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Does a Free Trade Agreement with ASEAN Make Sense?

In the short run, India is not going to benefit from the free trade agreement with the Association of South-East Asian Nations that was finalised recently. ASEAN is not a natural trading partner of India, and, unlike China, India has not established close relations with the region. But the agreement may make strategic sense in the long run, especially if India wishes to become a hub for services exports.


Does a Free Trade Agreement with ASEAN Make Sense?

Parthapratim Pal, Mitali Dasgupta

economic impact. For these products no duty reductions are offered. This is called the negative list or the exclusion list.1

Initially Indian negotiators were cautious as there were apprehensions that the ASEAN countries are more competitive in sectors like agriculture, textiles, auto and

In the short run, India is not going to benefit from the free trade agreement with the Association of South-East Asian Nations that was finalised recently. ASEAN is not a natural trading partner of India, and, unlike China, India has not established close relations with the region. But the agreement may make strategic sense in the long run, especially if India wishes to become a hub for services exports.

Parthapratim Pal ( is with the Indian Institute of Management, Calcutta and Mitali Dasgupta (mitalig@teri. is with the Energy and Resources Institute, New Delhi.

ndia is in the process of signing a free trade agreement (FTA) with the Association of South-East Asian Nations (ASEAN). On 28 August 2008, India and ASEAN concluded a Trade in Goods (TIG) agreement which will operationalise the FTA in merchandise trade. They will be formally signing this TIG agreement in the ASEAN-India Summit to be held in Thailand in December 2008. Implementation of the agreement, which begins from 1 January 2009, will be completed by 2018. Negotiations between India and ASEAN on services and investment have just started. India has considerable interest in the ASEAN market in these two sectors and it is expected that it will take at least another year before these negotiations are concluded.

The signing of the TIG agreement will mark an important milestone in India’s economic relationship with ASEAN. Since the Look East Policy adopted in the early 1990s, India’s engagement with ASEAN has been on the rise. In 1992, India became a sectoral dialogue partner of ASEAN and in 1996 it became a member of the ASEAN regional forum. In 2003, India and ASEAN signed the bilateral framework agreement which spelt out the broad p arameters of an agreement on trade in goods. The framework agreement suggested that the final TIG agreement would be reached by 2006. Since 2003 negotiations regarding specific aspects of the agreement have been in progress.

However, signing of the TIG agreement was delayed as the negotiations got stuck a few times due to differences between the parties on the coverage of the negative list.

In a preferential or free trade agreement, countries are allowed to keep a small number of products out of the c overage of the agreement. These are g enerally sensitive products where trade liberalisation can have serious negative auto components and electronics and that India would face negative consequences unless sensitive items in these sectors are protected. Consequently, India submitted a list of around 1,400 products at HS-6 digit level as the negative list. Those products accounted for about 42% of t otal exports of ASEAN to India.2 But as n egotiators from ASEAN insisted that the products included in the FTA should cover at least 90% of exports to India, a pruning of the negative list was required. At the end, it was decided that each signatory country of the Indo-ASEAN FTA can have at most 489 products in its negative list provided that these products do not exceed more than 5% of total bilateral imports. India’s negative list includes 302 agricultural items, 81 items from textiles and clothing, 52 items from machinery and auto and 32 items from chemicals and plastics. There are 22 other items from various other sectors which are also part of the negative list. It has been decided in the negotiations that for products which are not in the negative list, duties will be reduced in a phased manner starting from 2009 and the duty cut will be completed by 2018. For most products, duty will be reduced to zero by 2018. However, India has also identified 611 products, which will only get a partial duty cut. Among these products, India has put five products on the highly sensitive list. They are tea, c offee, pepper, crude palm oil and refined palm oil.3

India’s stance during the negotiations indicates a somewhat defensive position in the goods sector. This is not surprising because India runs a fairly large trade defi cit vis-à-vis ASEAN. According to the data of Direction of Trade Statistics (DOTS) published by the International Monetary Fund (IMF), India had a trade deficit of $14,562 million in 2007 with ASEAN. This is around 15% of India’s total trade deficit. For individual ASEAN members, India’s trade pattern show that for the last 10



years (1998 to 2007), it had a trade deficit each year with Singapore, Malaysia, Indonesia, Thailand and Myanmar. India runs a trade surplus with other ASEAN members including Vietnam and Philippines (Table 1). However, the overall trade balance is significantly negative. The concern is that if India has already such a huge trade deficit, reduction of tariff rates may worsen the situation unless there is a significant export boost.

