ASEAN-INDIA FREE TRADE AGREEMENT - ECONOMY

ASEAN-India Free Trade Agreement - ECONOMY

NEWS: After 15 years, it is time to review the achievements, prospects and the way

Forward for the ASEAN-India Free Trade Agreement (AIFTA).

WHAT’S IN THE NEWS?

ASEAN-India Free Trade Agreement (AIFTA): An Overview

  • Operationalization: AIFTA was launched in 2010 to expand and diversify trade between India and ASEAN in goods and services.
  • Initial Assumptions: Leveraging cost advantages and duty preferences was expected to benefit both partners.
  • Need for Review: After 15 years, issues such as trade imbalances, structural challenges, and market access disparities necessitate a review.

Key Issues with AIFTA

1. Misguided Assumptions

  • Higher Duty Preferences by India: India offered greater tariff concessions to ASEAN, granting disproportionate market access.
  • Accelerated Tariff Elimination: India committed to a faster reduction of tariffs than ASEAN nations, favoring ASEAN exporters.
  • Compartmentalized Timelines: Extended tariff elimination periods for Cambodia, Laos, Myanmar, and Vietnam (CLMV), particularly Vietnam, allowed them to capitalize on India's market.

2. Structural Disadvantages

  • Manufacturing Networks: ASEAN's integrated manufacturing ecosystem provided economies of scale, disadvantaging India.
  • Barriers for Indian Firms: Indian companies faced challenges accessing ASEAN markets in sectors like two-wheelers, pushing them to establish ASEAN-based operations.

3. Regional Comprehensive Economic Partnership (RCEP) Impact

  • Strengthened ASEAN-China Ties: RCEP deepened ASEAN-China manufacturing linkages, increasing ASEAN competitiveness.
  • Circumvention Practices: Lenient Rules of Origin (ROO) under AIFTA facilitated the routing of Chinese goods (e.g., steel) through ASEAN, harming Indian industries.

4. Sectoral Challenges

  • Trade Deficit: India became a net importer of key products like iron, steel, and electronics.
  • Gold Import Exploitation: ASEAN leveraged AIFTA to import raw gold, convert it to finished products, and export to India under preferential tariffs, circumventing duties.

Challenges in Current Framework

1. Imbalanced Market Access

  • Limited Reciprocity: Indian exports face barriers, while ASEAN enjoys easy access to Indian markets.
  • Selective ASEAN Support: Sectors like electronics and metallurgy deepen trade imbalances.

2. Circumvention Practices

  • Rules of Origin Exploitation: Non-ASEAN goods are rerouted through ASEAN nations, worsening India's trade deficit.
  • Eroded Competitiveness: Domestic industries, especially steel, face severe setbacks.

Recommendations and Way Forward

1. Strategic Negotiations

  • Game Theory Application: Use frameworks like Nash Equilibrium to achieve balanced trade terms, avoiding non-tariff barriers and ROO exploitation.
  • Focus on Indian Exports: Prioritize market access for pharmaceuticals, IT, textiles, automobiles, and food products to reduce trade disparities.

2. Strengthen Domestic Industries

  • Make-in-India Initiative: Enhance production capacities in base metals, defence, electronics, and emerging technologies.
  • Friendly Investment Climate: Establish Special Economic Zones (SEZs) and tax-free financial centres to attract investment and reduce bureaucratic hurdles.

3. Revisiting FTA Terms

  • Stricter Rules of Origin: Ensure ASEAN-origin goods adhere to genuine criteria to prevent circumvention.
  • Reciprocal Market Access: Demand fairer terms for Indian products in ASEAN markets.

Conclusion

  • AIFTA has facilitated trade but also exposed structural and procedural flaws, leading to imbalances.
  • Recalibrating terms, fostering domestic manufacturing, and addressing systemic disparities can create a balanced and mutually beneficial trade partnership.