State Planning BoardOccasional Paper 2010 01

ASEAN-INDIA FREE TRADE AREANoises of Dissent from Deep SouthK N Harilal

ASEAN-INDIA FREE TRADE AREA

Noises of Dissent from Deep South

K N Harilal

Kerala State Planning BoardThiruvananthapuram

ASEAN-INDIA FREE TRADE AREA

Noises of Dissent from Deep South

Author Dr. K N Harilal

MemberKerala State Planning BoardThiruvananthapuramEmail: harilal@cds.ac.in

Publication Occasional Paper No. 2010:01

Published by Member SecretaryKerala State Planning BoardThiruvananthapuram

Disclaimer The views, analyses and conclusions included in this papermay not necessarily reflect the views or the position of theKerala State Planning Board or the Government of Kerala.

February, 2010

ii

Foreword

he discussion on the implications of the Indo-ASEAN Free TradeAgreement for Kerala’s economy needs to shift from immediateresponses to scholarly arguments. The following study by

Dr.K.N.Harilal, member of the Kerala State Planning Board and AssociateFellow at the Centre for Development Studies, Trivandrum, is perhaps thefirst attempt at effecting such a shift. It is a careful examination, based onsignificant research work, of the FTA and its implications for the state.

There are three aspects in particular of Dr.Harilal’s work which are striking.The first is the line of his argumentation. The debate over the FTA till nowhas focused on the following question: suppose we assume the base pre-tariff prices to continue and the base exchange rates, then does the loweringof tariffs for a whole range of commodities, which the FTA entails, affect theproducers of Kerala? And if so, to what extent? This however is not the issueof Dr.Harilal’s concern. His main argument instead is that the FTA wouldprevent any help to the farmers in the event of a crisis and that such crises,for no fault of the farmers, are common for tropical agriculture. Hisargument in short is based on the ubiquity of crises that hit farmers insteadof focusing on what would happen to them in non-crisis situations, which iscertainly a fruitful and novel way of examining the issue.

Secondly, in basing his argument on the ubiquity of crises, he explicitlyinvokes the link between financial and agrarian crises. The East Asianfinancial crisis of the late nineties for instance, had an impact on Keralafarmers via the exchange rate movements it engendered. And since suchfinancial crises, and associated exchange rate variations, occur frequently inthe current epoch, dominated by speculative financial flows across theworld, for a government to have its hands tied by a Free Trade Agreementthat lays down extraordinarily low peak tariffs, which are far below even the“bound rates” under the WTO, is tantamount to a dereliction of its dutytowards petty producers.

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Thirdly, Dr.Harilal rightly rejects the “productivity argument”, oftenadvanced by the defenders of the FTA, which states that the real solution tothe problem of the primary producers lies not in curtailing free trade but inraising productivity, so that they can compete effectively internationally.This argument is a non sequitur because, first, productivity increases arebest achieved not when the producers are in distress (such as will be causedby the FTA) but when they are comfortably placed and have an incentive toundertake the investment necessary for such increases; and secondly,livelihood considerations must take priority over productivityconsiderations.

The conflict between “efficiency” and “livelihood” does not arise intraditional trade theory, upon which the argument for free trade and hencethe rationale for FTAs is based, because traditional trade theory assumes fullemployment. It assumes in other words that those displaced by competitionin one sphere invariably find employment in some other sphere; it is amatter merely of reordering resources which, other than transitionallyperhaps, causes no distress to anyone. But full employment is an absurdassumption to make in the context of a capitalist economy, especially anunderdeveloped one like ours. Those displaced by the imposition of freetrade in such an economy, such as the victims of “deindustrialization” in thecolonial period, simply join the ranks of the reserve army of labour as part ofa vast pauperized mass. In such circumstances preserving people’slivelihood becomes far more important that any supposed “benefits” thatfree trade would bring.

Many may express skepticism over Dr.Harilal’s argument for commodityagreements between tropical producing countries, as opposed to FTAsinvolving these countries. Commodity agreements work best when marketshares have got somewhat stabilized, and these stable shares are thenincorporated in to the agreement. But when say a country like Vietnam ismaking a big thrust to expand its market share, it may be unwilling to acceptany commodity agreement. In short, commodity agreements may face thesame problems, arising from the intensity of competition among tropicalproducers, whose existence makes FTAs unacceptable. But no matter whatposition one takes over Dr.Harilal’s suggestions, his study is quite invaluableas a serious and scholarly contribution to the on-going debate.

Prabhat PatnaikVice Chairman,

Kerala State Planning Board

iv

Preface

outh India and South East Asia have many common features. Kerala inparticular share many features of the South East Asian Nations. This isespecially true of the agricultural sector. Agro-climatic conditions and

the cropping pattern are almost the same in the two regions. As such India-ASEAN Free Trade Area Agreement would have major implications for theeconomy of the state. The present study by Dr. K N Harilal, Member, StatePlanning Board is an attempt to asses the likely impact of the new FTA onthe economy of Kerala. Its insights therefore would be of immense value tothe policy makers. In fact, there is an attempt in the study to chalk out anagenda for policy and action. Dr. K N Harilal deserves special appreciationfor having taken pains to conduct such a scholarly and exhaustive study on asubject which is being discussed and debated widely. His attempt seems tobe appropriate and timely.

I hope that the observations on the possible effects of the FTA and the policyrecommendations that follow would provoke more debates, research as wellas policy responses.

Teeka Ram MeenaMember Secretary

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Acknowledgements

he author gratefully acknowledges: Professor Prabhat Patnaik (ViceChairman, Kerala State Planning Board) for writing the ‘Foreword’;Teeka Ram Meena (Member Secretary, State Planning Board) for

writing the ‘Preface’ and M. Rajesh for the Cover Design and excellentresearch assistance. He also wishes to thank all those who have offeredvaluable comments and suggestions on an earlier version of this paperpublished in Mathrubhumi weekly (Spetember 20, 27, October 4, 11,November 15, 2009).

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Contents

Forew0rd ii

Preface iv

Acknowledgements v

Introduction 01

Section I: The Trade in Goods Agreement 05

AIFTA Rules of Origin 15

Section II: Transition Arrangements and Kerala 20

Section III: The Case for Regulating Trade Reiterated 34

Are the rates not high enough? 39

Safeguard norms 42

Productivity argument 45

Getting Lost in Value Chains 49

Forfeiting the Livelihood Case 53

Section IV: Towards an Agenda of Policy and Action 55

References 68

Appendix – AIFTA: Trade in Goods Agreement 71

vii

Tables

1. Proportion of Tariff Lines under Different Categories 07

2. Tariff Reduction Schedule for Special Products 09

3. Average Tariff Rates of Members according to AIFTA-Commitments 13

4. Annual Rate of Tariff Reduction according to AIFTA Commitments 14

5. Specific Duty Items of AIFTA Members 15

6. Rules of Origin of PTAs Involving India 18

7. Area and Productivity of Principal Crops in Kerala 22

8. India and Asean: Trends in Production of Major Crops 23

9. Minimum Support Price for Copra and PricesRealised in Kochi Market 27

10. Rubber based products under Exclusive andHighly Sensitive Lists in Malaysia 28

11. Exclusive and Highly Sensitive fish products in Indonesia 32

12. Base Rates Tariff Lines in the Exclusion List – INDIA 40

13. Price Variability: Rubber and Coffee 41

14. India and Asean: A comparison of Productivity of Major Crops 47

ASEAN-INDIA FREE TRADE AREA

Noises of Dissent from Deep South

n 13th August 2009 the minister of commerce and industry of the

Republic of India and the ASEAN economic ministers met in Bangkok,

Thailand and signed the ASEAN-India Trade in Goods Agreement (TIGA).

The TIGA is supposed to be a major step ahead in the ongoing programme for

establishing a full-fledged free trade area between ASEAN and India (AIFTA).

The AIFTA region accounts for about 1.7 billion people and a combined gross

domestic product of approximately U.S. $ 2.75 trillion as of 2008. For India

undoubtedly this is the biggest Preferential Trading Agreement (PTA)

initiative in its post independence history. In spite of its huge importance for

the region, especially for the Indian economy, the event of signing the TIGA

did not receive much media attention in the country. In fact, till the last

moment hardly anybody in the country except the Prime Minister and his

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2

cabinet colleagues and perhaps some senior officials of the commerce ministry

knew that it was going to be signed on the 13th. Even the high powered

delegations from Kerala led by the Chief Minister and the Opposition Leader

who met the Prime Minister a week before the signing ceremony were not told

anything about the possible dates of signing of the TIGA. It was as if the

government wanted it to be a hush-hush affair. But, it cannot be blamed for

the apparent lack of interest of the media, which persisted even after the

signing ceremony and the release of the texts of the agreement and the tariff

schedules. It could very well be interpreted as a sign of approval and

consensus at the national level, at the least among those who are fortunate

enough to be sufficiently visible and audible. Notwithstanding minor

differences over details all major national parties except the Left, appear to

welcome the AIFTA package including the TIGA. It is more or less the case of

major industry and trade associations as well.

But consensus eludes TIGA when it comes to the South Indian States,

particularly Kerala that shares similar geographical and agro-climatic

conditions as the South East Asian Nations. Almost every political party in the

State, except the Indian National Congress have expressed concerns and

differences. The regional media has been much more sensitive to the issues

involved than its national counterpart. Industry and trade associations in the

region are quite apprehensive about the possible outcome. The fisheries sector

in the state is already up in arms. On October 2nd the state witnessed a massive

show of protest by nearly 30 lakh people when they formed a human chain

extending over 800 kilometers between Kasargod and Thiruvananthapuram.

The protests do not appear to be dying down. In fact, peasant organizations in

the state are preparing for a long drawn out struggle against the agreement

demanding ameliorative measures. The present paper is an attempt to

decipher the voices of dissent from the South.

The southern dissent against AIFTA however cannot be seen in isolation.

What the AIFTA represents for India is a larger movement towards ‘barrier

free borders’! As we shall see subsequently, India appears to have played the

lead role in the AIFTA negotiations by offering to cut its tariffs deeper and

faster than what the ASEAN countries had offered to do in return. The

message that India wanted to convey through the TIGA is unmistakable; we

are a nation in haste to prove our free trade credentials! Indeed the country

is in a hurry to liberalise all its border measures on imports as well as

3

exports, not only vis-à-vis ASEAN countries but also with other trading

partners. It is the image that India wanted to strike by playing the main

facilitator’s role in reviving the Doha negotiations. It is the image that India

seeks to create and live up to by passionately pursuing FTA negotiations

with a host of other countries and country groupings. In this background,

the southern dissent can be broadly classified into two types. The first type

of dissent is related to the transition arrangements. It contests the official

claim that the TIGA has sufficient provisions for ensuring smooth transition

to free trade between India and the ASEAN- 10 nations. According to those

who raise the voice of dissent from the south the transition arrangements

are particularly inadequate in the case of many products originating in south

India, especially the tropical commodities. The second type of dissent is

more fundamental in nature in so far as it questions the very philosophy of

unregulated trade among nations that runs the present wave of reforms. The

protestors of the second type will not join the official position that portray

free trade as the best policy option for all products, sectors, and seasons.

They demand state intervention and regulation of trade. They dissent the

moves that forfeit the sovereign rights of the nation to regulate trade even

during emergencies and that too forever1.

Even though the immediate focus of the present study is South India, the

issues that we take up for discussion are quite relevant in the larger context

of the Global South. Thus viewed the term ‘Deep South’ in the title of the

present study is used in double sense. It has two related but different

meanings. First refers to the geographical region of South India. Second

meaning is related to the idea of Global South. In fact, the problems that we

raise in the paper in the context of South India, such as short-run

fluctuations and long term movements in relative prices of primary

commodities, are among the core trade and development issues of the South

in general. As we try to argue in the present study PTAs formed among

Southern countries, which are getting formed among all kinds of groupings

of developing countries, notwithstanding their other possible beneficial

effects, are likely to worsen the well-known primary commodity problems.

Resolution of the primary commodity problems typically requires regulation

1 The arguments against free trade and for regulation are many. The present studyfocuses on a narrow subset of such arguments for regulation that are particularlysuited for addressing trade problems specific to commodities. We do not howeverrule out other widely acknowledged arguments against unregulated trade.

4

both within nations as well as internationally. But, the PTAs among

developing countries tend to undo regulation and heighten competition

among primary commodity producers.

The PTAs among developing countries, such as the AIFTA, has implications

for the ongoing Doha Round negotiations of the WTO as well. As we argue in

the present study they might undermine many long held demands and

postures of developing countries in multilateral negotiations. The paper is

organized in four Sections. In Section I we present the salient features of the

TIGA and compare India’s commitments vis-à-vis those of other AIFTA

members. In Section II we analyse the transition arrangements, especially

from the point of view of some important south Indian commodities. In

Section III our focus is on the arguments that reject free trade as the first

best policy option and demand state intervention and regulation of trade. In

Section IV we put together an agenda for policy and action.

5

SECTION I

The Trade in Goods Agreement

he AIFTA TIGA is a typical WTO compliant free trade area agreement.

Even though, non-discrimination is the founding principle of the WTO

regime it allows for discriminatory arrangements such as free trade areas

and customs unions under Article XXIV of the GATT 1994. The Article XXIV

provision for the FTAs, however, is subject to stringent conditions set to

discourage misuse of the provision for perpetrating discriminatory trade

policies. It insists on well laid out road maps and early completion of the

process of formation of the FTA. As a perusal of the TIGA suggests it is likely

to more than fulfill the requirements of the global regime that too well ahead

of the stipulated time limits. By all means it is the most ambitious

preferential trading arrangements that India had hitherto entered into.

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6

The schedule of tariff reduction commitments undertaken by the AIFTA

members varies significantly among them. In fact, India’s commitments to

the Philippines are quite different from her commitments to the rest of the

ASEAN countries2. Similarly, each ASEAN member has a separate tariff

reduction schedule vis-à-vis India. In spite of the variability among the tariff

schedules they share certain common features as outlined in Article 4 and

Annex 1 of the TIGA. The tariff lines are divided into four broad categories,

viz., Normal Track, Sensitive Track, Special Products, Highly Sensitive Lists

and Exclusion List according to the intensity of tariff reduction or

elimination commitments.

In the case of tariff lines included in the Exclusion List AIFTA members are

allowed to retain their base rates, i.e., the MFN applied rates as of 1 July

2007. In other words there is no commitment regarding tariff reduction.

However, there is a general commitment, keeping in line with Article XXIV

of GATT 1994, to review the exclusion list every year with a view to improve

market access. Obviously, there will be pressure to reduce the number of

tariff lines kept in the exclusion list, and of course; it would be extremely

difficult to push in any new product line into this privileged list, which gets

maximum transition benefits. Interestingly, as Table 1 indicates the

proportion of tariff lines kept in the exclusion list vary considerably among

countries. While India keeps around 10.7 per cent of her tariff lines in the

exclusion list, Vietnam, which ranks first among the AIFTA members in this

respect, keeps nearly 18.3 per cent of the tariff lines under this category. On

the whole, i.e., when all the AIFTA schedules of commitments are put

together around 10 per cent of the tariff lines would be there in the exclusion

list. It follows from the above that nearly 90 per cent of the tariff lines are

subject to reduction commitments.

2 In the present study India’s tariff schedule in the AIFTA context means theschedule which is applicable to ASEAN-5+ CLMV. India’s tariff schedule applicableto Philippines is not taken into our calculations.

7

Table 1. Proportion of Tariff Lines under Different Categories

CategoriesCountry EL NT-1 NT-2 SP ST HSL – A HSL – B HSL - C TotalIndia 10.7 63.9 10.3 0.3 14.8 Nil Nil Nil 100.0Brunei 12.8 68.6 11.3 Nil 7.4 Nil Nil Nil 100.0Cambodia 2.0 80.4 4.1 Nil 13.2 0.2 Nil Nil 100.0Indonesia 7.6 41.8 4.7 Nil 39.5 Nil 0.1 6.3 100.0Lao PDR 2.8 69.5 8.6 Nil 19.2 Nil Nil Nil 100.0Malaysia 9.9 59.2 14.6 Nil 15.1 Nil 0.3 0.9 100.0Myanmar 14.1 64.4 7.5 Nil 14.0 Nil Nil Nil 100.0Philippines 13.0 58.9 17.0 Nil 6.8 Nil Nil 4.4 100.0Vietnam 18.3 60.3 8.9 Nil 7.0 0.4 1.2 4.0 100.0Thailand 12.2 67.0 8.9 Nil 11.7 0.2 Nil Nil 100.0

Note: EL refers to Exclusion List; NT-1 and 2 to Normal Track 1 and 2; SP to SpecialProducts; and HSL – A, B and C to Highly Sensitive Lists A, B and C;

Singapore is not included in the analysis for it follows near perfect free trade policies.

Source: Schedule of Tariff Commitments, Association of Southeast Asian Nations, 2009

Before considering reduction commitments under different Tracks and Lists

it is important to make some observations regarding the base rates from

which the tariff cuts are to be effected. The base rates of the TIGA are the

applied rates as of 1 July 2007, except for products identified as Special

Products. It is a major difference from the WTO negotiations because as is

well known in the WTO system the reference rates for tariff negotiations

have always been the bound rates. Implications of taking applied rates as

base rates are quite far-reaching for product lines and countries where there

is considerable difference between bound and applied rates. Notably, India

is one country where the two rates differ quite widely, especially in the case

of agricultural products. In WTO negotiations because of high bound rates

even drastic commitments for reduction did not have much direct impact on

the applied rates of agricultural products and hence on trade flows. Whereas

in the AIFTA negotiations, since the base rates are the applied rates, the

resultant reduction commitments would have immediate direct impact on

the applied rates. As we shall confirm subsequently there will be immediate

8

and steep reduction in the applied rates right from the very launch of the

FTA on 1 January 2010.

Further, even though tariff reduction under the AIFTA are effected on the

applied rates and not on the bound ones the resultant reduced rates would

turn out as the upper limits of the relevant lines! In effect they will be the

‘bound rates’ in the new FTA. Obviously what it entails is drastic cuts in the

upper limits to which tariffs can be raised in the case of most products. It is

true that the AIFTA members including India are free to raise their MFN

rates (applicable to goods originating outside the AIFTA) to the WTO bound

levels. But, it will not be of much consequence in the case of products in

which AIFTA producers are significant suppliers in the international market.

