ASEAN-India FTA

The ASEAN-India Free Trade Agreement (AIFTA), operational since 2010, aimed to promote economic growth, diversify trade, and create mutual advantages for both India and ASEAN member states. Spanning over a decade, this agreement facilitated substantial trade exchanges, with ASEAN comprising 11% of India’s global trade in FY23. However, challenges such as a widening trade deficit, structural imbalances, and misuse of trade provisions have led to calls for its review. The upcoming discussions present an opportunity for India to address these issues, protect domestic industries, and recalibrate the agreement for a balanced and equitable trade relationship.

The Framework and Key Provisions of AIFTA

• The ASEAN Trade in Goods Agreement (ATIGA), under which AIFTA operates, was implemented between 2010 and 2011. It proposed tariff eliminations on 74.2% of tariff lines, with reduced tariffs on 14.2% more. The remaining 11.6% were excluded from concessions.
• India’s trade with ASEAN has grown significantly since the agreement’s inception. Between FY2009 and FY2023, India’s exports to ASEAN increased by 130.4%, while imports surged by a staggering 234.4%.
• The trade deficit with ASEAN has widened considerably, growing from $7.5 billion in 2011 to approximately $44 billion in FY23. Imports from ASEAN primarily include coal, palm oil, and electronic goods, while India exports refined petroleum, agricultural products, and engineering goods.
• Unlike the European Union, where tariffs are standardized across member states, ASEAN allows individual nations to set their tariff schedules. India, however, offered a single tariff schedule for all ASEAN members, a system criticized for limiting the flexibility to address country-specific trade sensitivities.

Challenges in the Implementation of AIFTA

• Imbalanced Duty Preferences: India extended higher duty preferences to ASEAN nations, creating an uneven playing field. ASEAN countries, which historically had lower import duties, gained easier access to the Indian market, while Indian exporters faced restrictions.
• Differentiated Timelines for Tariff Reductions: ASEAN nations like Vietnam were granted longer timelines for tariff elimination, giving them prolonged preferential access to Indian markets. Vietnam, leveraging its strategic position as part of the China+1 supply chain, became a major beneficiary.
• Structural Manufacturing Disparities: ASEAN’s integrated manufacturing networks enabled economies of scale, making their exports highly competitive. India, lacking such structural advantages, struggled to compete in sectors like electronics and machinery.
• Non-Reciprocal Market Access: Indian industries, particularly pharmaceuticals and automobiles, faced market barriers in ASEAN nations. For instance, Indian two-wheeler manufacturers had to establish ASEAN-based plants to compete against entrenched Japanese and Chinese players.
• Exploitation of Rules of Origin (ROO): The Rules of Origin provisions under AIFTA have been misused. Non-ASEAN goods, particularly Chinese products, have entered Indian markets under ASEAN-origin labels. This has had significant impacts:
  • Steel imports: Indian steel manufacturers faced challenges as cheaper Chinese steel entered India via ASEAN countries.
  • Gold imports: ASEAN nations processed raw gold into gift items and exported them to India at preferential tariffs, affecting Indian jewelry manufacturers.

Sectoral Impacts and the Influence of RCEP

• Electronics and Machinery: Rising imports of electronics, medical instruments, and optical devices highlight India’s growing dependence on ASEAN. The Regional Comprehensive Economic Partnership (RCEP) has further deepened ASEAN’s integration with China, strengthening their competitive advantage.
• Steel and Plastics: India’s status shifted from a net exporter to a net importer of steel due to the influx of cheaper imports from ASEAN. Imports of plastics and other raw materials have similarly grown, impacting domestic industries.
• Gold Trade: Exploitation of FTA provisions in the gold sector has enabled ASEAN nations to circumvent tariffs, further affecting India’s trade balance.

India’s Strategy in the Upcoming Review

India’s approach to the review of AIFTA aims to address key structural issues and safeguard its domestic industries.

• Reassessment of Zero-Tariff Concessions: India plans to revisit zero-tariff concessions granted on imports like mobile phone components to protect its domestic electronics industry, particularly from Vietnamese competition.
• Stricter Rules of Origin Compliance: Tightening ROO norms will prevent non-ASEAN goods from exploiting the agreement. Enhanced monitoring will ensure genuine value addition in goods imported under AIFTA.
• Improved Market Access for Indian Exports: India seeks to secure better opportunities for its pharmaceuticals, textiles, IT, and food products in ASEAN markets to reduce trade disparities.
• Sector-Specific Countermeasures:
  • Electronics: India aims to counter ASEAN’s dominance in electronics by incentivizing domestic production and negotiating fairer trade terms.
  • Steel and Metallurgy: Strengthening domestic steel production and reducing reliance on imports will be a priority.
• Addressing Non-Tariff Barriers (NTBs): India plans to tackle NTBs like technical regulations and customs procedures that restrict its exports to ASEAN nations.

Towards Building a Balanced Partnership

To foster a sustainable and equitable trade relationship, India needs to implement a multi-dimensional strategy:

• Enhancing Domestic Competitiveness: Strengthening key industries like electronics, defense, and base metals will reduce dependency on imports. Initiatives like “Make in India” and the establishment of Special Economic Zones (SEZs) can attract investments and boost local manufacturing.
• Adopting Game Theory in Negotiations: Leveraging strategies like the Nash Equilibrium can help India secure balanced terms, avoiding trade imbalances caused by non-tariff barriers and exploitation of trade provisions.
• Improving Investment Climate: Creating tax-friendly policies and reducing regulatory hurdles will encourage both domestic and foreign investments, enabling India to compete more effectively in global markets.
• Revisiting FTA Provisions: Recalibrating tariff schedules, strengthening ROO compliance, and ensuring reciprocal market access will safeguard Indian industries and prevent circumvention practices.
• Diversifying Trade Relations: Exploring alternative markets and expanding Indian exports in emerging sectors will reduce dependency on ASEAN and address the trade deficit.

The ASEAN-India Free Trade Agreement has undeniably enhanced trade relations but at the cost of significant challenges for Indian industries. By focusing on structural reforms, sector-specific strategies, and strengthened trade governance, India can transform AIFTA into a mutually beneficial framework. The upcoming review is a critical opportunity to protect domestic industries, reduce trade imbalances, and build a more equitable partnership with ASEAN for sustained economic growth.