Review of Asean Fta

7/29/2019 Review of Asean Fta

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INDIA-ASEAN FREE TRADE AGREEMENT:-A SETOR-WISE IMPACT ANALYSIS

(REVIEW OF LITERATURE)


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INDIA- ASEAN FREE TRADE AGREEMENT:-A SECTOR-WISE IMPACT ANALYSIS

(REVIEW OF LITERATURE)

ASEAN emerged as a major actor in the politics of Asia Pacific region

after the end of cold war. Date back history reveals that India had

extensive cultural, economic and political ties with the Southeast Asian

Nations. But after Independence, this region was overlooked by India.

The changed global circumstances in 1990 andIndias Look East

policy forced India to adapt the New Economic world order i.e.

regionalism. A quantum jump in Indo-ASEAN relations came with theeffort to forge closer links with the Southeast Asian countries after 1991.

The ASEAN-India nexus has grown from sect oral dialogue partnership

in 1992 to full dialogue partnership in 1995 and subsequently to a

summit level interaction, with the first India-ASEAN summit held in

2002. Trade is one of principal channels of India and ASEAN

integration. Both the parties are complementary to each other. From the

last seven years, trade has done manifold increase i.e. 150% increasewhich is remarkable.The present review is an attempt to examine the

existing literature regarding India- SEAN Trade relations. There is

growing body of literature on the concerned issue. For this, under, four

broad themes literature has been analyzed. At first, Trade Relations

between India-ASEAN in historical perspective has been examined.

It is observed that India and ASEAN are not awkward strangers. They

have shared close relationship since the ancient times. Second sectiondeals with growth of trade between the two actors from time to time. It is

observed there is drastic increase in bilateral merchandise trade and

commercial services.


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Smitha Francis in her research paper title A Sectoral impact Analysis

of the ASEAN India FREE Trade Agreement (2011) analyzed the

pattern and composition of Indias trade with the major ASEAN

countries and Indias tariff reduction scenario in different sectors usingthe data for the Period 1995_2008. It was observed that under AIFTAG,

the trade blocs members will have increased access to the Indian market

for semi-processed and processed agricultural products and close

substitutes, which could adversely affect the countrys agricultural

sector. Indian small and medium enterprises in food and other

agriculture-related products, some intermediate goods, and light

manufacturing products are also likely to suffer. She Concluded Tariff

reduction and its elimination under the AIFTA will not only disrupt

farmers domestic markets, but also reduce their bargaining power and

lead to a fall in domestic prices because of the increased supply of

agricultural and related semi-processed (and processed) products.

Further, it should be noted that even while utilizing safeguard provisions

under the FTA, tariffs cannot be raised above the levels scheduled in it.This means that India will have the right to raise tariffs with ASEAN

only to the highest level that it is committed to in the agreement. With

tariffs dropping to zero in most cases, this becomes meaningless.

Therefore Indias commitments under the AIFTA are likely to have a

significant negative impact on livelihoods and food security across

several segments of the rural population in the country.

She further argue that recent trends in Indias export and import

structures point to its increasing participation in FDI-driven production

networks centered on ASEAN. The implications of Indias tariff


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reduction commitments under the AIFTA for its agricultural and non-

agricultural sectors were analyzed against this backdrop. It is established

that ASEAN countries will gain significantly increased market access in

India in several semi-processed or processed agricultural products. Both

the reduced demand for local agricultural products because of this and

increased imports of close substitutes could lead to a fall in the prices of

local crops, thus adversely affecting the domestic agricultural sector.

Further, Indian SMEs in agriculture-related products and food products,

as well as in some intermediate goods and light manufacturing productsare likely to be negatively affected by the drastic tariff liberalization

under the AIFTA. However, import liberalization in intermediate goods

will impel MNCs to undertake production rationalization across the

region, particularly in the transport equipment and machinery sectors.

This might also help Indian MNCs that are active in the region,

especially in the chemicals and iron and steel sectors. The paper argues

that this will lead to Indias deeper integration in production networks in

some industries such as machinery, chemicals and transport equipment.

