Arc of disadvantage

 

As a vision statement, Prime Minister Manmohan Singh’s idea of a pan-Asian community encompassing the Association of South-East Asian Nations (ASEAN), China, Japan, Korea and India rivalling the European Union in terms of income and the North American Free Trade Area in trade is, no doubt, bold and ambitious. But the necessary building blocks—in terms of India’s bilateral and regional free trade agreements with individual Asian countries—to realise this “arc of advantage” are of varying size and shape that might well become stumbling blocks to this process of integration.

 

India’s engagement with ASEAN is of recent vintage—the early 1990s to be precise when we became a sectoral dialogue partner. A decade later, a framework agreement on comprehensive economic cooperation with this regional grouping was concluded in 2003. The country has already signed a free trade agreement (FTA) with Thailand and a comprehensive economic cooperation agreement is already operational with Singapore. There is also an FTA with the Bay of Bengal grouping of countries called BIMSTEC—Bangladesh, India, Myanmar, Sri Lanka and Thailand.

 

To leverage this “arc of advantage” that is ASEAN plus 4 (China, Japan, Korea and India), an FTA with this grouping is expected to get operational in 2007. Singh’s vision of a pan-Asian community is considered to be a natural extension of the FTA that India has with ASEAN. Together with the individual FTAs China, Japan and Korea have with ASEAN, it is envisioned that all of this could coalesce into an overarching free trade agreement that would integrate Asia as a whole, including Australia and New Zealand. As a vision statement, this certainly commends itself.

 

This pan-Asian vision, however, remains a distant dream. The Asian theatre, of late, is witness to a rapid proliferation of bilateral trade agreements between individual countries with each having different rules of origin and preferences: 15 are currently in operation, close to 10 have been signed, more than 20 are under negotiation and at least 16 more are proposed, according to the Asian Development Bank. These agreements form an unruly mass of criss-crossing strings that Professor Jagdish Bhagwati calls a “spaghetti bowl” that hamper rather than facilitate free trade.

 

India—like Japan perhaps—belatedly sought to participate in various bilaterals in Asia as it was frustrated by the slow progress in the multilateral WTO talks. BIMSTEC was a reality thanks to the tensions between India and Pakistan that have virtually put paid to cooperation, if not integration, in South Asia. With the shadow of China looming over Asia, India also felt that it had to defend its turf by concluding bilaterals with countries like Thailand and Singapore. But there is now a realisation at the highest levels of government that these bilaterals must be scrutinised.

 

Consider the proposed India-ASEAN FTA, for instance, which “we need to be careful about” as there could be “macro benefits but micro pains” according to Union minister of state for commerce Jairam Ramesh in his interaction with the Forum of Financial Writers. To protect farmers and textile producers, a negative list of 1,414 tariff items—including palm oil, toilet seats, chewing gum—was originally included for exemption from free trade with ASEAN. Such a list is currently being pruned down as it drew polite rebukes from Malaysia that wants India to liberalise import of palm oil.

 

ASEAN is concerned that if palm oil, tea, pepper and textiles form part of India’s negative list, this would affect 80 per cent of its total exports to India. But Ramesh feels that “we cannot afford to have agriculture and textiles frontloaded in this FTA” in view of their adverse impact on individual state economies like Kerala. The India-ASEAN FTA’s benefits in terms of aggregate trade potential are also highly skewed in a 4:1 ratio against India, according to a study done by the Malaysian Institute of Economic Research and the Indian Institute of Foreign Trade.

 

If the India-ASEAN FTA—considered one of the building blocks to the pan-Asian community—affects major stakeholders like farmers and India Inc, who then is responsible for rushing the country into such bilateral agreements? Ramesh, for his part, believes that politics and non-economic factors are the main drivers of this process: for example, the need to show that India has arrived on the world stage. Bhagwati also mentions that the short tenure of bureaucrats and politicians predisposes them towards immediate results: bilaterals are easy to sign and regret perhaps. There thus are no prizes for guessing what this larger pan-Asia vision is stumbling on.