India: India´s trading arrangements with ASEAN

"I am never satisfied with the progress, I want things to move faster..." this was said by ASEAN Secretary General, H.E. Mr. Ong Keng Yong to the Business Standard, a business news publication, on the sidelines of a seminar organised by non-aligned Research and Information Systems and the Federation of Indian Chambers of Commerce and Industry (FICCI).

It is indispensable to appreciate the significance of intra-regional trade as it has a positive impact on the other countries, which form the inter-regional trade. Some people view world trade as consisting generally of intra-regional trade and the inter-regional trade. There is also talk of regionalisation versus globalisation of world trade. In 1980s, the share of intra-regional trade in total world trade increased in Western Europe, North America and Asia. In 1990 intra-regional trade in goods accounted for 61% of total trade in goods of the European Community – 41% for Asia and 35% for North America. Over 60% of the trade of the Pacific rim nations stays within the area. Regional integration schemes tend to increase intra-regional trade. Trade between the 12 members of the European Community (EC) increased to 60% in 1990. Intra-regional trade increased in the European Free Trade Association (EFTA) and the Association of South East Asian Nations (ASEAN).

Now, coming to one of the most important economic grouping in Asia – ASEAN and its relation with India, a burgeoning developing country.

ASEAN is a political, economic, and cultural organization of countries located in Southeast Asia. Founded on August 8^th 1967, its aim is to foster cooperation and mutual assistance among members. The member countries meet annually every November in summits. The current member countries of ASEAN are, Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Viet Nam, Laos, Myanmar and Cambodia. Papua New Guinea enjoys the status of an observer in the ASEAN. The first four countries as mentioned above are its founding members. ASEAN regularly conducts dialogue meetings with other countries and organizations, collectively known as the ASEAN dialogue partners. They are Australia, Canada, The People's Republic of China, North Korea, South Korea, the United States, India, Japan, Mongolia, New Zealand, Russia, and the European Union. ASEAN Headquarters is located in Jakarta, Indonesia.

The ASEAN Regional Forum (ARF) is an informal multilateral dialogue of 23 members that seeks to address security issues in the Asia-Pacific region. The ARF met for the first time in 1994. The members include the 10 member states of the ASEAN, the observer Papua New Guinea, and the 12 ASEAN dialogue partners. The association includes about 8% of the world's population and in 2003 it had a combined GDP of about US$700 billion (roughly equivalent to South Korea) and this GDP was growing at an average rate of around 4% p.a. The economies of member countries of ASEAN are diverse, although its major products include electronic goods, oil and wood. The ASEAN countries are culturally diverse it includes more Muslims than any other geopolitical entity -- about a quarter of a billion, mostly in Indonesia and Malaysia. Other main religions of the various people in the region include large numbers of Buddhists in Thailand, Myanmar, Laos, Cambodia, Vietnam and Singapore and the predominantly Catholic Philippines. This simply proves that ASEAN is the only organisation with such diversity. ASEAN has governments with widely differing views on governance and political process, including practices in areas such as suffrage and representation. Government types range from democracy to communism and socialism. The level of corruption in ASEAN governments is also an area with large disparity.

ASEAN's interest in India arises from two considerations. First, ASEAN has traditionally engaged all the major powers of the world. India's rising economic and technological competence has the prospective to provide considerable opportunities for ASEAN countries. Second, ASEAN and India are working towards a free trade agreement, which leaders hope to make operational in a decade. This requires a considerably enhanced understanding of each other's economic structures, institutions, and political systems.

There is a lot of talk about how ASEAN can boost Indian economy and how relations with ASEAN can boost India’s foreign trade. India’s engagement with the ASEAN started with its "Look East Policy" in the year 1991. India became a Sectoral Dialogue Partner of ASEAN in 1992 and Full Dialogue Partner in 1996. In November 2001, the ASEAN-India relationship was upgraded to the summit level.

