Inside Story of India-Asean FTA

On August 10, an Indian expert on trade agreements received a call from the commerce ministry. India was going to sign the long-pending Free Trade Agreement (FTA) with the Association of Southeast Asia (Asean), a powerful bloc of 10 Asian countries, two months before the October date initially expected.

The next day, the official flew out to Thailand to assist Commerce and Industry Minister Anand Sharma and his team who were already holding hectic parleys with their Asean counterparts. Two days later, India signed its most comprehensive trade deal yet, committing to bring down import tariffs on 80 percent of the commodities it traded with Asean.

Asean’s members — Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Myanmar, Laos and Cambodia — and the six countries that the grouping wants to integrate the regional trade with (China, India, Japan, South Korea, New Zealand and Australia) are home to about half the world’s population, account for about $9.4 trillion in gross domestic product (GDP) and form the fastest growing region in the world.

The signing of the deal was the culmination of six-year-long talks punctuated by rivals’ attempts to delay India’s entry into the trade bloc as well as internal pressures that kept the government’s hands bound. This time, India came down from some of its long-held positions to push through the deal. And, the run-up to the signing was actually kept quiet to avoid domestic pressures from building up. Even Cabinet ministers such as A.K. Antony had reservations. But there was one man in the Cabinet who wanted the deal desperately: Prime Minister Manmohan Singh.

The closest window available was a ministerial meeting set for mid-August in Thailand, the current chair of Asean. India had to act fast, the outgoing commerce secretary G.K. Pillai had told the PM.

One of the first things that Singh did after being re-elected in May — this time without the shackling presence of Left parties who were virulent opponents of the agreement — was to ask his principal secretary T.K.A. Nair to take charge of the process.

Meanwhile, whenever he met his counterparts from Asean countries at international fora, Singh actively lobbied for the deal. He also impressed upon them about the compulsions against India’s compromising on agricultural goods, a person close to the PM told Forbes India.

The initial plan was to sign the deal during the October summit of the East Asian countries in Thailand. For Singh, however, it would have been too late. He would be in a much stronger position going into the summit with the deal in the bag than without. 

No Longer a Spoiler
If things went well, India could be a lead player in East Asian integration, the most ambitious regional effort after the European Union. Instead, Singh had been facing flak at many international fora
for India’s inability to conclude negotiations. It was seen, especially by rich nations, as a “dealbreaker”.
The perception was not without reason. India is considered the principal “spoiler” at the head of a group of about hundred developing countries in the stalled Doha round of talks of the World Trade Organization (WTO). It has often stuck to its paranoia about an import onslaught against its impoverished farmers. Others did not see it that way.

Recently, in the proposed FTA of Asia-Pacific Economic Cooperation nations or Apec, a non-Asian delegate warned that if India is included, the Apec FTA will become the Apec “non-FTA”.
There was another worry. China, with its massive trade relationships in Asia, was moving rapidly to take control of the region’s economic moves.

China, which began talks with Asean along with India in 2003, signed the goods agreement in 2004. It caught India by surprise by concluding an investment agreement with Asean on the same day that Delhi signed the trade of goods agreement. It had already inked a services agreement in January 2007. India is the last country to sign the deal with Asean Plus Six (APS) grouping. That meant India was at least two steps behind China in its Asean ties. It had to change gears.

On August 7, India signed an FTA with South Korea. A similar agreement with Japan will be concluded before the year ends. In September, India has concluded the joint study for pacts with Indonesia and Australia and negotiations are set to begin. It is also in talks for a separate FTA with New Zealand and has also concluded a Comprehensive Economic Co-operation Agreement with Singapore. Two members of India’s negotiating team say that the Prime Ministers Office (PMO) was actively pursuing each one of them. “Manmohan Singh is convinced that globalisation is an irrevocable process and India has to have its share,” says a person close to the PM.

Singh’s push for a quicker resolution to many of these negotiations is aimed to achieve three larger objectives, various sources say. First, a quick sealing of international trade agreements will blunt criticism against the country’s negotiating ability and intent. Second, it would allow India to counter the fall in export demand from Western countries by focussing on markets of the relatively faster growing east Asian economies.

Third and most importantly, it will give Singh the high ground to stake India’s claim for a major role in the proposed integration of the East Asian region, which is likely to be on the summit agenda.

The Way They See Us
The problem as many East Asian experts and negotiators like Noburu Hatakeyama, CEO of the Japan Economic Foundation and one of the senior most Japanese interlocutors,  see is India’s insistence to sort out even the minutest of detail, often missing the woods for the trees. “Indian negotiators often get stuck in the nitty-gritty,” says Hatakeyama.

Many times, India digs its own grave. Navrekha Sharma, India’s ambassador to Indonesia between 2006 and 2008, says that often it is also the case that Indian government’s priorities are very different from others.

“Yes, definitely there is a problem of perception,” says P.K. Dash, India’s chief negotiator with East Asian economies. “[But] Their tariffs are lower. We are late entrants in this arena [of bilaterals and regional trade agreements] with higher tariffs and defensive interests in almost every sector from agriculture to textile.”

Some Indian officials say that many Asean members often played hardball to keep India out for a while. “Asean is also not without blame in this regard. They are 10 countries and they took their time to harmonise their position,” says Rajiv Sikri, secretary in the ministry of external affairs between 2004 and 2006.

