Bilateral trade agreement between India and ASEAN Country · economy. The benefits of the FTA may possibly have a positive impact on the growth rate of India, to improve productivity

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Research Article ISSN 2229 – 3795

ASIAN JOURNAL OF MANAGEMENT RESEARCH 67 Volume 7 Issue 1, 2016

Bilateral trade agreement between India and ASEAN Country Shalini Trivedi1, Aakash Vaish2

1- Research Scholar in Economics, IIT Kharagpur, Kharagpur, India 2-Undergraduate student, Amity University, India

[email protected]

ABSTRACT

The Bilateral Trade Agreement is limited to trade in goods while negotiations for a similar agreement for services are currently underway. The theoretical foundations leading to advocacy of free trade agreements is unequivocally as should free trade to increase production, improve specialization and lead to further improvements in well - being in the long term consumers and producers. However, practical experience and lessons of the BTA that have been implemented in other parts of the world do not provide the necessary support for the conclusions that emerge from the theory of free trade. What is the likely impact of the India-ASEAN BTA on the Indian economy? What industries benefit from the implementation of the BTA and which industries will be affected? What are the opportunities and threats Indian companies should be aware of? These are some questions were addressed in the current paper. The objective of the research is to determine and analyze the revealed comparative advantage of India on ASEAN countries and vice-versa in specific product sectors where the trade agreement has its impact and identifying the strong and weak points where India needs to focus. Examine the likely impact of the recently signed India-ASEAN BTA on certain product sectors. We conducted research on the secondary data sources and we made inferential conclusion over the results obtained. We note that the implementation of the BTA can only result in increased dependence on trade between India and ASEAN.

Key words: Bilateral trade agreement, ASEAN, India, comparative advantage, Indian economy. 1. Introduction

Bilateral or regional trade agreement is a type of agreement which is between two or more countries, including the beneficiaries of an agreement to reduce quotas, tariffs and any other restrictions on trade between them. Bilateral trade agreements or BTA are bilateral, while RTA or regional trade agreements are usually signed between a number of countries in a given region. The agreements cover trade in goods and services and addresses issues such as IPR or intellectual property right. They also contain provisions for complete chapters relating to the protection of investments and foreign investors. Bilateral and regional trade agreements are also known as PTA or preferential trade agreements, as they are useful to particular countries to which they relate. They are divided into two classes:

Bilateral trade agreement between India and ASEAN Country

Shalini Trivedi, Aakash Vaish

ASIAN JOURNAL OF MANAGEMENT RESEARCH Volume 7 Issue 1, 2016

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1. Customs Unions – In this two or more countries come into an agreement to reduce tariffs and other types of restrictions on trade among themselves, but also to apply a common external or outside tariff to trade with other countries (for example, the African Customs Union); and

2. Free Trade Areas – In this two or more countries come into an agreement to reduce tariffs and other types of restrictions on trade among themselves, but each one of them continues to find the appropriate tariffs that apply to trade with other countries as well (for example, the NAFTA or North American Free Trade Agreement).

1.1 How does the BTA or FTA work within the global trade?

Bilateral and regional trade agreements are an important element of global and multilateral trade agreements, the first was known trading system - General Agreement on Trade and Tariffs (GATT) called. GATT gave birth to a multilateral trading system, which is now endorsed or promoted by the World Trade Organization (WTO), which has resulted in the elimination of trade barriers around the world and the rise of global market . Bilateral and regional trade agreements have become an element increasingly important and visible international trade over the past twenty years. Statistics available on the WTO website show that 205 bilateral and regional trade agreements in force in July 2007 and 2010, it is estimated that this number will increase to about 400. The rapid increase in bilateral and regional trade agreements in recent years have resulted in an important debate about the effect that the effect of "regionalism" will have on the multilateral trading system. There are valid arguments on both sides of the debate, but whether regionalism is good or bad, it must be regarded as the place of how bilateral and regional trade agreements work and how it can create new economic opportunities. 1.2 The concept of international free trade

