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/)

Kerala’s fear of INDIA – ASEAN Free Trade Agreement: A reality check

Led by Communist Party of India (Marxist), hundred of thousands of Kerala residents took to the streets to form a mammoth human chain from one end of the Kerala to the other to express their anger over the recently signed India-ASEAN Free Trade Agreement (FTA).

The agreement seeks to remove or reduce the tariff on trade-in-goods including sensitive products such as coffee, tea, palm oil and pepper in a phased manner. The import tax on Kerala’s products like coffee, tea, rubber, copra, coconut, coir, cashew, pepper, cardamom, coconut oil etc will have to be brought down to 50% or less by 2019. Import tax for Palm Oil has to be brought down to 40%. At present the import tax is cent percent for tea and coffee. It is 70% for pepper and 90% for Palm Oil. The liberalisation in trading of cash crops will expose Kerala’s small and marginal farmers in the plantation sector to the competition and this, some argue, may lead to over one million job losses. The partial duty cuts in 2019 will mean that the import prices will become cheaper than the local produce which will eventually jeopardise the interests of millions of cash crop farmers.

The central government seems to betting on the argument that India’s billion plus population as against the ASEAN’s 600 million population ultimately works in India’s favour presenting a substantial opportunity for Indian exporters and businessmen. The Centre argues that the agreement gives Indian exporters a tremendous opportunity to gain additional market space in the sectors like machinery and machine parts, steel and steel products, and agricultural products such as oilcakes, wheat, auto components, chemicals and synthetic textiles where the bilateral trade in the year 2007-08 stands at nearly $40 billion.

The Centre seems to have a different view on the impact of the agreement on Kerala’s economy. Anand Sharma, commerce minister, told a delegation of Left parties on October 5 that the sensitive farm sectors have been protected in the FTA. “What we will definitely do is to have some experts look into the plantation sector and their problems so that the eGoM has inputs from people who have more knowledge. But let me make it clear that problems of our plantation sector are structural and have nothing to do with the Indo-Asean FTA.” The minister also urged the government to take measures to increase the agricultural productivity by engaging skilled labour.

If we attempt to gauge the effects of the agreement, there are over 300,000 workers in the coir sector and nearly 250,000 in the cashew sector whose jobs will be at stake once the pact comes into effect from Jan 1, 2010. According to All India Kissan Sabha, the productivity levels of Kerala’s farmers are far lower than their counterparts in the ASEAN region who enjoy the benefits of economies of scale. The difference in productivity levels between Indian farmers and ASEAN farmers is so vast that any reduction in the existing tariff rates will “sound the death knell” for over one million farmers and labourers engaged in the plantation and maritime sectors.

The central government’s argument that coconut is in the negative list and the coconut farmers are thus protected does not hold ground in reality. Reduction in palm oil tariff will have severe implications on the coconut farmers as Palm oil is a substitute of coconut oil and the deal will enable palm oil to take over the market. The import of palm oil has already caused huge economic distress among the groundnut farmers, leading to suicides in regions such as Ananthapur in Andhra Pradesh.

Vani Archana, Indian Council of Research in International Economic Relations (ICRIER), said that “an FTA will adversely affect the unorganized sectors, especially the agricultural sectors, as the domestic market will be flooded with cheap imports. This view holds true for India, because of low productivity in these areas. The Indian government must meet this challenge by providing all necessary and reasonable support to the various stakeholders in the trade agreement, especially the unorganized sectors like agriculture, so that their production efficiency is brought in line with those of the other ASEAN countries. Measures should be taken by the governmental and non-governmental organizations, along with self-governed bodies of farmers, to strengthen the competitiveness of India’s agricultural sector.”

So the deal is not just a case of a substantial opportunity riddled with “minor” challenges as the Central government puts it.