Back to their corners

The proposed free trade area agreement between India and the Association of South East Asian Nations (ASEAN) is unlikely to materialise in the near future. Deep divisions have crept up on both sides over the possible benefits from such an agreement. A section of India's policymakers are apprehensive about cheap imports flooding the market and how this would effect vulnerable sections of the population, particularly farmers and workers in labour-intensive industries such as textiles. Some within ASEAN also contend that India is unlikely to fully open its economy to duty-free imports, thereby diluting the potential effectiveness of any FTA. The main bone of contention is the 'negative list', or those items that would be excluded from the proposed FTA agreement. These would have limited or no tariff concessions. Matters came to a head on 25 July this year, when Rafidah Aziz, Malaysia's Trade and Industries Minister, announced that ASEAN had suspended talks on an FTA agreement with India on account of the latter's reluctance to open up its markets. She pointed out that the negative list of 850-odd items comprised roughly 30 percent of the exports of ASEAN members to India. Rao Inderjit Singh, India's Deputy Minister for Defence, who happened to be in Kuala Lumpur at the time, immediately undertook damage control. He told journalists that the fact that India had reduced the number of items to be placed on the negative list – from 1414 to around 850 – actually indicated its commitment to making the agreement work. He hinted that the list could be further reduced, and added that the talks were still very much alive. Singh also claimed that Aziz's views were not representative of the entire ASEAN, which at present comprises ten countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam. Singapore's Foreign Minister, George Yeo, during a meeting with Indian negotiator Rajiv Sikri, even offered to draft a statement to the effect that Rafidah Aziz "was not speaking on behalf of ASEAN". In August, India offered further concessions by again cutting the number of products on its negative list, bringing the total down from 850 to 560. The then-Special Secretary to India's Ministry of Commerce and Industry, Gopal K Pillai, stated that New Delhi was willing to offer tariff concessions for 94 percent of ASEAN exports to India. Such a plan would, for instance, reduce tariffs on refined palm oil from 90 to 60 percent, crude palm oil from 80 to 50 percent, black tea from 100 to 50 percent and pepper from 70 to 50 percent. However, New Delhi continued its refusal to give agricultural concessions, on the grounds that doing so could adversely affect the livelihoods of Indian subsistence farmers. The concessions resulted in the resumption of negotiations, although Malaysia's Minister Aziz still felt that India's timetable for reducing tariffs was too slow. The Indian proposal to reduce tariffs on palm-oil products over 16 years also came under fire, with ASEAN officials arguing that New Delhi should offer concessions, such as cutting duties on palm oil gradually over a 10-year period after an initial five-year period. India has also offered to implement Tariff Rate Quotas, which apply a certain customs duty to a specified quantity of a particular import, and a different duty rate to imports above that quota. However, the negotiations are likely to hit another roadblock in the future, given the fairly uncompromising stances taken by both sides on other issues. Reactive regionalism The disagreement over India's negative list has served as a reality check on New Delhi's Look East policy. The impetus for wooing the Southeast Asian 'tigers' came from the repeated failure of multilateral talks at the World Trade Organisation (WTO) – in Seattle during 1999, Cancun in 2003, Hong Kong in 2005, and Geneva this past June. Those failures have spurred many countries, including India, to look towards regional cooperation and bilateral agreements as viable substitutes for time-consuming negotiations at the WTO. For New Delhi, an added impetus to forge closer economic ties with Southeast Asia came from the stiff competition posed by China. That has not stopped either country, however, from making efforts to engage the other as trading partners. Thus, regionalism has gained ground as a reaction to the failure of the multilateral process to put in place a rule-based international trading system. India gained a foothold in the Asia-Pacific region after ASEAN and its dialogue partners recognised India's membership in the ASEAN Regional Forum. The first India-ASEAN Economic Ministers meet was held in 2002, and an initial regional cooperation agreement was signed in October 2003. This provided for an FTA arrangement among the countries, which would be implemented in a phased manner – by 2011 India would have such an arrangement with longstanding