Even now, Vietnam has refused to sign the Indo-Asean FTA until India recognises it as a market economy, leaving room for a hurdle in the deal.

Experts assisting Indian negotiators also suspect that Asean often acted at the behest of China. “It is not ruled out because it would serve China’s larger strategic interest if India and Asean do not get closer. If they want to throw a spanner in the works then they have the means to do so,” says Sikri.
China is the dominant trading partner of Asean. At present, its trade with the bloc stands at $170 billion while India’s trade, without the FTA, is $40 billion. Even with the FTA in place, India expects to reach only $80 billion in the next five years, less than half of China’s current level.

Chief negotiator Dash says that it is difficult to say whether Asean slowed things down under pressure from China but he does agree that often enough Asean dug its heels on uncritical issues. For example, Asean chose to suspend talks for almost eight months in 2007, demanding zero tariffs on export of palm oil from the bloc to India when it was already decided at the ministerial level that India would bring down its effective tariff from 80 percent to 50 percent. In any case, the government had kept the duty on palm oil at zero for the past two years because of heavy domestic demand.

A similar demand was to reduce tariffs twice every year instead of the previously agreed annual cuts. The issue came up after the initial start date of the FTA, January 1, 2009, was missed due to political trouble in Thailand.

Seasoned negotiator Hatakeyama says he had never heard of bi-annual tariff cuts anywhere in the world. India refused to accept this demand as it would have led to sharper cuts and cumbersome procedures.

Compromise or Delay
As with any negotiation, Asean was using pressure tactics that would force India to compromise or delay further. Irrespective of whether Asean delayed at China’s behest or not, it never missed out on playing China against India during negotiations. “The Chinese model was always there in the backdrop. It was a constant refrain they had,” says Sharma.

Dash says talks were suspended thrice since they started in 2003. According to him, the suspensions happened every time Asean felt India is not ready for an FTA.

The first time it happened was on the issue of Rules of Origin (ROO) in 2004. ROO is a simple test to establish whether an imported product actually originated from a signatory nation. “It is a very contentious area since the Indian industry was very apprehensive of Chinese goods being routed into India through Asean,” explains Dash.

Asean wanted a product to be called its own if it had 25 percent value addition in any of the bloc countries. However, in every trade pact, India has opted for “Change of Heading” rule, which means after value addition, irrespective of how much, the product must progress from one classification to another.

There is a global system under which all possible products are classified: 2 digit, 4 digit, 6 digit and 8 digit levels. At the 2-digit level, discussions are broad-based (like a product being classified as wood) and at the 8-digit level, the most specific (like a product being classified as HB pencil). At the 8-digit level, an exporting nation can claim value addition more easily than it can do at the, say, 4-digit level. So, India wanted a product to shift at the 4-digit level after value addition for it to be called an Asean product.

Asean too follows a “Change of Heading” (at the 4-digit level) criteria in its FTA with China. However, it insisted on a far more relaxed norm with India. And India had to give in partly.
It agreed to twin criteria: Change of Sub-Heading at the 6-digit level and a 35 percent value addition. Asean has never agreed to such twin criteria with any partner but Dash assures that no third party products will enter India.

India also compromised on the negative list, which details products that are not eligible for tariff cuts. In 2005, India had placed 1,414 items in the list out of the total 5,224 products at the 6-digit level.

“Initially, we thought that we would not give any concessions but we realised that unless we do, some important partners like Indonesia and Vietnam may get nothing out of the deal and the overall FTA may fail as a result,” says Dash. These countries primarily export palm oil, tea, coffee and pepper — which states like Kerala and Karnataka produce. Eventually, India agreed to bring down its negative list to just 1,297 products at the 8-digit level.

East Asian Integration
The urgency to conclude the FTA shows India’s quest for more political and economic leverage in East Asia. The launch of the East Asian Summit in 2005 in Kuala Lumpur, involving all the 16 APS countries was the first step towards the formation of an East Asian Community (EAC).

India has traditionally been a votary of multilateralism. However, since the articulation of the “Look East” policy by the Congress government in 1992, India has increasingly shifted its focus to gaining a larger footprint in the regional markets.

The latest push in this direction came from Manmohan Singh in 2005 when he made a case for an Asian Economic Community (AEC) combining Asean countries, China, India, Japan and Korea and called it the ‘arc of advantage’ across which there would be free movement of people, capital, ideas and innovations.

With India being perceived as a “laggard” in negotiations as well as the long-pending FTA with Asean, which is also the convener of the East Asian Summit, there was a real danger that India may miss the bus.

At a recently concluded conference on East Asian integration in New Delhi, some of the delegates like Shujiro Urata, professor at the Graduate School of Asia Pacific Studies in Japan, suggested that the economic bloc could be started up with 15 countries and India could join later. That is precisely what India does not want to do. “Sequencing would be artificial and we don’t agree to it,” says Dash.

Sikri points out why it is important to be in the starting line-up. “Because the rules of the game are set at the beginning. Those joining late will have no say and would have to abide by the rules already laid down. I am sure the PM pushed for concluding the India Asean FTA because he understands the strategic importance of this move.”