India-ASEAN FTA: Renegotiating a lopsided trade pact

Negotiators seek to address disproportionate trade growth and non-tariff barriers in the upcoming review of the India-ASEAN FTA.

India-ASEAN FTA: Senior officials from India and the 10-member Association of Southeast Asian Nations will meet in Jakarta in July to review their free trade agreement. This negotiation is especially important for India which has been waiting for a review of the current treaty to renegotiate some clauses which, it feels, are heavily loaded against it. The last round of three-day negotiations concluded in Putrajaya, Malaysia on May 9.

India’s unhappiness with its free trade agreement with ASEAN has been evident for some time. India has been calling for a review of some clauses of the FTA which has been in place since January 2010. India highlights the fact that imports from ASEAN countries are growing at a much faster rate than exports, leading to the widening of trade deficit. The ASEAN bloc comprises Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Among these, Indonesia, Singapore, Malaysia, Thailand, and Vietnam account for 92.7% of India’s exports and 97.4% of its imports.

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The disproportionate trade balance has several underlying causes. One significant factor is the structure of the ASEAN economies, which are primarily export-oriented with robust manufacturing bases. In contrast, India has a diverse economy with significant service and agricultural sectors that have not fully capitalised on the FTA. This structural mismatch has exacerbated trade imbalances, as ASEAN countries have efficiently penetrated the Indian market, while Indian exports have struggled to gain similar traction in ASEAN countries.

The situation even led to a public confrontation by Commerce and Industry Minister Piyush Goyal, who labelled the FTA ill-conceived and unfair to Indian industry. While FTAs are generally reviewed within a year or two of their implementation to resolve any issues, it is worth questioning why the ASEAN trade bloc has not yet addressed India’s concerns.

Goyal’s criticisms also highlight concerns over specific sectors that have been adversely affected by the FTA. For instance, India’s micro, small and medium enterprises (MSMEs), which form the backbone of its manufacturing sector, have found it challenging to compete with cheaper and more efficiently produced ASEAN goods. This has led to calls for protective measures and support to help these industries adapt and compete on a more level playing field.

Some progress was made last year when both sides decided to complete the review by 2025, giving hope to the industry for a possible course correction. Given that the deal is over a decade old, officials believe it is high time the agreement is updated to keep pace with changing times. Modernising the FTA should include revisiting the rules of origin criteria, which have been a contentious issue. Current rules often fail to prevent the rerouting of goods through ASEAN countries, thereby exploiting preferential tariffs.

Strengthening these rules to ensure that only genuinely ASEAN-origin products benefit from the agreement could help address some of India’s trade concerns and foster fairer competition. India also wants the FTA to be more user-friendly and facilitate more trade, considering the utilisation rate of regional trade agreements has been low.

Expectations from India-ASEAN FTA

India’s domestic industry has complained that while ASEAN countries have enjoyed greater market access to India, the reverse has not happened. The industry has called for an assessment of why India’s finished products are not getting adequate market access and what barriers have caused this imbalance. The negotiations must scrutinise the non-tariff barriers that have discouraged Indian exports. Opaque non-tariff barriers and outdated rules of origin are creating hurdles for Indian products. Additionally, concerns linger about trade diversion, where goods from other countries enter India through ASEAN using preferential routes.

Addressing these barriers requires a multipronged approach. Firstly, enhancing transparency and communication between the trading partners can help identify and resolve non-tariff barriers more efficiently. Secondly, investing in trade facilitation measures, such as improving customs procedures and streamlining documentation processes, can significantly reduce the friction faced by Indian exporters. These steps would not only bolster India’s exports but also enhance the overall efficiency of the trade agreement.

While trade between India and the bloc has more than doubled in the past decade, reaching over $131 billion in 2022-23, a closer look reveals a worrying trend. This growth is primarily driven by a surge in imports from ASEAN, which reached $87.57 billion, significantly outpacing India’s exports to the region ($44 billion). This imbalance has resulted in a widening trade deficit, ballooning from $5 billion in 2010-11 to a substantial $43.57 billion in 2022-23. The share of bilateral trade with ASEAN is almost 10% of India’s total trade.

India must conduct an internal review of its trade policy, as high duties on raw materials make finished goods from ASEAN cheaper. India is heavily reliant on ASEAN nations for palm oil, coal, and other raw materials and commodities such as laptops, computers, petroleum products, machinery, and iron and steel. On the export front, India sends petroleum products, electronics, electrical machinery, automobiles, medicines, gold jewellery, and diamonds.

Furthermore, diversifying India’s export basket to ASEAN could reduce dependency on a few key commodities and help mitigate trade imbalances. Promoting high-value sectors such as information technology, pharmaceuticals, and biotechnology, where India has a competitive edge, could open new avenues for trade. Encouraging Indian companies to establish a stronger presence in ASEAN markets through joint ventures and partnerships could also enhance trade relations and create a more balanced economic exchange.

The way ahead

The ongoing review presents a chance to rectify a pact that has yielded lopsided benefits. India has successful trade pacts with other nations, proving that the ASEAN pact can also be fixed with due diligence. India has 13 Regional Trade Agreements (RTAs) and Free Trade Agreements in place with various countries and regions, including Japan, South Korea, countries of the South Asian Association for Regional Cooperation (SAARC), Mauritius, the United Arab Emirates, and Australia. India’s merchandise exports to all these countries/regions have registered tremendous growth owing to these pacts.

The successful implementation of other trade agreements provides valuable lessons for the ASEAN-India FTA review. Key elements such as stringent enforcement of rules of origin, periodic review mechanisms, and sector-specific support can be incorporated to ensure the agreement remains relevant and beneficial. Leveraging digital trade and e-commerce, which have gained prominence in other FTAs, can also be explored to enhance trade efficiency and reach.

As FTAs remain a focal point of its trade strategy, India is engaged with multiple countries and blocs, including Oman, the UK, the EU, Canada, and various Indo-Pacific Economic Framework (IPEF) partner countries for establishing new FTAs. As India continues its review with ASEAN, it must also assess the impact of the Regional Comprehensive Economic Partnership (RCEP) on its trade dynamics, as analysts believe that RCEP is also hurting exports to ASEAN. Another top priority should be to bring flexible or product-specific rules for value-addition norms in the case of imports. As India negotiates product-specific rules to claim the origin of products in its recent FTAs, similar negotiations should be conducted with ASEAN.