On the other hand, there are hardly any immediate benefits for Indian

producers as average percentage tariff drops in Malaysia, Indonesia and

Thailands Normal Track products are much lower than Indias. Further,the ASEAN-5 economies are leading exporters of light manufacturing

products. India will also be competing with China and South Korea in

the ASEAN market, which already have FTAs with ASEAN. Thus


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Indian SMEs will find it difficult to hold their own against these

countries in such sectors. Apart from China and South Korea, ASEAN

has also signed FTAs with a number of other major countries such as

Australia and New Zealand. While India has signed CECA with South

Korea, other countries could make use of the AIFTA to route their

products through ASEAN into the Indian market. China is a major

producer of agricultural goods and a variety of other manufactured

goods. Meanwhile, the fall in Japans share in Indias imports is linked

to Japanese MNCs reorganizing their production networks in Asia afterthe progress of bilateral FTAs in the region. It should also be noted that

Australia and New Zealand are major producers of milk products. So the

rise in Indias imports could be much more than is currently possible to

envisage. There is also little doubt that companies across these countries

will reorganize their production and procurement strategies, following

the Japanese example. The consequent decline in the need for setting up

production facilities in India in favour of imports from any of these

countries is also likely to have a significant negative effect on

employment and livelihoods. In conclusion, neglect of the development

needs of domestic agriculture and a manufacturing base for the expected

gains from service sector liberalization with ASEAN, together with theknown problems in service sector liberalization, are likely to make

Indias employment and livelihood issues even more challenging.


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According to Viswanathan and Shah (2008), the launching of trade

reforms and liberalization policies in the post-World Trade Organization

(WTO) context has already seriously affected the Indian plantation

sector in general and tea and rubber production in particular. One of the

most explicit effects of the trade reforms has been the emergence of

market uncertainties, leading to high volatility or a steep fall in the

international and domestic prices of commodities due to the removal or

dilution in tariff and nontariff trade barriers. The extent of decline in

prices and their instability have both been the highest for rubber and tea,which have had adverse effects on production. In the case of rubber,

liberal trade policies have resulted in the removal of quantitative

restrictions (QRs), which in turn enabled manufacturers of rubber

products to directly import rubber through duty-free channels (as and

incentive for exporting rubber products). The coping mechanisms

adopted by the tea and rubber planting communities (medium and large

tea planters and small rubber producers) have included cost-saving and

labour-displacing measures such as diluting or even discarding

scientifically recommended agro-management practices; labour

retrenchments; lockouts; and resistance to routine tripartite wage

negotiations. A large number of medium- and small-scale tea estateshave closed in the major tea-growing regions of India due to the crisis

and troubled labour relations. This has severely affected the livelihoods

of labourers and their dependent communities, as there has been a slump


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in employment, non-payment of wage and non-wage benefits, and the

disappearance of other social security measures.

In his study Ramphul ohlan (2012) investigates the pattern and trends

in Indias bilateral trade with ASEAN countries during 1980-2008. India

and ASEAN countries trade specialization products have been

estimated applying Lafay (1992) index. The prospect for Indias

expansion in ASEAN is examined using to estimate the changes in

pattern of Indias comparative dynamics of Indias trade specializationhave been compared with growth in the world demand. The empirical

findings on the share in ASEAN countries trade has slightly grown, but

has been less than that of Japan and China. Further, this shift has been

more marked in the case of imports. While the ASEAN countries are not

a major destination for Indias exports, these countries play a significant

role in Indias imports.

India runs a large and worsening trade deficit merchandise trade deficit

with ASEAN was US$ 16.3 billion in 2008, a 12.1 per cent or US$ 1.7

billion increase over 2007. Indias ratio of balance of trade to total

foreign trade worst in case of its trade with ASEAN countries than itsoverall foreign trade. During the last three decades, Indias trade

intensity in intensity in ASEAN countries has deteriorated. SEAN export

to India when matched against Indias import profile are more


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compatible in contrast with Indias exports to ASEAN and its import

profile. In the context of competition between ASEAN countries and

India, the study explores that Indias comparative advantage is rather

poorer than ASEAN countries. The policy implication is that in order to

benefit from ASEAN-India Free Trade Agreement in Goods India needs

for enhancing its competitiveness. Indias simple average MFN applied

advalorem tariff rates were higher than ASEAN countries.

