China and Neighbourhood

Estimating the Impact of the Indo-ASEAN Free Trade Agreement on India’s Balance of Trade*

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By Ranajoy Bhattacharyya and Avijit Mandal | 15 April 2010


 

India signed a Free Trade Agreement with ASEAN on 13th August, 2009.

Abstract

 

In this paper we analyze one aspect of the possible impacts of the
FTA: that on India’s Balance of Trade. It is found that the impact of the
agreement on India’s balance of trade is expected to be negative. India’s
imports will rise significantly, however there will be no commensurate
rise in India’s export to these countries except to Indonesia.

India signed a Free Trade Agreement with ASEAN on 13th August, 2009.In this paper we analyze one aspect of the possible impacts of the FTA: that on India’s Balance of Trade. It is found that the impact of theagreement on India’s balance of trade is expected to be negative. India’s imports will rise significantly, however there will be no commensuraterise in India’s export to these countries except to Indonesia.

 

1. Introduction

 

India signed a framework agreement on comprehensive economic cooperation with the Association of South East Asian Nations (ASEAN) in October 2003. The agreement proposed to progressively liberalize and promote trade (in goods and services) as well as investments between them. As a means to that end the agreement proposed to enter into negotiations for the creation of a Regional Trade and Investment Area (RTIA) which includes a Free Trade Area in goods. After negotiations lasting almost six years a Free Trade Agreement (FTA) was signed between them on 13 August 2009. The objective of the proposed RTIA a part of which was implemented by the signing of the FTA appears to be economic as well as political with the political part being as important as the economic, if not more. On the economic front, several arguments have been put forward, either for ASEAN as a whole or for particular countries within ASEAN, in favor of the RTIA in all the three areas that are expected to be covered by it: a goods agreement (see for example, Mehta (2005)), a services agreement (Joseph and Parayil (2004) and Karmakar (2005)) and an investment agreement (Mukherjee et al (2003)).

There are however skeptics who are especially critical of the FTA part of the RTIA. Interestingly some of these arguments have been put forward by politicians rather than economists. For example one of the members of the Indian parliament from Kerela, Mr. A. K. Anthony is of the opinion that an FTA with ASEAN “will hurt the interests of states like Kerala as Customs tariff of produces such as pepper, coffee and palm oil would have to be brought down substantially in the next 10 years under the agreement”. Indeed there are clear economic reasons for being skeptical. The average tariff for the ASEAN countries in 2006 was 6.53% (for all products) which was substantially lower than the average tariff of India to these countries (16.55%). Thus an FTA will clearly imply that India will have to bring tariffs down to a greater extent than the ASEAN. Also, among the ASEAN members India has preferential trade agreements with Thailand, Myanmar and Singapore. This leads to lower impact of the Indo ASEAN FTA for these three ASEAN members. Finally due to a much stronger trade relationship between these countries and China, market access for India will lower in the ASEAN member countries (see, Pal and Dasgupta (2009)).

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* Published in the First Issue of Journal of Global Analysis (JGA).

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