The CAFTA and the IAFTA demonstrate China and India’s intentions to access the Southeast Asian market by formalising trade relations with ASEAN. Both deals have come with their fair share of cost. Certain domestic constituencies have been upset, and this might generate more protests down the line. India’s plantation and oilseed farming lobbies have been opposed to the IAFTA because of concerns over cheap ASEAN imports of spices and palm oil. Conversely, Indonesia has expressed concerns over the CAFTA leading to flooding of cheap Chinese imports in its domestic market.
The scale and scope of the two deals are different. The CAFTA is larger – it covers a total population of 1.9 billion, while the IAFTA covers 1.7 billion. In combined GDP terms, the CAFTA will produce US$6 trillion in market prices and US$4.3 trillion in total trade. By contrast, the IAFTA will produce a combined GDP of US$2.6 trillion and will generate US$45.8 billion in total trade.
What explains this relatively large difference in generated profits?
The difference between CAFTA and IAFTA has much to do with China’s greater geographic and economic size. But it is also caused by the extent to which China and ASEAN have integrated into each other’s networks. Similar integration between India and ASEAN, at least until now, has been much more limited.
Specifically, Chinese and ASEAN products had begun obtaining greater access to each other’s markets from as early as 2005, and there has been a five-year phased reduction in tariffs by both sides. This calibrated reduction has led to China and ASEAN currently trading around 7,000 items at a zero tariff rate. Such access has helped production networks from both sides to trade deeper with each other and has strengthened intra-industry trade linkages.
In contrast, after signing a framework economic cooperation agreement with ASEAN in 2003, India’s negotiations with ASEAN on a goods FTA have themselves lasted for more than five years. It is only from January 1, 2010 that exports from either side have begun getting greater access to each other’s markets, and this access will be phased.
What are the consequences of India’s failure to act swiftly?
A major consequence of India’s failure to adequately prepare trade linkages with ASEAN is that India’s market access gains from the IAFTA will be partly neutralised by the CAFTA. Further, the comparative structure of Indian tariffs has placed Indian exporters at a disadvantage. At the time of commencement of the IAFTA, average Indian tariffs were much higher than comparable ASEAN tariffs. As the IAFTA rolls out, Indian tariffs will be cut far deeper than ASEAN tariffs, giving the latter’s exports relatively greater access to India’s domestic market.
How can India act to secure greater economic gains?
From the IAFTA perspective, India’s biggest gains are expected from services. Current talks between India and ASEAN in this area need to be pursued vigorously to reach a quick conclusion.
But there is another option aside from IAFTA – greater trade ties with China. This option makes eminent sense for India. Indo-China trade at US$41.8 billion is not too far behind India-ASEAN trade of US$45.8 billion. But both these figures are minuscule compared to China-ASEAN trade. Moreover, most of India’s current exports to China suffer from lack of relative comparative advantage vis-à-vis similar exports from ASEAN. The relative disadvantages of Indian exports in both ASEAN and Chinese markets can be significantly overcome if India can work out a formal trade agreement with China. Specifically, if tariffs on Indian goods in China are cut (via a free trade agreement, for instance), then Indian goods will gain a greater market share in China.
In sum, India’s lack of market integration has put it behind the eight-ball in Asian terms. It should act quickly and pursue greater trade integration. An FTA with China is a good place to start.
Amitendu Palit is Visiting Senior Research Fellow at the Institute of South Asian Studies (ISAS) at the National University of Singapore. He was earlier with ICRIER, New Delhi and the Ministry of Finance, India.
This article was first published here at the Financial Express.