ASEAN countries, and by 2016 with the rest. The 2003 agreement also included the Early Harvest Programme (EHP) of immediate deliverables, and unilateral trade preferences by India in favour of ASEAN's least developed countries, Cambodia, Laos and Burma. The EHP provided for tariff eliminations by 31 October 2007 for the older ASEAN countries – Indonesia, Malaysia, Singapore, Thailand, the Philippines and Brunei – and by 31 October 2010 for the new member states. The agreement adopted by the ASEAN-India Partnership in 2004 reinforced the intentions of both parties to deepen their commercial links. Currently, India has bilateral agreements with Singapore and Thailand. In 2005, it became evident that the proposed India-ASEAN FTA agreement would encounter major hurdles, because over half the exports to India of at least five ASEAN members – Indonesia, Malaysia, Burma, Thailand and Vietnam – was limited to a single commodity, which was invariably from the agricultural sector. The Indian Ministry of Agriculture raised strong objections to the inclusion of farm products such as pepper, rubber, palm oil, coffee and tea in the tariff liberalisation programme. The ministry instead suggested that these commodities be included in a 'sensitive' or negative list. ASEAN members, including the single-product-exporting countries, opposed this measure, and wanted the tariffs on all goods to be reduced to zero at one go. Free trade agreements generally work on the principle that at least 80 percent of a country's trade is covered under the agreement. ASEAN maintains that if these agricultural items are part of a sensitive list, single-product-exporting countries such as Malaysia (which mainly exports palm oil to India) and Thailand (a major exporter of rice) will not meet this criterion of substantial trade coverage. India's Agriculture Ministry contends that the commodities mentioned are on a list of special products in the WTO, and subsequently should not have zero tariffs slapped on them under any FTA. The issues at stake do not pertain only to trade, of course, but also to the livelihoods of a large number of people. For instance, import of palm oil and pepper under the Indo-Sri Lankan FTA has adversely impacted farmers in South Indian states such as Kerala. In fact, the crucial stumbling block in completing the Doha round of talks at the WTO was on account of the developed countries themselves being unwilling to reduce their farm subsidies. Jairam Ramesh, India's Minister of State for Commerce, has said: "We cannot have an FTA just for the sake of having an FTA, especially if it negatively impacts the interests of our farmers. FTAs that result in macro-benefits can also cause micro-pains." Hence, while the proposed FTA may result in macro-economic benefits to the country, it could grievously hurt large sections of farmers as well as local industry. The Indian government has officially acknowledged that at least 100,000 desperate farmers committed suicide in different parts of India between 1993 and 2003 – an average of 10,000 a year. Tariff reduction, especially of customs duties on imports of agricultural commodities, is an extremely sensitive issue in India. Unbalanced trade area Until India initiated economic reforms in 1991, its peak customs duty rate was as high as 150 percent. Since the United Progressive Alliance government in New Delhi is dependent on the 'outside' support of 61 MPs from the Left parties for a majority in the Lok Sabha – and these parties, led by the Communist Party of India (Marxist), are opposed to the government's agenda of economic liberalisation – political compulsions are bound to impinge on the Indo-ASEAN talks. Congress leader Sonia Gandhi has already warned both Manmohan Singh and Commerce Minster Kamal Nath about the consequences of hurting the interests of those cultivating groundnuts, pepper, rubber, tea and coffee. Finance Minister P Chidambaram also pointed out to the Trade and Economic Relations Committee, which advises the prime minister, that if customs duties on palm oil were halved, the government's revenue loss would be around INR 14 billion per year on this item alone. A look at the developing trade relationship between India and Thailand will help throw light on the broader dealings with ASEAN. Opposition to FTAs has also come from Indian industrialists, in particular leading the Ministry of Commerce to announce that it will re-evaluate certain bilateral commitments made in the India-Thailand FTA. This agreement was signed in 2003 during the previous National Democratic Alliance government led by the Bharatiya Janata Party, and envisaged a process by which the two countries would progressively reduce taxes on 82 items over three years, and complete the creation of a tax-free zone for trade of 5000 items by 2010. There is considerable evidence to indicate that exporters in Thailand have benefited