Thai manoeuvre

The significant outcome of Prime Minister Manmohan Singh's visit to Bangkok last week was the agreement on an "early harvest" list of items for trade between India and Thailand.

The list is expected to pave the way for a staged phase-out of the customs duty on 82 items imported by India and Thailand from each other, expansion of this list to include more items after September 2006, and eventually for a full-fledged free trade agreement between the two countries by 2010.

While in itself the move has positive implications for two-way trade, currently at $1.5 billion, there are other important signals that the Bangkok announcement offers for the future.

One, the uncertainty created in the last few weeks over the conclusion of new free trade agreements seems to have been removed. The government of Manmohan Singh had subjected all new proposals for a free trade agreement to a review on the grounds that not enough preparatory work had been done before these were proposed.

The Prime Minister had himself stated that he would like to give a "hard look" to all the proposed agreements, including the Framework for Free Trade Area Agreement with Thailand, which was signed by the Vajpayee government in October 2003.

That the "early harvest" list of items could be finalised without losing much time and during the Prime Minister's Bangkok visit shows that the government has satisfied itself and wants to move ahead with more regional trade pacts.

Second, while agreeing to the "early harvest" list, India has managed to stipulate a 40 per cent value addition norm in the rules of origin. This was a contentious issue, but India had a wary eye on Thailand's free trade agreement with China and the danger of Chinese goods flooding the Indian market through Thailand.

Eventually, Thailand agreed to the 40 per cent value addition norm in return for the finalisation of the "early harvest" list. While framing the list, care has been taken to safeguard the interests of Indian farmers. Most of the agricultural items included in the list are those in which India faces no competition from Thailand.

Thus, the list does not mention rice, but includes durum wheat, apples and mangoes. Thailand does not grow any of these, so how much of a "harvest" this can yield becomes a question.

Nevertheless, this marks a beginning and the agreement on a 40 per cent value addition norm also sets the precedent for future free trade agreements with other countries, like Singapore.

Purists would contest claims about the benefits of such regional trade agreements, by pointing to their trade-diverting and -distorting character, and the fact that business lobbies on both sides manage to keep out of the list all those items the trade in which would have maximum consumer benefit.

Also, such trade agreements can become a substitute for genuine multilateral trade liberalisation. And, as the experience with Sri Lanka shows, whenever exports become a threat to domestic business and offer a real consumer benefit, the wheels of government move to thwart free trade.

Against this would be placed the fact that, since the conclusion of India's free trade agreement with Sri Lanka, trade between the two countries has doubled.