It is notable here that among the ASEAN members, India already has preferential India has significant trade with Malaysia, Indonesia and the Philippines. Though the current volume of trade with Vietnam is low, Vietnam is one of the fastest growing countries in the world and the trade p otential between India and Vietnam is considered to be significant.

The Tariff Profile

To understand whether the Indo-ASEAN FTA can boost India’s exports, it will be useful to have a look at the tariff profile of these countries (Figure 1). Figure 1 shows

Table 1: India’s Trade Surplus/Deficit with ASEAN Member Countries (in million $)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Cambodia, their total market sizes are not very big. Laos and Cambodia’s total import were about $2 billion and $6.6 billion r espectively in 2007. The only exception is Vietnam whose applied tariff rates are higher than other ASEAN members and which has a big enough market (total i mport in 2007 was of $62.7 billion).

Even if one assumes that India will have some advantages in the ASEAN market because of the tariff margins given in the TIG agreement, it is not certain that Indian e xporters will be able to increase their market share in these countries. In agriculture, India has become a net importer

Brunei and there are concerns about food security Darussalam 3.05 1.73 2.63 2.90 3.72 4.22 4.31 32.64 40.34 50.07

and the exportable surplus in this country.

Cambodia 2.85 6.60 6.88 2.48 16.97 18.55 17.10 21.68 24.43 30.32

Moreover, reports indicate that domestic

Indonesia -556.28 -635.65 -536.55 -717.28 -541.06 -883.68 -1160.84 -1492.88 -2450.39 -3975.02

producers in India are finding it difficult

Laos 0.98 1.35 5.00 5.52 1.85 0.59 2.00 4.59 5.68 7.05

to compete with agricultural imports from

Malaysia -1137.28 -1504.35 -820.68 -1032.57 -627.00 -1044.36 -1206.95 -1231.50 -4429.51 -4599.52

countries like Vietnam (spices including

Myanmar -151.45 -139.05 -131.13 -144.76 -274.11 -304.77 -295.35 -383.30 -473.73 -587.90

pepper and plantation crops), Indonesia

Philippines 113.80 85.83 126.53 147.41 299.41 236.62 208.86 272.87 233.00 176.98

and Malaysia (palm oil).6 Also, Thailand

Singapore -754.58 -862.95 -655.53 -2001.17 -92.87 26.29 919.87 2091.95 -4000.42 -5664.81

is a big exporter of agricultural goods and

Thailand 63.60 103.33 174.60 81.65 301.66 250.02 72.60 -95.74 -513.20 -1035.06

as an ASEAN member it has better access

Vietnam 116.70 136.25 195.85 157.36 280.97 356.22 427.08 534.92 648.69 1035.88

Overall trade deficit -2298.61 -2806.93 -1632.41 -3498.46 -630.45 -1340.29 -1011.32 -244.77 -10915.11 -14562.02

Source: Direction of Trade Statistics, IMF.

trade agreements with Thailand, Myanmar and Singapore. India, Myanmar and Thailand are part of the Bay of Bengal I nitiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) trade group. India also has a separate FTA with Thailand. India and Singapore have signed a Comprehensive Economic Cooperation Agreement (CECA) few years back.4 Though the terms and tariff reduction conditions of these agreements may be different from that the applied tariff rates in Malaysia, Indonesia, Philippines and Brunei Darussalam are quite low. They are somewhat higher in Laos, Cambodia and Vietnam. But India has the highest applied tariff rates among the countries mentioned in Figure 1.

In a preferential trade agreement, the advantage to partner countries occurs due to the gap between applied MFN rates and the preferential rates. As the applied MFN rates are quite low in most major ASEAN

Figure 1: Applied Ad Valorem Tariff Rate of Some ASEAN Members and India

(Simple Average Applied Tariff (2006) in %)

313.15.16.Agriculture Non-Agriculture 8.2 6.8 12.3 7.9 9.6 5.8 5.2 3 18.1 13.7 24.2 15.7 19.5 8.2 37.6 16.4

Indonesia Malaysia Philippines Brunei Darussalam Source: World Tariff Profiles 2006, WTO.

the present agreement but still it can be assumed that the marginal impact of the Indo-ASEAN FTA will be less for these three ASEAN countries (i e, M yanmar, Thailand and Singapore). Among other ASEAN members,

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november 15, 2008

Cambodia Vietnam Laos India

countries, India is unlikely to gain much advantage because of the FTA. This is particularly true for bigger ASEAN countries like Malaysia, Indonesia and Philippines.5 While tariff rates are higher in Laos and to other ASEAN markets. Therefore, in agriculture, it is unlikely that India will be able to take much advantage of the tariff margins given in TIG agreement.