Ohlan suggests that tariff elimination under ASEAN-India Free TradeAgreement in Goods is likely to increase import surges in India. Indias

exports basket is highly diversified. India has a comparative advantage

in some of the fastest growing sectors of the world demand. It shows

signs of Indias potential benefits from multilateral trade liberalization.

(Okimoto 2005) find that Intra Industry Trade (IIT) among ASEAN

countries and China is quite significant but there is still very little intra-

industry trade between ASEAN and India. Indias 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 receivedmost of its FDI in the manufacturing sector.


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Shankaran Nambiar (2011) concluded that Indias age structure

favours development for variable fields in the service sector. In contrast

to the other major Asian nations, India's working population will

increase rather than decrease for another 30 years. Within ASEAN, only

Cambodia and Laos have an increasing working population while the

share of people aged 15 to 64 will decrease in all other ASEAN nations

by 2020.

This trend will lead to increasing demand of services in ASEAN andIndia will prove to be a good partner to reduce and maybe even

overcome this shortage. Additionally, ASEAN nations will face a lack of

skilled labour, a factor that could be filled by India. Due to their

enormous growth in the past years, economies like Malaysia, Singapore

and Thailand face shortages in manpower at all skill levels. He argued

that India needs to engage member countries on services. This

suggestion is made because the service sector integration within ASEAN

has yet to be accomplished and ASEAN is relatively closed to Foreign

Service providers that unless India and ASEAN sign an agreement on

free movement on service providers on a bilateral basis with ASEAN.

Nambiars study has tried to explore the future prospects of Indian-ASEAN relations. The agreement on trade in goods that came into effect

at the beginning of 2010 was possibly a starting point in this respect.

The next stage in Indias economic relations will be to seek completion


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of an agreement on trade in services. This is an area in which Indias

contribution to the region can be fully realized. He suggest that services

prove to be a very good starting point to enhance cooperation further,

there are several political as well as organizational obstacles that have to

be resolved before India and ASEAN can take their cooperation to the

next level.

He opined that an agreement on services trade would be well advised,

since it might help to overcome the bias in benefits from the currentagreement towards ASEAN states. On the other hand, ASEAN states

need to come to terms with the direction in which ASEAN integration

will precede. If this question remains unsolved, it is unlikely that

ASEAN states will be able to represent themselves as one body in global

negotiations. Nevertheless, given their different levels of development,

India will have to engage with the states with due consideration to their

economic conditions. In addition to the possibilities that India can find

within the services sectors of the respective ASEAN member states,

there are other areas for cooperation. These areas include capacity

building and the improvement of connectivity through infrastructure

development. Indias technical expertise can also be extended toASEAN by cooperating in disaster forecasting and management. Indeed,

Indias engagement with ASEAN should be comprehensive and Wide-

ranging. Nevertheless, the question of how this involvement will be


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executed depends on the framework that is selected. The two options

that are possible are ASEAN+4 and ASEAN+6. Since there are political

barriers that may have to be overcome in accessing these regional

architectures, it would be to Indias benefit to initiate its engagement

with ASEAN member states on a bilateral basis. This will give India the

opportunity to build a firm basis for involvement with ASEAN

regardless of the framework that eventually emerges.

Jagdish Bhagwati argues in Going It Alone: the Case for RelaxedReciprocity in Freeing Trade , about certain assumptions regarding

Indian trade and economic arrangements. He believes that the analysis

implies that India should Be considering the regional option as a serious

complementary effort to securing Further liberalization at home and

abroad. India has recently signaled its willingness to depart from an

exclusive reliance on the multilateral approach by announcing its desire

to negotiate a free trade agreement with ASEAN countries.

According to him, India has already fired the regional salvo. Perhaps the

curious choice of ASEAN as India's preferred regional trade partner is

justified under the current circumstances. But, it raises the questionwhether there has been a considered and strategic assessment of the

desirability of pursuing regional integration.


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Chandrima sikdar and Biswajit nag in their cross country analysis of

following implementation of the FTA, bilateral trade between India and

ASEAN increases phenomenally. While Cambodia, Indonesia, the Lao

Peoples Democratic Republic, the Philippines and Viet Nam provide

additional markets for almost all Indian exports, Malaysia, Singapore

and Thailand provide markets for some of the fastest growing exports

from India. Malaysia, Thailand and Viet Nam become major importers

of Indian goods in terms of total exports by that country to ASEAN.They also provide markets for the fastest growing items 32 exported by

India. In particular, Thailand consistently provides a large market for

Indian products under all three scenarios.