disproportionately from the FTA in comparison to Indian exporters. In 2004-05, Thai exports to India grew by nearly 37 percent, whereas India's exports to Thailand grew by a meagre 5.8 percent. A report by Thailand's Department of Foreign Trade on the first three months of the Indo-Thailand FTA agreement found that Thailand's trade surplus ratio with India was 400:1. Under pressure from the business community, India now wants one-fifth of the 5000 tradable items to be placed on a negative list, on which there would be no tariff cuts. Indian industrialists claim that the current agreement is working against the interests of local industries. Power-cable manufacturers claim that this agreement would ruin their businesses in India, as it is not possible for them to compete with Thai companies unless internal fiscal, labour and infrastructure reforms are first implemented that would allow Indian firms to manufacture products at internationally competitive prices. According to a recent survey by the Federation of Indian Chambers of Commerce and Industry, the inverted duty structure that certain industries are facing may lead to Indian companies outsourcing products from Thailand, or setting up manufacturing bases in Thailand. The survey also reveals that internal cost disabilities are eroding the competitiveness of such industries vis-à-vis their Thai counterparts. In addition, some observers feel that New Delhi has compromised on the issue of Rules of Origin (ROO) with ASEAN members. Rules of Origin refer to the fact that goods exported from a certain destination must have a minimum specified value addition in the country of origin. India has reportedly agreed to a 35 percent value addition and changes in tariffs at the level of 'sub-headings', whereas in the case of bilateral arrangements with individual countries like Thailand and Singapore, the rules specify 40 percent value addition and tariff changes at the level of 'headings'. When ROOs are worked out at the level of sub-headings, it implies that value-addition norms have been specified in an extremely detailed manner, down to the level of not just broad product categories (say, garments) but along specific product lines (women's blouses, skirts, trousers and so on). In other words, the value-addition norms that are incorporated in the ROOs are, in India's case, lower or more liberal in the proposed FTA with ASEAN, and more stringent or higher in bilateral agreements with Thailand and Singapore. Rules of Origin are a major reason why negotiations are stalled between India and Thailand over expansion of items on the FTA list. New Delhi fears that further relaxation of the ROO could lead to imports from third countries via Thailand that would, in turn, antagonise Indian industry. The doubts expressed over the ROO are not without basis. According to a report by the Associated Chambers for Commerce and Industry in India, China, the Philippines, Malaysia, Indonesia and even Taiwan were using Thailand as a preferred destination to route to India a wide variety of products such as textiles, engineering items, processed foods and electronic products. Experts believe that the Indian farm and industry sectors desperately need infrastructural reforms in order to reap benefits from the FTAs. T S Viswanath, a senior adviser to the Confederation of Indian Industry (CII), has pointed out that Indian manufacturing has proven that it can be globally competitive, and is therefore not asking for protectionist measures. "All that we are saying is that lowering tariffs under FTAs should be accompanied with labour, fiscal and infrastructure reforms," he says. Indian companies are handicapped not only by acute infrastructural constraints, such as shortage of power and high tax rates, but also lack the flexibility enjoyed by some of their counterparts in Southeast Asia and China, particularly in terms of labour laws that make it easier for them to take on and dismiss workers. In the medium term, there needs to be a fine balance between genuinely required protection and economic liberalisation. This, in turn, requires a high level of preparedness on the part of India's bureaucracy, and also calls on the country's political leadership to build an internal consensus on contentious issues. In the final analysis, when there is competition among unequal participants, there has to exist considerable political sagacity and a willingness to compromise on all sides to work out trading arrangements that can create a win-win situation for all. One would need to be an incorrigible optimist to believe that the India-ASEAN FTA agreement would be implemented by the 1 January 2007 deadline. Negotiations are now at least one year behind schedule, and many issues currently appear intractable. Meanwhile, this failure will surely throw a wrench into India's plan to double its share of world trade to two percent by 2009.