ASEAN INDIA FREE TRADE AGREEMENT TRADE INDICATORS AND ANALYSIS OF TRADE CREATION AND TRADE DIVERSION

Abstract

From the past three decades, India has witnessed major drifts in its trade policy stance, shifting from a protectionist and a highly regulated economy to a more liberal one. The import substituting regime provided undesirable protection to the domestic industry with effective sealing out of foreign competition. Consequently, the share of Indian economy in world trade dropped from 2.53 per cent in 1947 to a mere 0.4 per cent in 1980 (GOI, TPR 1998)1. A switch in the policy towards liberalization was initiated in the mid-1980s, which gave a required spurt to its exports. This, however, could not be sustained and Indian economy faced severe balance of payment crisis in 1991, with export growth figures quickly plummeting to mere 4 per cent from around 17 per cent registered in preceding years. The economic shock provided a much- needed impetus towards a series of major structural and macroeconomic reforms aimed primarily at easing of restrictions on exports and imports in a phased manner. With this, the stalled liberalization efforts gathered momentum, shaping into a more comprehensive and systematic opening up of the economy in 1991 and after. The reforms aimed at creating conducive environment for achieving rapid increase in exports with the ultimate goal of making trade an engine for achieving higher economic growth (GOI Annual Report, 2000). This economic impulse got reflected in India’s newly envisioned ‘Look East’ policy which was implemented in 1991. The end of Cold War, following the collapse of the Soviet Union, fueled India’s quest for re-establishing its strained relations with the Eastern neighbors (Chatterjee, 2007). The Indian foreign trade policy rapidly sorted to improve interaction with the increasingly globalizing and dynamic Asia. Essential philosophy behind this policy was to increase India’s engagement with its South East and East Asian neighbors by forging closer and deeper economic integration (Chatterjee, 2007; Singh, 2010; Haokip, 2014). Interestingly, these domestic advances were a part of broader developments that were shaping the international scheme of things, further directing India’s trade policy framework in tandem with the world order. With a shift in the American strategy abandoning support for multilateralism, successful integration of Europe and its expansion, change in the economic policy of developing countries, including India, away from import substitution and continued stalemate of talks at multilateral level were some of the key forces encouraging regions of the world, other than Asia, to opt for 1 Share of India’s merchandise exports and imports in world merchandise exports and imports, in 2017, was 1.68 per cent and 2.48 per cent, respectively compared to 12.77 per cent and 10.22 per cent, respectively for China (Trade Profile, WTO, 2018). regionalism as the new measure to foster liberalization process (Frankel et al., 1997; Jayasinghe and Sarker, 2008; Findlay and Urata, 2009; Petri and Plummer, 2016). More recently, the development of complex global value chain (GVC)2 systems, made possible by technology, improved logistics, better information system, stimulated demand for further lower barriers to trade and shaped the Free Trade Agreement (FTA) landscape we face today (Petri et al., 2015). The compounding numbers of Regional Trade Agreements (RTAs) notified to WTO provide formal evidence in support of their growing significance. Over a span of 40 years, from 1948- 1994, GATT received notifications for 124 RTAs in all (Findlay and Urata, 2009), while since the commencement of WTO in 1995 there have been over 400 additional notifications (including goods and services) of RTAs till date with 459 RTAs in force3, of which 253 were FTAs. Their rising importance can be re-emphasized by the fact that since June 2016, all WTO members have notified participation in at least one RTA in force and continue to involve in new RTA negotiations. Besides increasing in numbers, they have evolved to be deeper and more complex in nature. The inclusion of new policy areas such as services trade, foreign investment, intellectual property, technical barriers to trade, dispute settlement and regulatory regimes, reflect more ambitious approach of these agreements and increasing globalization of the world economy (Dee and Gali, 2005). Although a latecomer, economically important Asia has emerged at the forefront of the global FTA activity. Asia’s progressive regionalization alongside rapid liberalization, outward oriented development strategies, infrastructure investment and upgrading human capital has transformed the region from underdeveloped backwaters into a global factory (Kawai and Wignaraja, 2011). The emerging world economic structure and India’s own march towards liberalization played a key role in shaping India’s policy stance in favor of regionalism (GOI, 2017)4. Initially, India adopted a very cautious and guarded approach to regionalism5 and engaged in only few 2 GVCs refer to the international fragmentation of production i.e. where different stages of production and assembly are located in multiple countries, with each step-in process adding value to the final product (WTO, OECD). Accessed from: http://www.worldbank.org/en/topic/global-value-chains 3 WTO statistics on RTAs are based on notification requirements rather than on physical number of RTAs. Thus, for an RTA that includes both goods and services, WTO counts two