India ASEAN free trade agreement

Abstract

The Free Trade Agreement (FTA) between the Association of Southeast Asian Nations (ASEAN, including 10 nations) and India (AIFTA) was drafted on August 13, 2009 in Bangkok after six years of negotiation (starting 2003) as a part of the Framework Agreement on Comprehensive Economic Cooperation Agreement (CECA). The AIFTA, which at present only includes an agreement on trade in goods (TIG), became effective from January 01, 2010 with Malaysia, Thailand and Singapore. Agreements on services and investments once finalised will be incorporated along with the TIG to take it towards the initially envisioned CECAi. The signing of the FTA forms an important milestone in India’s Look East policy and promises to provide it access to a large and growing Asian communityii. AIFTA collectively covers a market of nearly 1.8 billion people and proposes to gradually slash tariffs for over 4,000 product lines, thereby creating one of the largest regional trade blocs in the world. The 11 countries have a combined Gross Domestic Product (GDP) of $ 2.4 Trillion, total merchandise trade of $1.7trillion and foreign direct investment inflows of $ 95.7billion. ASEAN is among India’s top five trading partner along with the EU, US, UAE and China, although owing to the recent financial crisis, trade with ASEAN has overtaken that with the US. Total bilateral trade between India and ASEAN amounted to US$ 41 Billion in 2009-10iii. Principally, free trade is expected to increase production, improve specialization and lead to other welfare improvements in the long run for consumers and producers alike. But the practical manifestations of these theories are still debatable. Moreover, how the benefit pie would be divided amongst the two trading partners is also a subject of great interest. ivAn analysis into the trade data of India, ASEAN and the world suggests that the implementation of the FTA can result in intensifying the trade dependence amongst India and ASEAN. Seen in light of the fact that currently ASEAN region exports more to India than what India exports to ASEAN, greater trade dependence may possibly result in an increase in India’s exports to ASEAN. Moreover, India has increasingly been concentrating its exports to ASEAN towards mineral fuels and mineral oilsv. It is therefore plausible that post the implementation of the FTA, these sectors will benefit more as they will be best poised to avail of their greater presence within ASEAN. We also find evidence that suggests that the trading profile between India and ASEAN is such that ASEAN exports to India when matched against India’s import profile is more compatible in contrast with India’s exports to ASEAN and its import profile. This implies that ASEAN trade will benefit more post implementation of the FTA compared to the perceived gains from trade that India is likely to experience. Thus the agreement has also created controversies with substantial domestic resistance, particularly from the plantation sectors in the southern states of the country. China has been influential in the region in different arenas and also has a FTA with ASEAN already in place, while the US held the first ever summit with leaders of Southeast Asia on the sidelines of the annual Asia-Pacific Economic Cooperation (APEC) gathering in Singapore in November 2009 with the intention of becoming more active in the region. Therefore, the success of India-ASEAN FTA from India’s perspective is critically dependent on the existence of good institutions in the country and an efficient regulatory environment such that they act as true enablers for the benefits to flow through and disperse throughout the economy. These opportunities will result in enhancing the growth of key businesses in these sectors with the benefits of income and employment generation in India that will add to the India growth momentum.