The 1^st ASEAN Economic Ministers (AEM) – India Consultations were held on 15^th September 2002 in Brunei Darussalam where the Ministers, after discussing the Joint Study Report decided to establish an ASEAN-India Economic Linkages Task Force (AIELTF). The AIELTF was asked to prepare a draft Framework Agreement to enhance the ASEAN-India trade and economic cooperation before the 2^nd AEM – India Consultations. Subsequently, at the First ASEAN-India Summit held on 5^th November 2002 in Phnom Penh, Cambodia, the former Prime Minister of India Mr. Atal Bihare Vajpayee made the following major announcements:-

1. India will extend special and differential trade treatment to ASEAN countries, based on their levels of development to improve their market access to India;
2. FTA within 10 years timeframe; and
3. India is committed to aligning its peak tariffs to East-Asian levels by 2005.

Mr. Vajpayee and the Heads of Nation/Governments of ASEAN members signed a Framework-Agreement on Comprehensive Economic Cooperation between the ASEAN and India during the Second ASEAN – India Summit on 8th October 2003 in Bali, Indonesia. The key elements of the Framework Agreement on Comprehensive Economic Cooperation covered FTA in Goods, Services and Investment, as well as Areas of Economic Cooperation. The Agreement also provided for an Early Harvest Programme (EHP), which covers areas of Economic Cooperation and a common list of items for exchange of tariff concessions as a confidence building measure. The highlights of the Framework Agreement are as follows: -

(I) FTA in Goods

• The tariff reductions would start from 1^st January, 2006 and Most Favoured Nations (MFN) tariff rates to be gradually eliminated. While India will eliminate tariffs in 2011 for Brunei Darussalam, Cambodia, Lao PDR, Indonesia, Malaysia, Myanmar, Singapore, Thailand and Vietnam; Brunei Darussalam, Indonesia, Malaysia, Singapore and Thailand will eliminate in 2011. India and Philippines will eliminate tariffs for each other on a reciprocal basis by 2016.

(II) FTA in Services and Investments

• Negotiations to commence in 2005 and concluded by 2007.

• The identification, liberalisation etc. of the sectors of services to be finalised for implementation subsequently.

(IV) Areas of Economic Cooperation

• Areas of economic cooperation to include trade facilitation measures; sectors of cooperation; and trade & investment promotion measures.

(V) Early Harvest Programme (EHP)

• Based on the inter-Ministerial consultations and apex chambers of commerce, the items for EHP were finalised for exchange of concessions.

Mr P K Basu Managing Director, Robust Economic Analysis Pte Ltd (REAL); and Secretary, India Club, Singapore, says that India is the fastest growing economy among world democracies. The following diagram will be the evidence of such alleged statement.

Never in the history of mankind has a democracy with even 200 million people sustained annual real GDP growth of 5.9% over a 24-year period. India’s achievement is unparalleled. In 2003, India had the world’s highest nominal GDP growth. It’s because of these, India is closer to fulfilling one of its top priorities - forging stronger economic ties with the ASEAN. India and the 10-member ASEAN group will sign deals for a plan of action and to promote "shared prosperity" at the annual summit.

It’s because of India’s strong seeking nature that economists and honchos of the trade-world believe that an FTA with ASEAN will give India an opportunity to look beyond trade. This will undoubtedly bring India closer to its target of achieving 2 per cent share in global trade. At first, ASEAN was slow to respond to Indian overtures, but that is slowly changing. Asian countries struggled with the financial crisis of 1997, and India's economy began showing signs of promise. Experts say ASEAN also began to see how India could balance out China's power in Asia. The relationship has acquired momentum in the past two years. At the 2003 ASEAN summit, India and the Southeast Asian bloc agreed to create a free-trade area in goods, services and investment by 2011. Arvind Virmani, Director at the Indian Council for Research on International Economic Research, acknowledges that ASEAN has recognized India's dexterity in IT and in service exports. This is the reason why more countries of the ASEAN who had a mental block to trade with India are slowly breaking out of it.

International economists say that by wooing ASEAN, India ensures it is not isolated when regional trading arrangements are "en vogue". This could include eventual economic integration with economically dynamic East Asia. India's need to build links with developing economies now is pressing as developed nations put up more trade barriers despite preaching liberalization.

The developed countries are becoming highly protectionist and they are inflicting all sorts of barriers. Non-tariff barriers in the developed world are increasing rapidly which necessitates India to look beyond the developed world to expand its trade and ASEAN countries offer great opportunities to India. India is making better progress with some ASEAN members than with others. It has a free-trade pact with Thailand already, and, in the past year, greater investment from Malaysia and Singapore, with which it has a cooperation deal in the works.

