Despite apprehensions expressed by the Congress president, Sonia Gandhi, the prime minister?s trade and economic relations committee has reportedly given the green signal to implementing the proposed free trade area with the Asean from January 2007.

FTA is an arrangement under which the members agree to gradually move towards zero tariff on trade with all other member countries. However, unlike a Customs Union, the member countries need not have a common external tariff against non-members. This creates the problem that goods from a non-member nation such as the United States of America would be brought into a country such as India via a member country having the lowest tariff ? say Singapore. The standard method to check this is to have a ?Rules of Origin? requirement for goods. For example, 40 per cent of the value of a product must be added within the FTA in order to qualify for tariff concessions. In most cases, FTA members would start with a negative or a sensitive list where tariff reductions will not be applicable fully. Gradually, over time, the sizes of the negative and sensitive lists would be pruned. The purpose is to soften the adjustment costs for vulnerable producers.

Now the implications for India. The per capita gross domestic product of the Asean nations is nearly double that of India. So, Indian producers of export products would be able to sell a lot more to these countries if import tariffs go down, compared to having FTAs with poorer countries that are members of the South Asian Association for Regional Cooperation. Unhindered access to much bigger Asean markets would allow exploitation of economies of scale and reduction in the cost of production. As tariffs come down, Indian exporters will also gain from access to world-class inputs at global prices. All these would help Indian producers to gain greater international cost competitiveness in global markets everywhere, not just only against Asean producers.

Of course, there will be more imports as well as exports. Do not forget that trade balanced at a higher level benefits all trading nations. The scope for intra-industry specialization is particularly high in today?s world. For example, with specialization in different types of auto-components, auto-component makers in most countries of FTA may be able to survive. This is what happened in the European Union. In no European country has the automobile industry suffered a major decline after the formation of the EU. Only their specialization patterns have changed. For the same reason, there has been no significant job losses for auto workers in any EU country. If this is the extent to which such intra-industry specialization takes place within the Asean and FTA, the adjustment costs for industries and workers will be less. So far, there has been no major opposition from the Indian industry to the proposed FTA.

The main area of apprehension is agriculture. India is internationally competitive in most agricultural products. At the same time, the Asean is one of the most efficient global producers of rice, palm oil, plantation crops (like coffee, tea) and spices (like pepper). At this time, India has high agricultural tariffs in the range of 70 to 100 per cent. So, if tariffs have to be reduced as a result of FTA with the Asean, Indian producers of these products would have a hard time. Moreover, many of these producers are small and marginal farmers. At a time when distressed farmers are committing suicides in many parts of India, it would be politically very difficult to reduce tariffs on such products. Therefore, it is understandable why Sonia Gandhi has voiced her concern for the farming community. Many would question the need to cut down agricultural tariffs at a time when even the World Trade Organization permits high tariffs.

There is no doubt that consumers of agricultural products would gain as a result of lower prices due to lower import duties. But the consumer?s gains are usually given much less weightage, vis-?-vis the producer?s loss in political calculations. For one, the gains to consumers take the form of small gains for a large number of people, whereas the producer?s loss is more concentrated. In addition, producers are better organized and exert more lobbying power than consumers. It is also not always possible for consumers to know whether a change in price is due to alterations in import duties or something else. The producers are usually better informed about the link between tariffs and domestic prices.

One compromise solution to the farmer?s problem is to have tariff-quotas, which would allow imports at lower tariffs, but there will be an upper limit on the amount of such imports. Countries like Japan and Korea do impose such tariff-quotas on agricultural products like rice. This contains the damage caused to domestic producers of import-competing products. Indian negotiators are trying to sell the idea of tariff-quotas on agricultural imports from the Asean, which the Asean negotiators so far are not willing to accommodate.

There are several other problem areas. Several Asean countries are pressing India for shelving its negative list. Clearly, India cannot afford to do this, given its policy of supporting farmers and small enterprises in many areas. As a result of the bargaining, the negative list has now been reduced to 850, compared to the 1,414 originally proposed by India.

At this moment, considerable difference of opinion remains among the negotiators on both sides about the exact specification of RoO in different products.

India also wants to balance tariff concessions on goods with market access to the Asean?s service sectors where India has a recognized global comparative advantage. Many Asean countries are not very keen to give India this advantage. Hopefully, most of the current disagreements will be narrowed down with many more rounds of talks.

Finally, the gains from investment. One major advantage of being a member of a big FTA is that it may attract more foreign direct investment. Investors get tempted to set up factories in a country within the bloc from which they would have unhindered access to the big regional markets. However, this benefit would come to India only if it is the cheapest (and reliable) location for producing the product or service for the entire trading bloc. Unless India makes significant improvements in its infrastructure and labour laws, there is no guarantee that more investment would automatically come to the country. One may argue here that the membership of FTA with the Asean may force the government to bring about the needed changes.

Just as investment may come in some lines, investment may also flow out of the country in some other areas. To the extent that if FDI brings in better technology and management practices, many members of the FTA may benefit at the same time through the criss-crossing of FDI flows. Given the current trend of Indian producers going in for takeovers of companies in other countries, we may see more Indian presence in the industrial scene of other Asean countries, just as there will be more Asian companies in India.

Strategically, India cannot afford to be left behind by not signing an FTA with the Asean, given that China and Korea are in the process of doing so. India has been trying hard, so far unsuccessfully, to be a member of some major Asian trading bloc. Now that the opportunity has finally come, India has to grab it. Otherwise it would miss the bus on the proposed Asian economic community (along the lines of EU), which has the aim of eventually having a single Asian currency.

In this context, an analogy may help us comprehend the importance of the proposal. It would be easier for Indian players to improve performance and prepare for global competition by first participating in the Asian Games before going for the Olympics.