The increase in Indias imports from ASEAN is due to increased

exportsby Indonesia, Malaysia, the Philippines, Singapore, Thailand and

Viet Nam, plus the rest of ASEAN. These countries also supply the

items that register the largest increases in Indiasimports from ASEAN

following the implementation of the FTA.

Santosh kumar das and Ritika Tiwari examined the India-Asean FTA

with special reference to north-east region and concluded Trade onseveral occasions has proved to be the engine of growth in many

regions. Similarly, increasing regional and international trade can shape

the future course of development of the northeastern region. Hence, the


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free trade agreement between India and ASEAN is likely to offer enough

opportunities for the development of the NER by providing scope for

industrialization. However, there exist certain structural impediments,

which are likely to limit the trading activities between the NER and its

neighboring Southeast Asian countries, which ultimately affect growth

and development of the region.

The new trading arrangement will have limited impact on the

development of the region due to lack of specialization in exportableproducts, low level of industrialization, lack of connectivity due to

underdeveloped physical infrastructure, underdeveloped markets and

insufficient private investment. NER will not be able to derive benefit,

unless it transforms itself as a major production hub. In this context,

connectivity holds the key. Improved connectivity within NER and the

rest of the country is vital for the development of the region, as it will

facilitate greater market integration and boost the developmental

activities including the process of industrialization.

As of now, the belief that the FTA will bring open doors of opportunity

for the NER and will contribute immensely in its development process isfar from the reality. However, it is true that the FTA certainly provides

enough opportunity for the region to grow and develop. And NER

cannot take the maximum advantage, unless the above mentioned


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existing structural impediments are addressed and taken care of, and

hence will have limited impact on the development of the region.

Rahul Sen, et al., see great potential for a close cooperation between

India and ASEAN states (such as Malaysia, the Philippines and

Singapore) since these states have developed a comparative advantage in

the field of electronic hardware production. India, with its focus on

software development and applications, can explore opportunities in

complementing the activities in this country.These complementaritiescan be developed in various directions. Malaysias electronics sector is

home to innumerable multinational corporations (MNCs). In the course

of the development of the hardware industry, many local companies

have benefited from the technology transfer and some of them have

grown to become vendors to the MNCs. It is possible for Indian

companies to gain access to markets through these firms. With the

extension of technology and capital, it is possible for Indian companies

to extend their reach into the hardware industry. The scope for entry into

the Philippines could take a different track. The Philippines has a labour

force that is relatively cheap, educated and fluent in English. Indian

software companies could capitalize on these qualities to extend theoperations of their companies and take advantage of the availability of

the labour force in the Philippines and Malaysia.


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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.

Indo-ASEAN FTAs Impact on energy security according to Das Gupta

et al (2006) is likely to help Indias quest for energy security. India is

heavily dependent on west Asia for oil imports, which is a geopolitically

tense part of the world. India is currently the worlds 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. 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 theworld.India also imports LPG from Malaysia, which comprises just

3.5% of its total LPG import. On the other hand, among the ASEAN


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countries, Indonesia, Malaysia and Vietnam have about 1% of worlds

proven oil reserves and 3% of the worlds proven gas reserves.

Parthapratim Pal, Mitali Dasgupta(2008) concluded 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 Indias economic and strategic presence in the neighborhood.

Though India shares a land border with Myanmar and maritime borders

with Indonesia and Thailand, the ASEAN countries have never beeneconomically 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 Indo-

ASEAN FTA can also be viewed as another cog in the wheel of

increasing south-south cooperation. This is important because the world

economic system is presently going through some significant changes.

Regarding impact on service sector A number of studies have pointedout that there is significant complementarily between Indias service-

oriented economy and ASEANs light manufacturing driven economy

(Sen et al 2004; Kumar 2002; Bhattacharya and Arif 2002). The


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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.