The concept of free trade has become an accepted rule and is the only concept that underpins the multilateral trading system. Free trade includes the elimination of tariffs, quotas or other restrictions on international trade enabling global production of goods and services in the most effective and efficient manner. It is understood that free trade does not provide overall long-term benefits, the benefits are not primarily collected locally. If the imported products and services can be produced and sold at a lower price than local products, while local producers will lose. In such a situation, if local producers hold political power, then the result is the implementation of trade restrictions to protect domestic producers from foreign competition. It is clear that the fastest method of introducing a system of free trade is that all countries. Unilaterally remove all tariffs, quotas and other restrictions on international trade. There are various studies that show the economic benefits of independent tariff reductions without requiring any reciprocal action other countries6. However, for the reasons outlined above, many countries are struggling to make such a complete transition on their own. This is one of the main reasons for the creation of the WTO and the multilateral trading system, under which all major trading countries negotiate agreements for the removal of barriers to international 1.3 Bilateral trade agreements impact on global trade

As bilateral trade agreements have become a tool of trade policy increasingly important and visible, there was a rapid increase in the respective discuss the impact that these agreements have on world trade literature. Much has been discussed is the fact that bilateral trade




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agreements could have a large negative impact on trade liberalization and that although some benefits may be viewed in the short term as well, but the long-term outcome could be a complex system of preferential trade further away from the concept of multilateralism. Of particular concern is the complex nature of binding bilateral and regional trade agreements and the negative effects that this structure have on developing countries. Over the past twenty years, bilateral trade agreements have become increasingly important and sophisticated and they are now morewider than the multilateral trading system topics: for example, many bilateral and regional trade agreements deal with issues intellectual property rights and competition, which are not addressed in the multilateral trade agreements. In addition, they are more geographically extensive, many RTAs now concluded between several Member countries in different regions of coherent trade policies. This provides evidence that bilateral and regional trade agreements are increasingly used to strengthen political and economic partnerships. 1.4 Significance of research

The Free Trade Agreement ASEAN India was declared in Bangkok August 13, 2009 , and entered into force on 1 January 2010, with Singapore, Thailand and Malaysia. It was decided to put up with all Asen country in 2016. ALE covers a market of nearly 1.8 billion people and proposes to gradually reduce tariffs for over 4,000 product lines. Currently the FTA is limited to trade in goods while negotiations for a similar agreement for services are currently underway. The theoretical foundations leading to advocacy of free trade agreements is unequivocally as should free trade to increase production, improve specialization and lead to further improvements in well - being in the long term consumers and producers. However, practical experience and lessons of the FTA that have been implemented in other parts of the world do not provide the necessary support for the conclusions that emerge from the theory of free trade. What is the likely impact of the India-ASEAN FTA on the Indian economy? What industries benefit from the implementation of the FTA and which industries will be affected? Is this likely to cause a significant impact on wages, employment and trade in India in the coming years? What are the opportunities and threats Indian companies should be aware of? These are some questions that we address in this project report. Based on the mixed results of the impact of other FTA member countries, it is not surprising that the impact of the India-ASEAN FTA on the Indian economy is also likely to benefit from voters while it will have a negative impact in some sectors in the short term . Based on existing research, we find good reasons to advocate that the success of the FTA depends essentially on the existence of good institutions in the country and an effective regulatory environment so that they act as catalysts for the benefits to flow through and disperse in the economy. The benefits of the FTA may possibly have a positive impact on the growth rate of India, to improve productivity in the Indian manufacturing sector and usher in an environment (driven by healthy competition) that can foster closer business relationships leading to job creation and increased trade within India and ASEAN. We note that the implementation of the FTA can only result in increased dependence on trade between India and ASEAN. Seen in the light of the fact that currently exports the ASEAN region in India more than India 's exports to ASEAN, greater dependence on trade will eventually allow exports from India to the ASEAN to increase in the coming years. In




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addition, we also find that India has increasingly focused its exports to ASEAN mineral fuels and mineral oils. It is therefore plausible that after the implementation of the FTA, these sectors will benefit most as they will be better prepared to take advantage of their greater presence in ASEAN. Other sectors / industries can be expected to benefit through greater efficiency achieved through specialization but a deeper analysis should be conducted to arrive at a positive conclusion in this regard. We also find evidence that suggests that the profile of the negotiations between India and ASEAN such as ASEAN exports to India when matched against the import profile of India is more compatible in contrast exports from India to ASEAN and its import profile. This implies that the ASEAN trade benefit more post implementation of the FTA with respect to perceived gains from trade that India is likely to experience.

