Why in news?

A review of the India-ASEAN trade deal by 2025 is included in Prime Minister Narendra Modi’s 10-point plan at the 21st ASEAN-India Summit. This review stems from concerns over the growing trade imbalance favoring ASEAN and increased Chinese investments in the region.

What’s in today’s article?

• India-ASEAN trade deal
• Demand to review the trade deal
• Current Status of the Trade Deal Review

India-ASEAN free trade deal(AIFTA)

• About
  • AIFTA is a free trade agreement between India and the ten member states of the Association of Southeast Asian Nations (ASEAN).
  • It aimed to enhance economic cooperation by offering tariff concessions on goods traded between India and ASEAN countries.
  • It eliminates tariffs on 75% of goods traded between the two regions, and commits parties to reduce tariffs on an additional 10% of product lines to below 5%. 
  • The AIFTA promotes economic cooperation in sectors such as:
    • Agriculture, fisheries, and forestry; Services; Mining and energy; Science and technology; Transport and infrastructure; Manufacturing.
• Agreements
  • The AIFTA includes:
    • The ASEAN-India Trade in Goods (AITIG) Agreement, signed in 2009 and entered into force in 2010
    • The ASEAN-India Framework Agreement on Comprehensive Economic Cooperation, signed in 2003
    • The India-ASEAN Agreement on Services and Investment, signed in 2014 and implemented in 2015
• Performance
  • ASEAN remains a crucial trading partner for India, accounting for 11% of its global trade, with bilateral trade reaching US$ 122.67 billion during 2023-24.
  • India’s trade with ASEAN experienced astounding growth after signing the ASEAN-India Trade in Goods Agreement (AITIGA).
  • However, the trade disproportionately benefits the ASEAN region.
    • Between FY 2009 and FY 2023, imports from ASEAN to India grew by 234.4% while exports from India rose only by 130.4%.
    • As a result, India’s trade deficit expanded from US$ 7.5 billion annually when the agreement was enacted in 2011 to approximately US$ 44 billion in 2023.
  • 

Why is India asking for a review of the India-ASEAN trade deal?

• Current agreement is not balanced
  • India wants to review the AIFTA because it believes the current agreement is not balanced.
  • This deal is leading to a trade deficit due to issues like:
    • non-reciprocal concessions,
    • non-tariff barriers, and
    • concerns about rules of origin exploitation, which allows other countries, particularly China, to route exports to India through ASEAN nations, undermining domestic manufacturing in India.
• India as a global manufacturing hub
• The potential adjustment of tariffs is influenced by the need to protect burgeoning sectors within India's economy, aligning with the government's “Make in India” initiative to transform India into a global manufacturing hub.
• For instance, raising tariffs on mobile phone parts and automobile components could incentivize domestic production and reduce import dependency.
• Asymmetry in negotiation power
  • In the goods trade category, India eliminated import duties on approximately 74 percent of tariff lines and reduced duties on an additional 14 percent of tariff lines—highlighting one consolidated offer to ASEAN.
  • At the same time, each ASEAN member made separate offers to India.
  • This asymmetry in negotiation power also hinders India’s flexibility in protecting vulnerable domestic industries from competitive ASEAN imports.
    • The tariff preferences enjoyed by ASEAN countries in the Indian market under the AITIGA have been much greater than those Indian companies receive in ASEAN markets.
• Rerouting concerns
• The rising influx of Chinese investments and goods into ASEAN has sparked concerns over the rerouting of Chinese products into India through the region.
• In response, India's Ministry of Commerce and Industry launched an anti-dumping investigation into steel imports from Vietnam.
• The Economic Survey highlighted that Chinese firms are increasingly rerouting supply chains through countries like Mexico and Vietnam.
• Need for modernization:
  • The AIFTA is considered outdated and needs to be updated to reflect current market dynamics.

Current Status of the Trade Deal Review

• The two sides agreed to initiate a review during the 16th ASEAN-India Economic Ministers Meeting (AIEMM) in September 2019.
• However, it took three years to barely agree on the scope of the review at the 19th AIEMM in September 2022.