Friday, September 4, 2009

India’s Asean pact brings micro-pain, macro-gain

Paranjoy Guha Thakurta Augest.23 : The August 13 agreement on trade in goods (ATG), often described as a free trade agreement (FTA), between India and 10 countries of the Association of Southeast Asian Nations (Asean), has received a mixed response. Politicians from Kerala cutting across party lines are apprehending that the agreement would severely damage the state’s interests. Others have argued that the ATG/FTA in its present form — that took six years in the making — is lopsided in favour of Asean and that India will benefit only when a comprehensive economic cooperation agreement (CECA) is concluded. It is well known that Prime Minister Manmohan Singh has been extremely keen on the India-Asean ATG/FTA as part of the government’s "Look East" policy even if some of his colleagues in the Union council of ministers (notably A.K. Antony and Vayalar Ravi) have been less than enthusiastic. Jairam Ramesh often used to say that together with the macro-gain that any FTA brings, there is micro-pain. The question is whether the group of ministers set up by the Prime Minister would be able to assuage the micro-pain that seems certain once the agreement kicks in. The Asean — Brunei, Cambodia, Indonesia, Lao, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam — currently has a combined gross domestic product that equals India’s $1.2 billion with roughly half this country’s population at 560 million. Whereas Asean’s trade with India is barely two per cent of its total trade, India’s trade with Asean is a bit under 10 per cent of this country’s total trade (making it the fourth-largest trading partner). The agreement ambitiously aims at increasing two-way trade between India and Asean by a fourth in two years, from $40 billion in 2008 to $50 billion in 2010, at a time when world trade has shrunk by 10 per cent for the first time in 70 years. According to the FTG/ATG, India will eliminate customs tariffs on 4,185 items (accounting for 80 per cent of the total tariff lines) in stages varying between four and seven years starting January 1, 2010, that is, between 2013 and 2016. Most of these items (such as consumer electronics, pharmaceuticals, machinery and ready-made garments) at present attract the peak customs duty of 10 per cent whereas the corresponding figure for most of the Asean countries is half this proportion. This clearly implies that it would be relatively easier for the Asean to comply with the conditions in the ATG/FTA than it would be for India. The real benefits to India would come from the CECA that will include trade in services and investments — this is expected to be completed by December but many argue that the deadline appears rather tight. Moreover, it is contended that India should have first driven for concessions in trade in services and investment before committing itself to tariff cuts in traded goods, especially farm and fishery products. As per the agreement, India has a negative list of 489 items on which the country has made no commitments whatsoever to cut tariffs — these include farm products like coconut, coconut oil, natural rubber, cashew, coriander, cardamom, ginger, turmeric, vanilla, betelnut, nutmeg, tobacco, certain kinds of fish, shrimp and crab as well as industrial products such as textiles, chemicals and automotive components. There is a "sensitive" list of 585 items that include processed farm products and industrial items on which duties would be brought down gradually to five per cent by 2016. As far as five "highly sensitive" items are concerned — coffee, tea, pepper, crude palm oil and refined palm oil — India has not committed to bringing down tariffs below certain "comfort levels". Thus, duties on coffee and tea are to come down from 100 per cent at present to 45 per cent in 15 years and pepper from 70 to 50 per cent in 10 years. Malaysia and Indonesia are reportedly unhappy that under the agreement India is under no obligation to bring down tariffs on crude and refined palm oil below 37.5 per cent and 45 per cent respectively over the next decade. Furthermore, there are provisions to impose special safeguard duties in case there are import surges. These are the most contentious aspects of the ATG/FTA. Why? Simply put, the cost of producing many of these items are far lower in Asean countries than in India, one reason being the plantation sizes are bigger in the bloc leading to economies of scale. According to a press release by the All-India Kisan Sabha (AIKS), pepper productivity in Kerala is 320 kg per hectare against 1.2 tonnes in Vietnam and 2.3 tonnes in Indonesia. Productivity of coffee in India is 765 kg per hectare against 1.7 tonnes in Vietnam. Thus, AIKS says the trade pact is "unequal" and would "hinder the livelihood" of thousands of farmers, especially in Kerala and Karnataka. The contrary viewpoint is that Indian agriculture in general and the plantation sector in particular need to become more efficient, that the transition period provided is adequate and that it does not make long-term sense to protect inefficient segments of the economy from international competition by hurting consumers. Opponents of the ATG/FTA argue that the transition period is inadequate and that the government is just not doing enough to improve crop productivity by, among other things, expediting replacement of senile coconut palms and coffee plants, improving the social and physical infrastructure for plantation workers, initiating quick action in tackling mite infestation in coconut trees and pepper wilt, besides stepping up investments in research and development. Ardent believers in the virtues of free trade claim that bilateral trade agreements can never substitute a rules-based international trading system under the World Trade Organisation (WTO). However, given the stalemate in the Doha round of talks at the WTO, such bilateral agreements have become inevitable. The apprehensions about the India-Asean ATG/FTA are not surprising. Trade in agricultural commodities is invariably a controversial topic in all trade negotiations, whether these relate to developed or developing countries or take place at a bilateral, regional or multilateral level. An important reason why talks at the WTO are in a state of paralysis is that rich countries do not want to reduce farm subsidies and apply peak tariffs to agricultural products. That, indeed, is the problem. Paranjoy Guha Thakurta is an educator and commentator Source : The Asian Age

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