The ASEAN-India Trade Agreement and Its Discontents

Even as India has embraced a renewed fervor for free trade agreements, one trade deal remains disfavored in Indian memory. The 2009 ASEAN-India Goods in Trade Agreement (AITIGA) is one of the oldest trade agreements signed by post-liberalization India as well as one of its most controversial. Atypically for an establishment that prefers to settle diplomatic disputes behind the scenes, Indian diplomats and trade officials are publicly trenchant in their criticism of AITIGA. An oft-repeated narrative has emerged around the agreement: in the early 2000s, inexperienced Indian negotiators walked into an asymmetric deal, opening up their markets while getting little in return. Consequently, India’s trade deficit with ASEAN ballooned. Moreover, China exploited the AITIGA to route its goods into India through Southeast Asia. This narrative stems from misremembering history. Rather than a powerful tool for ASEAN and China to penetrate the Indian market, the AITIGA is, in fact, a shallow and weak instrument. Moreover, it is shallow precisely because India preferred it that way. By repeatedly telling itself an alternative story, New Delhi has developed irrational fears over economic cooperation with Southeast Asia and injected unnecessary acrimony in the relationship. The myth of AITIGA as a bad deal is costing India diplomatically. India started running a trade deficit with ASEAN in 1996, 13 years before the AITIGA was signed. The deficit stemmed from Southeast Asia’s shift from agrarian to manufacturing-led economies. The currency devaluations triggered by the 1997 Asian Financial Crisis further boosted the deficit. While the absolute figure of the trade deficit has ballooned over the last three decades, the India-ASEAN imports-to-exports ratio remains broadly similar to what it was in the 1990s. After the 1997 crisis, ASEAN was looking to economically integrate itself with its East Asian neighbors. In the early 2000s, it began pursuing ASEAN+1 FTAs with its six immediate neighbors: China, India, Japan, South Korea, Australia, and New Zealand. India had been excluded from the first wave of post-1997 regional integration – the ASEAN Plus Three, Asian Bond Markets Initiative, and Chiang Mai Initiative for currency swap. Eager not to miss out on another wave of regional integration, India agreed to negotiate the FTA. Contrary to the myth, Indian officials were tough negotiators. After all, India had decades of experience negotiating economic deals in the GATT, WTO, and elsewhere. The negotiations were tortuous and took much longer than the other ASEAN+1 FTAs. Moreover, there was a mismatch of approach. On the one hand, eager to gain access to the Indian market, ASEAN wanted to widen the FTA’s scope. On the other hand, India looked to protect its domestic industry by limiting the scope of the agreement. Indian businesses were lukewarm about seeking out greater market access in Southeast Asia. India’s tough negotiating ensured that the AITIGA was the shallowest of the ASEAN+1 FTAs. Whereas all other agreements committed parties to tariff elimination coverage of more than 90 percent, the AITIGA’s promised coverage hovered around 79 percent. ASEAN mirrored India’s reluctance to open its markets. For instance, Indian critics of the AITIGA often point to the fact that Indonesia promised only 48.7 percent tariff elimination coverage to India. Notably, Indonesia offered above 91 percent coverage to all other ASEAN+1 partners, including Australia, with which it ran a trade deficit at the time. AITIGA also ended up with the most stringent Rules of Origin among all the ASEAN+1 FTAs. It is the only agreement that demands dual compliance (35 percent local content and change in tariff subheading) for goods to qualify for preferential treatment. Its complex compliance rules and lower scope resulted in exporters avoiding using the AITIGA. In AITIGA, India got what it wanted – an agreement that signaled India’s commitment to its Look East policy without exposing its domestic industry to excessive international competition. While economists may argue over whether Indian protectionism is good economic policy, the debate is irrelevant from a diplomatic standpoint. For whatever reasons, Indian economic managers prefer shielding the Indian market. The AITIGA was a natural outcome of such preference. However, to then construct a narrative of the agreement as a bad deal in which India got duped is diplomatically damaging. To begin with, it erodes India’s credibility in the region as a reliable and competent partner. India began criticizing the AITIGA almost as soon as it was signed. The two sides agreed to open a review of the agreement in 2015 but still haven’t concluded it. Such long-drawn, dangling processes chip away at India’s image. AITIGA’s beleaguered state becomes a particularly bad look when contrasted with other ASEAN+1 FTAs, especially the one with China. Beijing began negotiating its FTA with ASEAN around the same time as New Delhi. However, it not only concluded the negotiations fairly quickly, but China and ASEAN have since upgraded the agreement twice. Today, the ASEAN-China FTA is a powerful instrument that deals with a range of issues from digital trade to green technology. The narrative of AITIGA as a loss for India has made New Delhi a less confident economic actor in Southeast Asia. The resultant hesitation has been evident in India’s exit from the Regional Comprehensive Economic Partnership as well as its reluctance to conclude bilateral FTAs with Southeast Asian countries such as Thailand and Indonesia. Today, even as India seeks out FTAs in the Middle East and Europe, it is too unsure of itself to look for a trade deal in Southeast Asia. Tellingly, the acrimony over AITIGA has spilled over into other aspects of ASEAN-India economic cooperation, even the ones which are in India’s interests. For instance, the 2014 ASEAN-India Trade in Services Agreement needs urgent upgradation to account for all the advancements in the digital economy. Given that India enjoys a services surplus with Southeast Asia, New Delhi should be eagerly driving the process. However, so far the two sides have not even begun discussing the issue. The self-created myths around AITIGA have cast a shadow on India’s Look/Act East policy. New Delhi needs to shed them to become a more confident, credible and engaged actor in the region.