1.5 Relevance of research

The analysis of specific industries particularly focuses on research on comparative advantage industries in India with the industries and trading partners of ASEAN. The basis of this type of analysis comes from the very foundations of the theory of trade and business that provides the finding that free trade always leads to a specialization in the section Un Certain products or industries in a country which enjoys particularly of a comparative advantage and will always eventually produce and export more products of these industries. Based on our analysis, we determine the result that the Indian industries have a competitive advantage in comparison with the Grand ASEAN countries:

1. Crafts & rugs 2. Textiles, clothing and accessories 3. Medical and pharmaceutical 4. Chemicals

On the other hand, the following industries in ASEAN have a greater competitive advantage over India:

1. Electrical equipment 2. Machines and devices

These manychances will certainly result in strengthening or improving the growth and development of leading companies in industries These additional benefits with the creation of jobs and income in India. We also stressed the importance of ideas and the importance of a coherent trade policy, which can improve the chances of the FTA to become a very important catalyst in the growth of India.

2. Literature review

Francis (2011) states that under the FTA agreement, members of the trade bloc will gain greater access to the Indian market for agricultural products processed and semi-processed and their close substitutes. Because of this Indian agriculture will be affected. This can also cause suffering for Indian small and medium enterprises in agriculture-related products, intermediate goods and products of light industry. But when viewed through a different perspective import liberalization in intermediate goods will encourage multinational enterprises to undertake rationalization of production in the region in the transportation equipment, machinery, chemicals and sectors iron and steel which could lead to greater




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integration of India in production networks in the sectors. Here, the ASEAN countries will have significantly increased market access in agricultural products in India. Thus, liberalization is bound to affect the domestic agricultural sector as now they will face strong competition (which if not done properly will reduce the demand for domestic products leaving the thank you competitors). Rates are something that protect Indian SMEs which when deregulated under the AIFTA will affect them negatively. According to given by Kawai and Wignaraja (2010) argument, the economically important Asia has emerged at the forefront of the global free trade agreement (FTA) activity. The problem "noodle bowl" is one of the many negative effects of the Asian FTA has added to concerns already present. Looking at how Asian regionalism seems still exist, the attention of policymakers should be to find a way to reduce the costs of FTAs while maximizing profits. Looking at the case in hand in a pragmatic perspective highlights all of the following recommendations: system support for the use of FTAs should be strengthened; rules of origin should be streamlined and improved administration, improved coverage of trade agriculture must be ensured; overall "WTO-plus" agreements must be forged; finally, a large area FTA should be encouraged Considering the politics and economics, we see that a likely scenario is FTA consolidation in Asia. This could be done by creating a PRC-Japan-ROK FTA, combining with ASEAN LRA and involving Australia, India and New Zealand be followed by links with North America and Europe. Finally, the analysis suggests that a bottom-up agreement in the Doha Round (refers to Doha WTOS) should be adopted. we see that there has been a change in trade policy in Asia which started from 2000. ALE assume more importance as an instrument of trade policy in Asia after the conclusion of these agreements 61. ALE knows the continuous increase of the influence of Singapore's three largest economies in the region have become key players in the activity FTA ASEAN as a group is becoming the hub of integration for ALE Asia. In addition, Asian FTAs have maintained strong inter-regional orientation, commercial coverage of free trade has increased. In addition to issues related to trade liberalization issues such as investment, intellectual property rights, and labor standards or mobility are increasingly considered. In Sikdar & Nag (2011) suggested that it may be entered into this agreement free trade India-ASEAN (AIFTA) came into force on 1 January 2010 with regard to Malaysia, Singapore and Thailand. In addition, it should enter into force for ASEAN members remaining after they have completed their internal needs. Because of this, it was considered necessary to analyze how the policy affects the FTA India and other ASEAN members. (GTAP) database of the Global Trade Analysis Project suggests that GDP and well-being of India's position has improved and continues to improve significantly with the IRS and imperfect competition, while the total trade of the country's trade with ASEAN remains roughly unchanged. Level of employment in the country, however, exacerbated to some extent. Also an increase in the price index of GDP can be seen from the first scenario CRS. Everything has its own light and darkness, as is the case with ASEAN India FTA has many opportunities for Indian industries and the challenges of survival increased competition [as stated Kallummal & Ratna (2012). While we are still unaware of how much gain it will bring to India, we can easily say that the labor intensive sectors and unorganized in India is a big challenge. There is no doubt that the reduction or elimination of tariffs on products such as tea, coffee, rubber, etc. are a sensitive issue for a developing country like India. Therefore, it has become important to see the impact of India unilateral tariff liberalization post Uruguay round taking into account imports from India, domestic production, etc. This will help to provide an overview on the how the FTA affects the national economy of a country.




