Indo-ASEAN trade pact and lessons from FTAs

Contact Counsellor

Last Updated02/03/2022

India and the United Arab Emirates (UAE) signed a comprehensive economic partnership agreement, which comprises a free trade agreement (FTA).
It is India’s fifth major FTA.
The experience with four previous FTAs shows that following a relaxation in tariffs, India’s imports have generally risen at a faster pace than exports to the respective trading partners.

India signed an FTA with its seven South Asian neighbors (Safta) in 2006.
In 2011, it signed separate FTAs with South Korea, Japan, and the 10 countries that comprise the Association of Southeast Asian Nations (ASEAN).
The ASEAN FTA is the most significant, as the bloc accounted for 10% of India’s exports and 11.7% of its imports in 2019-20.
By comparison, India’s overall trade with each of the other three regions was less than 4%.
It’s also with ASEAN that the gap between import growth and export growth has been the most pronounced.

In the initial stage of trade liberalization through FTAs, India will be adversely affected due to negative terms of trade and revenues foregone from tariffs
However, significant longer-term gains can accrue to India if there is a reallocation of resources to export-intensive sectors.

Singapore and Indonesia collectively comprise more than half of the imports to India.
On the exports side, Singapore is the largest destination, followed by Malaysia and Vietnam.
In 2011-12, the first year of this FTA, India’s exports to the region spiked 43% in 2011-12.
Meanwhile, India’s imports from ASEAN countries have nearly doubled between 2011-12 and 2018-19.
Therefore, India’s ‘terms of trade’ with Asean, calculated as the value of exports relative to imports, have worsened over the past decade, when the FTA has been in place.
Amid exports that moved in a narrow band, India’s trade deficit with ASEAN has widened from $5 billion in 2010-11 to $23.8 billion in 2019-20.
Seven of the top 10 import heads have grown faster than the overall rate.
Coal, palm oil, petroleum products and electronics-related items are the leading imports.
However, the relative importance of palm oil has reduced, while those of other products has risen.
On the exports side, mineral fuels and oils (except crude), which is the largest export over the past decade, has fallen significantly, while exports of frozen meat and unwrought aluminum have risen.

The UAE FTA will see duties being eliminated on 80% of tariff lines, accounting for 90% of India’s exports to the UAE by value.
In 2019-20, UAE accounted for 9.2% of India’s exports, the third-largest after the US and China.
Jewellery, diamonds, mineral oils, and electrical parts for telecom are the leading export heads.
It is expected that zero tariffs and greater market access can fire exports in sectors where India is competitive like textiles, leather and pharmaceuticals.
However, agricultural items such as dairy, fruits, vegetables, and foodgrains, where India can gain significantly, are currently excluded from the FTA.

The UAE FTA gives India an opportunity to deepen its engagement with other cash-rich countries in the Gulf Cooperation Council. As India is also in talks for more trade pacts, including with Australia, Canada, Israel and the European Union it should take lessons from previous FTAs and keep its interests intact while negotiating for trade pacts