Still, two-way India-ASEAN trade is far lower than it could be. In 2002 it was about $10 billion, only one percent of overall ASEAN trade. Sceptics doubt India can move fast enough to change that. With Chinese goods flooding the region, India is its own worst enemy, raising tariff barriers higher than countries in East Asia. It has promised to reduce duties, but usually is slow to act. Transport and communication links with the region also need to be improved. However, as India's economic profile grows, and its industry becomes more competitive globally, there is optimism the relationship will bear fruit.

INDIA-ASEAN trade in 2003-04 was about US$ 13.25 billion, over 5 times the 1993-94 trade figure. The balance of trade was in favour of ASEAN. Compared to other regional groupings, ASEAN is the fifth most important market in the world in terms of Indian exports and fourth in terms of imports. India’s exports to ASEAN include oil meals, cotton yarn, fabrics, machinery and instruments, marine products, rice, drugs and pharmaceuticals, chemicals, etc. In 2004, ASEAN accounted for 9.34 per cent of India’s global trade.

India will formulate a new set of rules of origin (ROO) for its free trade agreement (FTA) with the ASEAN by mid-July, 2005. ROO is a safeguard to prevent third countries from taking advantage of FTA between two other countries. ASEAN had rejected India’s twin criteria of determining ROO, which it generally uses in its various FTAs with other countries. ROO happens to be a vital component in any FTA as it determines the country of origin of products to be traded. If a product does not satisfy the ROO criteria then it is deemed as originating from a third country and cannot be traded under the FTA.

The two criteria being followed by India are the value addition method and change in tariff heading (CTH). The ASEAN countries use the value addition method, which specifies a minimum percentage of value addition to be achieved with domestic inputs to make a product eligible for concession - treatment under FTA.

Under the "RULES OF ORIGIN" :

What India wants is:

• Twin criteria of, value addition of 40 per cent and CTH. The concept of CTH arises out of the international Harmonised System of Nomenclature — or, common customs codes. This would basically determine products eligible for FTA concessions.

What ASEAN seeks:

• Just one criteria, specifying a minimum percentage of value addition to be achieved with domestic imports

However, India feels that the value addition method is not adequate, as high wage rates or high rent can increase the product value even without substantial physical addition. To prevent this, India has been insisting on the CTH method, under which a product has to fall into a different tariff heading than the imported inputs used in its production.

ASEAN had not agreed to India’s suggestion of applying the twin criteria on a list of items under the early harvest programme and the programme had to be dropped. If India agrees to ASEAN’s approach on ROO, it would have to apply only the value addition norm as against the twin criteria. The New Foreign Trade Policy announced on August 31 has set a target of 2 per cent share in world trade for India by 2009. This may be possible to achieve given that exports have been growing at the rate of over 20 per cent in the last few years and India's share in global trade has been increasing.

To actually realize this target, India may have to take certain bold steps, including signing free trade agreements. Though India has been a campaigner of multilateralism and acted as a responsible member of the WTO, regionalism as a reaction to the multilateral process has gained ground recently. However, the foreign trade policy has adopted a cautious approach to bilateral and regional FTAs when these have emerged as an essential means for protecting and expanding trade in today's world.

Many developed and developing countries have actively formed regional groupings to enhance their trade and development objectives, and India certainly needed to take some proactive steps in this direction. One such laudable measure is the signing of the India-ASEAN comprehensive cooperation agreement on October 8, 2003 in Bali, Indonesia. This FTA is expected to create a large market of 1.5 billion people, with a combined present GDP of $1.2 trillion. The India-ASEAN two-way trade grew 30 per cent from $7.6 billion in 1999 to $10 billion in 2002.

The volume of trade is still small, considering the vast potential for trade that exists among countries of over 1.5 billion people, and it is hoped that the target of $30 billion will be reached by 2010. Several reasons can be cited for the less-than-potential trade with ASEAN especially when India's exports are growing steadily. First, India has not made an earnest attempt to look beyond its traditional trading partners such as the US, the UK, Europe and Japan. Further, the preferential tariffs enjoyed by ASEAN members among themselves have made India's exports to this region uncompetitive. Moreover, the intra-ASEAN trade has been growing at 10 per cent annually, constituting nearly 25 per cent of the bloc's total trade.

