At a time when border talks with China to reduce friction points have made headway, a new worry is bothering trade policy makers in New Delhi. The ASEAN’s deeper economic integration with China, in the last 15 years since India’s Free Trade Agreement (FTA) with the bloc was forged, has become a knotty factor in the ongoing review of the trade pacts by India is trying to guard against the risk of China taking advantage of a possible greater opening up of markets between the two partners as China’s supply lines are now more intertwined with that of ASEAN countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia), where Chinese businesses have established their significant presence.
As a commerce ministry official put it, China is like the big elephant
in the room where India and the ASEAN are holding review negotiations. ASEAN’s imports from China are now 30 per cent of its total imports, which is up from 10 per cent 15 years ago. Recently, Chinese Premier Li Qiang talked about an even greater integration with the bloc. “India needs to weigh every step carefully keeping this in mind,” the official said.
India had demanded a review of the FTA with the ASEAN, formally called the ASEAN India Trade in Goods Agreement (AITIGA), signed in 2009, as it resulted in disproportionate gains for the ASEAN countries, with its trade deficit with the bloc widening to $38.46 billion from $7.5 billion in 2010, when the pact got implemented. “Now, there are concerns about a variety of products with a high Chinese content, ranging from steel products to mobile phones, making their way into India at preferential duties from countries such as Vietnam, Indonesia and Malaysia,” a source said.
With the Regional Comprehensive Economic Partnership (RCEP), an ambitious free trade pact between the ASEAN and its five FTA partner countries (China, South Korea, Japan, Australia and New Zealand) now operational, the risk of Chinese items coming into India through the ASEAN countries is even higher. “The answer to the concern does not lie solely in making ROO (rules of origin, which trace where an item originates) more stringent to keep Chinese items out. After RCEP, Chinese investment in the ASEAN is also increasing rapidly. So, the problem is more complex,” the source added.
The problem is that the ASEAN has to be convinced about allowing India adequate protection in items where its domestic industry is being hit most because of the FTA concessions. For that, the bloc would want additional concessions in other areas from India. That is something that has to be properly negotiated.
Also, while under the AITIGA, both sides agreed to open their respective markets by progressively reducing and eliminating duties on 76.4 per cent coverage of goods, the ASEAN countries did not take on uniform commitments. India wants countries like Vietnam, which had given disproportionately less market access in the AITIGA, to take on more tariff reduction under the review.
Cautious negotiating strategy
Meanwhile, it is not just the trade pact with ASEAN that has resulted in significantly higher imports of goods compared to exports, with concerns over potential breaching of rules of origin by the other side surfacing. The pact with the UAE that came into effect in February 2022 also is in the same predicament. And, even the deal with Australia, which came into effect in December 2022, is yet to deliver substantial export benefits compared to the pre-deal period.
With a series of FTAs that have proved more beneficial to partner countries, India is now adopting a more cautious negotiating strategy. It is temporarily pausing talks for trade pacts with smaller countries such as Oman and Peru.
The commerce ministry is working on developing a fresh Standard Operating Procedure (SOP) aimed at addressing the ‘lack of consistent and streamlined’ procedures for negotiating future trade agreements. The new SOP, designed to serve as a template for negotiation of multilateral and bilateral trade agreements, covers modern chapters in trade deals such as labour and environment, and emphasises the need for a clear understanding of ‘trade-offs’ and ‘each party’s bottom line’.
The ‘guidance document’, which includes draft templates for studies, reports and terms of reference, also incorporates input from the Ministry of External Affairs (MEA) on emerging trends such as ‘twinning’ agreements between state governments and the provincial governments of foreign countries to enhance cooperation in various areas. Additionally, it includes contributions from the Department of Economic Affairs (DEA) and references to inputs made by management consultancy firm the Boston Consulting Group.