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ASEAN-India Pact and Plantations: Realities of the Myths

The opposition to the ASEANIndia free trade agreement, particularly from the plantation sector of Kerala, is founded on simple static analytics - a tariff cut will reduce protection, increase imports and result in a price crash. However, a more dynamic approach reveals that imports are not only dependent on tariff reduction, but equally on productivity differences, the structure of markets and the exchange rate. Moreover, the FTA takes into account the threat of import competition through safeguard measures when there is substantial injury to domestic producers. The primary issues lie in the sphere of production, agricultural research and innovation, rather than protection under the FTA.

COMMENTARY

been highly succes sful in ensuring many

Realities of the Myths

provisions for safeguarding the varied interests of different sectors. One may then ask why the agreement K J Joseph has met with criticism from some sectors.

The opposition to the ASEAN-India free trade agreement, particularly from the plantation sector of Kerala, is founded on simple static analytics – a tariff cut will reduce protection, increase imports and result in a price crash. However, a more dynamic approach reveals that imports are not only dependent on tariff reduction, but equally on productivity differences, the structure of markets and the exchange rate. Moreover, the FTA takes into account the threat of import competition through safeguard measures when there is substantial injury to domestic producers. The primary issues lie in the sphere of production, agricultural research and innovation, rather than protection under the FTA.

This note draws from a larger study being undertaken in Centre for Development Studies, Thiruvananthapuram, at the instance of National Research Programme on Plantation Development

K J Joseph (kjjoseph@cds.ac.in) is at the Centre for Development Studies, Thiruvananthapuram.

T
he free trade agreement (FTA) between the Association of South-East Asian Nations (ASEAN) and India could be celebrated as a landmark in India’s integration with Asia and a beginning of an end to the isolation from major trading blocks. This FTA could also be considered as part of India’s strategy, in the context of newly emerging markets, to diversify her trading partners. The FTA, however, has had to face vociferous dissent from certain sectors in India.

About 80% of the traded goods subjected to tariff reduction/elimination under the FTA are divided into normal track, sensitive track, highly sensitive, special products, and the exclusion (negative) list.

In case of normal track goods, applied most favoured nation (MFN) tariff rates will be reduced and subsequently eliminated. For the sensitive track, all the applied MFN tariff rates above 5% will be reduced to 5%. Applied MFN tariff rates on special products (crude and refined palm oil, coffee, tea and pepper) will be brought down in a phased manner as follows: crude palm oil from 80% to 40%, refined palm oil from 90% to 40%, coffee and tea from 100% to 50% and pepper from 70% to 51% by 2019. The highly sensitive list has three categories of products with different reduction commitments by 31 December 2019. The applied MFN tariff rates in the first category are to be reduced to 50%, in the second category by 50% and in the third category by 25%. Finally there is a negative list of 489 pro ducts that includes 303 items of the agricul tural sector, 27 items of fisheries, 81 items from textiles, 50 items of the auto sector and 17 items of the chemicals sector.1

The agreement provided for safeguard measures in case a country’s exports exceed 3% of imports by the partner country and cause substantial injury to the domestic producers. The agreement also has a fairly strict rule of origin stipulating a value addition of at least 35% or a change in the tariff subheading level of the harmonised

October 31, 2009

This has been based on concerns about the plausible adverse effect on domestic producers due to imports under the FTA and the resultant price crash. The argument is perhaps a result of the drastic decline in the price of all plantation crops in the late 1990s, which is still fresh in memory. The FTA being quintessentially an economic issue, an analysis independent of politics would reveal that the contentions are burdened with a number of myths.

The purpose of this note is to highlight the realities of these myths and clear the debris so that the ground is made for replanting plantation development in the country. It is also argued that integration with ASE-AN perhaps offers the last opportunity to address the commodity problématique and to open up new prospects for the millions depending on the plantation sector.

Impact at the Macro Level

Predicting the impact of the FTA in precise terms is a difficult task. The theory of customs unions (Viner 1950) tells us that the net welfare outcome of an FTA would depend on the balance between trade creating and trade diverting influences of tariff reduction. The recent theoretical developments and empirical evidence tends to suggest that FTAs, especially the ones between developing countries, are mutually beneficial. Yet one cannot ignore that the extent of benefit would vary between countries, between sectors within countries and also across time. This is inter alia on account of the differences in the characteristics of partners, leading to varying sectoral complimentarity, and the specific context in which trade liberalisation takes place under the FTA.