For manufacturing goods, applied tariff rates in major ASEAN countries are even lower. This is not surprising as ASEAN is a leading exporter of light manufacturing products and are considered to be more competitive than India. It will not be easy for India to compete with these countries and increase its foothold in the ASEAN market.7 Secondly, India will also be competing with China in the ASEAN market which already has signed an FTA with these countries and has a head start. However, there are certain products where India is a big supplier to the ASEAN market and can increase its presence. For example, India is a big exporter of organic chemicals, pharmaceuticals, gems and jewellery and metal scraps. In the last two years, however, refined petroleum products have emerged as India’s top export item to the ASEAN region. But, as mentioned before, the tariff rates in major ASEAN countries in manufacturing goods are quite low and India is unlikely to get too much advantage because of the tariff preference (Figure 2, p 10).8 However, it can be argued that the TIG agreement at least ensures


that Indian exporters are not at a major disadvantage vis-à-vis other suppliers in the ASEAN market.

On the other hand, the FTA is likely to allow the ASEAN countries to take advantage of the large gap between high Indian applied tariff rates and the preferential rates. It is expected that the agreement will open up considerable market for ASEAN countries in agriculture, electronics, motor car equipment and other light reduction commitments will ensure that the MFN rates are brought down quite significantly both for agricultural and non-agricultural goods.

Also, one of the features of growing intra-regional trade among Asian countries is the increasing share of intra-industry trade (IIT) in total trade. In Asia, IIT is largely driven by trade in intermediate goods. Data show that share of intermediate goods in total manufacturing trade

Figure 2: Sectoral Break-up of Applied Tariff Rates in Selected ASEAN Countries and India

80.0 60.0 40.0 20.0 0.0 Indonesia Malaysia Philippines Vietnam India
Food and Animals Mineral Fuels, Animal and
Lubricants, etc Vegitable Oil
Source: ADB (2008).

manufacturing goods in India. This may negatively affect domestic farmers in agriculture and small and medium enterprises in light manufacturing (including textiles) in India. There are reports that India has already asked the Asian Development Bank to contribute to a fund to help compensate industries that are likely to be hit


by the Indo-ASEAN FTA.

However, it must be pointed out that India has been unilaterally decreasing its tariff rates and the prime minister of India has committed to bring them down to the “ASEAN level”.10 Therefore, the preference margin may gradually come down. Secondly, India is signing a number of FTAs and unless MFN tariffs are brought down, there can be major tariff rationalisation problems. India has already faced the problem of trade deflection11 in the Indo-Sri Lanka FTA and this problem is likely to reappear through other FTAs unless the MFN rates are brought down. Strict Rules of Origins (ROO) can take care of this problem to a certain extent but in the presence of so many overlapping FTAs, managing trade deflection through ROO can be very challenging. Also, if the Doha round is completed, the tariff

Chemical Products Manufactured Machinery and Goods Equipment

flows into emerging Asia12 is about 65%. According to IMF (2007), this is primarily a reflection of greater vertical specialisation to exploit differences in comparative advantage to build a production nexus. IIT among ASEAN countries and China is quite significant but there is still very little intra-industry trade between ASEAN and India (Okimoto 2005). India’s relatively high tariff rate and lack of dynamism in the manufacturing sector can be possible reasons behind this. Also, foreign direct investment (FDI) received by India has been mostly in the services sector while China has received most of its FDI in the manufacturing sector. Many of the multinational corporations (MNCs), which have invested in China, are also active in the ASEAN countries (mostly in ASEAN 5).13 These factors helped these countries to be part of a pan-Asian supply chain which, in turn, has resulted in increased IIT among these countries. In the absence of such synergy between India and ASEAN, it seems unlikely that in the short run, the TIG will lead to a major increase in trade flows among India and ASEAN. However, in the medium term there is a possibility of India becoming a part of the pan-Asian supply chain.14 But for that to happen, a more comprehensive treaty, covering investment and services, will be important.

Services Trade

A treaty which involves services will be extremely important for India also because India sees a big market for its services exports in ASEAN. India presently is one of the top exporters of services and according to WTO data, it is ranked 10th in the world15 and ahead of ASEAN countries like Singapore (ranked 16th), Thailand (ranked 27th) and Malaysia (ranked 29th). In 2006, exports of services from India were around $74 billion. India is particularly strong in information technology (IT) and Information Technology Enabled Services (ITES), telecommunication services, professional services, healthcare, financial services, and distribution services. ASEAN is also a big market for services imports. It is a net importer of services and according to WTO (2007), total import of services by ASEAN


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members was close to $ 150 billion in 2006. To put this figure in perspective, US’ import of services was around $300 billion in the same year. ASEAN also has major export interest in some services sectors. Tourism is one of the most important services trade for ASEAN countries. Apart from that, they are major exporters of air transport, construction, logistics, insurance and financial services.