notifications (one for goods and the other services), even though it is physically one RTA. 4 http://mea.gov.in/aseanindia/20-years.htm. Accessed as on 20th January 2018 5 Its stand on regional groupings was that they must fully conform with and support the rules of the multilateral system (WTO, TPR 1998). bilateral/regional arrangements mainly through Preferential Trade Agreements (PTAs) (GOI, Economic Survey 2005-06, 06-07). India's initial regional trade engagements were the Bangkok Agreement (1975), the Global System of Trade Preferences (GSTP, 1988), and the SAARC PTA (SAPTA, 1993). India also received preferential treatment under Generalized System of Preferences (GSP) schemes6. However, keeping pace with the developments all around, the earlier dormant India rigorously started pursuing its trade integration efforts as a means to foster liberalization, within the framework of multilateral rules, besides its ongoing autonomous trade reforms (GOI, TPR 2011)7. Real fillip to India’s RTA initiatives began in 2000s as India negotiated bilateral and regional trade agreements with several countries and groups. As on August 2018, the negotiations in various kinds of agreements8 are underway with 20 countries and groups together while agreements with 18 countries have already been concluded (MOC)9. Its major initiatives with groups include SAFTA, APTA, GSTP, BIMSTEC, AFTA, EU, MERCOSUR10 along with bilateral ties with many countries. However, of the concluded RTAs, ASEAN is the strongest contender. Ten dynamic markets of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, form the Association of Southeast Asian nations (ASEAN). The region merits attention for a plenty of economic and strategic reasons: (i) ASEAN is the largest and the first regional trading block with which India had signed an FTA (Singh, 2010, Joseph and George, 2014) providing India with the opportunity to access wider markets (ii) The centrality of ASEAN in the Asian region has attracted the attention of our policy makers to shift their focus towards this vibrant region (iii) Stalled growth prospects with South Asian neighbors and rising threat from China provided impetus to pursue further engagements with the South-East 6Schemes of Australia, Bulgaria, Canada, Czech Republic, the European Union, Hungary, Japan, New Zealand, Norway, Republic of Belarus, Republic of Poland, Russian Federation, Slovak Republic, Switzerland, and the United States. 7 Another push towards regionalism, on the one hand was the uncertainty of arriving at any consensus on multilateral liberalization, and on the other was the recognition that RTAs would continue to feature prominently in world trade for a long time. 8 These include besides FTAs, Comprehensive Economic Cooperation Agreements (CECA), Preferential Trade Agreements (PTAs), Comprehensive Economic Partnership Agreement (CEPA) and regional Comprehensive Economic Partnership (RCEP). 9 http://commerce.gov.in/InnerContent.aspx?Type=InternationalTrademenu&Id=32. Accessed from Ministry of Commerce and Industry (MOC) as on August 2018. . Asian nations (iv) India’s relationship with ASEAN is the foundation of the dynamic “Act East” policy, which was officially enunciated in 2014 and is a key pillar of India’s foreign policy. ASEAN India relations stepped up from sectoral dialogue partnership in 1992 to a full dialogue partnership in December 1995, elevating further to Summit level partnership in 2002 and naturally progressing into Strategic partnership in 2012. In 2003, at the second ASEAN India Summit, the ASEAN-India Framework Agreement on Comprehensive Economic Cooperation was signed which laid sound basis for the both the parties to enter into a free trade agreement (FTA)11. With this in effect, the consistent efforts toward forming an FTA with the region, however, only materialized in 2009, after six years of rigorous negotiations, and got implemented on January 1, 2010. It would be interesting to note that India and ASEAN jointly create a market of approximately 1.85 billion people with GDP of US $ 4.5 trillion in 2017. ASEAN is India’s fourth largest trading partner. India's trade with ASEAN has increased to US$ 70 billion in 2016-17 from US$ 65 billion in 2015-16. India's export to ASEAN has increased to US$ 30 billion in 2016-17 from US$ 25 billion in 2015-16 (GOI MEA, 2018)12. Coupled with these figures, the fact that it is India’s first FTA with regional block, ASEAN-India relations assume importance. Post the establishment of an FTA, it is important to take stock of its trade and welfare effects. The economic assessment that follows the implementation of an FTA is a major part of its monitoring process (Cheong, 2010). No definite consensus on the effect of FTA has made its impact assessment, majorly, an empirical issue. There are various aspects to analyzing the trade effects of an FTA, for instance, its utilization rate, coverage rate and so on, however, the Vinerarian concepts of Trade Creation (TC) and Trade Diversion (TD) remain at the heart of any such analysis. The extent of TC or TD that a free trade block leads to, is indicative of the static welfare effects of actual patterns of regionalization (Haveman and Hummels 1998). It is important to measure these effects for effective policy making primarily because TD poses a risk and renders the agreement economically inefficient (Robertson and Estevadeordal 2009). Following suite, this study also focuses on the estimation of these core aspects while evaluating the ASEAN-India Trade in Goods Agreement.