In this situation, the India-ASEAN comprehensive agreement offers several alternatives. An FTA with ASEAN will give India an opportunity to look beyond trade and to areas such as science and technology, information technology, biotechnology, space technology, tourism, and human resource development. This enhanced trade will undoubtedly bring India closer to its target of achieving 2 per cent share in global trade.

India has offered to eliminate tariffs for five ASEAN members — Singapore, Malaysia, Indonesia, Thailand and Brunei — by 2011. There are a few problems that India needs to address before this comprehensive cooperation agreement with ASEAN reaches the implementation stage.

India's import duties are moving towards ASEAN levels, but the pace has been tardy, dragging the bilateral trade volumes. The $30-billion trade target cannot be achieved if India's Customs duty rates remain at around 25 per cent when they are merely 8 per cent in Indonesia and 16 per cent in Thailand.

Further, sectoral FDI caps, as in telecom and aviation, are affecting investments from ASEAN. These could come in the way of India actively pursuing its Look East Policy for expanding trade destinations. Though multilateralism has witnessed a huge triumph in recent months with the signing of the WTO framework agreement ensuing in the strengthening of the multilateral trading system, there is no refuting that RTAs (Regional Trade Agreements) offer quick gains which are much needed for a developing economy such as India looking to making its mark on the global markets and cementing its place in Asia as an economic superpower after China.

Moreover, realising the importance of RTAs for increased trade liberalisation and the gains from trade, countries that have traditionally not been party to regional pacts are now negotiating and entering into RTAs. For instance, Japan, which was not part of any RTA for many decades, has joined the bandwagon by singing an FTA with Singapore in January 2002.

One of the important features of the India-ASEAN Cooperation Agreement is the Early Harvest Programme (EHP) that is an integral part of the ASEAN-India FTA. The progressive tariff reduction under the EHP shall commence from November 1, and elimination shall be completed by October 31 2007 for ASEAN-6 and India and October 31, 2010 for the new ASEAN member-states.

In the first phase of the EHP, India has agreed to exchange tariff concessions on 105 common products with ASEAN. India has also agreed to accord non-reciprocal tariff concessions to Cambodia, Laos, Myanmar and Vietnam on 111 products. Tariffs at 25 per cent or above are to be reduced to 15 per cent, tariffs between 10 per cent and 25 per cent are to be reduced by 10 per cent; and 10 per cent or less are to be reduced to 4 per cent by the first year of implementation and all the tariffs have to be progressively eliminated by 2007.

Products covered by the EHP shall qualify for tariff preferences in accordance with the rules of origin. However, all the agreements that India has signed so far have been an issue for debate because of the rules of origin problem. Such rules of origin are important to ensure that goods manufactured in neighbouring countries, such as China and Korea in the case of ASEAN, do not enter India by using Thailand or Singapore as a base merely to benefit from concessional duties.

It is here that the value-addition criteria come into play. The value-addition criterion says that goods exported from a certain destination must have a minimum value addition in the country of origin. However, there has been no progress on what is the right percentage of value-addition criteria. Moreover, the Government is also debating the huge revenue losses that it would incur due to the reduction in tariff rates on these 105 items in the EHP.

Clearly, there are several obstacles that India will have to tackle in the implementation of these FTAs with its South-East Asian partners. It has to persist with its efforts and sort all differences through negotiations if it has to benefit from the agreements.

In this backdrop, it becomes vital for India to charge ahead in its ties with ASEAN so that the adverse impact or trade diversion resulting by the creation of NAFTA (North American Free Trade Area) and the EU can be combated by enhancing growth within the Asian region. There is no doubt that China will always remain more closer to ASEAN because of its strong historic, cultural and ethnic ties with the region, but ASEAN definitely cannot ignore India. After many years, the idea of an Asian Economic Area seems to be closer to reality. The Asian Economic area will benefit the region immensely and act as a good counter balance to regional groupings such as NAFTA and the EU. But everything depends on the new Government and how it pursues these FTAs and brings them to their fruitful conclusion. India has no choice but to go ahead with FTAs if it is serious about achieving that 2 per cent share in world trade and doubling its share in global merchandise trade by 2009.

