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Thursday, December 10, 2009

FTAs: The Second Best Alternative?


After six years of painstaking negotiations, India at last signed the Free Trade Agreement (FTA)—of course, relating only to goods—with the Association of South East Asian Nations (ASEAN) on August 13. It shall, however, come into force from January 1, 2010.
        The current status of WTO talks being what it is, FTAs—agreements that provide for free trade among members but increase protection against non-members—are considered to offer an instant solution to trade openness. The present agreement with a trade block of 10 countries—Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Lao PDR, Myanmar and Cambodia—that has a combined GDP of over $2 tn offers India access to a big regional market that imports goods worth $1 tn. In the year 2007-08, India-ASEAN trade, the bulk of which confines to textiles, steel, processed food, plantation crops, and chemicals, is to the tune of $40 bn. This regional block is India’s fourth largest trading partner. The agreement can become truly historical if only India succeeds in garnering at least 8 to 10% share in the imports of ASEAN block countries by taking advantage of the initial 5% duty followed by 0% duty. 
          But FTAs, unlike multilateral trade negotiations, are discriminatory in nature. As Jacob Viner, a Canadian Economist, said, they could lead to trade diversion and be harmful to both the members of the FTAs and to worldwide efficiency of resource allocation. Such agreements are also likely to attract strong opposition from the affected communities as is seen now: farming community which is engaged in production of spices, coffee, and palm oil is its active resister, followed by textile, auto and chemical industry workers. Indeed, the Chief Minister of Kerala, dubbing the agreement as ‘neo-colonist’—“one of the several threatening manifestations of the policies of globalization and liberalization”—alleged that it would harm the interests of Kerala’s agriculture by allowing duty-free import of agriculture and marine products.
          But a critical look at the provisions of the agreement does not make one believe that it is against the interests of India: there is a ‘negative list’ of items in the FTA agreement. The ‘negative and exclusion’ list includes 303 items from agricultural sector, 81 items from textile sector, 50 items from auto sector, and 17 items from chemical sector. There is also a provision in the agreement for a gradual reduction of tariffs: India’s duties on 10,885 items will be reduced between 2010 and 2019 under various tracks and different timelines. During 2010 to 2014, the duty under 7,788 tariff lines, mostly with duties ranging from 7.5 to 10%, will be reduced on an average by 1.5 to 2 percentage point annually, while in 2010 to 2017, the duty under 1,252 tariff lines, with duties ranging from 7.5 to 10%, will be reduced at an annual average reduction of 1 to 1.5 percentage point.
        The government has also ensured that tariff on critical items of interest for India would be affected with reference to high rates prevailing in 2005, which were in the range of 80% for crude palm oil, 100% for coffee and black tea, and 70% for pepper. Thus, our commitment for tariff reduction by 2019 would still ensure a tariff of 37.5% for crude palm oil at the end of 2019. Similarly, for refined palm oil, coffee, and tea, the tariff would reach a level of 45% by 2019, and for pepper, the tariff would remain at a level of 50% by 2019. There is also a bilateral safeguard mechanism in the FTA to tackle the sudden surge in imports: if imports hurt a domestic industry, safeguard measures, including imposition of safeguard duties, may be put in place for a period of up to four years. The flexibility to invoke these safeguard measures will remain available for both sides for 7–15 years.
         This time around, the government appears to have become smart by including a strong regime in the agreement for ‘rules of origin’, which ensures that no product is exported to India without at least 35% value addition in the country of export. This is sure to take care of China, or any other country routing their goods to India through ASEAN.
        Cumulatively, all these provisions would mean that India will have enough cushion to strengthen its farm sector and also make the vulnerable industries more competitive to withstand the threat of imports from these countries. Nevertheless, the government must initiate necessary steps to address the structural inadequacies of plantation sector with no loss of time. Similarly, it must also aid auto and chemical industries to build R&D and become strong enough to weather the likely threat of imports under these sectors with no further loss of time.
        There is, of course, a fear, albeit genuine, that unless services and investments come under the umbrella of FTA, India may not be able to derive the full benefits of the agreement—indeed, the current balance of trade remains in ASEAN’s favor. But there is a strong hope that it materializes shortly: Rebecca, the Co-Chairperson of the ASEAN-India Trade Negotiating Committee, while addressing the press, told that ASEAN would now seek a ‘fast track approach’ for talks for a ‘single’ follow-up accord on liberalizing the two-way flow of services and investments, and hopefully finalize it within a year’s time. But in the ultimate analysis, what matters most in today’s world of liberalization is: ‘competitiveness’ of a country’s enterprises—be it agricultural or industrial. And that’s what the government must assist to take roots in Indian businesses.  
- GRK Murty


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