2010 Oct 28
October 28, 2010

Asean, India and the free-trade game

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The global surge in regional trade agreements has continued unabated since the early 1990s. India was an exception to this trend for many years, but the non-conclusion of the Doha Round and tedious negotiations at the WTO have forced India to join the free-trade bandwagon.

In 1991, India decided to aggressively increase trade and strategic relations with Southeast Asian countries as part of its Look East policy.

The aim was to build upon historical and cultural ties to expand markets, counter Chinese influence in the region and improve India’s standing as a regional power.

The policy has allowed India to grow economically and strategically.

To further growth, India’s new free-trade agreement with Asean began this year, with trade expected to climb to $50 billion from $40 billion in 2009.

This means that Asean is already India’s fourth largest trading partner after the European Union, the United States and China.

The India-Asean agreement is functional with four members: Singapore, Thailand, Malaysia and Vietnam.

Two more, Indonesia and Cambodia, will soon join by slashing duties on hundreds of products, including seafood, chemicals, apparel and tires.

The remaining four —Laos, the Philippines, Brunei and Burma— will take more time to become complete members.

The agreement raises two major questions: First, will it help India step up its trade and make its presence stronger within the Asean region, and second, will it compel India to pursue its economic reform program more vigorously?

The answer to both questions is yes.

With a combined population of 1.8 billion and a GDP of $2.75 trillion, the Asean-India FTA is one of the largest in the world. It offers huge growth opportunities to Asean and India.

Currently, India’s share of Asean imports is 2.1 percent, against 13 percent for China.

Given the China-Asean FTA, which makes Chinese goods cheaper in the Asean market, India needs this agreement just to maintain its trade share.

But if the agreement manages to extend not only to goods but also services and investment, India stands to achieve even greater gains.

According to the Federation of Indian Chambers of Commerce and Industry, the new trade deal will provide greater market access to Indian professionals and service providers.

The Asean region is a net importer of services, buying nearly $180 billion worth of services in 2007. In view of this and India’s competitive advantages in terms of cost and expertise in a range of areas, such increased access will be very beneficial.

As to the second question, in order to render the Indian market receptive to Asean investment, India will need to continue rolling out institutional reforms and bold policy changes.

These reforms are essential for the Indian government to boost the country’s economic resilience, increase export competitiveness and improve the Indian business environment.

As the infrastructure and retail sectors are large targets for Asean investors, these sectors will require particular focus.

In addition, the trade deal may drive labor market reforms, as India strives to compete as an exporter with China. These much-needed reforms would only bolster the Indian domestic economy.

And finally, the India-Asean FTA may go some way towards stemming China’s growing economic dominance in Asia, helping to managing China’s rise in a peaceful and constructive way.

Will the Asean-India FTA have any negative impacts?

Many in India are concerned that the FTA will adversely affect India’s trade balance with some Asean countries. A few countries like China will route their products into India through Asean.

The Indian domestic industry must be prepared to face the challenge of cheap imports from Asean flooding the Indian market. Even without this trade agreement, India faces large trade deficits with Indonesia and other Asean countries.

But overall, the Asean-India FTA must be considered a positive development. Asean and India need each other.

For Asean, India’s working-age population is growing, while the working-age population in other Asian economies, such as China, Korea and Japan, is declining.

India is also a world leader in information technology and an attractive destination for foreign investment. For India, the trade will drive existing economic reforms, assisting the nation in establishing itself as a growing economic power in Asia. –Dr. Geethanjali Nataraj, http://www.thejakartaglobe.com/opinion/asean-india-and-the-free-trade-game/397342