ASEAN Free Trade Agreement – A missed opportunity?

The India-ASEAN agreement assumes significance as it is India’s first FTA (Free Trade Agreement) with a trade bloc*. ASEAN is India’s fourth largest trading partner. India’s trade with ASEAN, which was worth US$9.7 billion in 2002- 2003, increased to US$40 billion in 2007-08.

The agreement widens the scope for furthering India-ASEAN economic relations. However, careful analusis of the claim that the FTA opens up new opportunities, offered in justification of signing the agreement, calls for a more prudent conclusion. This post has tried to bring out the different important arguments over whether India got the best deal after its prolonged negotiations with the ASEAN.

India’s original negative list had 1410 sensitive items to be exempt from the purview of the agreement, which would otherwise expose Indian farmers to global competition. However, faced with rejection by the ASEAN, the list got drastically reduced to 489 in the final agreement. It is difficult to comprehend the reasons behind India’s compromise on its initial stance to protect the remaining sensitive items. This is significant, especially since the negotiations were prolonged for the same reason.

Experts are skeptical whether India will be able to eliminate the underlying differentials in productivity between India and ASEAN countries in the ten–year period it had negotiated for commodities like tea, pepper, coffee and palm oil.

Indian farmers cannot withstand the competition from ASEAN farmers at current levels of productivity. For example, productivity of pepper in Kerala is around 320 kilograms per hectare (kg/ha), as against that in Vietnam, which produces 1.2 tonnes, and Indonesia, which produces 2.3 tonnes per hectare. Similarly, productivity of coffee in India stands at 765 kg/ha while Vietnam produces 1.7 tonnes/ha. The government could have invested during the last six years, when negotiations on the composition of the negative list were ongoing, by initiating reforms to prepare the specific areas in agriculture that would be impacted for the eventual competition.

India is still in talks with the ASEAN region over the inclusion of service sector under the FTA, where India enjoys global advantage. At $150 billion, ASEAN’s imports in this sector are almost half as large as that of the USA. Central Government’s reasoning behind its huge concession on the negative list could have been prompted by its expectation of capturing a vital share of this market. Given that it took six years for the government to clinch the current deal, one can speculate that the benefits from the service sector are not imminent. However, one may arguably doubt the wisdom of risking farmers’ jobs in the present for the benefit of the service sector in the future.

Lawrence Henry, in his extensive paper on trade arrangements between India and South East Asia, suspects that the major reason for the “evolution of the ASEAN-India entente” is the perceived hegemony of China in Asia. Southeast Asian States are very interested in balancing Chinese power in the region through India.

This raises a question whether this agreement should be seen as a response to counter China’s dominance in the region? However, Aekapol Chongvilaivan, thinks that the six years of long-drawn-out discussions allowed China to travel too far ahead for India to catch up even in the sectors where India had an advantage six years ago.

 The India-ASEAN agreement can bring importance to the northeast region that shares its borders and enjoys easier access to Southeast Asian countries. Dr Amita Batra, Associate Professor, Jawaharlal Nehru University, New Delhi, thinks, “While this may be seen as an important byproduct of the India-ASEAN FTA, the advantages of the potential connectivity offered by the FTA will only contribute positively to the region’s growth process if it is first lifted out of its current low economic equilibrium.”

The agreement could have been motivated by India’s rush to ensure that it does not miss the “boat of globalization”. But one can only hope that government will succeed in strengthening the agricultural sector and brook no delay in making a quick inroad into the ASEAN’s service sector.

As the rule goes, “play to your strengths” but hide your weaknesses before you are struck.

Note –

*Trade bloc – A set of countries which engage in international trade together, and are usually related through a free trade agreement or other association.

(source – http://www.businessdictionary.com/)