Viewed in this sense there is a major element of implicit tariff reduction

even in the case of the Exclusion list. Admittedly, in the case of tariff lines

included in the Exclusion list there is no reduction commitment vis-à-vis the

base rates, i.e., applied rates as on 1 July 2007. But, conspicuously, these

base rates, which are going to be the upper limits to which tariffs can be

raised in the AIFTA regime, are much lower than their corresponding WTO

bound rates. Therefore, the Exclusion List also represents an implicit tariff

cut as far as their upper limits are concerned. We shall examine the

implications of the scaling down of upper limits of import duties later.

Next in the order according to the degree of protection granted during the

transition period is the Highly Sensitive Lists. Here the member countries

are bound to reduce tariffs but not as steeply as in the cases of Normal or

Sensitive Tracks. Annex 1 of the TIGA specifies three different Highly

Sensitive Lists. Category A requires members to reduce applied MFN rates

to 50 per cent. In Category B reduction of applied MFN rates should be by

50 per cent. In Category C what is stipulated is reduction of MFN rates by 25

per cent. Obviously category C is the most attractive one among the Highly

Sensitive Lists in terms of protection given during the transition period. The

proportion of tariff lines kept under the Highly Sensitive Lists also vary

significantly among members. Surprisingly, India does not keep any tariff

line under these Lists! Indonesia has nearly 6.4 per cent of the tariff lines

kept under the HSL. Interestingly out of this 6.4 per cent 6.3 per cent

belongs to the HSL Category C. Malaysia (1.2 %), Philippines (4.4 %),

Vietnam (5.6 %) and Cambodia (0.2 %) are the other members using the

HSL facility.

9

There is an element of mystery around the category of Special Products,

which comes next in the order of protection allowable during transition.

Surprisingly, the Special Products appear only in India’s schedule of

commitments. Tariff schedules of other AIFTA members do not mention of

any Special Product. Even in India’s case Special Products constitute only

around 0.3 per cent of the tariff lines. It appears as if an exclusive group

specially designed for the five product groups declared as Special Products,

viz., crude and refined palm oil, coffee, black tea and pepper. None of the

AIFTA members except India designate them as Special Products. Further,

there is hardly any uniformity in the reduction commitments among these

five product groups. Therefore, instead of specifying a common pattern, the

Annex 1 of the TIGA gives separate schedules of reduction for each Special

Product, which are applicable paradoxically only for India (see Table 2).

Given the base rates in Table 2, the reduction commitments specified for the

Special Products are much steeper as compared to different categories

included under the Highly Sensitive Lists.

Table 2. Tariff Reduction Schedule for Special Products

- not later than 1st January -Tariff Line Base Rate 2010 2013 2016 2019 31.12.2019

Crude Palm Oil 80 76 64 52 40 37.5Refined Palm Oil 90 86 74 62 50 45Coffee 100 95 80 65 50 45Black Tea 100 95 80 65 50 45Pepper 70 68 62 56 51 50

Note: The original table gives rates for all the years between 2010 and 2019Source: Agreement on Trade in Goods under the Framework Agreement onComprehensive Economic Cooperation between the Republic of India and theAssociation of Southeast Asian Nations.

The categories left, viz., the Sensitive Track and the Normal Track represent

tariff lines earmarked for drastic cuts. As Table 1 shows, in India’s case they

together constitute around 89 per cent of the tariff lines. In most AIFTA

members they together account for more than 85 per cent of the tariff lines.

In the case of the Sensitive Track the base rates will have to be brought down

to 5 per cent by 31 December 2016. Notably, Cambodia, Lao PDR, Myanmar,

and Viet Nam are granted five more years to achieve the target of 5 per cent.

Given the logic of the AIFTA system for the Sensitive Track products the

10

stipulated 5 per cent will be the limit to which tariff can be raised in the

future.

The real drama of steep reduction in tariffs is to be seen in the case of the

Normal Track, which is divided into Normal Track 1 and 2. In Normal Track

1 for India, Brunei, Indonesia, Malaysia, Singapore, and Thailand the

reduction process will commence on 1 January 2010 and complete

elimination would be achieved by 31 December 2013. Philippines,

Cambodia, Lao PDR, Myanmar, and Viet Nam would be given a grace period

up to 31 December 2018 for completely eliminating the tariffs. As Table 1

reveals about 64 per cent of India’s tariff lines are under Normal Track 1. In

about four years tariffs would be completely eliminated against these

product lines. Further, given the logic of the AIFTA system, zero will be

India’s upper limit or ‘bound rate’ in all these tariff lines! In Normal Track 2

the elimination process is little more drawn out. Complete elimination

would be achieved before 31 December 2016 for Brunei, Indonesia,

Malaysia, Singapore, Thailand and India. But, Cambodia, Lao PDR,

Myanmar, and Viet Nam can wait till 31 December 2021 for achieving

complete elimination. Around 10.3 per cent of India’s tariff lines belong to

the Normal Track 2.

Is India offering too much for getting too little in return? Let us explain as to

why we think India has given more if not too much for what she has been

offered by the rest of the AIFTA membership. The impact of the TIGA on

India’s tariff structure can be graphically depicted as shown in Figure 1.

What the Graph plots is India’s average tariffs vis-à-vis ASEAN countries

except the Philippines. The tariff worm takes a noose dive on the day of

inception and reaches near ground level in the initial three to four years

itself. From the average base rate of around 12.9 per cent it gets reduced to

just 1.7 per cent by 1 January 2014 and further to 1 per cent by 1 January

2017.

11

Fig 1. Average Rate of Tariff of India in AIFTA

Note: India’s tariffs to Philippines are not taken into account

Graphs plotting average tariffs of AIFTA countries against India give a more

flat appearance. This is clear from Tables 3 and 4, which present data on

average tariff and the rates of reduction in the average rates. Obviously,

India is ahead of other AIFTA members in pace as well as depth of tariff

cuts. The relatively steeper cuts in India’s tariffs may be justified by giving

the reason that her base rates were higher. But, notably within four years

India’s average rates against ASEAN countries would be lower than the

average rates charged against India by the ASEAN nations, except Brunei

and Singapore!

It should be admitted here that our calculation regarding India’s reduction

commitments is at best an under estimate. In the context of WTO

negotiations tariff cuts undertaken by different countries are compared with

reference to bound rates. If we compare the reduction commitments of the

AIFTA members with reference to the MFN bound rates, as opposed to the

base rates, the reduction commitments of India would appear much more

sharper than the method we have used.

The reasons for the difference in the pattern of tariff reduction may be

obvious from the foregoing discussion, which may be summarized here. New

members of the ASEAN, viz., Cambodia, Lao PDR, Myanmar, and Viet Nam

are given a grace period of five years in reduction commitments in Normal

as well as Sensitive Tracks. But India’s reductions will be readily applicable

to the new members as well. The Philippines is also given four to five years

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extra time, but India is free to follow the Philippines pattern in her tariff

policy vis-à-vis imports from that nation. Further, as Table 1 shows Viet

Nam, the Philippines, Myanmar, and Lao PDR are allowed to keep higher

proportion of the tariff lines in categories other than the Normal Track. The

older group of ASEAN counties also place more tariff lines in categories

other than the Normal Track to moderate the depth of the tariff cuts.

Indonesia for instance keeps 39.5 per cent of her tariff lines in the Sensitive

Track. Even the distribution of tariff lines between Normal Track 1 and 2

have a bearing on the aggregate average rate at which the tariffs are cut.

13

Table 3. Average Tariff Rates of Members according to AIFTA-Commitments

Average Tariff RateYear India Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Vietnam Thailand

Base Rate 2007 MFN 12.9 4.3 14.3 7.7 10.1 8.9 5.8 6.9 12.6 11.61st Jan 2010 8.0 2.7 14.3 8.7 8.4 5.9 5.3 5.4 11.6 8.01st Jan 2011 6.5 2.3 12.7 8.2 8.2 5.0 5.0 5.2 10.9 6.61st Jan 2012 5.0 1.9 12.2 7.5 7.7 4.2 4.8 4.9 10.2 5.11st Jan 2013 3.7 1.4 10.7 6.9 6.9 3.5 4.4 4.7 9.3 3.331st Dec 2013 2.0 1.1 N.A 6.9 N.A 3.2 N.A N.A N.A 2.51st Jan 2014 1.7 0.9 10.2 6.4 6.2 2.6 4.2 4.1 8.3 2.11st Jan 2015 1.5 0.7 8.7 6.1 5.9 2.1 3.8 3.9 7.7 1.71st Jan 2016 1.2 0.6 8.2 5.6 4.6 1.6 3.5 3.3 6.8 1.231st Dec 2016 1.1 0.3 N.A 5.3 N.A 1.0 N.A N.A N.A 0.71st Jan 2017 1.0 0.3 7.1 5.2 4.4 1.0 3.2 3.0 6.3 0.71st Jan 2018 1.0 0.3 5.5 5.1 3.4 1.0 2.7 2.8 5.1 0.731st Dec 2018 N.A N.A 1.9 N.A 2.5 N.A 1.2 2.1 2.8 N.A1st Jan 2019 1.0 0.3 1.6 5.1 2.1 1.0 1.2 1.9 N.A 0.731st Dec 2019 1.0 0.3 N.A 4.7 N.A 1.0 N.A 1.1 N.A 0.71st Jan 2020 N.A N.A 1.5 4.7 1.8 N.A 1.1 1.1 2.6 N.A1st Jan 2021 N.A N.A 1.3 4.7 1.5 N.A 1.1 1.1 2.5 N.A31st Dec 2021 N.A N.A 0.7 N.A 1.0 N.A 0.5 N.A 1.6 N.A

Note: N.A refers to Not Available; Specific duty items are excluded for calculating averageSource: Estimated from Tariff Schedules of AIFTA members, 2009

14

Table 4. Annual Rate of Tariff Reduction according to AIFTA Commitments

Rate of Tariff ReductionYear India Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Vietnam Thailand

Base Rate 2007 MFN 12.9 4.3 14.3 7.7 10.1 8.9 5.8 6.9 12.6 11.61st Jan 2010 -38.0 -37.4 0.0 13.0 -16.8 -33.7 -8.6 -21.7 -7.9 -31.01st Jan 2011 -18.8 -14.4 -11.2 -5.7 -2.4 -15.3 -5.7 -3.7 -6.0 -17.51st Jan 2012 -23.1 -17.2 -3.9 -8.5 -6.1 -16.0 -4.0 -5.8 -6.4 -22.71st Jan 2013 -26.0 -25.0 -12.3 -8.0 -10.4 -16.7 -8.3 -4.1 -8.8 -35.331st Dec 2013 -45.9 -22.9 N.A 0.0 N.A -8.6 N.A N.A N.A -24.21st Jan 2014 -15.0 -20.7 -4.7 -7.2 -10.1 -18.8 -4.5 -12.8 -10.8 -16.01st Jan 2015 -11.8 -19.3 -14.7 -4.7 -4.8 -19.2 -9.5 -4.9 -7.2 -19.01st Jan 2016 -20.0 -22.5 -5.7 -8.2 -22.0 -23.8 -7.9 -15.4 -11.7 -29.431st Dec 2016 -8.3 -43.6 N.A -5.4 N.A -37.5 N.A N.A N.A -41.71st Jan 2017 -9.1 0.0 -13.4 -1.9 -4.3 0.0 -8.6 -9.1 -7.4 0.01st Jan 2018 0.0 0.0 -22.5 -1.9 -22.7 0.0 -15.6 -6.7 -19.1 0.031st Dec 2018 N.A N.A -65.5 N.A -26.5 N.A -55.6 -25.0 -45.1 N.A1st Jan 2019 0.0 0.0 -15.8 0.0 -16.0 0.0 0.0 -9.5 N.A 0.031st Dec 2019 0.0 N.A -7.8 N.A 0.0 N.A -42.1 N.A 0.01st Jan 2020 N.A N.A -6.3 0.0 -14.3 N.A -8.3 0.0 -7.1 N.A1st Jan 2021 N.A N.A -13.3 0.0 -16.7 N.A 0.0 0.0 -3.9 N.A31st Dec 2021 N.A N.A -46.2 N.A -33.3 N.A -54.5 N.A -36.0 N.ANote: N.A refers to Not Available; Specific duty items are not included.Source: Estimated from Tariff Schedules of AIFTA members

15

Another important point that should not be lost sight of is the use of specific

duties for protecting domestic production. Brunei (114 tariff lines), Thailand

(104) and Malaysia (93) are the major users of specific duties in the new

AIFTA club (See Table 5). Needless to say that specific duties lack

transparency and hence are less amenable to informed negotiations. They

are more restrictive than what they appear to be especially when the prices

keep low. In fact, the ASEAN countries, since they have started reducing

tariffs on intra-ASEAN trade as well as on MFN trade much earlier, are

known to be adept in using less transparent new protectionist tools for

commercial policy purposes. Apparently India- ASEAN negotiations appear

to have failed in addressing the use of such gray area measures for

commercial policy purposes.

Table 5. Specific Duty Items of AIFTA Members

Country No. of specific duty lines Total no.of linesIndia 11 12169Brunei 114 9759Cambodia 10 7893Indonesia 17 8207Lao PDR 15 7756Malaysia 93 9594Myanmar 1 9954Philippines 0 8415Vietnam 0 9983Thailand 104 7608

Note: Total number of lines includes all tariff lines- were tariff policies are reportedSource: AIFTA Tariff Schedules of members, 2009

AIFTA Rules of Origin

The impact of a FTA cannot be assessed without analysing its Rules of Origin

(RoO). The question of country of origin of commodities has become

complex in recent years, as globalisation of production process has resulted

in most industrial goods incorporating inputs from a wide variety of

countries or the goods being actually processed in different countries. It

16

becomes therefore important to have well laid out RoO to identify the

country of origin of the product. Preferential trading arrangements, whether

FTAs or customs unions, put RoO in place mainly to limit tariff preferences

to the members and prevent third parties benefiting from such concessions.

In FTAs they assume more importance on account of the need to prevent

trade deflection. The FTAs do not maintain common external tariffs. In its

place the FTA members maintain their own external tariffs. Hence, tariffs

may differ between member countries. In this setting, in the absence of RoO

any particular commodity can enter through the country with the lowest

duty on the item in question and get re-exported to other countries in the

FTA (Krishna and Krueger 1995). This is trade deflection. RoO prevent such

simple transshipment of goods by requiring products to originate in

exporting member countries.

However, if weak RoO norms were designed it would lead to trade

deflection, making protection of domestic value added by way of border

restrictions almost impossible. Member countries in the AIFTA region for

instance would be forced to forgo their autonomy in deciding the height of

border restrictions. In the long run all members will be forced to scale down

their tariffs to the level of the lowest tariff charged by any one of the member

in the FTA.

Significantly, compared to RoO of other FTAs signed by India the RoO of the

AIFTA, as defined in Annex 2 of the TIGA, appears to be the most liberal and

weak. A comparative picture of RoO of various PTAs signed by India is

given in Table 6. RoO agreements usually define origin status in terms of

three important criteria, viz., domestic value added (DVA), change in tariff

heading (CTC), and technical requirements (TECH). In addition to the three

basic criteria there could be supplementary rules as well. DVA is the amount

of value added to the finished product in the exporting member country. It is

calculated as

The FOB (Free on Board) value includes the value of packaging of export

product (other than containerisation) and excludes Cost Insurance Freight

17

(CIF) for the overseas route. The value of imported materials (non-

originating materials) will be either the CIF value at the time of importation

of the materials, or the earliest ascertainable price paid for them in the

territory of the exporting member country. Regarding domestic value added

(DVA) there is variation in the permitted amounts across the different

agreements (30% to 60%). In AIFTA the domestic value addition norm is 35

per cent. In India’s PTAs only India –Nepal Agreement has a more liberal

DVA norm. But, AIFTA norm is more liberal than what it appears because

what is specified is AIFTA content. In order to get the origin status the

minimum value addition required for the AIFTA region as a whole is just 35

per cent. In other words the 35 per cent value addition need not happen in

the originating member country but collectively in the ASEAN 10 plus India

region. In order to make the regime more liberal cumulation provisions are

also included in AIFTA RoO whereby materials from partner countries are

allowed to be used as originating inputs. Accordingly, products which

comply with origin requirements of the AIFTA ‘which are used in a party as

materials for a product which is eligible for preferential treatment under

the Agreement shall be considered as products originating in that party

where working or processing of that product has taken place’.

All the Agreements (except India-MERCOSUR PTA) include the norm of

Change in Tariff Classification (CTC) at heading level (4-digit), implying all

non-originating inputs must be of a different tariff classification at H.S. 4-

digit level than the finished product. In TIGA the change in tariff

classification required is at the sub-heading level of the Harmonised System.

Obviously it is a relatively liberal CTC norm. Appendix B of the TIGA

specifies product specific rules of origin (TECH). Notwithstanding rules

related to value added and change in tariff headings, products that satisfy

the product specific rules will be considered as originating from that party

where working or processing of the product has taken place.

There are two additional rules in all these agreements. First, the final

manufacturing process must be done in the territory of the exporting

country. Second, products should be directly consigned from the exporting

country to the importing country. Direct consignment rule requires that

goods for which preferences are requested are shipped directly to the

destination market and that if they are in transit through another country

then documentary evidence may be requested to show that the goods

18

remained under the supervision of the customs authorities of the country of

transit, did not enter the domestic market there and did not undergo

operations other than unloading and reloading.

Table 6: Rules of Origin of PTAs Involving India

PTA ROO PROVISIONS

CTC DVA TECH CumulationIndia-ASEAN FTA Yes 35% Yes YesIndia-Sri Lanka FTA Yes 35% No YesIndia-Nepal PTA Yes 30% No NoIndia-Afghanistan PTA Yes 50% No YesIndia-Thailand FTA Yes 40% Yes YesSouth Asia FTA Yes 40%3 Yes YesIndia-MERCOSUR PTA No 60% No YesIndia-Singapore CECA Yes 40% Yes YesIndia-Chile PTA Yes 40% No Yes

Note: Figures in parentheses in the cumulation-column indicates total regional value addition.