Shinoj (2009) has analyzed that in pursuance of Indias LOOK EASTpolicy, focus on trade between India and East Asia has heightened

during the previous decade. Alongside, successive governments in New

Delhi have sought to develop closed institutional links with the region, it

is estimated that India exported merchandise worth Rs. 44235 corers to

countries of ASEAN in 2005-06, while its imports were pegged at 45318

corers. The trade basket comprised of machinery and electrical

appliances, minerals, chemicals, textile and apparels, plastics and

processed foods, agriculture and vegetable products. The total

merchandise trade over the timeline has revealed that both exports as

well as imports have grown in double digit percentage during the decade

1995-96 to 2005-06. However the performance of Agriculturalcommodities in trade had been found declining. The estimates suggest

that India ASEAN trade in agricultural front has been quite

disappointing with the agriculture sector being out paced by other


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sectors, the fruits of various favorable policies have failed to get

manifested into Indias agricultural trade with the region.

CONCLUSION:-

No doubt, the existing work on India and ASEAN Free Trade

Agreement puts stress on mutually strong relations between the two

regions. Scholars arguments are in favor of economic ties between India

and Southeast Asia. But their work has failed to mention the proper

future solution that needs to be implemented.There still remain various

aspects which need to be looked into for the pcontinued success of their

relations in the future. The singing of FTA is not sufficient way, to get

maximum benefits and associated advantages from the FTA (January

2010), it is important for India to ensure that it can maintain proper

policy coordination and reforms overtime. A sincere attempt towards

effective management of regional integrationprocess should ensure a

progressive framework to facilitate trade at multilateral level. To

conclude, it can be said that both India and ASEAN are keen to establish

a sound and strong relationship with a long term emphasis on greater

cooperation and integration. But there are many challenges before them

which have to be accepted and try to make proper strategies so that their

relationship lasts for long run.


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REFERENCES:-

Ahmed, S.India-ASEAN Free Trade Agreement: A sectoral analysis,

SSRN Working paper 1698849 (2010). Accessed November 2010.http://ssrn.com/abstract=1698849.

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.

Bhgwati,jagdish (2002) : Going Alone: The Case for Relaxed

Reciprocity in Freeing Trade.

Chandrima sikdar and Biswajit Nag (2010):-Impact o India-ASEAN

Free trade agreement: A cross country analysis using applied general

equilibrium modeling.

Das,Santosh K. and Tewari Ritika (2010), IndiaASEAN Free

Trade Agreement and Development of North East:

Prospects and Challenges.

Francis,Smitha: A Sectoral Impact Analysis of the ASEAN-India

Free Trade Agreement(epw,nov.2011)

Karmakar, S. (2005). India-ASEAN cooperation in servicesan

overview, ICRIER Working Paper No. 176. Indian Council for

Research on International Economic Relations, New Delhi.
http://ssrn.com/abstract=1698849http://ssrn.com/abstract=1698849http://ssrn.com/abstract=1698849


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Ohlan,Ramphul ( 2012) ASEAN-INDIA FREE TRADE AGREEMENT

IN GOODS: AN ASSESSMENT.

Okimoto, Yumiko (2005): China and India: Challenges and

Opportunities for ASEAN from Japanese Perspectives, paper presented

at 30th Annual Conference of the Federation of ASEAN Economic

Associations (FAEA), November.

Parthapratim Pal, Mitali Dasgupta(2008):- Does a Free Trade

Agreement with ASEANMake Sense?

Shankaran Nambiar-Indias Engagement with ASEAN: Beyond

Trade in Goods.ISAS Working Paper No. 12926 August 2011.

Sen, R, M. G. Asher and R. S. Rajan (2004). ASEAN-India economic

relations: Current status and future prospects, Discussion Paper no.

73, Research and Information System for Non-Aligned and Other

Developing Countries (RIS), New Delhi.

Shinoj P. (2009), India-ASEAN Trade in Agriculture : Retrospect and

Prospect, PolicyImplications, National Centre for Agricultural

Economics and Policy Research, New Delhi.http://www.ncap.res.in

Viswanathan, P K and Amita Shah (2008): Trade Reforms and Crisis in

Indias Plantation Agriculture: Case Studies of Tea and Rubber

Plantation Sectors, paper presented at the Fourth Annual South Asia

Conference on Trade and Development 2008, Centre for Trade and

Development, New Delhi,17-18 December.
http://www.ncap.res.in/http://www.ncap.res.in/http://www.ncap.res.in/http://www.ncap.res.in/


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