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3. Methodology

3.1 Objective of the research

(i) To analyze the economic impact of the India-ASEAN FTA (ii) To analyze the major trends in India products exported to ASEAN countries to measure the impact of the FTA on Indian industry based on revealed comparative advantage and competitiveness analysis with major exporters in the world.

3.2 Data sources

To analyze the export competitiveness of important products of ASEAN countries and India with other leading exporters and important in the world using the revealed comparative advantage index or RCA. The sectors that have considered for the analysis are: Textiles, Clothing & Accessories, Machines & Appliances, Medical and pharmaceutical, Electrical Equipment. Data was gathered from government of India websites of FICCI, Department of Commerce government of India.

Table 1: India and ASEAN’s export and percentage share of world export (2009)

Source : Delloitte FICCI white paper




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3.2 Data analysis techniques

In order to achieve the objectives various calculations were done based on the following indexes. Export growth is the percentage change in the value of exports relative to the previous year, Export intensity index is the ratio of export share of a country (or region) to the share of world exports going to a partner. It is calculated as:

(1) where Xij is the dollar value of exports of country(or region) i to country(or region) j, Xiw is the dollar value of the exports of country(or region) i to the world, Xwj is the dollar value of world exports to country(or region) j, and Xww is the dollar value of world exports. An index of more than one indicates that trade flow between countries/regions is larger than expected given their importance in world trade. 3.2.2 Import growth Import growth is the percentage change in the value of imports relative to the previous year. Trade intensity index is the ratio of trade share of a country/region to the share of world trade with a partner. It is calculated as:

(2) where tij is the dollar value of total trade of country/region i with country/region j, Tiw is the dollar value of the total trade of country/region i with the world, twj is the dollar value of world trade with country/region j, and Tww is the dollar value of world trade. An index of more than one indicates that trade flow between countries/regions is larger than expected given their importance in world trade. 3.3.3 Revealed Comparative Advantage (RCA)

Revealed Comparative Advantage (RCA) is an index used in international economics for calculating the relative advantage or disadvantage of a certain country in a certain class of goods or services as evidenced by trade flows. A comparative advantage is “revealed” if RCA>1. If RCA is less than unity, the country is said to have a comparative disadvantage in the commodity or industry. RCA = (Eij / Eit) / (Enj / Ent)

Where,




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4. Results and discussion

4.1 India - ASEAN trade and economic linkages

The economic relationship between India and ASEAN is demonstrated by the fact that bilateral trade increased by more than 23.2 percent from $ 13.1 billion in 2003-04 to $ 57.8 billion in 2010-11. ASEAN has become the fourth largest trading country of India after the EU, U.S. and China. A summary of the export and import of India with ASEAN is given in Tables 1,2,3,4.

Table 2: India’s exports to ASEAN countries (US $ Million)

Table 3: India’s total imports from ASEAN partner countries (US $ Million)

4.2 Export intensity & trade intensity indices

The export and trade intensity indices tells us about nature of the intensity of the trading relationship between the two trading countries. The export intensity index tells whether there is more exports done by a country as when compared to other countries. The trade intensity index is defined as the ratio of the total trade share of a country to the share of world trade with a member country. Higher index value describes that the flow of trade between the countries is larger than usual. As compared to export intensity index, trade intensity index means the flow of between the trading countries.




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Figure 1: India’s bilateral trade with ASEAN countries

Figure 2: Export Intensity Indices

Source: Data has been considered from the ARIC website where in the source has been given as ‘IMF Directions of Trade Statistics’. 4.2 FTA impact on Indian industries based on RCA Index

In this research, we revealed comparative advantage or RCA index (Annex) determined to get to the competitiveness of important products for a variety of study chosen by the trends in the country. The structure of trade index RCA is designed to identify areas where an economy has a comparative advantage. Thus, in areas where the country has a value greater than 1 and the RCA index is relatively higher than other countries, it can be concluded that the country in question has a comparative advantage over other countries in this sector individual and an increase in the growth of trade in the sector would be useful for the country. RCA decreasing values mean that the country has a comparative disadvantage. 4.3 Graphs for RCA computation

Trends of the RCA index for the considered products over a period of last 15 years are shown.




