The importance of Asean for India

The evolving regional trade context should be the primary guiding factor for the AITIGA review

The review of the Asean-India Trade in Goods Agreement (AITIGA) is scheduled to begin next month. This has been a long-pending demand from the Indian industry seeking to alter the provisions of the agreement so that the bilateral trade balance, which is in favour of Asean, can be potentially reduced or reversed. Statements by the Indian industry, following soon after the review announcement last November, flagging an increase in certain imports from Asean (Business Standard, December 11, 2023), reflect the same sentiment. However, it would be best if the Indian negotiations are not guided solely by these apprehensions but undertaken keeping in view the evolving global and regional trade context.

The AITIGA, signed in 2009, was a shallow free-trade agreement (FTA) with less than 80 per cent tariff line liberalisation. The FTA also granted a greater advantage to some of the Asean economies through a relatively large negative list. Additionally, the rules of origin (RoO), specified a lower value-added content relative to India’s bilateral FTAs with member economies such as Singapore.  The expected compensatory gains in the agreement on services liberalisation also did not materialise due to the prolonged time period over which it was negotiated and Asean’s limited internal services sector liberalisation.

The increasing deficit with Asean, though, is more on account of India’s higher tariffs, and hence a relatively high preferential margin accorded to Asean economies, as also due to India’s limited export competitiveness. These two contributory factors are true for India in almost all its FTAs, given that India maintains relatively high average applied most-favoured nation (MFN) tariffs in the non-agriculture sector. So, it would be useful for India to  reduce its import tariffs before the start of the revision process next month. The Budget, due on February 1, may be a good time to accomplish this long-sought trade reform.

It may also be worth noting, in the context of review negotiations, that agriculture and textiles, often cited by India as examples of high protection by Asean’s non-tariff measures, are among sectors that remain outside the realm of preferential market access in most FTAs across the world.

The larger context of the FTA review, however, needs to be viewed in terms of the distinct advantage that it can provide India by facilitating its integration with regional and global value chains (RVCs/ GVCs). The FTA revision with Asean gives India an opportunity to make good the loss of staying out of the Regional Comprehensive Economic Partnership (RCEP) and a means to integrate with a proximate regional GVC hub. This is particularly timely as the centrality of Asean to the RVCs/GVCs is getting reinforced in the wake of the “China plus one” diversification strategy reorienting along the lines of ally-shoring. Asean economies’ largely neutral geopolitical stance, relative economic resilience, strong export orientation, and participation in multiple trade and investment agreements make them the most attractive in the region for GVCs relocating away from China. Regional economies like Japan and Korea are actively subsidising friendshoring to Indonesia, Thailand and Vietnam, among other Asean economies. Vietnam is the new semiconductor manufacturing friendshoring location for the US, in addition to an upgrade of the bilateral relations to a comprehensive strategic partnership. This evident intensification of GVC investments and the increasing number of potential beneficiary Asean economies in this context is a critical element that must be given high importance in the FTA review process. Keeping this in mind, three key inputs for the AITIGA review are discussed below.

The foremost consideration should be given to the formulation of appropriate RoOs. Over and above the fact that India should avoid excessively complex, dual-criteria-based RoOs, and make the certification procedures less burdensome, there is a need for careful consideration to be given to the region-wide cumulation formula that Asean countries have opted for under the RCEP. The 40 per cent regional content rule under the RCEP is highly facilitative of RVCs and a major attraction for relocating GVCs. It is possible that Asean will use the RCEP as a template for the AITIGA review. Accepting some form of region-wide cumulation in the RoOs will also help India overcome the limitation of staying out of the RCEP and assist in its integration with the RVCs/GVCs. Even for the product-specific rules of origin, India should take care not to specify the criterion of “change in tariff sub-heading” at the 6-digit level, as this may constrain parts and components trade integral to GVCs.

The second significant aspect relates to the investment chapter that India has thus far found difficult to negotiate in its FTAs. Asean’s expectations may, however, be defined by the latest upgrade of its FTA with Australia-New Zealand, which is significantly forward-looking. Apart from dispute settlement and MFN treatment for investors, the amendment of provisions limiting the use of performance conditions such as domestic content and minimum export requirements have been included in the revised investment chapter. These elements enhance the regional economies’ potential pull for investments. India may, therefore, need to evolve its stance beyond that based on its highly-restrictive model Bilateral Investment Treaty of 2016.

Thirdly, learning from the AITIGA experience, the review negotiations should be undertaken on a simultaneous and comprehensive basis, encompassing goods, services and investment liberalisation. Separate negotiations for each component limits, ex-ante, any possibility for simultaneous cross-sectoral bargaining and trade-offs, thereby limiting the ambition of the negotiating parties.  However, it is also important that in the liberalisation of services, India thinks beyond mode-4 liberalisation to consider sectors that, when combined with manufacturing, will contribute to export competitiveness. This includes areas of India’s comparative advantage such as repair and maintenance, as well as digital services, a sector that has received special focus in the Asean vision towards establishing the regional economic community.  

Finally, India must appreciate the importance of looking east. This is the only region following the FTA rulebook, as opposed to North America and the EU adopting selective trade protectionism and inward-looking regionalism.  Recent Trade Policy Forum talks with the US have not given any indication of restoration of the Generalised System of Preferences for India. Furthermore, the agreement towards the trade pillar of the Indo-Pacific Economic Framework, critical to GVCs, has not found consensus among member economies. India’s FTA with the EU has also shown little progress so far.

Therefore, India should ensure sufficiently diligent prior preparation for beneficial negotiations and timely conclusion of the AITIGA review process.

The writer is senior fellow, CSEP,  professor, School of International Studies, JNU (on leave), and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal