The ASEAN-India Free Trade Agreement (AIFTA), operationalized in 2010, aimed to expand and diversify trade between the two regions. However, 15 years later, the pact’s impact has been uneven, leading to a widening trade deficit for India.
A Misguided Approach
A key factor contributing to India’s trade deficit is the asymmetric nature of the agreement. India offered higher duty preferences to ASEAN countries than it received in return. Moreover, India agreed to accelerate tariff elimination, granting immediate market access to ASEAN firms without reciprocal benefits. This disparity, coupled with the compartmentalised approach to tariff phasing, particularly favoured the CLMV countries, especially Vietnam.
ASEAN’s Strategic Advantage
ASEAN nations possess a robust manufacturing network and integrated supply chains, allowing them to leverage economies of scale and scope. This structural advantage, combined with their strategic location, has enabled them to capitalise on regional value chains and export competitively.
RCEP and Rules of Origin
The Regional Comprehensive Economic Partnership (RCEP) further strengthened ASEAN’s position, integrating it more deeply with China and other regional economies. This has led to increased investments in ASEAN’s manufacturing sector, making it even more competitive.
India’s trade deficit with ASEAN has been exacerbated by the circumvention of rules of origin. Products from countries like China are often routed through ASEAN to benefit from preferential tariffs under AIFTA. This practice has harmed Indian industries, particularly in sectors like steel and electronics.
The Way Forward
To address these issues, India needs to adopt a more strategic approach in its future trade negotiations with ASEAN. This includes:
- Negotiating for Fair Market Access: India should prioritise securing better market access for its industries, particularly in sectors like pharmaceuticals, automobiles, IT, textiles, and food products.
- Strengthening Domestic Manufacturing: India needs to focus on improving its investment climate and promoting domestic manufacturing to reduce reliance on imports.
- Revisiting FTA Terms: India should consider stricter rules of origin and reciprocal market access to prevent circumvention and protect domestic industries.
By implementing these measures, India can strive for a more balanced and mutually beneficial trade relationship with ASEAN.