Source: From the RoO provisions in various PTA documentsavailable at the website of the Department ofCommerce of India http://commerce.nic.in/

Implementation of RoO also is a serious bone of contention amongst many

PTA partners. Improper implementation of these rules may make the RoO

regime weaker than what appears in letters. It will provide the origin-

certifying agencies with opportunities for rent-seeking activities. For

example, substantial abuse occurs in the issuance of certificates of origin.

Value addition norms require lengthy and costly audits to verify claims of

exporters requesting for preferences. This is a problem for developing

countries, which lack sophisticated accounting systems for verifying value

addition norms. Such abuse of RoO is documented in the case of copper

products from Sri Lanka under the Indo Sri Lanka FTA (Jha (2005). The

case of trade in edible oils between India and Sri Lanka is another example.

3 SAFTA RoO DVA are different for different member countries and is given inAnnex I. For India it is 40% DVA.

19

The issue of RoO enforcement, thus, takes a very important dimension as a

policy problem.

The issue of RoO administration becomes complex when countries employ

more than one set of RoO. The preferential RoO employed by a PTA member

more often than not differ from its non-preferential RoO. The RoO regime

of the country becomes further complicated when it becomes part of many

PTAs, which have different sets of RoO to determine origin of imported

products. This has been the case with AIFTA countries, including India,

where FTAs of all types are mushrooming. For Asian countries the

complexity of RoO has an important impact on the issue of trade facilitation.

Customs clearance in Asia is slow relative to that in Europe and North

America. Proliferating FTAs with differing RoO increases the problem.

Difficulties arise when the same product may have different countries of

origin for customs purposes depending upon the PTA market for which it is

destined. For example, a company in Singapore could find that its product

can enter ASEAN markets duty free, by satisfying the maximum import

content requirement of 60 per cent, but exactly the same product will not be

originating in Singapore in the context of the Singapore-Japan agreement,

as it has different origin criteria (Brenton 2003).

Among implications of a weak RoO regime we would highlight possible

adverse effects on the autonomy of commercial policy making of partner

countries. The RoO of the AIFTA are so weak so that they would constrain

large members such as India to follow the lead of more liberal and smaller

countries such as Singapore in fixing import tariffs. It can turn out to be a

major problem in the AIFTA region, where size and level of development of

countries differ drastically among the nations. Imports from rest of the

world would enter the PTA via the least tariff country. Smaller countries of

the region could turn out to be the unregulated gateways into the region,

especially into the bigger national markets such as India. They can open

floodgates of imports into the regional market in many products where they

do not have stake in the form of significant presence of import competing

production or a sizable home market to protect. Larger countries like India

will be forced to follow the model of smaller FTA members in their external

sector policy! It brings to sharp focus the question as to whether the same

set of tariffs and external sector policies would be equally good for countries

of continental size as India and small city-states like Singapore?

20

SECTION II

Transition Arrangements and Kerala

pening up of trade invariably necessitates adjustment. Many a line of

economic activity would find the going tough. Availability of cheap

imports might put pressure on their prices besides threatening to snatch a

share of the domestic market. The fall in product prices might immediately

get transferred to rates of profit, dividend, rent, wages, etc., adding pressure

on the factors of production to move out to relatively more attractive areas,

if any. On the other side of the coin, there would be many lines of activities

finding themselves to be more fortunate. All on a sudden they might find

their relative prices improving besides getting new and promising orders

from across the borders. Improvement in relative prices and opening up of

new markets might also push up factor prices tempting capital, labour and

other resources to move in. Such pressure of adjustment in the context of an

FTA is likely to be less if the production structures of the member countries

are more complementary in nature. On the contrary the pressure of

adjustment would be severe if the members have competitive economies

O

21

specializing in same set of products and sectors. In the case of AIFTA the

South Indian states, especially Kerala, are more worried because their

production structures are quite similar to those of the ASEAN countries.

This is particularly true in the case of agriculture and allied sectors and agro

based industries.

South India and South East Asia share very similar tropical agro climatic

conditions. Almost all crops grown in South India are cultivated in South

East Asia as well. They share almost the same kind of marine fisheries

resources too. Naturally, such similarities translate into industrial activities

also, especially to those that draw their raw materials from agriculture and

allied activities. Similarities become too close when Kerala economy is taken

separately for a comparative analysis. Natural rubber, coconut, tea, coffee,

Malabar spices, cashew, and tropical fish varieties such as shrimp,

crustaceans, tuna, cuttle fish, mackerel, sardines, etc., are leading areas of

Kerala’s specialization in national and international division of labour. They

are produced in the state for domestic consumption in India as well as for

export. Notably, the very same goods are among the main areas of

specialization of the South East Asian economies as well. In fact, South Asia

and South East Asia were main contestants in the international markets for

these products over many decades if not centuries. Interestingly,

competition in these product lines between South Asia and South East Asia

have been predominantly in the upstream nodes of the respective global

value chains and not so much in value added products seen at the down

stream end. It is now well established in the case of many commodity chains

that on account of intense competition in upstream nodes as against tough

entry barriers and increasing concentration in the downstream nodes an

increasing share of the total value generated in the chain accrue to the

western downstream nodes, which are more close to the consumers.

Unfortunately, the new FTAs among South and South East Asia might

further aggravate competition in the upstream nodes of the tropical

commodity chains and thus run down value realized in these countries,

especially by the farming communities. We shall return to this possible ‘race

to the bottom’ later. Here it suffices to note that Kerala’s agricultural

production structure as Tables 7 and 8 clearly bring out is not

complementary but highly competitive vis-à-vis the ASEAN countries. In

fact, the area under cultivation and production of tropical commodities have

been increasing both in Kerala as well as the ASEAN nations. In Kerala the

22

area under cash crops grew at the expense of food crops. This was promoted

as part of the national policy in India which laid a lot of emphasis on earning

as well as saving of foreign exchange. Kerala was prompted to cultivate cash

crops to earn and save foreign exchange offering in return food security

(Swaminathan 2000, Isaac and Ramkumar 2009).

Table 7. Area and Productivity of Principal Crops in Kerala

Crops Area [Ha] Productivity [Kg/Ha]1970-71 1980-81 1990-91 2006-07 1970-71 1980-81 1990-91 2006-07

Rice 874830 801699 559450 263529 1484 1587 1942 2435Pulses 39535 33859 23385 6870 354 664 707 759Pepper 117544 108073 168507 216709 213 264 278 297Ginger 12170 12662 14143 11082 1617 2530 3230 3835Turmeric 4304 3270 2669 3917 1241 1878 1919 2548Cardamom 47490 56376 66890 41362 26 52 52 207Banana 48759 49262 22099 59143 7568 6443 13355 7841Cashewnut 102713 141277 115621 70463 1122 580 888 875Tapioca 293552 244990 146493 87128 15729 16576 19134 28911Coconut 719136 651370 870022 872943 5536 4618 5239 6935Coffee 31564 57564 75057 84571 430 634 475 703Tea 37593 36164 34706 35365 1103 1402 1827 1517Rubber 179259 237800 384000 502240 439 590 800 1554

Source: Government of Kerala, Economic Review, various years

Given the competitive nature of the production structure of Kerala vis-à-vis

the ASEAN nations, and considering the fact that adjustment problems

would be more severe in such overlapping areas of production, the state,

particularly its farming community should have been given adequate

protection during the transition period. But, an analysis of the Indian tariff

schedules does not reveal any such consideration shown to the crops and

products in question. On the contrary, what it reveals is clear discrimination

against the crops and products of South India. Let us take the tariff

treatment contemplated for the transition period with respect to some of the

important crops and products for illustrating the point.

23

Table 8. India and Asean: Trends in Production of Major Crops[Thousand Tonnes]

Item Country 1961 1970 1980 1990 2000 2007India 43.2 63.6 149.8 118.1 292.0 288.0Indonesia 103.1 185.1 295.0 412.8 554.6 676.5Malaysia 2.7 3.5 10.1 7.2 39.8 40.0Philippines 32.3 49.0 125.3 134.1 107.6 97.9Thailand 0.1 0.6 9.1 71.5 80.6 55.7Viet Nam 4.1 7.3 8.4 92.0 802.5 961.2Co

ffee,

gree

n

World 4527.9 3849.6 4839.2 6071.0 7562.7 7848.9India 27.0 89.9 148.4 297.3 630.0 819.0Indonesia 693.2 802.1 1020.0 1275.3 1501.4 2755.2Malaysia 789.7 1269.4 1530.0 1291.5 928.0 1199.6Philippines 3.7 6.3 22.4 61.2 71.4 404.1Thailand 186.1 287.2 465.2 1418.0 2378.0 3024.2Viet Nam 78.1 33.0 41.0 57.9 290.8 601.7Na

tura

l rub

ber

World 2120.1 2986.3 3748.1 5225.4 7040.4 10311.8Indonesia 935.0 1300.0 3400.0 11151.8 36380.0 78000.0Malaysia 500.0 2155.0 12800.0 31000.0 56600.0 79100.0Philippines 1.0 7.7 43.8 161.0 212.0 385.0Thailand 5.5 5.5 107.4 1191.8 3343.0 6390.0

Oil p

alm fr

uit

World 13636.3 15127.9 29858.7 60902.1 120440.2 192503.2India 28.0 26.2 29.5 55.2 59.0 69.0Indonesia 13.6 17.2 36.6 69.9 69.1 74.1Malaysia 15.0 31.6 31.6 31.2 25.1 19.0Philippines 0.0 0.0 0.0 2.8 4.5 3.3Thailand 1.2 2.3 4.0 10.3 6.5 10.4Viet Nam 0.5 0.4 0.6 11.2 51.0 90.3

Pepp

er

World 71.3 102.6 178.6 287.9 313.6 423.6India 354.4 418.5 569.6 688.1 826.0 949.2Indonesia 77.1 64.2 106.2 155.9 162.6 150.2Malaysia 2.6 3.4 3.3 6.2 5.6 2.9Thailand 0.0 0.0 0.8 5.0 5.5 6.0Viet Nam 7.5 14.7 21.0 32.2 69.9 164.0

Tea

World 983.8 1286.8 1893.5 2524.2 2963.6 3902.9India 3328.0 4514.0 4250.0 7230.0 9420.0 11769.0Indonesia 5650.0 6260.0 8660.0 12120.0 15240.0 19625.0Malaysia 1220.0 1291.0 1188.0 1134.0 734.4 580.0Philippines 5023.2 5686.2 9141.0 11023.0 12994.7 14852.9Thailand 979.0 713.0 671.1 1426.3 1400.0 1721.6Viet Nam 153.4 118.5 311.3 894.4 884.8 1046.8

Coco

nuts

World 23841.3 26318.8 32247.8 42477.4 50795.4 60617.6Source: FAO Statistics, 2009

24

In the AIFTA framework the Exclusion List, which is subjected to no

reduction commitment whatsoever, is the most rigorous arrangement for

protection during the transition period. As can be seen from Table 1 India

keeps around 10.7 per cent of her tariff lines under the Exclusion List.

India’s Exclusion List is fairly exhaustive covering a wide range of sensitive

agricultural and manufactured products. It is in this context that the

exclusion of some of the key South Indian products from the highly

privileged Exclusion List becomes conspicuous and also somewhat

scandalous. If the burden of adjustment were a criterion they would have

easily qualified for a place in the exclusion list. But, instead of placing them

in the Exclusion List, black tea, coffee, pepper, crude palm oil and refined

palm oil are kept in a separate category referred to as the Special Products.

Unlike the products in the Exclusion List the Special Products are subject to

tariff reduction commitments, the details of which are presented in Table 2.

It is not as yet clear why the category ‘Special Products’ was innovated

exclusively for these five product groups. As we have already noted in India’s

tariff schedules they account for only about 0.03 per cent of the tariff lines!

Moreover, the category ‘Special Products’ appears in the tariff schedules of

no AIFTA member other than India! It is also unclear as to why these

products were not included under the Highly Sensitive Lists. In the Highly

Sensitive List-C the reduction commitments are not as severe as in the list of

Special Products. In fact, India does not put any product in the Highly

Sensitive Lists. May be it is the price that India had to pay for getting the

ASEAN countries agree to the AIFTA arrangement. They might have been

adamantly against allowing these products to be included either in the

Exclusion list or the Highly Sensitive Lists. Arguably, such a price may be

justified in terms of the logic of ‘micro pains for macro gains’. But, how is

the nation going to compensate the people and the regions suffering the

‘micro pains for macro gains’?

The introduction of palm oil varieties as Special Products deserves special

mention here. Palm oil is a close substitute of coconut oil. As such reduction

in tariffs facing import of palm oil would have direct implications for the

coconut economy of India. The coconut economy of the country is now

facing one of the worst crises in its recent history on account of very low

applied rates of import duties on palm oil (7 per cent for refined oil and nil

for the raw variety) and its subsidized provision through the public

distribution system. An idea on the crisis engulfing the coconut economy

25

may be gathered from Table 9, which present data on different sets of prices

of milling copra. Even the maximum price received was way below the

minimum support price declared by the government of India.

Strange as it may sound, the subsidy given for palm oil in the public

distribution system is not available to the coconut oil. Even though, coconut

products are placed in the Exclusion List the advantage of it is completely

lost on account of the special treatment given to the palm oil.

Another major tropical product, which has been gaining in importance over

time in terms of area under cultivation, growth in production as well as

productivity, is natural rubber. Fortunately, important items under the

natural rubber group such as smoked sheets (HS 4001.21) and technically

specified natural rubber (HS 4001.22) are in the Exclusion List. But, the

base rates quoted for them are as low as 20 per cent. Import duty cannot be

raised beyond the upper limit of 20 per cent even when the prices fall

drastically on account of real or potential threat of import surges. In our

opinion the upper limit for import taxation suggested in the case of natural

rubber and Special Products are grossly inadequate to meet the challenge of

frequently shifting fortunes of such tropical products in the international

markets. We shall take up the question of low upper cap of import duties in

some detail later.

The policy position on rubber related tariff lines leaves much to be desired

and raises many questions regarding the quality of homework that had gone

into the negotiating process. Out of 174 eight-digit tariff lines related to

rubber only 12 lines are put under the Exclusion List. While 78 lines are

under Normal Track-1, 14 lines belong to Normal Track-2 and 70 to the

Sensitive Track. Synthetic rubber and reclaimed rubber are seen under the

Normal Track. What is surprising however is the treatment meted out to the

rubber based industries. Majority of the rubber based industrial products

are under the Normal Track where the tariffs will be witnessing deep cuts in

the initial years itself. The story as we have already seen will not be

significantly different even in the case of products put under the Sensitive

Track. The poverty of thought behind the Indian strategy becomes vivid in a

comparison with Malaysia. As is clear from Table 10 the Malaysian strategy

is to boost rubber based industries by granting very high effective rate of

protection to value addition in the rubber chain. Notably, the nominal rates

could be quite deceptive as far as the effective rate of protection is

26

concerned. The very low rates charged at the raw material level and the

relatively higher rates for the final products would mean disproportionately

high effective rates of protection at the level of final products in Malaysia.

Malaysia has a well thought out strategy to use the provision of Exclusive

List (EL) and Highly Sensitive List (HSL) to protect rubber based industries

in that country. In contrast the Indian strategy as column 7 of Table 10 show

is one of granting negative protection to the processing activities. It should

be underlined here that it was the presence of a sizable and growing

domestic market for natural rubber, derived from the growth of the rubber

based industries in the country, that helped the rubber economy of the

nation achieve all its past gains. The present policy, which tend to expose the

rubber based industries to unfair international competition, especially from

countries like Malaysia, which give higher effective protection for domestic

value addition, would reverse the policy advantage that the sector in India

used to enjoy.

27

Give Table 9 Minimum Support Price for Copra and Prices Realised in Kochi Market

Milling CopraMaximum Price of the

year Minimum Price of the Year

SeasonMSP requestedfor by Govt. of

KeralaMSP recommended

by the CACPMSP declared

by Govt. ofIndia

YearlyAverage

Month Price Month Price

1996 3700 NR 2500 3007 Dec 4130 May 25331997 3800 2700 2700 3572 Jan 4434 Oct 32401998 4160 2860 2900 3021 Dec 3419 May 26741999 4000 3075 3100 3653 Nov 4031 Jan 33522000 4100 3250 3250 2477 Jan 3574 Oct 20702001 4600 3250 3300 2044 Dec 2561 Apr 18922002 4600 3300 3300 2857 Dec 3660 Mar 22612003 4600 3320 3320 3866 Nov 4549 Jun 32902004 4500 3500 3500 4353 Dec 4951 Feb 38302005 4550 3570 3570 3774 Feb 4956 Nov 32352006 4300 3590 3590 3312 Oct 3649 Jul 30352007 4870 3620 3620 3253 Jan 3536 Oct 30502008 4870 3660 3660 4054 Jul 4440 Jan 35252009 4900 4450 4450 3353 Jan 3997 Sep 3001

N.R.- Not Recorded; Source: State Agricultural Prices Board, Government of Kerala.

28

Table 10. Rubber based products under Exclusive and Highly Sensitive Lists in Malaysia

Tariff rates in MalaysiaTariff

rates inIndia

HS CODE DESCRIPTION BASERATE(2007MFN)

CATEGORY

1-Ja

n-10

1-Ja

n-14

1-Ja

n-17

31-D

ec-1

9

1-Ja

n-10

31-D

ec-1

9

4003.00.000Reclaimed rubber in primary forms or in plates sheets or strip.

