News and Analysis • Volume 13 • Number 2 • June 2009

18 - India Boosts Asian Trade Ties

After nearly a decade of negotiations, India is set to sign free trade agreements with the ten-member Association of Southeast Asian Nations and South Korea next fall.

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Tariff cuts are set to start in January 2010. Import duties for ‘normal’ products will be eliminated within four to six years, and reduced to 5 percent for sensitive products (about 10 percent of all traded goods) by end-2016. Duties on highly-sensitive products (palm oil, tea, coffee and pepper for India) will be brought down to 30-45 percent over ten years. In addition, the parties will be able to exempt ten percent of traded products from any cuts. The items on these so-called ‘negative lists’ vary from country to country. India’s list consists mostly of agricultural and fisheries products, but also includes rubber, textiles, chemical and petro-chemical products, auto components and spirits.

ASEAN accounts for roughly 10 percent of India’s exports. With the signing of the free trade agreement, analysts expect bilateral trade to surpass US$50 billion in 2010, up from US$48 billion projected for 2008-09.

As it stands, the agreement covers only goods, but it will be extended to services, investment and other areas of economic co-operation over time. The pact was delayed several times, mostly due to differences over issues such as the number of products that can be excluded from tariff reductions, the depth of the cuts and rules related to value addition.

ASEAN member states include Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The bloc already has free trade agreements with China, Australia and New Zealand, as well as South Korea. Talks are also underway with Japan.

The Comprehensive Economic Co-operation Agreement (CEPA) provisionally agreed between India and South Korea covers investment and services, as well as goods. It also includes bilateral co-operation pacts in several specific services sectors, and science anf technology.

The main issue holding up the conclusion of the treaty had to do with India’s demands for more access to the Korean services market, in particular in the educational and healthcare sectors. Access for other services professionals had been agreed earlier. Thus far, India has only a marginal share of Korea’s services imports, dominated by the US, the EU, Japan and China.

Whereas the ASEAN-Indian agreement requires India to reduce import duties on all but 500 products out of a total of 5,000, the deal with Korea reportedly allows it to maintain a ‘negative list’ of some 700 items, including cars and auto components, farm and fisheries products, wines, edible oils and textiles, as well as certain goods produced by small or medium-sized enterprises such as perfumes, soaps and toiletries.

After double-digit growth for many years, two-way trade between India and South Korea culminated at US$15.5 billion in 2008, but contracted by 40 percent in the first two months of this year. The CEPA is expected to lead to an overall increase in bilateral trade worth US$3.3 billion.

Indian news agency PTI quoted a senior commerce ministry official as saying that signing the two agreements was on the ‘100-day agenda’ of the new government. The formal ceremony could occur either on the sidelines of an ASEAN trade ministers’ meeting in August or at the bloc’s annual summit in October. India’s newly appointed Commerce and Industry Minister Anand Sharma said he would seek cabinet approval for both agreements shortly.