With the entry of Cambodia, Laos, Myanmar and Vietnam (known as new ASEAN), ASEAN today is a heterogeneous group of countries with varying levels of development. The old ASEAN (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) with the help of foreign direct investment (FDI) have built export competitiveness in a wide range of

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medium and high technology industries, and enjoy higher per capita incomes. But the new ASEAN, with the possible exception of Vietnam, exhibit many characteristics of less developed economies with lower per capita incomes originating from the primary sector, with manufacturing sector in its infancy (Joseph 2006). The trade between India and different member countries of ASEAN reflects their differential capabilities and stages of development.

The FTA takes place in a context wherein India’s trade with ASEAN is growing at a rate higher than that with rest of the world. To illustrate, during 2001-07 exports to and imports from ASEAN recorded an annual average growth rate of 25.7% and 29.5% respectively, as compared to 22% and 27% with rest of the world. Similarly, India’s trade deficit with ASEAN has also been growing faster. During 2001-07 it increased more than sevenfold from $0.9 billion to $7.1 billion as compared to a little more than 1.5 times increase (from $33.9 billion to $55.5 billion) with rest of the world. Within ASEAN bulk of the trade deficit was with old ASEAN as they accounted for 89% of exports and 95% of imports of India during the period under discussion.

Trade with the new ASEAN has been in India’s favour. During 2001-07 India’s exports to and imports from new ASEAN recorded an annual average growth rate of 30.3% and 15.6% respectively leading to a trade surplus for India to the tune of over $1 billion in 2007. This has been mostly due to trade with Vietnam – the most dynamic among the new ASEAN countries.

In a context of a growing trade deficit with ASEAN, India could have two options

– a static approach of raising the tariff barriers or a dynamic approach of liberalising trade in commodities, services and investment. Drawing from her experience under external liberalisation since 1991 that led to a healthy external sector, India opted for the latter strategy. Such a strategy, it is expected, would help in harnessing growing synergies between India and the ASEAN (Sen et al 2004, Asher and Sen 2005, Cheow 2005) and result in more efficiency seeking investment as has happened in case of India and Sri Lanka (Kelegama and Mukherjee 2007). Also, given India’s comparative advantage in services, a greater access to the growing service

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market of ASEAN, which is highly restricted at present (Karmakar 2005), would help India offset the deficit in merchandise.

Nonetheless, a short run adverse impact of the FTA on trade balance cannot be ruled out. As per the tariff data provided by the World Trade Organisation (WTO)2 the applied MFN tariff for all the products in India (14.5%) is significantly higher than that of the old ASEAN and even higher than the new ASEAN with the possible exception of Vietnam. To the extent that applied MFN tariff is low at present in ASEAN and a further reduction would be negligible under the FTA, India cannot expect much tariff r eduction induced increase in exports to ASEAN. On the contrary, for ASEAN, given the higher applied MFN tariff in India at present, further reduction under the FTA would help increase their exports to India (Pal and Dasgupta 2008, 2009). Scholars also fear that signing of the FTA in goods could weaken India’s negotiating position while discussing opening up of trade in services (Pal and Dasgupta 2009).

Sectoral Impact: Case of Plantations

The likely impact of the FTA on plantations can be analysed by either using simple static analytics or a dynamic perspective tempered by reality. Those opposing the FTA, by adopting the former approach, fear increased imports on the following grounds. With the ongoing Initiative for ASEAN Integration (IAI) and other measures to level the development divide among ASEAN countries, Cambodia, Laos and Myanmar are likely to record a better economic performance in the years to come as is being currently experienced in Vietnam. In such a context, facilitated by the FTA, India’s export of manufactures and capital goods to these countries would increase. This could further worsen their trade deficit, as is the case with Vietnam where India presently has a trade surplus of over $1 billion. In such an eventuality these countries would be left with hardly any option but to increase their exports to India at any cost. Being countries with a primary sector focus and agro-climatic conditions similar to southern states like Kerala, their primary exports would be competing with crops from these states. Competition from Vietnam has already been felt with its full intensity.