25 HSL C 24.5 22.5 21 19 9 5

40.05 COMPOUNDED RUBBER, UNVULCANISED…4005.91 - - PLATES, SHEETS OR STRIP:

4005.91.100 Of natural gums 30 HSL C 29 25 23.5 22.5 9 5

4005.91.910 compounded, unvulcanised plates, sheets or strip consisting of 25 HSL C 24.5 22.5 21 19 9 54005.91.920 compounded, unvulcanised plates, sheets or strip 25 HSL C 24.5 22.5 21 19 9 54005.91.990 Other 25 HSL C 24.5 22.5 21 19 9 540.08 PLATES, SHEETS, STRIP, RODS AND PROFILE SHAPES….4008.19.000 - - Other 30 HSL C 29 25 23.5 22.5 9 540.09 TUBES, PIPES AND HOSES, OF VULCANISED RUBBER ….4009.31.000 - - Without fittings 30 HSL C 29 25 23.5 22.5 9 54009.41.000 - - Without fittings 30 HSL C 29 25 23.5 22.5 9 54009.42.000 - - With fittings 30 HSL C 29 25 23.5 22.5 9 540.10 CONVEYOR OR TRANSMISSION BELTS OR BELTING….4010.12.000 - - Reinforced only with textile materials 30 HSL C 29 25 23.5 22.5 7.5 04010.19.000 - - Other 30 HSL C 29 25 23.5 22.5 7.5 0

29

Tariff rates in MalaysiaTariff

rates inIndia

HS CODE DESCRIPTION BASERATE(2007MFN)

CATEGORY

1-Ja

n-10

1-Ja

n-14

1-Ja

n-17

31-D

ec-1

9

1-Ja

n-10

31-D

ec-1

9

4010.31.000 - - Endless transmission belts of trapezoidal cross-section (V-belts), 30 HSL C 29 25 23.5 22.5 7.5 04010.32.000 - - Endless transmission belts of trapezoidal cross-section (V-belts), 30 HSL C 29 25 23.5 22.5 9 54010.39 - - OTHER:

4010.39.100 Of an trapezoidal cross-section (V-belts)other than those of 30 HSL C 29 25 23.5 22.5 7.5 0

4010.39.900 Other 30 HSL C 29 25 23.5 22.5 7.5 040.11 NEW PNEUMATIC TYRES, OF RUBBER4011.10.000 - Of a kind used on motor cars (including station wagons and 40 HSL C 39 35 32 30 9 54011.20.000 - Of kind used on buses or lorries 40 HSL C 39 35 32 30 9 5

40.12 RETREADED OR USED PNEUMATIC TYRES OF RUBBER….

4012.11.000 - - Of a kind used on motor cars (including station wagons and 30 EL 30 30 30 30 9 54012.12.000 - - Of a kind used on buses or lorries 30 EL 30 30 30 30 9 54012.24012.20.100 Of a kind used on motor cars 30 EL 30 30 30 30 9 54012.20.200 Of a kind used on buses or lorries 30 EL 30 30 30 30 9 54012.20.300 Of a kind used on aircraft 5 EL 5 5 5 5 9 54012.20.400 Of a kind used on motor cycles including motor scooters 30 EL 30 30 30 30 9 54012.20.500 Of a kind used on bicycles 30 EL 30 30 30 30 9 54012.20.610 of a kind used on tractor, implement and earthmover 30 EL 30 30 30 30 9 5

30

Tariff rates in MalaysiaTariff

rates inIndia

HS CODE DESCRIPTION BASERATE(2007MFN)

CATEGORY

1-Ja

n-10

1-Ja

n-14

1-Ja

n-17

31-D

ec-1

9

1-Ja

n-10

31-D

ec-1

9

4012.20.690 Other 5 EL 5 5 5 5 9 54012.20.710 of a kind used on tractor, implement and earthmover 30 EL 30 30 30 30 9 54012.20.720 of a kind used on forklifts and industrial equipment 30 EL 30 30 30 30 9 54012.20.790 Other 5 EL 5 5 5 5 9 54012.20.810 of a kind used on tractor, implement and earthmover 30 EL 30 30 30 30 9 54012.20.820 of a kind used on forklifts and industrial equipment 30 EL 30 30 30 30 9 54012.20.890 Other 5 EL 5 5 5 5 9 54012.20.910 buffed tyres 30 EL 30 30 30 30 9 54012.20.990 Other 5 EL 5 5 5 5 9 5

Source: ASEAN, 2009

31

A very similar story emerges in the case of the fisheries sector as well.

Common varieties of fish in the unprocessed form are given protection during

the transition period by placing them in the Exclusion List. This is true of

sardines (HS 0302.61, 0303.71), mackerel (HS 0302.64, 0303.74), tuna (HS

0304.29.40), cuttle fish (HS 0304.29.50), shrimps and prawns (HS 0306.13,

0306.23), crabs (HS 0306.14, 0306.24), etc. But, in different processed forms

the very same varieties of fish are offered a more liberal import policy.

Products of fish or crustaceans (HS 0511.91), prepared or preserved sardines

(HS 1604.13), mackerel (1604.15), crabs (1605.10) shrimps and prawns

(1605.20), etc., are put in the Normal Track. Indonesian policy, which is

another important producer of marine products appear to be quite different.

As can be made out from Table 11, as opposed to India’s liberal policy,

Indonesia is more restrictive and protectionist when it comes to prepared or

preserved fish. Indonesia appears to be using the category Highly Sensitive

List (HSL.C) very effectively to protect the marine products sector. As Column

9 in Table 10 shows India’s import duties would tend to be lower in the area of

processed fish varieties. It is not feared that there would be opening of

floodgates of imports in such fish varieties in which India has proven

comparative advantage. But, in the absence of import duties a permanent

threat of imports would be looming large as a check on fish prices in the

country.

32

Table 11 Exclusive [EL] and Highly Sensitive [HSL-C] fish products in Indonesia

Tariff rates in Indonesia Tariff rates in IndiaHSCODE DESCRIPTION

BaseRate2007MFN CATEGORY 1Jan10 1Jan14 1Jan17 31Des19 1Jan10 31Des1916.04 PREPARED OR PRESERVED FISH; CAVIAR AND CAVIAR SUBSTITUTES1604.13 --SARDINES, SARDINELLA AND BRISLING OR SPRATS:1604.13.11.00 ----In airtight containers 10 HSL C 10 9 8 8 25 01604.13.19.00 ----Other 5 HSL C 5 4 4 4 25 01604.13.91.00 ----In airtight containers 10 HSL C 10 9 8 8 25 01604.13.99.00 ----Other 5 HSL C 5 4 4 4 25 01604.14 --TUNAS, SKIPJACK AND BONITO (SARDA SPP.)1604.14.10.00 ---In airtight containers 10 EL 10 10 10 10 30 301604.14.90.00 ---Other 5 EL 5 5 5 30 301604.15 --MACKEREL :1604.15.10.00 ---In airtight containers 10 HSL C 10 9 8 8 25 01604.15.90.00 ---Other 5 HSL C 5 4 4 4 25 01604.16 --ANCHOVIES :1604.16.10.00 ---In airtight containers 5 HSL C 5 4 4 4 25 01604.16.90.00 ---Other 5 HSL C 5 4 4 4 25 01604.19.20.00 ---Horse mackerel, in airtight containers 5 HSL C 5 4 4 4 25 01604.19.30.00 ---Other, in airtight containers 5 HSL C 5 4 4 4 25 01604.19.90.00 ---Other 5 HSL C 5 4 4 4 25 01604.2 -OTHER PREPARED OR PRESERVED FISH :1604.20.11.00 ---In airtight containers 5 HSL C 5 4 4 4 25 0

33

Tariff rates in Indonesia Tariff rates in IndiaHSCODE DESCRIPTION

BaseRate2007MFN CATEGORY 1Jan10 1Jan14 1Jan17 31Des19 1Jan10 31Des191604.20.19.00 ---Other 5 HSL C 5 4 4 4 25 0

--FISH SAUSAGES :1604.20.21.00 ---In airtight containers 5 HSL C 5 4 4 4 25 01604.20.29.00 ---Other 5 HSL C 5 4 4 4 25 01604.20.91.00 ---In airtight containers 5 HSL C 5 4 4 4 25 01604.20.99.00 ---Other 5 HSL C 5 4 4 4 25 01604.30 -CAVIAR AND CAVIAR SUBSTITUTES :1604.30.10.00 --In airtight containers 5 HSL C 5 4 4 4 30 301604.30.90.00 --Other 5 HSL C 5 4 4 4 30 3016.05 CRUSTACEANS, MOLLUSCS AND OTHER AQUATIC INVERTEBRATES, PREPARED OR PRESERVED1605.1 -Crabs :1605.10.10.00 --In airtight containers 5 HSL C 5 4 4 4 25 01605.10.90.00 --Other 5 HSL C 5 4 4 4 25 01605.20 SHRIMPS AND PRAWNS : SHRIMPS PASTE1605.20.11.00 ---In airtight containers 5 HSL C 5 4 4 4 30 301605.20.19.00 ---Other 5 HSL C 5 4 4 4 30 301605.20.91.00 ---In airtight containers 5 HSL C 5 4 4 4 30 301605.20.99.00 ---Other 5 HSL C 5 4 4 4 30 301605.30.00.00 -Lobster 5 HSL C 5 4 4 4 30 30

Source: ASEAN, 2009

34

SECTION III

The Case for Regulating Trade Reiterated

hat the second type of dissent does is to reiterate an old and

established case for regulation of trade. As we have already seen what

the AIFTA represents for India is a larger movement towards making the

national borders free of trade restrictions. But for the political compulsions

and the road blocs created by those who oppose unrestricted trade the

current batch of leaders would have taken the nation much nearer to the

goal of seamless trade across borders. But, is free trade the best policy choice

for all products and under all circumstances? Is there a case for regulation of

trade beyond the transition period? Obviously, as various shades of dissent

show there is no consensus in favour of free trade at the level of policy

making in the country. The message emanating from the world of economic

theory is more unequivocal. It does not give an unqualified affirmative

answer in favour of free trade policies. This is true even when radical and

W

35

heterodox traditions are left out of reckoning and only the mainstream

strands are considered. Even within the mainstream literature there exists

umpteen strong cases as well as arguments that favour interventionist

policies and hence reject free trade as the first best policy choice. Here we do

not need to get into a detailed review of arguments in favour of state

intervention in trade. Instead, we emphasize the fact that the arguments in

favour of free trade policies are particularly weak in the case of agricultural

products and more so in the case of the tropical commodities.

In fact, it will not be an exaggeration to say that tropical commodities suffer

more from free trade than protectionism. Even before the signing of the

original GATT, tropical commodities were traded much more freely and with

far less state intervention than the agricultural products of the temperate

zone or even the manufactures. The tropical commodities are produced

primarily for trade: They are produced mostly in the southern countries and

consumed mainly in the developed north. To use the WTO jargon, the

tropical commodities are relatively free of the interventionist measures

classified under ‘domestic support’, ‘market access’, and ‘export

competition’. On account of their development deficit, and particularly due

to their fiscal fragility, the tropical commodity producing countries of the

third world are not in a position to heavily subsidise domestic production or

exports. As a result hardly any country from among them cross the

compliancy limits imposed by the Agreement on Agriculture of the WTO

either in ‘domestic support’ or ‘export competition’. In the case of ‘market

access’ too the tropical commodities fare much better than other traded

goods. Since the developed countries are completely dependent on southern

production they welcome imports from the south and do not place many

trade barriers, especially if the imports are in the raw material form. Of

course, trade barriers tend to escalate across processing chains and as the

developing countries try to move up the value chains. Notwithstanding tariff

escalation, it can be safely stated that unlike in the case of other agricultural

products or even the manufactures like ‘textiles and clothing’ the problems

faced by the tropical commodities were not that of excessive state

intervention or too much regulation of trade. Viewed in this sense the

conceptual trio ‘domestic support’, ‘market access’, and ‘export competition’

does not adequately capture the problems faced by the tropical commodities.

Neither were they the key problems raised in various international forums

by the developing or developed country partners of trade in tropical

36

commodities. Instead, tropical commodity negotiators were concerned

mainly about the commodity specific problems such as instability of the

market and prices and the long-term decline in the terms of trade. These

problems arise not because of too much regulation but on account of freer

trade and absence of regulation. The ways out suggested invariably required

state intervention in trade both within individual countries and at the

multilateral level.

The need to intervene in trade for correcting the tropical commodity

markets were recognized long back and formally acknowledged at the

multilateral level even as early as in 1948 when the Havana Charter was

formulated (UNESC 1946). Even though the International Trade

Organisation, which was supposed to oversee the implementation of the

Havana Charter did not come into existence, the GATT, which filled the

void, also approved of the need to regulate tropical commodity markets. It is

significant that such multilateral treaties and organisations, founded on the

principle of free trade, non-discrimination and non-intervention, had

approved of the need to regulate trade in tropical commodities. This was

because of the realization that the tropical commodity markets left to their

own need not necessarily lead to sustainable and socially acceptable

outcomes. This is explained primarily in terms of relatively low price

elasticity of demand as well as supply, which characterise many tropical

commodities. As a result of low elasticities the market forces of supply and

demand do not respond adequately to changes in prices. Therefore, even

small initial changes in prices, which might occur on account of one reason

or other, tend to get magnified into sharp upturns or downswings in prices.

It is to this we should add the impact of speculation in commodity prices.

Consequent vicissitudes in prices and associated uncertainties can lead to

inefficient and unsustainable allocation of resources besides producing

socially undesirable outcomes. It is in this context that the international

community, particularly the multilateral organisations with the

responsibility of strengthening the international division of labour, and

promoting trade among nations, had decided right from the beginning to

treat the tropical commodities on a separate track. It is this global consensus

that the AIFTA is now beginning to break. In fact as we shall argue out in

some detail later the AIFTA might even endanger the global consensus in

this regard and extend its model to the Doha negotiations.

37

The history of price movements, especially of the instability indices, is ample

proof for the widely acknowledged vulnerability of the tropical commodities

to vicious price fluctuations. The experience of the recent East Asian

currency crisis will serve as a useful instance for illustrating the point.

During the East Asian crisis almost all currencies of the region experienced

sharp fall in their exchange rates. The fall in the exchange rates of national

currencies were soon transmitted to the prices of tropical commodities,

particularly to those in which East Asia has a significant share in world

production and trade. Given the normal logic of the market both supply and

demand should respond to the price signals and move the market to a new

equilibrium and regain stability in prices. But, that the copybook does not

work in the case of the tropical commodities was once again proved during

the East Asian crisis. Given the nature of tropical commodities demand did

not quite respond to the fall in prices. The supply side was equally obstinate

to move. Normally it is difficult for the farmers to shift the cropping pattern

in short notice and without long drawn out preparation. This is more so in

the case of perennial crops, which are planted with a long-term view of

various factors. Incidentally, tea, coffee, pepper, coconut, rubber and many

other crops of the South Indian region are not particularly suitable for

switching area under cultivation or production according to short run

fluctuations in prices. In fact, instead of producing and supplying less, the

small and marginal farmers, who engage in farming primarily for their

livelihood, tended to produce and supply more so that their income levels

are not affected by the price fall. Needless to say that speculators too had a

field day, supported as they were by liberalization and de-control of

commodity futures and related markets. Financialisation of the commodity

markets generate new space for speculators and tend to redraw the value

chains (Newman Susan 2009). In short, what should have ended up as

minor and temporary disturbances in prices had got amplified into a deep as

well as long drawn out depression in the prices.

The agrarian crisis that ensued has had many painful consequences in the

South Asian region including occurrence of peasant suicides (Prakash 2007).

The peasant suicides were symptoms of a deep and painful adjustment

process necessitated by the fall in prices. In fact, the agrarian crisis had

indebted, pauperized and displaced many peasants as well as agricultural

labourers from their traditional livelihood opportunities (Chattopadhayay

and John 2007). It has also resulted in changes in the distribution of

38

ownership of land, and also the land use pattern, in terms of the mix of crops

as well as the division between agricultural and non-agricultural uses.

Notably, on many occasions such as the East Asian crisis such fall in prices

might be due to transient reasons and need not be reflecting sustained shifts

in demand or supply that require lasting changes in the allocation of land,

labour or capital. The temporary reasons for transient upward or downward

movement in prices might disappear as fast as they appear. But, in the

meanwhile such agrarian crises might result in irreversible changes in the

land use pattern besides causing irreparable damages to the farming

community.

The tropical commodity producers of the South Asian region are yet to fully

come out of the damage caused by the East Asian crisis. Ironically, for that

reason they are failing once again to respond adequately to the market

signals! After the long drawn out East Asian crisis the commodity prices

have started firming up and increasing. But the cultivators are responding

with a lot of reluctance and doubt. After the harrowing experience of the

debt crisis they do not possess internal funds to make new investment,

neither are they forthcoming to contract new loans. Banks and other lending

institutions on their part are not too happy lending to the sector because of

the high risk factor. It is hard and costly to recover land already converted

for other purposes including non-agricultural use. Harder perhaps is the

task of bringing back skilled agricultural labourers who had migrated into

construction and various other non-agricultural activities (Mohanakumar

and Chandy 2009).

It follows from the foregoing discussion that it would be unsustainable as

well as uneconomic to allow the fluctuations in the tropical commodity

markets to have unmediated impact on allocation of scarce resources not to

speak of the impact on the livelihood of the dependent population. It is for

the same reason that international organisations such as the GATT and the

UNCTAD provided for international commodity agreements and regulation

of trade. The process of liberalization and globalisation and the advent of the

WTO have almost wound up the commodity agreements and the

corresponding national arrangements for regulation. The only arrangement

left to check the adverse consequences of transient fluctuations in the

international market perhaps has been the wall of high bound tariffs, which

could be switched to service when emergencies appeared on the horizon.

39

Under normal conditions the applied rates can be much lower as they have

generally been compared to the bound rates. But, the higher upper limits in

the form of bound rates served as a guarantee of protection against the

vagaries of the market as well as the possible speculative attacks.

Are the rates not high enough?

Interestingly, the TIG agreement will considerably drain the freedom of the

country in raising the tariffs even during emergencies such as a quick fall in

the price of some crucial commodities. It is so because in the AIFTA

framework the upper limits of tariffs are not the WTO bound rates. The

upper limits relevant in the AIFTA context are rates given in the tariff

schedules of individual AIFTA members. In India’s case for about 75 per

cent of the tariff lines (Normal Track) the upper limit to which the tariff can

be raised will be nil after three to six years. In about 14 per cent of the lines

(Special Track) the upper limit will be set at 5 per cent in three to six years.

