India and the Association of South East Asian Nations (ASEAN) are all set to hold negotiations on February 18-19, 2024 in New Delhi to “modernise” their decade and a half old free trade agreement (FTA) and address the concerns over the rules of origin (ROO) and trade imbalance. The move is part of ongoing efforts to re-negotiate the trade agreement following a significant increase in the trade deficit with the 10-member bloc.
A review of ASEAN-India Trade in Goods Agreement (AITIGA) has been a long-standing demand of Indian businesses and the early commencement of the review would help in making the FTA trade facilitative and mutually beneficial for both India and ASEAN members. They have agreed to fast track negotiations for the existing free trade agreement in goods between the two regions and conclude the talks by 2025. India and the ASEAN-FTA for goods was signed in the year 2009 and that of services was signed in 2014. At that time, the trade deficit was around 7 to 8 US$ billion, which significantly increased to 10 US$ billion in the year 2017 and now it has increased 44 US$ billion. India's exports to ASEAN countries was USD 19.1 billion in 2008-09 and it increased to USD 44 billion in 2022-23. On the other hand, imports from the 10-nation bloc rose to USD 87.6 billion in the last fiscal as against USD 26.2 billion in 2008-09.
Renegotiation of FTA- India has been pushing for the re-negotiation of the current FTA owing to this widening deficit, as the current framework of agreement does not have a review or exit clause in the current FTA framework. The major reason for this widening trade deficit is the Indian products were not getting equal market access in the ASEAN markets. India's exports to ASEAN have been affected due to the non-reciprocity in FTA concessions, non-tariff barriers, import regulations, ROO (rules of origin) regulatory measures and quotas.
As India’s concerns some of its exports, such as steel products and pharmaceuticals are not getting full benefit of the treaty, while on the other side many products like Palm oil exports from Malaysia and Indonesia, coconuts from Malaysia and electronic imports from Vietnam and Malaysia were getting benefitted. Besides concerns have also been raised about routing of goods from the third countries in India through the ASEAN members by taking the duty advantages of the agreement. Complaints have been raised of Chinese products, such as set-top boxes, finding their way into India through the ASEAN nations by taking advantage of the concessional duty rate offered under the treaty. ASEAN has a much deeper economic engagement with China through the ASEAN- China Trade and Goods Agreement.
Along with these one other major reason for the growing deficit has been the low utilization of the FTA route by the Indian exporters to the ASEAN countries because of difficulties faced in negotiating the rules. Unlike the European Union, the 10-nation AEAN trading bloc, following an export-led-growth strategy with 1.8 billion worth market sees each member offer a different set of concessions, while seeking a uniform proposal from its partner. Multinational corporations have been investing in ASEAN as part of their China-plus-one policy. Besides, the implementation of the production-linked incentive schemes has fuelled demand for intermediate products in India. The domestic firms mostly imports capital goods, raw materials and intermediates from the ASEAN, the tariff concessions under the free trade agreements (FTAs) for these have also been advantageous to many sectors and adversely impact the domestic Indian companies, especially chemicals and metals manufacturers.
Market Access and ROO- India and the ASEAN are set to begin their negotiations on the existing free trade agreement (FTA) with a focus on market access and comprehensive Rules of Origin (ROO) regulations. The current rules of origin framework is not detailed enough, allowing exporters from the third countries to exploit concessional customs duties. In 2018-19, the sudden spike in imports from Singapore and Vietnam had raised doubts about FTAs being misused for declaring third-country goods as originating from FTA partners. The current negotiations of the FTA aim to address this issue and prevent goods from third countries being dumped in the Indian market.
The ‘ROO’ prescribes minimal processing that should be done in the FTA country, as the final manufactured product may be called ‘Originated good’ in that country. Under this provision a country that has inked an FTA with India cannot dump goods from some third country in the Indian market, by just putting a label on it. It has to undertake a prescribed value addition in that product to export to India. The existing agreement is in trade in goods, and in that the core areas are market access and ROO. In manufactured products, a domestic value addition of 35% of FOB (the cost at the frontier of the exporting country) value was mandated. Another condition for availing confessional tariff was that the final processing is to be performed within the territory of the exporting country. And also the value addition requirements must be different for agricultural products and manufactured products as agricultural products are mostly grown and processed locally, manufacturing happen in global value chains. For the current round of talks on these core areas the government had already taken the stakeholder consultations covering various sectors.
Revamping AITGA- Modernising the AITGA will include incorporating changes in the ‘ROO’ framework, which can help India to reduce the trade deficit and increase market access for Indian goods in the ASEAN nations as well as blocking the dumping of Chinese goods through the ASEAN route. The modernized AITGA will also have a chapter on the trade remedies, which will seek to provide a safety net for the domestic industry against unfair trading practices or unforeseen surges in the imports of goods. But as per the current news no new addition of areas, such as environment, labour, MSMEs or gender as the current focus is on making the existing pact much more efficient and transparent.
India–ASEAN relations- India had renewed engagements with South-East Asia during the early 1990s, and the cooperation between India and ASEAN has steadily improved. The ASEAN was formed in 1967 and India commenced the "Look East Policy (LEP)” initiative in 1991, trying to gain better access to the regional markets in the South-East Asia. Towards this objective, the “LEP” of India had transformed into “Act East Policy” in 2014. For both security and economic reasons, India requires robust diplomatic relationships with the ASEAN members. India may be able to increase its footprint in the Indo-Pacific zone and amongst Southeast Asian countries by improving its linkages with the ASEAN countries. These connection initiatives help maintain Northeast part of India in a central position, assuring the north-eastern states’ economic development. The linkages will also serve as a counter to China’s influence in the area. As majority of India’s trade is reliant on maritime security, ASEAN holds a key place in the rules-based Indo-Pacific’s security architecture. In order to fight terrorism, tax evasion, energy, climate change, security cooperation with ASEAN countries is essential. India has also been the one country that is acting as bridge between SAARC (South Asian Association for Regional Co-operation) and the ASEAN through the regional grouping BIMSTEC (Bay of Bengal Initiative for the Multi Sectoral Technical and Economic Co-operation), strengthening its position in the Asia Pacific region.
The Way forward- Going the way forward, capacity building among the exporters and importers and creating awareness among the various non-tariff barriers, the various regulatory measures becomes essential to tap the huge ASEAN markets. Further there is a need to take up consistent strategy to work on the viable solutions to reduce the trade deficit with the ASEAN. For this, building infrastructure and connectivity becomes crucial, connecting North-East part of India with the East-Asian region of Asia, where the trade feasibility would lead to reducing the supply chain costs and thereby boosting the regional trade. Similarly “Services Trade’ negotiations at a future date would lead to reducing trade deficit with ASEAN, as services exports from India as telecommunications, IT/ITES services, educational services, health tourism and further cooperation in the MSMEs have relative advantage and would be beneficial to India for correcting the asymmetry.
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