Secretary General, ASEAN Mr.Yong said that it was important for bureaucrats on both sides (India and ASEAN ) to change their mindsets. "The approach of India always is what can we do to sell more to ASEAN and we always begin with why should we always talk of buying and selling with India. This mindset must be dumped or junked if we want our economies to change for the better," he said.

He also said that India has several advantages, such as a plethora of civil engineers, educational institutions and IT specialists who are not found easily in the ASEAN. He asserted that the demand is of quality and low costs, which India can easily provide, being a labour intensive economy. He portrayed his interests to make investments in India.

For a relationship which began warming up only about a decade ago, the India-ASEAN partnership has been trotting at quite a fast pace.

• India became a sectoral dialogue partner of ASEAN in 1992. The sectors were trade, investment, tourism and science and technology.

• Mutual interest led ASEAN to invite India to become a full dialogue partner of ASEAN during the fifth ASEAN summit in Bangkok in 1995 and a member of the ASEAN Regional Forum (ARF) in 1996.

• India signed an agreement in October 2003 for a free trade area (FTA) with Thailand. Under the agreement, 84 items can be imported from Thailand from April 2004 at 50 percent of the normal rate of duty prevailing in India. The pact with Thailand is to be followed by a similar agreement with Singapore and, ultimately, the entire ASEAN region and India is committed to aligning its peak tariff to East Asian levels by 2005.

• India has also been engaged in negotiations to form a Comprehensive Economic Cooperation Agreement (CECA) with Singapore.

• Sub-regional cooperation has accelerated too. The Mekong-Ganga Cooperation (MGC) and the BIMST-EC (Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation) are indicators to this effect.

• In 2003, India acceded to the Treaty of Amity and Cooperation (TAC) in South-East Asia, signed a declaration to combat international terrorism, and agreed on comprehensive economic cooperation to step up their current trade turnover of $12 billion.

The deepening of ties is beginning to show in the intra-country trade figures. India-ASEAN trade in 2002-03 was about $9.76 billion, about four times the 1993-94-trade figure of $2.5 billion. India's exports to ASEAN were $4.61 billion while imports came to about $5.15 billion in this period. Growth in India's exports to ASEAN in recent years has been much higher in comparison to other destinations. India's trade with the world in 2003 stood at $114.13 billion, ASEAN accounting for 8.56 percent of India's global trade.

Bilateral relations are underpinned by close historical and civilizational interaction and shared commonalities in terms of size, diversity (ethnic and religious) and multi-culturalism. Since the advent of the Democratic Reform era in Indonesia in 1999, relations have expanded in all areas. There have been annual Summit level meetings from 2000, a Ministerial Joint Commission has been established and MOUs concluded, inter alia, on Defence and Counter-Terrorism Cooperation.

Total trade between India and Indonesia during 2004 stood at US$ 3.27 billion an increase of 36% in 2003. India is among Indonesia’s largest buyers of Crude Palm Oil (CPO) and an importer of its mining, petroleum and paper products.  India’s exports refined petroleum products, wheat, rice, sugar and iron and steel products to Indonesia.

The trade balance between the two countries is tipped in Malaysia's favour now. In the first seven months of this year, exports from Malaysia to India grew to $1.7 billion, while imports from India into Malaysia grew to $8.3 million.

However, the trade balance could change soon thanks to India's IT foray into Malaysia. In fact, Malaysia is one of the most e-literate states in ASEAN, with 126 computers for every 1000 people, and 6.5 million Internet users.

Malaysia is among the top ten international investors in India. Up to 2003, investments spread over diverse industries ranging from aqua-culture to rubber businesses to telecom equipment were pegged at around $450 million. In the infrastructure sector, Malaysian companies have already completed 21 projects worth $830 million.

Malaysia is focusing on the Indian traveller in a big way. Malaysia had 145,000 Indian visitors in 2003 and expects the number to rise to over 200,000 this year by promoting itself as a motor sport, conference and golf destination.

India has already become Singapore's fastest-growing trade partner this year, overtaking China. Two-way trade between Singapore and India grew at 54.3 per cent in the first six months, and is set to top S$10 billion for the full year - easily exceeding last year's record trade of S$7.9 billion. India is Singapore's 12th-largest trading partner and also the 12th-biggest market for Singapore-made goods.