In the case of Special Products such as crude and refined palm oil, tea,

coffee, and pepper, which cover nearly 0.3 per cent of the tariff lines, the

upper limit will be fixed below 50 per cent as shown in Table 2. In the case of

the Exclusion List, which covers 10.7 per cent of the tariff lines, India does

not have any reduction commitments. But it is no consolation because the

base rates, defined as the MFN applied rates as of 1 July 2007, are not high

enough to be used against the threat of vicious price falls. It is clear from

Table 12, which presents an analysis of the base rates in the Exclusion List.

The average for the whole list is as low as 33.8 per cent. The proportion of

tariff lines having rates below 10 per cent is as high as 44 per cent. The

proportion of lines having rates above 50 per cent is only around 19 per cent.

Tariff lines with duties above 100 per cent are as low as 3.2 per cent.

40

Table 12. Base Rates Tariff Lines in the Exclusion List - INDIA

Base Rate Number Percent Average

Below 10 568 43.8 9.1211 – 20 57 4.4 15.7021 – 30 392 30.2 29.9931 – 40 6 .5 40.0041 – 50 24 1.9 48.7551 – 75 59 4.5 67.9776 – 100 150 11.6 96.30Above 100 41 3.2 150.00Total 1297 100.0 33.80Source: ASEAN, 2009

Viewed in the above sense what TIG agreement marks is the beginning of

the end of the bound rates based protection that the WTO system used to

ensure the agricultural products, which are particularly vulnerable to short

run price fluctuations. In multilateral negotiations, including the ongoing

Doha Round, the developing countries have been fiercely defending their

right to maintain high bound rates in the area of agricultural products. It

was meant as a defense against western subsidies on the one hand and short

term price fluctuations on the other. But, the preferential trading

arrangements among developing countries such as the AIFTA would render

their posture on bound rates redundant. Given the TIG agreement and its

schedule of commitment it would be meaningless to fight for the right to put

high MFN bound rates in the case of tropical commodities produced and

traded by the AIFTA countries. The problem of lower and lowering upper

limit of tariffs might spread to more tropical commodities by way of

Preferential Trading Arrangements in other developing country groupings.

In spite of the AIFTA induced reductions for nearly eleven per cent of the

tariff lines (Exclusion List and the Special Products) the average tariff would

be around 35 per cent. Moreover for about 3 per cent of the tariff lines

including Special Products the rates would be as high as around 50 per cent.

The question therefore arises as to whether these rates are not high enough.

The answer will depend on the purpose for which protection is sought. These

rates would appear high enough or even too high under normal conditions.

41

But, they are not high enough if the purpose is to guard against possible violent price

fluctuations in the international market.

Table 13. Price Variability: Rubber and Coffee

Rubber (RSS-4)* Coffee (Parippu)*Maximum

Price of theYear

MinimumPrice of the

YearMaximum Price

of the YearMinimum Price

of the Year

Year

Year

ly Av

erag

e

Mont

h

Price

Mont

h

Price

Year

ly Av

erag

e

Mont

h

Price

Mont

h

Price

1991 1950 Aug 2001 Nov 1861 N.A N.A N.A N.A N.A

1992 2295 Oct 2566 Jan 1887 N.A N.A N.A N.A N.A

1993 2382 Jun 2573 Nov 2158 N.A N.A N.A N.A N.A

1994 2819 Dec 3498 Jan 2385 N.A N.A N.A N.A N.A

1995 4640 May 5763 Aug 3821 11517 Jun 13700 Dec 99001996 4668 Jan 5090 Dec 4202 8617 Jan 9400 Jul 80001997 3545 Jan 4124 Dec 2394 7258 May 8600 Nov 59001998 2581 Oct 2860 Feb 2371 6517 Sep 7000 Mar 60001999 2623 Jun 2974 Feb 2323 5583 Jan 6700 Dec 49002000 2775 May 3071 Dec 2507 3533 Jan 4100 Dec 30002001 3104 Aug 3604 Apr 2663 2434 Jun 2727 Dec 22142002 3620 Dec 4172 Jan 3209 2384 Dec 3071 Feb 17642003 4813 Nov 5356 Jan 4296 2900 Feb 3268 Jun 26772004 5575 Jul 6595 Jan 5166 3043 Jun 3240 Feb 28292005 6062 Dec 6865 Feb 5146 4686 May 5396 Jan 31532006 8772 Jun 10718 Jan 7326 5484 Nov 6185 Mar 48272007 9009 Feb 9780 Jul 7891 6650 Sep 7017 Jan 60932008 10778 Aug 13812 Dec 6458 8464 Jul 9200 Jan 7334

2009 9391 Nov 11251 Feb 6894 7416 Feb 7796 Nov 7154

Note: * Rupees/Quintal; N.A – Not AvailableSource: State Agricultural Prices Board, Government of Kerala 2010

42

The data on prices of coffee and rubber presented in Table 13 will make the

point clear. Even in the case of yearly average prices we see very high

variability. Volatility of prices becomes clearer when we take monthly data.

This is particularly clear from the data since 1997 when the East Asian

currency crisis hit the commodity markets. For instance coffee prices

declined from Rs. 11517 per quintal to Rs. 2384 in 20024. When prices fall so

much and so fast import duties of the order we discuss turns out be too

insufficient to check the slide. It is for meeting such emergencies that the

developing countries wanted the upper limits or bound rates of tariffs to be

kept high. The bound tariffs are not applied on a regular or permanent basis.

Safeguard norms

International trade agreements provide for safeguard norms as a precaution

against sudden and injurious spurt in imports. The spirit is to give some

grace time for the affected import competing sectors for adjustment. But, it

is a general limitation of the safeguard norms, especially when compared to

the bound rates, that there is a time lag before they can be pressed into

service. In the event of a surge in imports or potential threat of such a surge

the country concerned if it desires so can immediately raise the tariffs up to

the level of the WTO bound rate. It can do so without fearing WTO dispute

settlement procedure. But, if the country concerned wants the tariffs to be

raised beyond the level of the bound rates the best option, which is very

widely used, is to resort to the WTO provision for safeguard measures. It is

up to the country concerned to decide whether a tariff should be raised up to

the bound level or not. Significantly, the action is not subject to multilateral

scrutiny. But, the safeguard actions are subject to multilateral norms as well

as scrutiny. Therefore, more often than not the safeguard actions take longer

preparation time before raising the tariff or putting a non-tariff barrier in

place. Obviously, therefore, the importance of having fairly high bound rates

4 If prices were fluctuating so much even before the TIGA and even while the boundtariffs were quite high what is the point in arguing against TIGA or the proposed cutin upper limits of tariffs? Answer to this question lies in the fact there wereloopholes in the system that allowed cheap imports free of customs duties undervarious pretexts. That such loopholes existed is no excuse for introducingunregulated trade.

43

or high upper limits for tariffs especially in areas prone to sudden spurts in

imports can hardly be exaggerated.

AS we have already explained as far as trade within the AIFTA is concerned

the members cannot raise their tariffs to the WTO bound rates even when

they face an actual or potential threat of a surge in imports. But, the AIFTA

has its own provision for safeguard measures. The safeguard norms of the

TIGA, however, are too weak to serve the purpose for which they are put in

place. According to Article 10 of the TIGA, which defines the AIFTA

safeguard measures, the members have the right to initiate a safeguard

measure on a good within the transition period of that good. The transition

period of a good shall begin from the date of entry into force of the TIGA and

end five years from the date of completion of tariff reduction /elimination

for that good. Obviously, therefore, in the AIFTA even the provision for the

safeguard measures is a transitory arrangement. Once the transition period

of all goods are over the members cannot any more use the AIFTA safeguard

measure. It will cease to be a trade policy tool within the AIFTA framework.

Moreover, even as a transition arrangement the AIFTA safeguard measures

are unlikely to be effective because the safeguard tariffs would be too low to

check the spurt in imports. It is clear from paragraphs 3 and 4 of Article10 of

the TIGA, which are reproduced here.

Paragraph 3 of Article 10: “A Party shall be free to take an AIFTA safeguard

measure if, as an effect of the obligations incurred by that Party under this

agreement, a good is being imported from the other Parties to which tariff

concession was made for that good in such increased quantities, absolute

or relative to domestic production, and under such conditions so as to

substantially cause or threaten to cause serious injury to the domestic

industry of the importing party that produces like or directly competitive

goods in its territory”.

44

Paragraph 4 of Article 10: “If an AIFTA safeguard measure is taken, a party

taking such a measure may:

(a) Suspend the further reduction of any tariff rate under this

agreement for the good; or

(b) Increase the tariff rate on the good concerned to a level not to

exceed the lesser of;

(i) the applied MFN tariff rate on the good in effect at the time the

action is taken; or

(ii) the applied MFN tariff rate on the good in effect on the day

immediately preceding the date of entry into force of this

Agreement.

At least in the event of a surge in imports the AIFTA Parties should have

been allowed to raise their tariffs to the level of the WTO bound rates. But,

in effect there is no guarantee that they would be allowed to raise the tariffs

even to the level of the applied MFN rates. If it was allowed the Parties could

have easily raised the applied MFN rates to ensure that such higher duties

are applicable on imports from within AIFTA sources as well. Curiously

enough, if “the applied MFN tariff on the good in effect on the day

immediately preceding the date of entry into force of the” TIGA were lower

than “the applied MFN rate at the time of action” the former would be the

upper limit for the AIFTA safeguard action! This is a roundabout way of

saying that the AIFTA safeguard measure is designed as a non-starter. It is

so because the applied MFN rates on 31 December 2009 are likely to be very

low as they are at present for India. Take for instance India’s present MFN

rates for crude (nil) and refined (7 per cent) palm oil (Harilal 2009).

Nevertheless, there is a saving grace in the provisions of the Article 10 by

which the AIFTA members retains the rights and obligations under Article

XIX of GATT 1994 and the Agreement on Safeguards in Annex 1A to the

WTO Agreement (Agreement on Safeguards) and Article 5 of the Agreement

on Agriculture. By virtue of this provision the AIFTA Parties retain their

right to resort to safeguard measures provided for in the cited agreements.

As we shall explain later they offer much higher degrees of freedom in

45

dealing with the problem of sudden surge in imports compared to the AIFTA

provisions.

Productivity argument

Is not the demand for protection a lame excuse for not improving

productivity and enhancing competitiveness? There cannot be any doubt

that sectors that lag behind the race to improve productivity, minimize costs

as well as prices and hence fail to improve competitiveness are likely to

clamor for protection. But, what about those who strive and succeed in the

race for improving productivity and competitiveness? Will they ever require

protection from external competition? As we shall argue out here keeping

abreast of the race of productivity alone cannot guarantee success or even

survival in an activity exposed to unmediated global competition. The

disastrous impact that the East Asian currency crisis has had on the

plantation crops is a useful lesson from recent history to expose the

limitation of the productivity argument. The currency crisis has hit even

those who were leading the productivity race. The best example is that of

natural rubber. As data presented in Table 14 show India cannot be blamed

to be a laggard in the race to increase productivity in natural rubber. On the

contrary it can claim to be the world leader in productivity. In spite of its

advantage in productivity the East Asian crisis did hit the rubber economy of

the country, that too very viciously and causing irreparable damages. In a

way the rubber growers in India were being forced to pay for no fault of

theirs but for the mismanagement of the economies of the East Asian region.

Our intention here however is not to belittle the importance of improving

productivity. As Table 14 shows a comparative analysis of productivity of

various crops across countries leaves much to be desired. A caveat however

needs to be added here. The productivity figures compiled by the FAO,

which are widely used now, are not strictly speaking comparable. In the case

of most crops the varieties cultivated in different countries, the market

segments they cater, etc, differ quite widely. For instance, productivity

comparisons between different coffee varieties such as Arabica and Robusta

need to be done carefully. Further, a comparative analysis of productivity

cannot ignore variability in farming practices. For instance, coffee

46

cultivation in India is considered to be unique because it is mostly shade

grown. In the case of coconut and most spices Kerala follow a mixed

cropping pattern, which make estimates of yield fraught with difficulties.

Notwithstanding such problems associated with measurement and

comparison of productivity levels across countries there are certain clear

messages that can be delineated from the available data. The measurement

problems do not affect comparison of productivity over time as much as they

do affect a comparison of its levels. While India’s main competitors

registered significant improvement over time in most crops her performance

in general has been rather lack luster. This underlines the need to make

concerted efforts to improve productivity performance of leading export-

oriented crops.

There are not many people who contest the view that productivity of the

crops in question, which are likely to be exposed to more intense

competition in the near future, should be improved. But, this leads us to

another important policy issue. What should be the role that the State plays

in ensuring the targeted productivity growth? In India we have the

experience of crops like natural rubber where the State had taken the lead

role by investing in infrastructure, research, extension, and more direct

support in the form of subsidies. The World Bank, even though the

international agencies oppose State intervention in such matters, had also

played a very important role in the above rubber development programme.

It is also widely agreed that the strategy has worked very well. But, as it is

equally well known, the State was equally active in ensuring fair and stable

prices to the cultivators. The State used to intervene in the domestic market

as well as in international trade for ensuring fair and stable prices. In fact, it

was the magic of fair and stable prices that worked for the natural rubber

sector. The rubber growers, dominated as they have been by the small

holders, were in fact responding, quite overwhelmingly at that, to the

systematically orchestrated price signals. Moreover, the international rubber

agreement and its buffer stock operations used to play a key role in

maintaining semblance of stability at the global level. In any case the system

did not allow exposing the rubber growers to the vagaries of the

international market.

47

Table 14. India and Asean: A comparison of Productivity of Major

Crops

Item Country 1961 1970 1980 1990 2000 2007India 4500 4970 8099 4785 9573 8396Indonesia 5664 6068 5923 5527 4398 6980Malaysia 3390 3597 7163 5507 7509 7547Philippines 8282 9080 12303 9365 7855 7894Thailand 600 2000 5306 11850 12345 8192Co

ffee,

gree

n

Viet Nam 1933 3924 7763 14873 16827 19700India 5998 6514 7709 10283 15750 18200Indonesia 5123 5766 6326 6835 6255 9926Malaysia 6074 8462 9473 8001 7138 9227Philippines 3663 2885 4138 7088 8805 36412Thailand 4650 3539 3750 10128 15603 17102Na

tura

l rub

ber

Viet Nam 6354 3113 4675 2613 7058 10947Indonesia 133571 130000 166666 165694 180635 171806Malaysia 115468 143762 164653 177543 184065 211440Philippines 66666 70000 70564 123846 132500 118461

Oil p

almFr

uit

Thailand 57894 57894 96443 124142 160351 146859

India 2718 2180 2698 3218 3010 2804Indonesia 8000 4783 7319 9347 6908 6560Malaysia 30000 45467 24819 27094 19192 14179Philippines 0 0 0 0 0 17878Thailand 15000 15333 15999 20364 23985 37384

Pepp

er

Viet Nam 15000 12058 13051 12190 18279 18851India 10699 11739 14913 16580 16857 17011Indonesia 7205 7209 12320 16497 13414 13591Malaysia 7483 10506 13513 18960 18787 8142Thailand 0 0 1403 3030 2972 3000

Tea

Viet Nam 3926 5034 6057 5374 9943 15399India 46030 43171 39231 49016 53220 60664Indonesia 50000 49761 48031 53591 58806 67672Malaysia 51476 41645 33530 35942 38652 33720Philippines 41864 30182 28247 35421 41665 44208Thailand 52884 33952 28867 41205 43018 67331Coco

nuts

Viet Nam 36179 36461 45372 42129 54854 88114Note: Productivity = Hectogram/HectareSource: FAO Statistics, 2009

48

The big question here is whether such a strategy of ensuring fair and stable

prices can be sustained in the new policy environment of seamless trade.

Apparently, the most important elements of the successful rubber model in

India will have to be dropped now. The long-term view of the government of

India is to free trade in all sorts of goods, including primary commodities,

from every possible form of intervention. The AIFTA is a major step in this

direction. Therefore, the programme for augmenting productivity of crops

will have to now hop on one of its two legs. It amounts to say that the Sate

would now onwards intervene on the supply side but not at all on the

demand side. It will help augment productivity and production and hence

supply. But will not intervene even in the face of a major price fall on the

demand side by way of procurement operations, building a buffer stock,

and/ or restricting imports. In fact, procurement operations or the buffer

stocks cannot be sustained without restraining imports particularly when

the prices fall in the international market. In the case of export dependent

crops import restrictions alone will not help stabilize prices. It will require

intervention at the international level involving all major producers and

perhaps also leading consumers. In fact, this was what the erstwhile

commodity agreements strived to achieve with varying levels of success.

A State sponsored programme for augmenting productivity cannot hope to

walk without having control over both its legs. The State, which encourages

and supports the growers in augmenting productivity, production and

supply, cannot leave them in the lurch when the prices fall. If so the

cultivators are unlikely to respond to the State run campaigns for increasing

productivity. After a disastrous price fall or two, which admittedly might not

have anything to do with long-term demand conditions for the products

concerned, the growers might start looking at the State’s initiatives with

lingering doubts. They are likely to become less enthusiastic in

experimenting new technologies related to planting materials, farming

practices, fertilizers, pest control, post harvest operations, etc. They are

likely to become reluctant in investing own or borrowed funds in the face of

uncertainties. It also brings to the fore a fundamental flaw in the position of

international agencies such as the World Bank. They preach leissez fare and

free trade policies. But what is preached is observed only on the demand

side. They refuse to intervene and insist on leaving the demand side to the

49

market. But has no hesitation in intervening directly in the market to

augment supply and heighten competition among the hapless producers of

primary commodities. This is not an isolated instance where we see direct

involvement of supra national agencies in the market. In fact, very often

their job is inside the market, trying to push or pull the market forces in the

direction of their choice and according to their whims and fancies. It is as if

the World Bank and its sister agencies have replaced the invisible hand of

the market with their limbs.

