Opinion FTA with ASEAN

Finally,the India-ASEAN free trade agreement will get off the ground in Bangkok,after six years of haggling.

August 13, 2009 04:52 PM IST First published on: Aug 13, 2009 at 04:52 PM IST

Finally,the India-ASEAN free trade agreement (FTA) will get off the ground in Bangkok,after six years of haggling. One shouldn’t look at it purely as a classic FTA. It is more a Comprehensive Economic Cooperation Agreement (CECA).

In a classic FTA,restricted to manufactured goods,India’s relative gains would have been limited. While tariffs within ASEAN vary,on an average,manufacturing tariffs in ASEAN

counries are lower than those in India. Ipso facto,market access through reduction in such duties benefits ASEAN more than India. And resistance to duty reductions is immense,such as in palm oil and its derivatives,which is the main reason why negotiations took so long.

Even now,it is not quite a FTA,since tariffs will only be eliminated on around 450 tariff lines by 2015,covering around 80% of tariff lines (not value of trade).

On another 10% of items on the sensitive list,tariffs will be reduced to 5%,not 0%. This still leaves a negative list of around 500 tariff lines,such as processed food and fruit juices,natural rubber,textiles and garments,chemical and petro-chemicals and automobile products. On welfare grounds,there is no reason why there should be such exclusion.

The spirit of FTAs is invariably circumvented through such negative and sensitive lists,not to speak of rules of origin and local content requirements. Since duties on manufactured products are already low and are expected to decline further through Doha negotiations,meat of RTAs (regional trade agreements) is really in WTO-plus elements,like services. Despite Doha,there are no immediate prospects of significant liberalisation in services. It is in Indian interest to take this FTA to CECA,with liberalisation in banking,IT,telecom,education,tourism and cross-border investment agreements.

That’s already happened for Singapore and Sri Lanka is on the cards. Questions are often asked about whether India’s spaghetti bowl of RTAs serves any purpose,since they also strain the Commerce Ministry’s limited negotiating capacity.

While this is a valid point,and many of India’s RTAs seem to be driven by reasons other than economic and give an impression of being ad hoc,there are some geographical regions where RTAs do serve an economic purpose,independent of whatever happens multilaterally.

ASEAN,China,Europe,US and South Asia (driven sub-regionally rather than through SAARC) come to mind. Brazil and South Africa are somewhat different. Hence,the formalisation of increasing economic ties with ASEAN is welcome,notwithstanding the Kerala angle.