For a region which has liberal policies for merchandise trade, services trade in ASEAN is highly regulated. As Karmakar (2005) points out, services trade in ASEAN is not only more regulated for foreign suppliers, but the restrictions are also there for intra-ASEAN trade. Efforts are being made to gradually integrate services trade among ASEAN members. The ASEAN Framework Agreement on Services (AFAS) provides the broad framework to achieve this. The target is to make ASEAN a single market and production base through free flow of goods, services, investment, skilled labour and freer flow of capital by 2015.

Given ASEAN’s market size, India’s competitiveness in services exports and lack of openness of the services sector in ASEAN countries, there is a significant potential gain from a comprehensive economic cooperation agreement (covering goods, investment and services) with ASEAN. N egotiations between India and ASEAN on services trade liberalisation have just started and it will be up to the Indian negotiators to ensure that the lack of tangible benefits accruing to India in the goods sector is

o ffset through an agreement on trade in services. A number of studies have pointed out that there is significant complementarity between India’s service-oriented economy and ASEAN’s light manufacturing driven economy (Sen et al 2004; Kumar 2002; Bhattacharya and Arif 2002). The Indo-ASEAN FTA should thrive to balance these complementarities and bring out a mutually beneficial deal. A services deal with ASEAN is also expected to open up significant opportunity for cross border movement of Indian professionals. One of the major barriers for movement of skilled professionals is lack of recognition of qualifications among nations. To avoid this problem it is important to have Mutual Recognition Agreements (MRAs) among trading partners. However, MRA negotiations

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november 15, 2008

take very long to conclude.16 R ecently ASEAN countries have signed MRA among themselves in some sectors including engineering, architecture, medical and accountancy. India has strong e xport interest in these sectors and Indian negotiators must explore whether a common MRA with the ASEAN members is a feasible option (Anuradha 2008).

Energy Security

Apart from these issues, closer economic and political ties with ASEAN are likely to help India’s quest for energy security. I ndia is heavily dependent on west Asia for oil imports, which is a geopolitically tense part of the world. India is currently the world’s sixth largest energy consumer, and the third largest oil and gas consumer in Asia, after China and Japan. For India, oil imports account for about 72% of the total oil consumption, of which 67% is being sourced from west Asia (Das Gupta et al 2006). Hence, on the external front, India is pursuing diversification of supply sources and trying to significantly increase exploration of oil and gas. Among the ASEAN countries, India at present imports crude oil from Malaysia and Brunei, which contributes 5.4% of its total crude imports from the world.17 India also i mports LPG from Malaysia, which comprises just 3.5% of its t otal LPG import. On the other hand, among the ASEAN countries, Indonesia, Malaysia and Vietnam have about 1% of world’s proven oil reserves and 3% of the worlds’ proven gas reserves (BP Statistics 2007).

To conclude, it can be said that the Indo-ASEAN trade in goods agreement may not be beneficial for India in the short run but it can be thought of as a part of a long-term strategy to improve India’s economic and strategic presence in the neighbourhood. Though India shares a land border with Myanmar and maritime borders with I ndonesia and Thailand, the ASEAN countries have never been economically very close to India. In fact, India and the ASEAN countries are not considered natural trading partners. This is in direct contrast to China which has established a distributed regional network of production and trade in this region.

The Indo-ASEAN FTA can be perceived as an initial step towards increased economic integration of India with south-east Asia. From a broader perspective, the I ndo-ASEAN FTA can also be viewed as another cog in the wheel of increasing southsouth cooperation. This is important because the world economic system is presently going through some significant changes. On the one hand, there is a s evere economic slowdown and major financial problems in the developed world. On the other, there is talk of developing countries like China and India emerging as drivers of southern economic growth (Kaplinsky and Messner 2008; Nayyar 2008). Though the impact of China on other developing countries is much stronger, India can play a complementary role. While China provides a big market for e xports, via a manufacturing supply chain, for other Asian countries, India can potentially become a hub of services-led growth. If I ndia aspires to play a prominent role in the global economy and g overnance, increased cooperation with ASEAN makes sense as a strategic move.


1 WTO allows an RTA if the RTA has a “significant trade coverage”. This essentially means that the exclusion list in an RTA cannot be very large and the products in the exclusion list should not account for a high percentage of total bilateral trade.

2 Source: asp?upFile=StakeholderConsultationWorkshopOn India-ASEANFTANegotiationsWrapUpMeeting-13 March-2006_Background.pdf

3 Final duty on these products will be as followed: Tea, coffee 45%, pepper 50%, crude palm oil 37.5%, and refined palm oil 45%.

