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India-Korea CEPA: A step in right direction

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In Brief

Given the backdrop of a prolonged Doha round with no consensus being reached on several issues in the WTO, both developed and developing countries are left with no option but to pursue regionalism in a rigorous way to cater to their developmental needs. India is no exception to the idea and has signed several agreements in the last five years, the Comprehensive Economic Partnership Agreement (CEPA) with Korea being the most recent. The signing of India-Korea CEPA on 7th August 2009 though delayed, has been welcomed and rightly so, by both the business community and policy makers from both the countries. This agreement which has provisions for substantial reduction of both tariffs and non-tariff barriers in a phased manner is expected to take India-Korea relations to a higher level and enhance India’s presence in East Asia.


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The Asian growth story mainly revolves around India and China, However, South Korea is the 4th largest economy in Asia, and remains a key trading and investment partner to India. The opening up of the Indian economy has not only enhanced market access to Korean goods, but also provided investment opportunities for the internationally competitive Korean companies. Given the size of the Korean and Indian economies and their structural complementarities, the current flow of trade and investment between two countries is relatively low due to several tariff and non-tariff barriers. The CEPA is likely to address these problems and is also a corroboration of India’s ‘Look East Policy’. On the other hand, Korea is looking beyond its traditional trading partners such as the US and China to sustain its trade and economic progress.

India-Korea Trade
Between 1991 and 2007, India’s exports to South Korea increased by 10 times, imports by more than 17 times resulting in an increase in trade deficit. The increase in merchandise trade between the two countries has been attributed to changing demand structure and comparative advantages of both the economies in complemenmtary sectors. The Indian export basket has traditionally consisted of low value added products which shifted over time to a wider range of industrial products in recent years. On the other hand, some conventional export commodity groups, such as cotton, have lost their dominant position. However, the Indian import basket from Korea in recent years has mainly consisted of relatively high value added products such as electrical machinery and equipments, nuclear reactors, iron and steel, transport equipments, mineral fuels and their products, organic chemicals, etc.

The abolition and reduction of tariffs on 90 per cent of Indian goods and 85 per cent of Korean goods in terms of value under the CEPA would make exports from both the countries competitive in each others markets. Further, renegotiation regarding goods concessions and preferred tariff rates would also help India-Korea trade.

As far as bi-laterteral trade in services is concerned, it has consistently increased in some sectors such as IT/Software services and travel services. Given the fact that India is the 9th largest exporter of commercial services and Korea is the 11th largest importer of commercial services, the CEPA agreement which gives market access and alllows inflows of professionals such as IT workers, engineers, and teachers would be beneficial for India and improve bilateral trade in services.

India-Korea Investment Relations
Sensing the opportunity in the Indian economy, many Korean companies have aggressively started entering the Indian market since 1991, and within a short period of time Korean enterprises such as LG, Samsung, Hyundai etc, have not only established their presence but have also diversified their businesses in various sectors in the economy. The share of Korea was around 4 per cent of total cumulative FDI received by India between 1991 and 1999. However, post 2000, the Korea’s share has declined to 0.6 per cent of total cumulative FDI during the period April 2000 to November 2008. Major sectors attracting Korean FDI approvals are electrical equipments (including computer software & electronics), metallurgical industries, food processing industries etc. Although Indian investment in South Korea is negligible, the CEPA has come at the right time for Indian companies eager to expand into Korea. This is a good opportunity for the Indian IT industry looking to establish a stronger presence in the APEC region. Similarly, some of the sectors where South Korean investors will be able to invest and reap benefits are food processing, textiles, garments, chemicals, metals and machinery due to a reduction in tariffs.

Trade and Investment Barriers
In some of the product categories which constitute a major proportion of Korea’s exports, India’s tariff rates are very high such as vehicles, rail/tram roll-stock, iron and steel. Imports of certain products, like electrical appliances, where Korea is very competitive, are subject to licensing by the Bureau of Indian Standards (BIS) which is cumbersome and expensive. As a result of the CEPA, some of the barriers to Korean investors such as high regulation, nationality or residency requirements, biasness in award of projects, compulsory registration with local specific service provider associations, etc will be relaxed, thereby increasing Korean FDI in the future.

Similarly, Indian exporters would benefit from the CEPA in sectors, like textiles and apparel products and agricultural and fishery products, where Korea maintains high tariffs of more than 30 per cent. Further, Indian exports which were subject to rigid standards, technical regulations and conformity assessment procedures, particularly in drugs, food, cosmetics etc. will find it easier to enter Korean markets. Addtionally, the restrictions on Indian investment in Korea in the telecommunications sector, film and broadcast industry, voice-overs, local advertising and foreign re-transmission channels will also be removed. The agreement will create an enabling framework to reduce barriers and resolve the disputes, thereby, reducing anti-dumping cases in future.

The successful conclusion of CEPA will encourage collaboration between small and medium size Korean companies to synergize with Indian SMEs in the areas of semi-conductors, plastics, auto parts, agricultural instruments, textiles, multi-media, ceramic products etc. The agreement which proposes bilateral economic cooperation in 13 areas, such as audio-visual content, energy, information and communications technology, and science and technology, will strengthen economic cooperation and both countries will benefit immensely.

Overall, the India-Korea CEPA is a step in the right direction given the slow down of world trade. The reduction and abolitions of tariffs thorugh the CEPA will result in an increase in trade and investment relations between two of the largest economies in Asia. Apart from an increase in trade, the two definite positive results expected due to the agreement are an increase in Korean FDI inflows into Indian manufacturing sectors, and inflows of professionals from India to Korea. Though, the agreement did not pay much attention to reducing tariffs and other regulations in agriculture, fisheries, and mining due to their sensitive nature, the India-Korea CEPA will boost trade and investment between the two countries at a time when the developed world is turning to protectionism because of the global financial crisis.

Pravakar Sahoo is Associate Professor, Institute of Economic Growth (IEG), Delhi.

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