India’s comprehensive economic partnership agreement with South Korea, coming after the free trade agreement that it signed with Singapore in 2005, can turn out to be significantly more beneficial than the immediate gains that accrue from freer trade. It could lead to more Korean investment in India, and the use of India as a low-cost manufacturing base for export to third-country markets. It signals the coming together of Asian economies, and the greater integration of the Asian market, so far dominated by China’s growing influence in the region. For Korea, the agreement gives it an important advantage in that its companies can now compete more effectively in India against rivals from Japan and even China—as India has lowered tariffs for Korea on 85 per cent of its imports (Korea in turn has dropped tariffs for 90 per cent of its imports). For India, such an agreement with a member of the developed-countries’ club (the Organisation for Economic Cooperation and Development) is a statement of growing confidence about the competitiveness of its economy, although the underlying calculation would be that there is a large degree of complementarity between a developed economy like South Korea and an emerging giant like India.
One issue is whether vulnerable sections of the economy have been taken care of while pursuing the goal of freer trade. Of course, it should not be that no one is under pressure to improve competitiveness; that after all is one of the benefits of imported competition. The fact that the agreement has been concluded without serious protest from Indian manufacturers suggests that they have learnt to live with progressively lower tariffs and do not feel threatened by the protective walls coming down.
The Korean government sees the agreement as having the potential to boost bilateral trade between the two countries by $3.3 billion annually, that is taking it up by over a fifth. Trade with India accounts for only 0.8 per cent of South Korea’s global trade, while the corresponding figure for India is not much better at 1.9 per cent. India runs a trade deficit with South Korea, and exports mostly low-value items like iron ore, oil meal and leather, other than some textile items and drugs and chemicals. South Korea exports electrical goods, machinery, transport equipment and steel. There is no reason why India cannot raise its own steel-making capacity and become a serious exporter of steel. This can get a push if Korean steelmaker Posco’s plan to set up a 12 million tonne steel plant in Orissa gets off the ground. South Korea has till now invested $2.2 billion in India, whereas the only significant Indian investment in South Korea is Tata Motors’ $118 million acquisition of Daewoo Commercial Vehicle.
A study by Samsung Economic Research Institute sees in the agreement the potential for India to become a beachhead for deeper penetration of markets in Europe, Africa and West Asia. Hyundai, which is currently India’s largest car exporter, has the potential to do better as the duty cuts for component imports will make it more competitive in India and give it a bigger manufacturing base. The report notes that India needs an export-oriented manufacturing base and has cheap but excellent manpower. With a firm footing in the potentially massive Indian market, South Korea can be one step ahead of China and Japan. The agreement could also ease the two-way flow of services.
