The ASEAN-India FTA (AIFTA) was launched in 2010 with the hope of expanding and diversifying India’s trade in both goods and services by leveraging cost and other benefits for both trading partners.

After 15 years, it is time to review the achievements, expectations and path forward. AIFTA has indeed led to a widening trade deficit due to unbalanced mandate preferences, market access inequalities, and the structural advantages enjoyed by ASEAN countries under the agreement, among many other factors. Let us understand the issues, challenges and the way forward in light of the planned review of AIFTA.

misguided assumptions

One of the key factors in AIFTA was that India offered a higher level of mandate preference than it received to ASEAN countries. Historically, India’s import duties have been higher than those of ASEAN countries; This meant that FTA concessions provided significant market access to ASEAN exporters.

Additionally, India agreed to a more accelerated timeline for the removal of tariffs, creating immediate opportunities for ASEAN firms to expand into Indian markets without providing mutual benefits to Indian companies. Another critical issue is the compartmentalized approach taken by India in phasing out tariffs on different ASEAN countries.

The agreement set an ambitious timeline for reducing tariffs, while offering CLMV (Cambodia, Laos, Myanmar, Vietnam) an even more generous time window.

This divergence in tariff elimination timelines has allowed CLMV countries, particularly Vietnam, to benefit from a longer period of preferential access and increase their competitive advantage in the Indian market. Vietnam’s central position in China+1 and the operationalization of RCEP have led to huge gains by becoming a net exporter to India, contributing to the trade deficit with other ASEAN countries.

We have overlooked the fact that ASEAN countries have a long-standing history of economic cooperation with a robust production network that is deeply integrated among member countries. By leveraging economies of scale, scope and systems, ASEAN countries have created a manufacturing ecosystem with regional value chain synergies that allow them to export competitively.

India too remained at a disadvantage in key sectors. For example, in the case of the two-wheeler industry, Indian manufacturers faced barriers to fair market access in ASEAN countries and were forced to invest in ASEAN-based manufacturing facilities to compete with the better-established dominant players in Japan and China. regional networks.

While the lack of mutual market access in high-potential sectors has limited India’s export growth, it has also opened the door to significant ASEAN imports.

From RCEP to Rules of Origin

RCEP has further integrated ASEAN with China, strengthening production and investment ties between these economies. With China’s extensive investment in ASEAN’s manufacturing sector, the region is becoming increasingly competitive.

Due to tensions at the India-China border, many electronics and machinery companies have redirected their investments to ASEAN, allowing ASEAN countries to reap the benefits of both RCEP for sourcing and AIFTA for exports; This was made possible by complying with highly flexible rules of origin (ROO).

Import data for categories such as electrical machinery, optical and medical instruments, iron and steel and plastics show this trend, with rising imports reflecting India’s growing dependence on ASEAN for these products. Throughout the bargain, the FTA inadvertently facilitated circumvention practices that harmed India’s domestic industries. For example, India, once a net exporter of iron and steel, has become a net importer, partly due to the diversion of cheaper Chinese steel through ASEAN countries.

Leveraging AIFTA-ROO, Chinese steel can enter India under the name of ASEAN origin products. This practice has not only weakened the competitiveness of Indian steel producers but also increased India’s trade deficit with ASEAN.

Gold imports are another classic example of FTA exploitation. ASEAN countries import raw gold, convert it into manufactured souvenirs and then export them to India, benefiting from preferential tariffs.

Once imported, these gold items are often used as jewelery in India. Importers are exploiting FTA rules to circumvent duties that would apply if products were sourced directly from non-ASEAN countries.

The Way Forward

To address inequalities in future negotiations, we should plan two paths: planned negotiations using the game theory approach. For example, Nash equilibrium within game theory proposes the search for a stable arrangement in which neither party can gain by changing conditions under the guise of circumventing non-tariff barriers and rules of origin. But ASEAN’s sectoral advantages in electronics and metallurgy may still challenge Indian industries. To avoid the Prisoner’s Dilemma, India should counter ASEAN’s selective support of sectors such as electronics, which deepens trade imbalances, by advocating for fairer terms. India should prioritize securing better market access for its industries, especially pharmaceuticals, automobiles, IT, textiles and food products, to enhance competitiveness and reduce trade inequalities with ASEAN.

Most importantly, India’s policymakers need to rethink the investment climate to promote ‘Make in India’. We must scale our capacity in critical sectors and emerging technologies such as base metals, defence, electronics and electricity.

Since investors always prefer to stay away from the clutches of regulatory bureaucracy, a friendly investment regime such as tax-free financial centers or SEZs can play an important role.

Finally, a review of FTA terms through stricter rules of origin and reciprocal market access could support Indian industries by preventing subterfuges such as routing of non-ASEAN goods through ASEAN countries to avoid tariffs. With these realignments, India can protect key sectors, reduce the budget deficit, and develop a balanced, mutually beneficial trade relationship with ASEAN.

The author is Professor and Head, IIFT New Delhi. Opinions are personal