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Figure 3: RCA Comparison of Medical and Pharmaceuticals products

Source: Calculations based on United Nations Conference on Trade &-Development database

Figure 4: RCA Comparison of Textiles, Apparels & Accessories

Source: Calculations based on United Nations Conference on Trade & Development database

Figure 5: RCA comparison of machineries & appliances

Source: Calculations based on United Nations Conference on Trade &Development database




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Figure 6: RCA Comparison of Electrical Equipment

Source: Calculations based on United Nations Conference on Trade & Development database 4.3 Analysis of comparative advantage

In the medical and pharmaceutical sector in India had a great RCA (> 1). In this sector, the ASEAN countries have had little RCA. Therefore India is more competitive than the ASEAN countries in this sector. But overall economies of the EU (27) all have high RCA in comparison to other countries. Thus, India really needs to win in this area if the opening of trade between the two trading partners. With the growing importance of the textile industry in the Indian economy, we RCA index for textiles, apparels and accessories sector to determine where India is worldwide. Trend analysis shows that India has an RCA index compared to ASEAN countries. Overall India and China have a high index of RCA compared to other economies. India has a large RCA China, but it was overtaken by China in recent years. The ASEAN countries have high RCA in the field of machinery and equipment. Overall, they had a high value of RCA until 2005, after which they were overtaken by China. In comparison with India, it has the lowest comparative advantage among all countries. The ASEAN countries shows a very high RCA in the electrical equipment sector and therefore have a greater comparative advantage. Overall, they have high compared to all the economies of RCA values. India on the other hand has very low RCA (<1) and a comparative disadvantage in this sector, therefore. 5. Conclusion

Therefore, from 2003 until 2011, India had a negative balance of trade with ASEAN members. We also see that the balance of the India Trade (BoT) is in favor of ASEAN countries and the gap is widening every year since 2005-2006. Bot India with the ASEAN countries grew from 688.2 million dollars in 2004-2005 to 7.62 billion U.S. dollars in 2009 to 2010. This is due to the increase in bilateral imports from Malaysia, Indonesia, Singapore and Thailand, as shown in Tables 2, 3 and figure 1.




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Export and trade intensity has a value greater than 1 index which tells us that the exports of the country of origin or more trades with a destination in particular that the world is on average as evidenced by the figures 1 and 2. India and ASEAN have had intense trade relations with each other as we shall see. This can be concluded from the observed trend lines where trade intensity for the two economies show that the value of the index never fell below 1. We also conclude from this trend that the trade intensity of ASEAN with India more intense than usual. Thus, the implementation of FTA between the two economies is increasing

dependence on trade between them.

Finally, we conclude that the section that India is to improve and specialize in textiles, crafts and areas of medicine and pharmacy trade with the ASEAN countries. Sectors of the electrical equipment and machinery, ASEAN economies to specialize in comparison with India as evidenced by Figures 3,4,5,6 5.2 The benefits of the FTA can be

1. Increase in the economy 2. Lower prices after price is reduced, because of significant economies of scale

and increased competition between companies 3. A greater variety of consumer products 4. The least efficient firms to exit the competition 5. The rate of increase in employment related to the respective trade 6. Inclusion of foreign investment

6. References

1. Brownsell & Overy, (2010), Bilateral and regional trade agreements, Advocates for International Development.

2. Ghosh & Roy, (2011), India ASEAN Free Trade Agreement Implications for India’s

Economy, Deloitte-FICCI White Paper, pp 22-30.

3. Jayanta, 2009, After India-ASEAN FTA, Centre for Studies in International Relations and Development (CSIRD), CSIRD Policy Brief # 3.

4. Seshadri, (2009), Evolution in India’s Regional Trading Arrangements, Journal of World

Trade, 42(3), pp 903- 926.

5. Ohlan, (2012), Asian-India free trade agreement in goods: an assessment African Journal of

Social Sciences, 2(3), pp 66-84.

6. Francis, (2011), The ASEAN-India Free Trade Agreement: A sectoral impact analysis of

increased trade integration in goods, Economic and Political Weekly, 4(2).

7. Sikdar & Nag, (2011), Impact of India-ASEAN Free Trade Agreement: A cross-country analysis using applied general equilibrium modelling, Asia-Pacific Research and Training Network on Trade Working Paper Series, No 107.

8. Narayan, (2013), Expanding India-ASEAN Connectivity, ISAS Insights No. 198 – 28

February 2013, p.1.




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9. Karmakar, (2005), India–Asian cooperation in services – an overview, Indian council for

research on international economic relations, Working Paper No. 176, pp 1-3.

Documents

Bilateral trade agreement between India and ASEAN Country · economy. The benefits of the FTA may possibly have a positive impact on the growth rate of India, to improve productivity