Editorial
August 7, 2004
India-Thailand: Freeing Trade
The India-Thailand free trade agreement (FTA) is back in business, the glitches having been ironed out during prime minister Manmohan Singh's recent visit to Bangkok. The two countries have arrived at an 'early harvest' list of 82 items on which they will progressively reduce import duties beginning September 1 this year, making them totally duty free by September 2006. This first phase is to be followed by the gradual elimination of duties on other items (running into thousands), with full free trade between the two countries in force by 2010.
The FTA proposal was announced with much fanfare during former prime minister Vajpayee's visit to south-east Asia last year, and phase one of the duty reduction was supposed to kick off in March. However, negotiations stalled on the question of rules of origin. Thailand has FTAs in place with China among other countries, and many sections of Indian industry feared that it could be used as a conduit to flood the Indian market with low-cost goods manufactured in China.
Thailand, for its part, was worried about state governments in India being unenthusiastic participants in the process, thus creating obstacles in the implementation of the FTA. These issues now appear to have been resolved. All items exported from Thailand to India will be subject to at least 40 per cent value addition in order for them to be eligible for lower import duty. And India has assured Thailand that the states are bound by the agreement signed by the centre. The 'early harvest' list includes a range of agricultural, engineering and consumer goods such as durum wheat, apples, plywood, jewellery, fans and air conditioners. Sensitive items like rice, where both countries have a significant production for both the domestic and international markets have been kept out of the purview of free trade.
The proposal of an FTA with Thailand was universally welcomed by Indian industry. The auto components sector has been particularly vocal in its objections. Thailand has huge capacities set up by Japanese car manufacturers and there have been fears that these cost-competitive goods could be imported by Indian automobile companies, to the detriment of the booming domestic industry. Thailand has also had apprehensions about doing business here.
Such unease notwithstanding, it is generally agreed that two-way trade, currently at around $2bn, will receive a huge boost once the agreement kicks in. For Thailand, the attraction is India's billion-plus population, strong economic growth and a rising middle class. For India, Thailand could be the first step towards a deeper trade and strategic engagement with the larger ASEAN entity, in keeping with its 'Look East' motto.
The India-Thailand FTA comes in the wake of the the Indian prime minister's promise to take a 'hard look' at the slew of free and preferential trade agreements conceptualised by the NDA government over the past year. Clearly, while the immediate issues may have been resolved, the larger idea of FTAs, their role and relevance and issues such as their trade distorting effects are still being re-examined. This is partly in response to protests by various Indian industrial sectors that their competitiveness in the domestic markets will be hurt by such deals. There is apprehension that some of these FTA proposals were mooted much too hastily, without thinking them through, and may result in a loss of revenue as well as damage to Indian industry.
In this regard, some point to the direction of India's first FTA, signed with Sri Lanka in 1998. Negotiations then were also bedevilled by differences over rules of origin, and it took the personal intervention of Vajpayee to push the deal through.
Since then Indo-Sri Lankan bilateral trade has registered strong growth. However, laxity in fixing the rules of origin norms are said to have proved detrimental to some segments of Indian industry, especially edible oil and copper. Sri Lanka has no domestic production of these items, yet huge quantities of these goods are being exported, in fact accounting for a major share of Sri Lanka's trade with India.
Thus there is a strong case for looking each FTA proposal individually and following a more nuanced approach to bilateral trade. The lack of a multilateral trade liberalisation regime among developing countries has resulted in a surge of FTAs and preferential trade agreements between developing countries. Almost 300 such deals have been notified since the conclusion of the Uruguay Round in 1994, and there is sufficient evidence that FTAs have been an important facilitator of greater trade and investment flows, especially in developing countries.
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