Impact analysis of India-Korea FTA

Abstract

This study is a part of a comprehensive study on Impact Analysis of India’s Free Trade Agreements conducted by IIM Bangalore for the Department of Economic Affairs, Ministry of Finance, Government of India. The overall study covers the ASEAN-India, India-Japan, India-Korea, India-Thailand, India-Singapore FTAs, among others. This paper focuses on analysing the impact of the India’s Comprehensive Economic Partnership Agreement (CEPA) with the Republic of Korea signed in 2009. In the past two decades, most economies in the world have entered into various kinds of regional and bilateral agreements. These include free trade agreements (FTAs), preferential trade agreements (PTAs), economic cooperation and economic partnership agreements (ECAs and EPAs), among others. These are between countries with similar as well as vastly different levels of development, and both within and across regions. India has been no exception to this trend and in recent years has significantly expanded its bilateral trade and investment relations with a growing number of countries, including Korea. Though economic theory stipulates that FTAs should enable trade creation and minimize trade diversion to ensure net welfare gains to all economies involved, it is not clear to what extent these basic economic principles have been followed by India in its pursuit of the FTA. Indian industry has been sceptical about the gains accruing to India after the entry into force of these FTAs and is of the opinion that such agreements have helped the exporters of other countries while Indian exporters have not gained much or have been hurt by increased import competition. Further, South Korea has called for reopening the CEPA with India recently. Underlining the need to negotiate CEPA “with authenticity”, the South Korean President Park Geun-hye Ms. Park pointed out that since its operationalization, trade in volume terms has increased by 70 per cent but its content does not match with that of other FTAs. Ms. Park felt there was enough potential to raise the level of trade and investment and suggested liberalisation of the visa regime, a proposal that has already been accepted in-principle by India. Against this backdrop, there is a need to examine the economic rationale underlying the India-Korea CEPA and to what extent basic economic principles of trade creation and trade diversion have been kept in mind when designing these agreements and when making as well as securing concessions in different sectors. There is also a need to assess the impact of the CEPA on India’s exports to and imports from South Korea in some of the major sectors of trade interest and to what extent domestic factors such as our tariff structure or business environment may be shaping this impact. There is also a need to assess the effect of third country FTAs on the bilateral trade impact with South Korea, i.e., what is the margin of preference India has secured from South Korea given that the latter has also offered concessions to third countries under their other FTAs and to what extent has there been utilization of the concessions given by India by third countries through South Korean markets. Hence, for various reasons, a comprehensive analysis of the India-Korea CEPA is required to take stock of how well it has been negotiated, its impact thus far and thereby help guide India’s future negotiation in the upcoming round of discussions.