Getting Lost in Value Chains

Intensification of competition among primary producers, on account of

signing of FTAs among major producing countries and various supply-

augmenting interventions by the State and the international agencies,

particularly since such agencies fail to intervene on the demand side, are

likely to adversely affect the cultivator’s share in the value produced and

distributed across the relevant value chains. In fact, it might also result in

spilling over the productivity gains to the down stream nodes of the value

chains. Let us illustrate the proposition in some detail. A value chain is a set

of value adding activities through which a product passes from the initial

production or design stage to final delivery to the consumer. The value chain

framework will help us bring out certain dimensions of the impact of the

FTA that we have not been able to discuss so far. Long-term deterioration of

relative prices (terms of trade) and short run fluctuations in prices are two

long recognized primary commodity problems. We have already discussed

some important aspects of the latter issue and concluded that the TIGA

would tend to worsen the problem of short run price fluctuations for the

tropical commodity producers of India. Looking at the commodity problem

from the value chain perspective one fears that the TIGA would have adverse

effect on the terms of trade as well.

The literature explains the long-term decline in the terms of trade of primary

commodities in terms various factors. Among them the nature of demand,

reflected in the low income elasticity, play a very important role. The

demand for primary commodities, especially in the raw form, does not grow

as fast as the income does. Therefore, if the supply fails to adjust, the prices

50

would tend to decline vis-à-vis other commodities. The way out suggested is

diversification of the production structure into value added products and

manufactures. But, such upward mobility in the international division of

labour is easily said than achieved. There are umpteen barriers to be

overcome before such a feat is accomplished. Availability of capital,

information, trade contacts, technology, skill, entry barriers erected by the

competitors such as intellectual property rights, trade barriers, etc can prove

to be difficult hurdles. Therefore the primary commodity producers find it

difficult to move out into new areas of specialization or even to move on to

more advantageous nodes of the same value chains.

Typically the Southern segment of the value chain ends with primary

processing and export of the raw material to the western markets. Imports of

the raw material, advanced processing, packing and branding, retailing, etc,

are the typical Northern nodes. The tropical commodity value chains have

undergone tremendous transformation over the last fifteen to twenty years.

An important feature of this process of transformation has been the growing

market power of large retailers and other dominant actors belonging to the

downstream nodes of the global value chains. In the place of independent

retailing shops in typical city high streets, large retail chains (integrated

distributor-retailers: the super markets) have come to dominate most of

western developed markets. The trend is now fast spreading into the rest of

the world as well. The retail revolution in the North is not restricted to the

displacement of individual retailers and specialty shops by super market

chains. An equally important development has been consolidation and

concentration within the super market sector. Takeovers, mergers, and

acquisitions have led to the domination of the sector by a small number of

retail giants. In response to the increasing concentration at the retail level,

the penultimate node (for instance food processing and distribution) has

also been trying to consolidate and establish countervailing power by way of

takeovers, mergers, and acquisitions. A similar process of consolidation and

concentration is reported at the level of importers as well. The number of

importers of leading commodities has come down drastically in most

western markets.

The transformation of the chains and the consequent domination by

retailers and other downstream operators has had far reaching implications

for different nodes in the chain and their interrelationship (Gereffi et al

51

2001). One generally observed feature of this change has been the increasing

role of lead firms, most often retailers, in the governance of the chains. The

retailers and other downstream operators now govern the chains by setting

and implementing new practices and rules for transactions between nodes

and among actors in the chain. In fact, without the favour of the lead firms it

would be difficult for the upstream actors to have access to the consumers.

Therefore, the lead firms virtually dictate terms to the upstream nodes and

the associated actors.

While downstream nodes have witnessed a consolidation of market power,

the trend in the upstream nodes has been in the reverse direction. The neo-

liberal policies have removed entry barriers and helped heighten

competition among workers, farmers, local traders, primary processors, and

exporters. Winding up of international commodity agreements, national

commodity boards, state trading agencies, buffer stocks, procurement

operations, etc, on the one hand and introduction of future trading, foreign

investors, flexible labour laws, etc., on the other have all contributed to the

observed heightening of competition in the Southern nodes. As a result,

workers, cultivators, traders, processors and other actors from the South are

now pitted against corporate concentration and retailer market power in the

North, which have clear oligopsonic advantage over transactions in the

chain. Such unequal distribution of power cannot but get reflected in the

distribution of value among different nodes and actors. According to Talbot

(1997) from around a third of the total income until the late 1980s the share

of coffee growers and producing states had come down to nearly 15-20 per

cent in the aftermath of the breakdown of the quota system in 1989. Many

studies in the area of coffee and various other tropical commodities bring

out similar pattern of change in the distribution of total income. It is also

well documented that such siphoning of income from the upstream to the

downstream nodes results in further degeneration of already deplorable

working and living conditions in farming and primary processing in the

underdeveloped world, not to speak of environmental standards. Primary

processors compete among themselves by cutting down wages, refusing to

pay wage and tax arrears, reducing expenditure on working conditions,

getting exemption from local taxes and labour welfare legislations, seeking

exemption from land ownership and land use legislation, compromising

environmental standards, leaving the responsibility of managing the

fluctuations and the crisis to the workers or the State and various other

52

survival strategies (Harilal et al 2006). Farmers, especially small holders

also employ such strategies besides super exploiting themselves not to get

thrown off the division of labour.

What the TIGA is going to do in such a scenario is more or less clear. It is

going to heighten competition in the Southern nodes of the tropical

commodity chains. Until recently the main theatre of competition among

Southern countries and actors were the western markets. They used to

engage in fierce competition among themselves, often to their own peril, to

sell maximum to the western buyers. Therefore, the criticism against

producers of tropical commodities, including those in South India, that they

are reluctant globalisers is unfounded. Production of these commodities

over many centuries has been for the global market. The contribution of the

present era of globalisation is the introduction of competition among

Southern producers for each other’s home market. This happens because of

indiscriminate reduction in the tariffs of developing countries on account

various reasons such as unilateral tariff cut undertaken individually by the

Southern countries, liberalization on account of the WTO process, and

elimination of tariffs necessitated by the FTAs formed among developing

countries. AIFTA is one such FTA among tropical commodity producers that

is committed to eliminate tariff on intra-community trade.

Till recently the main producers of the tropical commodities used to protect

their domestic market with high tariffs and even non-tariff barriers

especially when prices collapsed or threatened to collapse in the

international market. And for that reason they used to keep bound tariffs at

a relatively high level. This is particularly true of countries like India with a

sizable domestic market for most commodities, which worked as a cushion

during price falls. Generally the domestic prices ruled lower than the world

prices and ensured relative profitability of selling abroad. But, the domestic

prices served as some sort of minimum supply price below which the

exporters refused to ship. Obviously, the high bound tariffs were not meant

to deal with the non-existent threat of imports from the western countries.

Neither were they required to restrict imports from other Southern countries

when the going was good in the international market and everybody tried to

sell in the attractive western markets. Why should Malaysia try to sell in

India when international prices are higher than Indian domestic prices? And

why should Indians import from abroad when domestic prices rule lower?

53

Evidently, the leading exporters of the tropical commodities did not

normally have any domestic supply gap to be filled in by imports. Imports

became feasible and attractive only when international prices collapsed.

They are bad weather imports that happen mainly when crisis hits the

sector, which would invariably trigger further spiraling down of prices.

Therefore, high tariffs are absolutely unavoidable when the prices collapse in

the international market and the commodity suppliers compete to drive

down prices everywhere including in each other’s market. It is important

here to take note of a possible reason for occurrence of trade in tropical

commodities among the major producers that happen even when the prices

rule high in the international market. For instance, Sri Lanka may sell low

quality tea at lower than global tea prices to India, which the Indian

importer uses then for mixing with good quality Indian tea to be sold either

in the home market or abroad. In fact, such unfair trade practices are widely

reported.

Forfeiting the Livelihood Case

While defending India’s uncompromising position on issues related to trade

in agricultural products, which was partly responsible for the collapse of the

WTO talks in July 2008, India’s Commerce and Industry Minister Kamal

Nath said, “I can negotiate commerce but I cannot negotiate livelihood

security” (Business world, 28 July 2008). These words reflected the spirit

with which developing nations tried to protect livelihood security of millions

of farmers and agricultural labourers in the WTO talks. On these issues

India had the support of more than 100 developing and least developed

countries. This included G-33, the African Group and the African-

Caribbean-Pacific Group of countries. As a Special and Differential

Treatment measure the developing countries wanted the right to self

designate ‘an appropriate number’ of Special Products, based on the criteria

of food security, livelihood security and rural development needs so that

they are exempt from tariff reduction commitments. In order to protect

livelihood security they also demanded a Special Safeguard Mechanism for

use of developing country members to deal with sudden and harmful spurts

in imports. Such safety valves were found to be unavoidable because of the

persistence of huge domestic support for agriculture in developed countries.

54

It was the stalemate around these issues that resulted in the collapse of the

WTO talks. Notably, India and other champions of the third world have

since then forfeited their moral right to stick to these demands by signing

the TIGA. In TIGA such self-designation of products is allowed but without

much consequence because the base rates for tariff negotiations are fixed

much below the WTO bound rates. Further, the TIGA has provisions for a

safeguard mechanism but it has hardly any teeth to prevent injurious influx

of imports. Having compromised on livelihood security at the regional level,

the AIFTA countries will find it difficult to force their demands in the

multilateral forum.

55

SECTION IV

Towards an Agenda of Policy and Action

It would be too idealistic as well as ambitious to believe that the state would

look after the welfare of all citizens equally well. Its primary commitment is

to those who constitute and run it. India’s commitment to the ‘look east’

policy and the AIFTA could be seen in this light. It only shows that the ‘look

east’ policy and the AIFTA serve the purpose of those who wield power. It is

no guarantee that the AIFTA would be beneficial to the majority or for all

sections of people, sectors or regions. In the present study we have shown

that the TIGA would be detrimental to the interests of tropical commodity

producers. The immediate reason for taking up the present study has been

the protests of commodity producers in south India, especially Kerala. But,

our findings on tropical commodities are applicable to producers from other

countries as well. We have chosen tropical commodities purposely to

represent certain critical trade and development issues of the Global South.

Primary commodities produced predominantly by the Southern countries

suffer from the problem of severe price instability. They also encounter the

56

problem of long-term decline in relative prices. Making trade more free

cannot resolve these commodity problems. The strategy of decontrol and

deregulation would only aggravate the commodity problems. Even though

the need for regulation of tropical commodity markets was clearly

recognized by multilateral organisations such as ITO, UNCTAD and GATT,

not to speak of economic literature, the advent of the WTO has introduced a

u-turn in policy. The global regime does not any more recognize the need to

treat trade in tropical products on a separate track. Instead the universal

solution of free trade is recommended for the tropical commodities as well.

The Uruguay Round agreement has initiated a process of deregulation of

trade in tropical commodities, especially among the producing countries.

The FTAs among the developing countries such as the AIFTA would

deregulate trade further and heighten competition among tropical

commodity producers. It is our proposition in the present study that the

TIGA would only worsen the primary commodity problems. It will make

tropical commodities more vulnerable to price fluctuations, besides pushing

down the share of producers in the value chain.

Another important conclusion of the present study is related to the position

of developing countries in WTO negotiations. In multilateral negotiations

they have always been under severe pressure to reduce the bound rates of

tariffs across all tariff lines so that their markets are more accessible to

others. But, they have been defending the right to keep reasonably high

bound tariffs in the area of trade in agricultural products. This position was

justified in view of the heavy subsidies in western countries on the one hand

and the threat of price instability in primary commodity markets on the

other. As we have argued at length in the present study FTAs among

developing countries are likely to undermine the position of developing

countries on bound rates in multilateral negotiations. The FTAs among

developing countries, by which the main producing countries agree to

remove tariffs on trade among themselves, would make the demand for high

bound tariffs redundant. This is particularly true in the case of tropical

commodities, which are produced almost exclusively in the developing

world. It will have implications for primary products produced both in

developing and developed countries as well.

The primary commodity problems are of critical importance to South India,

especially Kerala. South India’s role in the international division of labour

57

has for long been that of a producer of tropical commodities. Kerala

particularly had been and continues to be a leading supplier of tropical

commodities such as pepper, cardamom, cinnamon, nutmeg, tea, coffee,

cashew, coconuts, rubber, and various other minor tropical products to the

rest of the world. Therefore, tropical commodity problems discussed in the

study are of great import to the south Indian states in general and Kerala in

particular. The problems of tropical commodities assume special importance

in the context of Kerala’s role in the national division of labour too. Even

within the national division of labour Kerala’s role has been primarily that of

a region specialising in the production of certain tropical commodities. In

fact, as we have shown, since independence the regional economy has got

further oriented towards production of such cash crops vis-à-vis food crops.

Notably, such orientation of the regional production structures has come

about within a policy regime that on purpose encouraged such

specialization. It was made possible by ensuring food security on the one

hand and fair prices for the tropical commodities on the other. The neo-

liberal policy environment is forcing the central government to go back on

both these policy commitments. The TIGA and the consequent

liberalization of trade will only add to the uncertainty in prices besides

worsening of the relative prices that the producers receive. Added to this is

the problem of growing uncertainty regarding availability as well as price of

food products.

In what follows our objective is to outline an agenda for policy and action

that are available for addressing the problems delineated in the study. As we

have demonstrated vividly, one uncontestable outcome of the AIFTA will be

the drastic reduction in the upper limits to which the AIFTA nations have

freedom to raise the tariffs, even when encountering emergencies such as a

price collapse. India’s average tariff will be brought down from 12.9 per cent

to just 2 per cent by the end of 2013. By then India’s average rate will be

lower than those of all other AIFTA partners, except Brunei and Singapore.

For nearly 89 per cent of the tariff lines the upper limit to which tariff can be

raised would as low as 0 to 5 per cent soon. Even in the case of the Exclusion

List in effect there will be a major reduction in tariffs because in such cases

the base rates are significantly lower than the MFN bound rates. In any case

the FTA ideal is to eliminate autonomy and freedom of member countries to

restrain imports from partner countries. Nobody appears to raise the

question as to whether such a policy of complete free trade would be ideal

58

for all products, including the tropical commodities. It is this policy scenario

that we think would contribute to the problem of instability in prices. Even

though it cannot be seen as a comprehensive solution an efficient safeguard

mechanism can act as a useful safety valve.

However, the AIFTA safeguard mechanism is unlikely to serve the purpose

for which it is established. First of all the present mechanism is conceived as

a transition arrangement. Further, the tariff rates chargeable under the

proposed safeguard mechanism are too low to be of much significance. The

two reference rates, the lower of which would be used in the safeguard

action, are the MFN applied rate at the time of the action; and the applied

MFN tariff rate on the good in effect on the day immediately preceding the

date of entry (1 January 2010) into force of TIGA. The second reference rate

is likely to be too low in most cases to be used effectively to check a sudden

surge in imports that occur when prices decline drastically. The way out we

suggests is to renegotiate the safeguard mechanism. It cannot be a

transitory arrangement as it is designed now. The primary commodity

problem that it should address is not a transient phenomenon. Therefore, it

should be redesigned as a permanent inbuilt safeguard mechanism of the

TIGA. The second modification that we suggest is to bring the MFN bound

rates of the WTO into the picture. As a safeguard measure, in the event of an

actual or potential surge in imports and an abnormal fall in price the AIFTA

partners should have the freedom to raise the relevant tariff to the level of

corresponding WTO bound rate. Incidentally, WTO members can raise the

tariffs to the bound level without invoking the safeguard provision or fearing

any multilateral scrutiny. Therefore, what is suggested here is a less

stringent safeguard mechanism as compared to the WTO system. Yet, it will

be a much more meaningful mechanism than what is currently proposed in

TIGA. Such a move will add moral value and strength to the long

established negotiating position of developing countries to have relatively

high bound rates for primary commodities. Needless to reiterate our

argument here that such a move should not be construed as narrowly

protectionist in nature, because it is absolutely essential to ensure efficient

allocation of resources, sustain production, improve productivity and avoid

unwelcome shortages in the future.

Raising applied rates to the level of MFN bound rates need not be a

sufficient cure for an injurious surge in imports and consequent swift fall in

59

prices. It is because of this that the WTO system provides for a safeguard

mechanism that allow member countries to go beyond the bound rates. In

this context, as we have already pointed out there is a saving provision in the

TIGA Article 10 by which the AIFTA members retains the rights and

obligations under Article XIX of GATT 1994 and the Agreement on

Safeguards in Annex 1A to the WTO Agreement (Agreement on Safeguards)

and Article 5 of the Agreement on Agriculture. They offer much higher

degrees of freedom in dealing with the problem of sudden surge in imports

compared to the provisions of the AIFTA safeguard mechanism. The WTO

safeguard provisions need to be activated only when the members desire to

go beyond the bound rates. All the three windows of safeguard action

suggested here allow the members to raise the tariffs beyond the bound

rates. In the first two cases members are allowed to resort to non-tariff

measures as well. But, in the first two windows cumbersome procedures,

need for giving compensation, and the possibility of retaliation make the

safeguard measures less attractive to the policy makers. Article XIX of GATT

1994 and the Agreement on Safeguard are designed to suit mainly the

requirements of industrial products. It is the reason why Article 5 was

included in the Agreement on Agriculture.

Under GATT 1994 and the Agreement on Safeguards action can be taken

only if there is existence of serious injury or the threat of serious injury to

domestic production. But, under Article 5 of the AoA safeguard action can be

taken without the demonstration of any adverse effect on domestic

production. Members can initiate action if the import price falls below a

particular level or if the import quantity rises above a particular level. This is

not to say that the AoA provision is free of limitations. Under AoA the

measure that a member can take is an increase in duty. There is no

provision for imposing a quantitative restriction on imports. Further, the

process by which the safeguard duty is fixed is too complicated and hence

susceptible to conflicting interpretations. Further, many countries including

India were excluded from the AoA provision of Special Safeguards. It is in

view of such limitations that the developing countries raised the demand for

a Special Safeguard Mechanism in Doha Round negotiations. According to

the Hong Kong Ministerial Declaration of 2005 developing countries would

“have the right to have recourse to a Special Safeguard Mechanism based on

import quantity and price triggers, with precise arrangements to be further

defined”. If the import price falls below the price trigger, or alternatively if

60

the import quantity falls below the quantity trigger, the SSM can be invoked

and a safeguard (additional) duty imposed. Needless to say the efficacy of

the SSM would depend on how and at what level the quantity/ price triggers

are set. In fact, it was the central issue on which the North-South divide

reached a deadlock in the mini-Ministerial meeting in July 2008. India has

famously taken a firm position in the SSM stalemate supported

overwhelmingly by more than 100 developing countries. Interestingly,

Indonesia another AIFTA partner was leading G33, which has been fighting

for an effective SSM. It is widely expected that India, Indonesia and the

developing world as whole would be holding on to their position and succeed

in establishing a meaningful SSM.