4 The Indo-ASEAN TIG agreement has provision that it would complement the existing Singapore

– India CECA as it offers exporters from Singapore a choice of which preferential avenue to use to maximise their returns.

5 In 2007, total import of Malaysia, Indonesia and Philippines were $147 billion, $74.5 billion and $55.5 billion respectively. Source: Direction of Trade Statistics, 2008, IMF.

6 It will be interesting to note that composition of goods which India imports from Sri Lanka has changed completely after the Indo-Sri Lanka FTA. Top exports from Sri Lanka now include vegetable oil, coffee, tea, spices and copper. It is alleged this is a case of “trade deflection” where these products are being pushed to India from ASEAN countries through Sri Lanka, taking advantage of the Indo-Sri Lanka FTA.

7 To put the figures in perspective, ASEAN’s total GDP is around the same as that of India. However, in 2007, merchandise exports from ASEAN was more than 5.5 times of that of India.

8 The fact that the TIG is unlikely to bring much gain to India was not unknown to Indian negotiators. For example, India’s minister of state for commerce Jairam Ramesh says “the fact that I ndia entered into FTA talks with ASEAN knowing that we have lesser competitiveness than them in goods trade speaks volumes of our attempts to integrate economically with Asia”, Financial E xpress, 30 September 2008.

9 “India Seeks ADB Funding to Help FTA-Hit Firms”, Financial Express, 30 September 2008.


10 See 17 Export-Import Databank, Ministry of Commerce,
100&art_id=8579 India.
11 Trade deflection takes place when imports enter
an FTA via the member country with the lowest
external tariff on non-member trade. References
12 “Emerging Asia” refers to China, India, Hong Kong SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines, Thailand and Vietnam. ADB (2008): Emerging Asian Regionalism: A Partnership for Shared Prosperity (Manila: Asian Development Bank).
13 14 ASEAN 5 is defined as Singapore, Malaysia, Indonesia, Thailand and Philippines. Companies like Honda Motor Company are a lready talking about integrating India in its production chain. The CEO of the company recently said “The FTA between India and ASEAN coun- Anuradha, R V (2008): “What ASEAN Pact Holds for India?”, The Economic Times, 3 October. Bhattacharya, B and M Ariff (2002): “Study on AFTA-India Linkages for the Enhancement of Trade and Investment”, a report submitted to the Government of India and the ASEAN Secretariat, May.
tries will create new opportunities for our operations in India, specially in sharing components. BP Statistics (2007): Statistical Review of World Energy, British Petroleum, June.
With FTA, lot of components can be sourced from India and there will be a lot of possibilities for I ndian vendors to supply to our global operations”, ‘Honda Looks to Cash in on India’s FTA with ASEAN’, The Economic Times, 25 September 2008. Das Gupta et al (2006): “Energy Security Issues: F ocus on China and India”, background paper commissioned by the Institute of Policy Studies (IPS) with support from the World Bank and IMF for the Programme of Seminars at the 2006 IMF-World
15 India is ranked 5th if EU is taken as one country. Bank Group Annual Meetings in Singapore,
16 For example, the CECA between India and Singapore 16-18 September.
has provisions for MRAs. But the MRA negotia- IMF (2007): “Regional Economic Outlook: Asia and
tions are still continuing. Pacific” (Washington DC: IMF), October.




Kaplinsky, R and D Messner (2008): “The Impact of Asian Drivers on the Developing World”, World Development, Vol 36, No 2, pp 197-209.

Karmakar, S (2005): “India–ASEAN Cooperation in Services – An Overview”, Working Paper No 176, (New Delhi: ICRIER).

Kumar, N (2002): “Towards an Asian Economic Community: The Relevance of India”, Discussion Paper No 34, Research and Information System for Non-Aligned and Other Developing Countries (RIS), New Delhi.

Nayyar, Deepak (2008): “China, India, Brazil and South Africa in the World Economy: Engines of Growth?” Discussion Paper dp2008-05 (Helsinki: WIDER).

Okimoto, Yumiko (2005): “China and India: Challenges and Opportunities for ASEAN from J apanese Perspectives”, paper presented at 30th Annual Conference of the Federation of ASEAN Economic Associations (FAEA), November.

Sen, Rahul, M Asher and R S Rajan (2004): “ASEAN-India Economic Relations: Current Status and F uture Prospects”, Discussion Paper No 73, Research and Information System for Non-Aligned and Other Developing Countries (RIS), New Delhi.

WTO (2007): International Trade Statistics, WTO, G eneva.



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