In a similar vein there is a perception of heightened import competition from other ASEAN countries as well. Compared to India, old ASEAN countries like Malaysia, Indonesia and Thailand have a much higher production of plantation commodities like black pepper, natural rubber, coffee and to a lesser extent, tea (Table 2, p 17). Owing to a large and growing domestic market, production of these crops in India is increasingly for domestic consumption. Production of plantation crops in ASEAN, on the other hand, is mostly for the world market as their domestic market is very small. Yet,

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Table 1: Importance of India for ASEAN Exports and Their Share in the implementation of the India-SriIndia’s Import for Select Plantation Commodities

Lanka FTA, import of pepper (black

Crops 2000 2007 Share of India Share in India’s Share of India Share in India’s and green) from Sri Lanka to India in Total Export Import in Total Export Import

recorded a nearly sixfold increase

Vietnam Coffee 0.22 28.34 0.24 13.65during 2001 to 2008 ($3.4 to $18.2

Tea 1.31 9.64 0.52 2.39million) as predicted by Harilal and

Pepper 1.05 11.31 3.79 26.98Joseph (1999). Similarly, after the Natural rubber 0.41 10.12 0.51 2.79

FTA with Thailand, the import of

Malaysia

natural rubber from Thailand in

Coffee 0.07 0.04 0.92 0.09 Tea 0.00creased nearly tenfold (from $12

Pepper 1.01 7.33 0.24 0.40million in 2005 to $116 million in

Natural rubber 0.30 29.70 0.52 4.66 2008). Import from other countries Thailand

also recorded a similar increasing

Coffee 0.01 0.08 1.83 0.99

trend. Thus, we find an association

Tea 0.01 0.00 Pepper 0.01 0.00between tariff and import. But we

Natural rubber 0.13 28.94 1.93 45.59 cannot jump into premature con-

Indonesia

clusions as association cannot be

Coffee 19.24 54.64 15.65 36.69

construed as causation.

Tea 47.30 32.66 11.89

Our estimate of the elasticity of

Pepper 67.62 31.13 72.36 43.58 Natural rubber 3.43 9.20 17.14 38.95 import with respect to tariff is not

Source: The World Bank and UNCTAD, COMTRADE database provided as found statistically significant. Thus, part of World Integrated Trade Solution (WITS).

the negative relationship between India accounts for only a negligible share tariff and imports predicted in theory does of their total exports while these exports not stand the test of Indian reality. How does form a substantial part of India’s imports one account for such a deviation between (Table 1). To illustrate, India accounts for theory and practice? This has to be seen only about 3.8% of Vietnam’s export of against India’s import policy with provision pepper while their share in India’s import for duty-free import of raw materials for exis as high as 27%. Similarly, India provides ports. A bulk of the import of plantation comonly 1.9% of the export market for Thai modities that we have noted above has been natural rubber but it accounts for over 45% through advance licensing route (dutyof India’s imports. Hence given the large free) for processing and export, as noted by domestic market of India and large-scale George and Joseph (2005). This was further supply of these commodities in the ASEAN confirmed by the author’s discussion with countries, the removal of tariff barriers, it is feared, would result in increased import competition and lead to a fall in domestic prices. The solution lies in doing away with the FTA such that the plantation sector could be fortified from external competition. Such simple static analytics might appeal to those opposing the FTA. But if the objective is to develop a vibrant plantation sector and improve the livelihood of millions involved, there is need for a dynamic approach and a more careful analysis.

From Perception to Reality

To appreciate the reality we need to move out of the simple analytics to a dynamic analysis of the real world. The key issue will be the actual (observed) relation between tariff rate and import on the one hand and import and domestic price on the other, the latter relation determining the fortunes of the plantation sector. It is found that since

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officials in commodity boards. Such a policy has the laudable objective of promoting employment through value addition, and aspires to make India a global processing hub for plantation commodities. To the extent that such imports provide backward linkages to the plantation sector abroad and weakens the plantation sector within, it has the unintended effect of robbing Paul to pay Peter. Hence one fails to understand the econo mic logic of being blissful to dutyfree imports while raising a voice of dissent against an FTA that envisages no tariff reduction in most commodities and only a phased reduction for a few others. If the real concern is with plantations and the millions involved therein, the attempt should be to correct the anomalies in the import regime and help develop a vibrant processing sector that provides growth impulses to the country’s plantation sector. Given the ecologically fragile regions this sector operates in (which are more backward than some of the least deve loped countries that were exempted from tariff reduction com mitment under the WTO), and its role in inclusive growth, we do not need a Kautilya to make the case for subsidising this sector.