Even if an SSM is established fulfilling all the requirements specified by the

G33, it would not by itself ensure timely and effective use of the new

mechanism. The developing countries have a poor track record as compared

to their developed counterparts in using WTO compliant regulatory

measures such as safeguard actions. It is partly due to the problems related

to the multilateral system. But, there are internal problems in developing

nations that constrain effective use of such facilities. More often than not the

demand as well as the pressure for an anti-dumping or a safeguard action

should come from the affected producers. Producers in developed countries

are better informed as well as equipped to come together and lobby for such

protection. Even industries in developing countries, characterised as they

are by industries with large number of small and tiny units, find it difficult to

bring together producers for the required collective action. The position of

agricultural sector is even worse. There is no mechanism of aggregation of

peasant opinion and power to demand timely action by the designated

authority in the country. Most peasants will not even have any information

on how the prices they receive are formed or set, leave alone the question of

anticipating a surge in imports or a price fall. It is interesting here to remind

us of the fact that the theoretical and empirical models used to justify free

trade assume ‘perfect information’. The only way to solve the problem of

grave information asymmetry that exists is the state to take a lead role for

and on behalf of the peasants. There should be an agency specially

empowered by the government which gather and analyse all relevant

information on production, supply, demand, trade and all other pertinent

variables and recommend safeguard action well in advance anticipating

possible surge in imports or fall in prices. The empowered agency can have a

61

system of consultation for gathering peasant opinion. In fact, in our opinion

commodity boards can be designated as the empowered agencies. They will

prepare and fight the case for the farmers before the designated authority in

the country.

Now, what if the Doha Round fails to set up an effective SSM, or if it is not

properly enabled to address special problems of certain commodities? For

instance, suppose a crop is suffering from a potential threat of imports,

which cannot be proved and safeguard action taken according to the legal

provisions and norms set by the SSM. In our opinion government still will

have the responsibility of solving the problem of instability in prices. The

empowered agency should be given the additional responsibility of ensuring

fair prices and stable income to the farmers. The commodity boards in India

play a welcome role in enhancing production and productivity of the crops

by making vital interventions in the market. If they can intervene in the

market on the supply side they can very well do the same on the demand

side to ensure fair prices to the cultivators and fair wages to the agricultural

labourers. An appropriate combination of measures including support

prices, pubic procurement, buffer stocks, insurance, quality control, value

addition, trade policy intervention, and welfare and rehabilitation activities

may be designed and implemented for each commodity. If the government

is not desirous of promoting cultivation of certain crops, and if it consider it

uneconomic and socially not so desirable, it may make it well known to all

farmers and labourers. On the other hand if it consider it important to have

growing production of certain commodities, and if it is desirous of

promoting their cultivation, it should take up the responsibility of protecting

the livelihood of people involved in such cultivation when they suffer from

vicissitudes of the market. This responsibility of the government assumes

special importance when viewed against its claim that the TIGA would result

in major gains for the nation as a whole even if it adversely affect some

regions or sectors. If the nation as whole is benefiting so much it can very

well compensate those who bear the burden of adjustment.

South India and South East Asia share a common tradition of successful

cooperation among producers to tackle the commodity problems. When

European planters dominated the rubber sector in India and South East Asia

they used to work together to realize higher prices for natural rubber. The

Stevenson Output Restriction Scheme that existed between 1922 and 1928 is

62

a good example for this. There were many similar efforts later in the area of

natural rubber including the more recent International Rubber Agreement.

Other commodities too have had similar experience of cooperation among

producers. As we have argued out earlier the AIFTA is likely to take the two

regions in the opposite direction. Instead of cultivating cooperation among

producers the new FTA is going to promote cutthroat competition among

them. The tropical commodity producers in the AIFTA region, by virtue of

liberalization of intra-region trade under the new FTA, would be trying to

capture each others home market. Interestingly, such intense competition

among countries producing tropical commodities for each others home

market will not result in any substantial increase in the aggregate demand

for the commodities in question. Instead what can be expected is only a

reallocation of the available market among producers. In the process it

might also run down the producer prices and unit value of exports of the

commodities in question. What is recommended therefore is an informed

move towards regional cooperation. Regional integration need not always

take the form of intensification of competition among producers in the

region, especially when competition is giving way to market concentration at

the downstream end of most value chains. The supra national authority of

AIFTA, that limit sovereignty of participating nations, can be used to check

fratricidal competition and promote healthy cooperation among producers.

What shape such cooperation among producers should take will vary from

commodity to commodity. In the case of some commodities such as natural

rubber the AIFTA region will have near complete monopoly over production

as well as supply. In some other cases it will have overwhelming dominance

over production and supply. Nonetheless in most cases the AIFTA region

will have the potential to be the nucleus of South- South cooperation to

establish commodity power. New generation commodity agreements will

have to be evolved in the case of each crop taking commodity specificities

into consideration. The experience of earlier experiments, successes as well

as failures, will be of immense use in developing a new architecture for the

future commodity agreements. One thing however needs to be stated clearly.

The commodity agreements of the past have had their share of problems,

including problems created by the unfair attitude of those who stood to

benefit out of their failure. But, their successes as well as failures, and more

so their disappearance in the wake of the recent neo-liberal onslaught,

underline the need to reinvent them. One of the reasons for the failure of the

63

commodity agreements has been the tendency among the partners to violate

the common norms. This is particularly so in the case of production targets.

But such violations and failures do not prevent the world making fresh

attempts, learning from successful experiments of the past. This is true of

all effort of producers to organize and bargain for better prices. For millions

of peasants and labourers, who find their livelihood in the production of

these commodities, free trade is no alternative. The fair trade movement in a

sense is a show of empathy and solidarity to the hapless primary producers.

But, they deserve a better solution.

Coming to problems specific to South India and Kerala we put forward

following policy suggestions. Since South Asia has a production structure,

which is competitive, not at all complementary, vis-à-vis that of the South

East Asia it deserved a much better transition arrangement in TIGA

compared to what has been offered. The crops, which deserved highest

transition protection, have been extended the worst possible transition

arrangement. Government of India should take the lead to correct this

mistake by way of renegotiation of the reduction schedule of some of the

selected commodities. In any case, the government should not to allow any

further cut in tariffs in the case of such commodities in future negotiations

that are likely to come up soon. The most critical thing for millions of

peasants and labourers who depend on these commodities for their

livelihood is fair and stable prices. Regulating trade within the country and

across the borders should help the country achieve the above goal. In this

the proposed safeguard mechanism and market intervention within the

country would be of great help to the policy makers.

The government should also come up with a comprehensive transition

package for the commodities in question. There is intense competition

among producers of tropical commodities to increase productivity, reduce

prices and gain more market share. Introduction free trade in the AIFTA

region would further intensify the competition. But, the recent history of

trade liberalization, uncertainty in prices, climate change, debt crisis, etc.,

makes farmers averse to risk taking. It should be kept in mind here that the

burden of uncertainty in the tropical commodity value chains is rapidly

transferred to the growers. When the prices increase the upper nodes of the

chain are not allowed to partake in it, whereas any decline in price is

immediately transferred to the farm gate. In fact, such strategies of

64

transferring the burden of uncertainties to the upstream nodes such as

cultivation and primary processing has prompted bigger players in many

tropical commodity chains to leave the risky nodes to the petty producers or

even to the labourers themselves. Large capital tends to focus more on

branded products and marketing5. In the context of such transformation of

the value chains it would be unrealistic to expect the small holders and petty

commodity producers, who are caught up in the upstream nodes because of

their inability to move out, to make the investment required for

improvement in productivity and competitiveness. In fact, as many studies

have documented, even bigger planters were refusing to make such long-

term investment in view of the uncertainties associated with the

commodities. And that is one of the reasons why productivity performance

lagged behind in the case of many of these crops. It is here we see the role of

state intervention by direct as well as indirect means to promote investment.

The state can either invest directly or support private investment by

providing various incentives. Further, in order to sustain growth in

investment, production and productivity the state should also put in place a

mechanism that minimize risk of uncertainties that arise on account of price

fluctuations, natural disasters, crop failures, etc.

Opportunity cost of the growth of the plantation sector in Kerala can in fact

be expressed in terms of food production foregone. The area under

cultivation of the cash crops was increased at the expense of the food crops.

As has already been noted the state could take the risk of specializing in non-

food crops because it was assured food security by the national policy

regime. But, the neo-liberal turn in policy, however, has weakened all the

important elements of the food policy regime in the country that assured

food security to the deficit states like Kerala such as control over external

trade, regulation of domestic market, public procurement, public

distribution, statutory rationing, etc (Patnaik 2007 and Isaac and

Ramkumar 2009). The change in the policy regime as recent trends suggest

would tend to move the terms of trade against the tropical commodities vis-

à-vis., food articles. This would hamper the food security situation in deficit

states like Kerala. As such one remedial action suggested here is focused on

food security. The national government should come forward to shoulder the

5 The experiment of Tata Tea in Kannan Devan Plantations in Kerala involving theworkers in Ownership is a good instance to be cited.

65

responsibility of ensuring food security in all the regions of the state. If the

central government is reluctant the state government, notwithstanding

severe limitations within which it operates, will have to devise policies to

meet emergencies that are likely to come on the food front. Incidentally,

Kerala is making such an initiative in its Eleventh Five Year Plan.

So far in this essay we have not dealt with the question of the overall impact

of the TIGA on the Indian economy. Among the supporters of the AIFTA

there are people who believe that it would be detrimental to the agricultural

sector. Yet they back the new FTA because according to many of them the

gains accruing on account of freer trade and greater integration in

manufactures and services would outweigh the loss if any in the agricultural

sector (Joseph K J 2009). In the manufacturing sector Indian exporters are

likely to benefit from the preferential access that they would be accorded in

the new FTA. But the gain on account of preferential access would depend a

great deal on the margin of preference. It may be noted here that the MFN

applied rates of tariffs of the ASEAN countries are too low to leave much

room for significant margin to the preferential partners (Pal and Dasgupta

2008 and 2009). This is obvious from our Table 3, according to which

except Vietnam (12.6 %) and Cambodia (14.3 %) all other ASEAN countries

have average base rates significantly lower than that of India (12.9 %). As

we have already noted the base rates are defined as the applied rates as of 1

July 2007. As for tariffs facing Indian exporters in ASEAN countries the

reduction on account of TIGA would be made from base rates which are

already very low. On the other hand the ASEAN exporters to India would

find the new arrangement more attractive because of higher preference

margin. Since India’s MFN applied rates are relatively high and since India

had undertaken to implement drastic reduction commitments, the tariff

margin that the ASEAN traders enjoy vis-à-vis other MFN sources would be

substantial. Viewed in this sense the new arrangement may worsen India’s

balance of trade with the ASEAN countries (Pal and Dasgupta 2008 and

2009). This should be seen in the context of already widening trade deficit of

India with the ASEAN countries.

In spite of adverse short run effects the FTA can prove to be advantageous

to those who are capable of drawing dynamic gains. For instance, by virtue

of the expansion of the market the FTA might allow producers to reap scale

economies. Now that they are producing for larger markets they can cut

66

costs and achieve higher levels of efficiency. But, such advantages are reaped

more easily by the bigger firms and larger players. Bigger firms in India will

therefore find the extent of their market and hence scope of division of

labour and room for reaping scale economies significantly expanded. This

may be the reason why the Indian big capital and the State run by it support

the FTA projects. The same will be the effect on large firms located in

ASEAN countries. In fact, ASEAN economies may have an edge in exploiting

the advantages of the larger market because of their early exposure to

foreign direct investment and trade. Multinational companies operating

from the ASEAN region are sure to make advantage of the opening up of the

Indian market to freer trade in the AIFTA region. But, what about millions

of small scale units and petty commodity producers in India who are thrown

suddenly into an entirely different environment of business and

competition? They do not have the wherewithal to organize production on a

large scale nor do they have the contacts to win over the potential market in

the ASEAN region. In order to convert the potential markets into real sales

they will need huge doses of additional capital, new technologies, trade

contacts, access to information, and many other attributes. In the absence of

such attributes they are unlikely to gain new markets, but would at the same

time run the risk of losing the market in their own backyard to the AIFTA

competitors. The solution is state intervention to support the small and

petty producers so that they withstand the pressure of new competition at

least within the country. Obviously, therefore, government should have an

elaborate program to support the small scale and petty commodity

producers in the country. This is particularly so in the case of industries in

which the Indian producers are denied a level playing field under the new

regime. The case of natural rubber based industries in India deserves special

mention here. As we have already shown in Table 10 the TIGA agreement

would deny level playing ground to the Indian industry vis-à-vis their

Malaysian counterparts. The Malaysian strategy is too obvious to be

explained in detail here. The tariff reduction schedules of Malaysia are such

that their producers would be granted very high effective protection

compared to the Indian producers. The rubber manufacturers nurtured

under such carefully orchestrated policy of protection will be entering the

Indian market soon without any tariff barrier whatsoever. This is a clear

recipe for deindustrialization of the rubber sector in India, which would also

have implications for the natural rubber plantation industry in the country.

67

The plantation industry in Kerala had benefitted immensely by the presence

of a stable and growing rubber based industry within the country. In its

absence the volatility of the international market for rubber would be felt

more acutely by the planters in the country.

Coming to the realm of public action what we emphasize is the importance

of pan AIFTA action by the people of the region. The AIFTA induced

heightening of competition is likely to induce the phenomenon known as

‘race to the bottom’ in many lines of economic activities among AIFTA

countries. We have already noted that the AIFTA would tend to help

downstream nodes at the expense of the upstream ones in tropical

commodity chains. It was also suggested that the AIFTA nation-states would

have to come together to check such mutually harmful competition among

countries in the region. But, the nation-states are likely to come and act

together only if the issues involved were of interest to the powerful and the

articulate. We cannot expect such automatic action in the case of issues

affecting workers, peasants and other petty commodity producers. Such

sections of the society will have to mobilize themselves, not only within

individual countries but also across countries and in the AIFTA region as a

whole to put pressure on the nation-states and the AIFTA establishment to

act. Therefore mass organisations of the people should try and convert the

AIFTA platform from one of mutually harmful competition to one of

regional cooperation and united action. Another dimension of competition

among the AIFTA nations, which is also likely to turn mutually harmful, is

the race for attracting investment. In their bid to attract capital more often

than not the nation-states give concessions to the investors at the expense of

various other sections of the people. Nation-states compete to give investors

direct and indirect subsidies besides granting exemption from human rights

regulations, labour welfare legislations, environmental standards, local and

federal taxes, etc. A possible deterrent against such tendencies would be the

unity of the people and their organisations across countries forcing the

governments to cooperate and not to compromise on generally accepted

minimum standards in various areas such as labour rights and

environmental standards.

68

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71

APPENDIX

AIFTA : TRADE IN GOODS AGREEMENT

AGREEMENT ON TRADE IN GOODS UNDER THE FRAMEWORK

AGREEMENT ON COMPREHENSIVE ECONOMIC COOPERATION

BETWEEN THE REPUBLIC OF INDIA AND THE ASSOCIATION OF

SOUTHEAST ASIAN NATIONS

PREAMBLE

The Government of the Republic of India (India) and the Governments of

Brunei Darussalam, the Kingdom of Cambodia (Cambodia), the Republic

of Indonesia (Indonesia), the Lao People’s Democratic Republic (Lao

PDR), Malaysia, the Union of Myanmar (Myanmar), the Republic of the

Philippines (the Philippines), the Republic of Singapore (Singapore), the

Kingdom of Thailand (Thailand) and the Socialist Republic of Viet Nam

(Viet Nam), Member States of the Association of Southeast Asian Nations

(collectively, “ASEAN” or “ASEAN Member States”, or individually, “ASEAN

Member State”),

RECALLING the Framework Agreement on Comprehensive Economic

Cooperation between the Republic of India and the Association of Southeast

Asian Nations, signed by the Heads of Government/State of India and

the ASEAN Member States in Bali, Indonesia on 8 October 2003 and the

Protocol to Amend the Framework Agreement on Comprehensive Economic

Cooperation between the Republic of India and the Association of

Southeast Asian Nations, signed in [venue] on [date];

RECALLING FURTHER Articles 2 and 4 of the Protocol to Amend the

Framework Agreement on Comprehensive Economic Cooperation between

the Republic of India and the Association of Southeast Asian Nations which

reflect the commitment of India and ASEAN to establish the ASEAN- India

Free Trade Area covering trade in goods by 2013 for Brunei Darussalam,

72

Indonesia, Malaysia, Singapore and Thailand and India; by 2018 for the

Philippines and India; and by 2013 for India and by 2018 for Cambodia, Lao

PDR, Myanmar and Viet Nam;

REITERATING the importance of special and differential treatment to

ensure the increasing participation of the new ASEAN Member States in

economic integration and cooperation activities between India and ASEAN;

REAFFIRMING the Parties’ commitment to establish the ASEAN-India Free

Trade Area while allowing flexibility to Parties to address their sensitive

areas as provided in the Framework Agreement;

HAVE AGREED as follows:

ARTICLE 1

Definitions

For the purposes of this Agreement, the term:

(a) AIFTA means the ASEAN-India Free Trade Area under the

Framework Agreement on Comprehensive Economic Cooperation

between the Republic of India and the Association of Southeast Asian

Nations;

(b) applied MFN tariff rates shall include in-quota rates, and shall:

(i) in the case of ASEAN Member States (which are WTO Members as of 1

July 2007) and India, refer to their respective applied rate as of 1 July

2007, except for products identified as Special Products in the

Schedules of Tariff Commitments set out in Annex 1; and

(ii) in the case of ASEAN Member States (which are non-WTO Members as

of 1 July 2007), refer to the rates as applied to India as of 1 July 2007,

except for products identified as Special Products in the Schedules of

Tariff Commitments set out in Annex 1;

(c) ASEAN means the Association of Southeast Asian Nations which

comprises Brunei Darussalam, the Kingdom of Cambodia, the Republic

of Indonesia, the Lao PDR, Malaysia, the Union of Myanmar, the

Republic of the Philippines, the Republic of Singapore, the Kingdom of

Thailand and the Socialist Republic of Viet Nam and whose members

are referred to in this Agreement collectively as the ASEAN Member

States and individually as an ASEAN Member State;

73

(d) Framework Agreement means the Framework Agreement on

Comprehensive Economic Cooperation between the Republic of India

and the Association of Southeast Asian Nations, signed in Bali,

Indonesia on 8 October 2003, as amended;

(e) GATT 1994 means the General Agreement on Tariffs and Trade 1994 in

Annex 1A to the WTO Agreement, including its Notes and

Supplementary Provisions;

(f) goods means materials and/or products;

(g) originating good means a good that qualifies as originating under

Article 7;

(h) new ASEAN Member States refers to Cambodia, Lao PDR, Myanmar

and Viet Nam;

(i) Parties means India and ASEAN Member States collectively;

(j) Party means India or an ASEAN Member State;

(k) WTO means the World Trade Organization; and

(l) WTO Agreement means the Marrakesh Agreement Establishing the

World Trade Organization, done on 15 April 1994.