India's investment in Singapore has grown by 14 per cent over the past decade. More than 300 Indian IT companies have set up software development operations in Singapore. There are about 1500 Indian companies currently based in Singapore and every year around 150 new companies set up base. Indian firms now make up the fourth largest community in Singapore.

India and Thailand signed a free trade agreement in August 2004, to unleash trade potential between the two countries. Yet even without the agreement, trade is booming. By 2000, the two countries were doing trade worth $1.22 billion. Indian companies in the gems and jewellery sector have already established a reputation for themselves in Thailand and about 57 per cent of India's exports to Thailand (in value terms) originate from this sector.

The free trade agreement - which is projected to boost Thailand's GDP by 0.34 per cent - is expected to take this figure to a new level. A joint feasibility study conducted by the two countries has concluded that the FTA would result in significant trade creation: India's exports to Thailand could increase by 42.71 per cent, while Thai exports to India would rise by 113.71 per cent. Trade creation is simply the beneficial effect of the customs union of shifting supply from a high cost domestic source to a lower cost source of a partner (i.e. another member of the union).

Myanmar, which joined ASEAN in 1997, is India's entryway to South East Asia. India's northeastern states share their borders with Myanmar. Yet roads connecting India and South East Asia have been lying abandoned for decades.

Bilateral trade between India and Myanmar can be doubled within two years, according to the India-Myanmar Joint Task Force Report released in October 2004. The taskforce, which has set a target of bilateral trade worth $1 billion by 2006 from the March 2003 level of $411 million, believes that strong linkages between Myanmar and India's northeastern states can make this target possible.

The value of Indian exports to Vietnam stood at $457 million and from Vietnam to India stood at $30 million in 2003. At the moment, India has investments in Vietnam's sugar and pharmaceuticals business. The Nagarjuna Group and KCP have set up sugar ventures, and Ranbaxy has a pharmaceutical venture. India is now looking to the IT and energy sectors to up the tempo of investments. ONGC has put in $200 million in an upstream gas project in southern Vietnam. The oil and gas major has already started getting revenue from its investment, and is generating cash flows of around $6 million flowing in from the sale of gas to the downstream industries in Vietnam.

After the independence of the Philippines in 1946 and that of India in 1947, the two countries established formal diplomatic relations on November 26, 1949. In the post-Cold War era, where commerce and trade are the driving force behind political relations among countries, the relations between the two countries have deepened and acquired a wider range. India’s growing engagement with ASEAN has also lent a fillip to the bilateral ties. The two countries have synchronized their positions on several regional and international issues. In August 2001, the Philippines solicited our support to their candidature to UNSC for 2004-05. As a gesticulation of goodwill, India decided to adjourn its candidature for UNSC and agreed to support the Philippine candidature.

Bilateral trade between India and the Philippines was US$ 341.22mn during January – November 2004. Major items of Indian exports are: pharmaceuticals, iron and steel manufactures and tools, textile yarn, petrochemicals, auto and motorcycle parts, cereals, etc. Major imports from Philippines are: semi-conductors, inorganic chemicals, auto parts, garments and miscellaneous industrial products.

Over the years, the two countries have signed several agreements, which provide a broad framework for our bilateral ties. The agreements / MOUs signed between the two countries include, Air Services Agreement (1949), Cultural Exchange Agreement (1969), and many others.

 At the ASEAN-India Partnership for Peace, Progress and Shared Prosperity under the "Institutional and Funding Arrangements for Implementation", to realise the objectives of the ASEAN-India Partnership, the following measures will be taken:

· ASEAN and India will implement specific activities and projects as contained in the attached Plan of Action;

· ASEAN and India will strengthen the existing funding mechanisms, including the ASEAN-India Cooperation Fund, for effective cooperation and implementation of the ASEAN-India Partnership and Plan of Action;

· ASEAN and India are committed to providing requisite resources and in accordance with their respective capacities, including mutually exploring effective and innovative external resource mobilisation efforts, to accomplish the various strategies and measures outlined in the Plan of Action;

· The progress made in the implementation of the ASEAN-India Partnership and the Plan of Action will be reviewed by the Senior Officials and the Foreign Ministers of ASEAN and India under the ASEAN-India Dialogue Relations; and

· The Plan of Action will be reviewed periodically taking into consideration the dynamic developments in the region and the world.

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