Let us now turn to the issue of imports and domestic prices. We have seen that after the India-Thailand FTA there has been a massive increase in imports of natural rubber. But this import was not associated with any decline in prices. Instead the price of

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of India’s productivity. On

Natural rubber

the basis of observed pro

1995 51.12 (65) 55.68 (63) 103.91 (63) 33.78 1325.80

ductivity differences be

2007 74.87 (36) 69.60 (36) 128.99 (36) 82.57 (36) 1820.00

Production 2755172 1199600 3024207 601700 819000 tween India and compet-

Black pepper

ing countries in some of

1995 262.58 (65) 485.96 1137.39 550.48 314.00

the crops, it is evident

2007 208.92 (70) 451.56 (70) 1190.57 (70) 600.35 (70) 280.40

that even if India reverts

Production 74131 19000 10419 90300 69000 Coffee to the tariff levels in pre1995 82.66 (10) 115.74 184.92 214.88 654.50

liberalisation period, these

2007 106.65 (100) 115.31 (100) 125.16 (100) 300.99 (100) 839.60

crops could not be pro-

Production 676475 40000 55660 961200 288000

tected to the level of their

Tea 1995 77.09 (10) 115.62 17.03 32.23 1761.40 satisfaction. For instance,

2007 77.16 (100) 46.22 (100) 17.03 (100) 87.42 (10) 1701.10 the productivity of black

Production 150224 2850 6000 164000 949220

pepper in Malaysia and

Figures in parenthesis are MFN Applied tariff. Productivity in India is given as kg/hectare. Production figures are in MT and for the year 2007.

Indonesia is higher by

Source: Estimates based on FAO statistics.Tariff data is from TRAINS proved as parts of WITS.

208% and 451% respec

natural rubber recorded nearly a threefold increase – a rate of increase unheard of in the history of rubber. Similar instances can be enumerated. The obser ved pattern needs to be seen against the reality wherein domestic prices are governed by prices in the world market which, in turn are shaped by global demand-supply conditions and other factors. In such a context, it is rather myopic to argue that domestic prices are determined by imports. It is not to argue that imports have no bearing on domestic prices. In fact, even a threat of imports is sufficient to cause short run price fluctuations.

To be fair, the threat of such import competition has already been taken into account in the FTA. Hence some of the products are permitted to enjoy the ongoing level of protection (negative list) while in others tariff reduction has been effected in a phased manner (special products) such that productivity and competitiveness can be built up. More importantly, since the share in India’s total import is more than 3% in all the partner countries, India could resort to safeguard measures in case of substantial injury to the local producers. What is needed is an effective mechanism to monitor prices and markets for which there is no dearth of institutional mechanism at present.

For those opposing the FTA, since tariff cut under the FTA would lead to reduction in protection, tariffs need to be maintained to shield the domestic industry from import competition. It is productivity along with cost of production and exchange rate that determines the required level of tariff. Table 2 presents data on productivity (production per hectare) in competing ASEAN tively, and that of Vietnam is higher by 600%. In such a context it is rather naïve to believe that it is the tariff (70% at present) that protects black pepper production in India. In other crops like coffee and tea India’s producti vity disadvantage is lower and in natural rubber India’s productivity is the highest (Table 2). Yet, in natural rubber India maintains an effective applied tariff rate of 36% and still f aces import competition. Thus viewed, tariff as a measure of protection has its o bvious limits. Perhaps product differentiation could be a more powerful means of protection.

