April-December)
    Total imports 9114.7 10883.7 18089.7 22674.6 20238.7
    Total exports 8425.9 10411.3 12603.9 16384.2 13777.1
    Trade balance -688.8 -472.4 -5485.8 -6290.4 -6461.6
    Non-edible-oil trade
    Total imports (minus imports of edible oil) 7319.2 9757.2 16789.4 20901.2 18156.0
    The table shows that even without tak- Total exports (minus exports of edible oil) 8405.7 10384.6 12580.5 16336.5 13726.6
    ing edible oil or mineral oil trade into con- Trade balance (without edible oil trade) 1086.5 627.4 -4209.0 -4564.8 -4429.4
    sideration, India had a trade deficit with Non-mineral-oil trade Total imports (minus imports of mineral oil) 9010.4 10546.6 12859.7 15315.3 12812.1
    ASEAN for the last three years. If India is Total exports (minus exports of mineral oil) 6196.3 7948.4 8408.3 11484.4 9925.0
    further liberalising its tariff rates vis-à-vis Trade balance (without mineral oil trade) -2814.2 -2598.2 -4451.4 -3830.9 -2887.1
    these countries, then unless there is a *Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam Soc Rep.
    HS-15 is taken as edible oil, HS 27 is taken as mineral oil.
    major gain in market share in ASEAN, India’s Source: Ministry of Commerce, Government of India.
    Economic & Political Weekly September 19, 2009 vol xliv no 38 13
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    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).

    Call for Papers

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    4 WTO allows an RTA if the RTA has a “significant References Ministry of Commerce, Government of India: “Trade

    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.

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