Those who oppose the FTA consider it only as a source of deadly competition. It is ignored that integration between countries also provides immense scope for cooperation to address common problems. It is generally agreed that while commodity production is a source of foreign exchange and livelihood for millions in both India and ASEAN, the globally determined commodity prices have been historically susceptible to cyclical fluctuations – the socalled commodity problématique. In a c ontext wherein earlier attempts to address the commodity problem failed, the moot question is whether the ASEAN-India i ntegration will help in addressing this problem. Since India and ASEAN together account for a significant part of the global production of most of the plantation crops, the FTA, together with the Agreement on Comprehensive Economic Cooperation leave scope for constructive cooperation to influence the international price and address the commodity problématique. Here it is worth remembering that with respect to the plantation sector, the India-ASEAN v ision 2020 calls for, among others, the setting up of India-ASEAN Commodity Boards for price stabilisation through supply management, common brand building, joint marketing and research and other mutually beneficial initiatives (RIS 2004). Thus the FTA, contrary to popular arguments, could breathe fresh life into the plantation sector and the well-being of millions, mostly women and marginal farmers, who derive their livelihood from plantations.

Conclusions

The extent of gain and loss to the parties involved vary in most agreements. The ASEAN-India FTA is no exception. There is no denying that given the present state of

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plantations, it has the potential to be one such affected sector. However, we have argued that the additional threat posed by the FTA is not substantial when compared to the threat that the sector has been confronting over the years under the trade policy regime that has the provision for duty-free import.

Since integration leaves scope for both cooperation and competition, there is the potential to collectively address the commodity problem by harnessing the new possibilities for coordinated action to influence commodity prices. But for any such actions to be effective and sustainable there is the need to bridge the efficiency gap in the sector across countries. Thus viewed, the plantation sector in India cannot afford to continue, with or without ASEAN, in the current form. Here neither the protection provided under FTA nor the productivity enhancing efforts would be sufficient. There are various issues that need urgent attention in the sphere of production, processing and marketing, labour, agricultural research

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and innovation including the application of new techno logies and, needless to say, the deve lop ment of much needed general and specific infrastructure. But what appears to be missing is the willingness for institutional reforms at various levels to facilitate the emergence of a vibrant system of innovation and production that involves the coordinated actions of dif ferent stakeholders.

Notes

1 For details see http://commerce.nic.in/trade/international_ta_indasean.asp

2 Tariff data is accessible at http://www.wto.org/ english/res_e/booksp_e/tariff_profiles08_e.pdf

References

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Cheow, E T C (2005): “Strategic Relevance of Asian Economic Integration”, Economic & Political Weekly, 3 September, pp 3960-67.

Damodaran, A (2002): “Conflict of Trade Facilitating Environmental Regulations with Biodiversity Concerns: Case of Coffee Farming Units in India”, World Development, Vol 30, No 7, pp 1123-35.

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George, T K and J Joseph (2005): “Value Addition or Value Acquisition? Travails of the Plantation Sector in the Era of Globalisation”, Economic & Political Weekly, Vol 40, No 26, pp 2681-87.

Harilal, K N and K J Joseph (1999): “India-Sri Lanka Free Trade Accord”, Economic & Political Weekly, Vol 34, No 13, 27 March, pp 750-53.

Joseph, K J (2006): Information Technology, Innovation System and Trade Regime in Developing Countries – India and the ASEAN (New York: Palgrave Macmillan).

Karmakar, S (2005): “India-ASEAN Cooperation in Services – An Overview”, Working Paper No 176 (New Delhi: ICRIER).

Kelegama, S and I N Mukherjee (2007): “India-Sri Lanka Bilateral Free Trade Agreement: Six Years Performance and Beyond”, RIS Discussion Paper No 119 (New Delhi: Research and Information System for Developing Countries).

Pal, P and M Dasgupta (2008): “Does a Free Trade Agreement with ASEAN Make Sense?”, Economic & Political Weekly, 15 November, pp 8-12.

– (2009): “The ASEAN-India Free Trade Agreement: An Assessment”, Economic & Political Weekly, 19 September, pp 11-15.

Ramesh, Jairam (2008): “India’s Economic Integration with Asia”, Invited lecture delivered at the Asian Development Bank (mimeo).

RIS (2004): ASEAN-India Vision 2020 – Working Together for a Shared Prosperity, ASEAN-India Network of Think-Tanks and Research and Information System for Developing Countries, New Delhi.

Sen, R, M G Asher and R S Rajan (2004): “ASEAN-India Economic Relations: Current Status and F uture Prospects”, Economic & Political Weekly, 17 July, pp 3296-3307.

Viner, J (1950): The Customs Union Issue (New York: Carnegie Endowment for International Peace).

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