ARTICLE 2

Scope

This Agreement shall apply to trade in goods and all other matters relating

thereto as envisaged in the Framework Agreement.

ARTICLE 3

National Treatment on Internal Taxation and Regulations

Each Party shall accord national treatment to the goods of the other Parties

in accordance with Article III of GATT 1994, which shall apply, mutatis

mutandis, to this Agreement.

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ARTICLE 4

Tariff Reduction and Elimination

1. Except as otherwise provided for in this Agreement, each Party shall

gradually liberalise, where applicable, applied MFN tariff rates on

originating goods of the other Parties in accordance with its schedule

of tariff commitments as set out in Annex 1.

2. Nothing in this Agreement shall preclude any Party from

unilaterally accelerating the reduction and/or elimination of the

applied MFN tariff rates on originating goods of the other Parties as set

out in its tariff reduction/elimination schedule in Annex 1.

3. Except otherwise provided in paragraph 1, all commitments

undertaken by each Party under this Article shall be applied to all the

other Parties.

ARTICLE 5

Transparency

Article X of GATT 1994 shall be incorporated, mutatis mutandis, into and

form an integral part of this Agreement.

ARTICLE 6

Administrative Fees and Formalities

Each Party reaffirms its commitments under Article VIII.1 of GATT 1994.

ARTICLE 7

Rules of Origin

The Rules of Origin and Operational Certification Procedures applicable to

the goods covered under this Agreement are set out in Annex 2 and its

Appendices.

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ARTICLE 8

Non-Tariff Measures

1. Each Party shall:

(a) not institute or maintain any non-tariff measure on the importation

of goods from the other Parties or on the exportation or sale for

export of goods destined for the territory of the other Parties,

except in accordance with its WTO rights and obligations or other

provisions in this Agreement; and

(b) ensure the transparency of its non-tariff measures allowed

under subparagraph (a) and their full compliance with its obligations

under the WTO Agreement with a view to minimising possible

distortions to trade to the maximum extent possible.

2. The Parties reaffirm their rights and obligations under the Agreement

on Technical Barriers to Trade in Annex 1A to the WTO Agreement and

the Agreement on the Application of Sanitary and Phytosanitary

Measures in Annex 1A to the WTO Agreement, including notification

procedures on the preparation of relevant regulations to reduce their

negative effect on trade as well as to protect human, animal or plant

life or health.

3. Each Party shall designate its contact point for the purpose of

responding to queries related to this Article.

ARTICLE 9

Modification of Concessions

1. The Parties shall not nullify or impair any of the concessions made by

them under this Agreement, except as provided in this Agreement.

2. Any Party may, by negotiation and agreement with any other Party to

which it has made a concession, modify or withdraw such concession

made under this Agreement. In such negotiations and agreement,

which may include provision for compensatory adjustment with

respect to other goods, the Parties concerned shall maintain a general

level of reciprocal and mutually advantageous concessions not less

favourable to trade than that provided in this Agreement prior to such

agreement.

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ARTICLE 10

Safeguard Measures

1. Each Party, which is a WTO Member, retains its rights and obligations

under Article XIX of GATT 1994 and the Agreement on Safeguards in

Annex 1A to the WTO Agreement (Agreement on Safeguards) and

Article 5 of the Agreement on Agriculture in Annex 1A to the

WTO Agreement (Agreement on Agriculture). Any action taken

pursuant to Article XIX of GATT 1994 and the Agreement on Safeguards

or Article 5 of the Agreement on Agriculture shall not be subject to the

Agreement on Dispute Settlement Mechanism under the Framework

Agreement (ASEAN-India DSM Agreement).

2. A Party shall have the right to initiate a safeguard measure under

this Article (an AIFTA safeguard measure) on a good within the

transition period for that good. The transition period for a good shall

begin from the date of entry into force of this Agreement and end five (5)

years from the date of completion of tariff reduction/elimination for

that good.

3. A Party shall be free to take an AIFTA safeguard measure if, as an

effect of the obligations incurred by that Party under this Agreement, a

good is being imported from the other Parties to which tariff concession

was made for that good in such increased quantities, absolute or relative

to domestic production, and under such conditions so as to substantially

cause or threaten to cause serious injury to the domestic industry of the

importing Party that produces like or directly competitive goods in its

territory.

4. If an AIFTA safeguard measure is taken, a Party taking such a measure

may:

(a) suspend the further reduction of any tariff rate under this Agreement

for the good; or

(b) increase the tariff rate on the good concerned to a level not to exceed the

lesser of:

(i) the applied MFN tariff rate on the good in effect at the time the action is

taken; or

77

(ii) the applied MFN tariff rate on the good in effect on the day immediately

preceding the date of entry into force of this Agreement.

5. An AIFTA safeguard measure may be maintained for an initial period of

up to three (3) years and may be extended for a period not exceeding

one (1) year if it is determined pursuant to the procedures referred to in

paragraph 6 that the measure continues to be necessary to prevent or

remedy serious injury and to facilitate adjustment and that there is

evidence that the domestic industry is adjusting. Notwithstanding the

duration of an AIFTA safeguard measure on the good, such a

measure shall terminate at the end of the transition period for that good.

6. In applying an AIFTA safeguard measure, the Parties shall adopt and

apply, mutatis mutandis, the rules for the application of safeguard

measures, including provisional measures, as provided under the

Agreement on Safeguards, with the exception of the quantitative

restriction measures set out in Articles 5 and 7, and also, Articles 9, 13,

and 14 of the Agreement on Safeguards.

7. An AIFTA safeguard measure shall not be applied against a good

originating in the territory of a Party so long as its share of imports of

the good concerned in the importing Party does not exceed three (3)

per cent of the total imports of that good from the other Parties.

8. In seeking compensation under Article 8 of the Agreement on

Safeguards for an AIFTA safeguard measure, the Parties concerned shall

seek the good offices of the Joint Committee established under Article 17

to determine the substantially equivalent level of concessions to that

existing under this Agreement between the Party taking the

safeguard measure and the exporting Parties which would be affected by

such a measure prior to any suspension of equivalent concessions. Any

proceedings arising from suchgood offices shall be completed within 90

days from the date on which the AIFTA safeguard measure was applied.

9. If no agreement on the compensation is reached within the timeframe

specified in paragraph 8, the Parties concerned shall be free to

suspend the application of tariff concessions under this Agreement,

which is substantially equivalent to the AIFTA safeguard measure on

originating goods of the Party applying the AIFTA safeguard measure.

78

10. On a Party’s termination of an AIFTA safeguard measure on a good,

the tariff rate for that good shall be the rate that, according to that

Party’s schedule of tariff reduction and elimination as set out in Annex 1

would have been in effect had the measure not been applied.

11. Notwithstanding the provisions of this Article, no Party may impose an

AIFTA safeguard measure on a good to which actions are being

applied pursuant to Article XIX of GATT 1994 and the Agreement on

Safeguards or Article 5 of the Agreement on Agriculture. When a

Party intends to apply, pursuant to Article XIX of GATT 1994 and the

Agreement on Safeguards or Article 5 of the Agreement on Agriculture,

an action on a good to which an AIFTA safeguard measure is being

applied, it shall terminate the AIFTA safeguard measure prior to the

imposition of the action to be applied pursuant to Article XIX of GATT

1994 and the Agreement on Safeguards or Article 5 of the Agreement on

Agriculture.

12. All official communications and documentations exchanged among

the Parties and with the Joint Committee relating to an AIFTA safeguard

measure shall be in writing and shall be in the English language.

ARTICLE 11

Measures to Safeguard the Balance of Payments

Nothing in this Agreement shall be construed to prevent a Party from taking

any measure for balance of payments purposes. A Party taking such measure

shall do so in accordance with the conditions established under Article XII

of GATT 1994 and the Understanding on Balance of Payments

Provisions of the General Agreement on Tariffs and Trade 1994 in Annex 1A

to the WTO Agreement.

ARTICLE 12

General Exceptions

Each Party retains its rights and obligations under Article XX of GATT

1994, which shall be incorporated, mutatis mutandis, into and form an

integral part of this Agreement.

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ARTICLE 13

Security Exceptions

Nothing in this Agreement shall be construed:

(a) to require any Party to furnish any information the disclosure of which it

considers contrary to its essential security interests;

(b) to prevent any Party from taking any action which it considers necessary

for the protection of its essential security interests, including:

(i) action relating to fissionable materials or the materials from which they

are derived;

(ii) action relating to the traffic in arms, ammunition and implements of

war and to such traffic on other goods and materials as is carried

on directly or indirectly for the purpose of supplying a military

establishment;

(iii) action taken so as to protect critical communications infrastructure

from deliberate attempts intended to disable or degrade such

infrastructure;

(iv) action taken in time of war or other emergency in international

relations; or

(c) to prevent any Party from taking any action in pursuance of its

obligations under the United Nations Charter for the maintenance of

international peace and security.

ARTICLE 14

Customs Procedures

1. Each Party shall endeavour to apply its customs procedures in a

predictable, consistent and transparent manner.

2. Recognising the importance of improving transparency in the area of

customs procedures, each Party, at the request of an interested

person, shall endeavour to provide, as expeditiously and accurately as

possible, information relating to its customs procedures to the

interested person concerned. Each Party shall endeavour to supply not

only the information specifically requested but also any other pertinent

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information which it considers the interested person should be made

aware of.

3. For prompt customs clearance of goods traded among the Parties, each

Party, recognising the significant role of customs authorities and

the importance of customs procedures in promoting trade

facilitation, shall endeavour to:

(a) simplify its customs procedures; and

(b) harmonise its customs procedures, to the extent possible, with relevant

international standards and recommended practices such as those

made under the auspices of the World Customs Organization.

ARTICLE 15

Regional and Local Governments

In fulfilling its obligations and commitments under this Agreement, each

Party shall, in accordance with the provisions of Article XXIV.12 of

GATT 1994 and the Understanding on the Interpretation of Article XXIV of

GATT

1994, take such reasonable measures as may be available to it to ensure

observance by state, regional and local governments and authorities within

its territories.

ARTICLE 16

Relation to Other Agreements

1. Each Party reaffirms its rights and obligations vis-à-vis another Party

under the WTO Agreement and other agreements to which these Parties

are party. A Party, which is not a party to the WTO Agreement, shall

abide by the provisions of the said Agreement in accordance with its

accession commitments to the WTO.

2. Nothing in this Agreement shall be construed to derogate from any

right or obligation of a Party under the WTO Agreement and other

agreements to which these Parties are party.

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3. In the event of any inconsistency between this Agreement and

any other agreement to which two or more Parties are party, such

Parties shall immediately consult with a view to finding a mutually

satisfactory solution.

4. This Agreement shall not apply to any agreement among ASEAN

Member States or to any agreement between India and any ASEAN

Member State unless otherwise agreed by the parties to that

agreement.

ARTICLE 17

Joint Committee

1. A Joint Committee shall be established under this Agreement.

2. The functions of the Joint Committee shall be to:

(a) review the implementation and operation of this Agreement;

(b) submit a report to the Parties on the implementation and operation

of this Agreement;

(c) consider and recommend to the Parties any amendments to this

Agreement;

(d) supervise and coordinate the work of all Sub- Committees established

under this Agreement; and

(e) carry out other functions as may be agreed by the Parties.

3. The Joint Committee:

(a) shall be composed of representatives of the Parties; and

(b) may establish Sub-Committees and delegate its responsibilities thereto.

4. The Joint Committee shall meet at such venues and times as may be

mutually agreed by the Parties.

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ARTICLE 18

Dispute Settlement

Unless otherwise provided in this Agreement, any dispute concerning the

interpretation, implementation or application of this Agreement shall be

resolved through the procedures and mechanisms as set out in the ASEAN-

India DSM Agreement.

ARTICLE 19

Review

The Joint Committee shall meet within one (1) year from the date of entry

into force of this Agreement and then biennially or otherwise as appropriate

to review this Agreement for the purpose of considering additional

measures to further enhance the AIFTA as well as develop disciplines and

negotiate agreements on relevant matters as may be agreed.

ARTICLE 20

Annexes and Future Legal Instruments

1. The Annexes and Appendices shall form an integral part of this

Agreement.

2. The Parties may adopt legal instruments in the future pursuant to the

provisions of this Agreement, including those proposed to them by the

Joint Committee. Upon their respective entry into force, such

instruments shall form an integral part of this Agreement.

ARTICLE 21

Amendments

1. This Agreement may be modified through amendments mutually agreed

upon in writing by the Parties. Any amendment shall enter into force

after all Parties have notified all the other Parties in writing of the

completion of their internal procedures for the entry into force of such

amendment.

2. Notwithstanding paragraph 1, amendments relating to: (a) Annex 1,

provided that the amendments are made in accordance with the

amendment of the Harmonized System and include no change on tariff

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rates applied to the originating goods of the other Parties in accordance

with Annex 1; and

(b) Annex 2,

may be made by mutual agreement in writing by all Parties.

ARTICLE 22

Depositary

For the ASEAN Member States, this Agreement shall be deposited with the

Secretary-General of ASEAN, who shall promptly furnish a certified copy

thereof to each ASEAN Member State.

ARTICLE 23

Entry into Force

1. Each Party shall notify all the other Parties in writing upon completion

of its internal requirements1 necessary for the entry into force of this

Agreement. This Agreement shall enter into force on 1 January 2010 or

the date, by which such notifications have been made, by the

Governments of India and at least one (1) ASEAN Member State.

2. Where a Party is unable to complete its internal requirements for the

entry into force of this Agreement by 1 January 2010, this Agreement

shall enter into force for that Party on 1 June 2010 or upon the date by

which that Party notifies the completion of its internal requirements,

whichever is earlier. In exceptional circumstances, where a Party is

unable to complete its internal requirements for the entry into force of

this Agreement by 1 June 2010, this Agreement shall enter into force for

that Party on a mutually agreed date after that Party has informed all

Parties of the completion of its internal requirements.

3. In relation to Parties making the notification referred to in paragraph 2,

those Parties shall be bound by the same terms and conditions of this

Agreement, including any further commitments that may have been

undertaken by the other Parties under this Agreement by the time of

such notification, as if it had notified all the other Parties in writing

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of the completion of its internal requirements before the date of

entry into force of this Agreement.

ARTICLE 24

Termination

This Agreement shall remain in force until either India or ASEAN

Member States collectively give written notice to the other of their intention

to terminate it, in which case this Agreement shall terminate 12 months after

the date of the notice of termination.

IN WITNESS WHEREOF, the undersigned being duly authorised by their

respective Governments, have signed this Agreement.

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Annex 1

Schedules of Tariff Commitments

Explanatory Notes

1. The tariff lines subject to tariff reduction and/or elimination

under this Annex are categorised as follows:

(a) Normal Track

(i) Applied MFN tariff rates for tariff lines placed in the Normal Track

will be reduced and subsequently eliminated in accordance with the

following tariff reduction and elimination schedule:

• Normal Track 1:

1 January 2010 to 31 December 2013 for Brunei Darussalam, Indonesia,

Malaysia, Singapore and Thailand, and India

1 January 2010 to 31 December 2018 for the Philippines and India

1 January 2010 to 31 December 2013 for India and 1 January 2010 to 31

December 2018 for Cambodia, Lao PDR, Myanmar and Viet Nam

• Normal Track 2:

1 January 2010 to 31 December 2016 for Brunei Darussalam, Indonesia,

Malaysia, Singapore and Thailand, and India

1 January 2010 to 31 December 2019 for the Philippines and India

1 January 2010 to 31 December 2016 for India and 1 January 2010 to 31

December 2021 for Cambodia, Lao PDR, Myanmar and Viet Nam

(ii) Where the applied MFN tariff rates are at 0 per cent, they shall

remain at 0 per cent. Where they have been reduced to 0 per cent, they

shall remain at 0 per cent. No Party shall be permitted to increase the

tariff rates for any tariff line, except as otherwise provided in this

Agreement.

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(b) Sensitive Track

(i) Applied MFN tariff rates above five (5) per cent for tariff lines in the

Sensitive Track will be reduced to five (5) per cent in accordance

with the following tariff reduction schedules:

1 January 2010 to 31 December 2016 for Brunei Darussalam, Indonesia,

Malaysia, Singapore and Thailand, and India

1 January 2010 to 31 December 2019 for the Philippines and India

1 January 2010 to 31 December 2016 for India and 1 January 2010 to 31

December 2021 for Cambodia, Lao PDR Myanmar and Viet Nam

(ii) Applied MFN tariff rates of five (5) per cent can be maintained for up to

50 tariff lines.

For the remaining tariff lines, applied MFN tariff rates are reduced to 4.5 per

cent upon entry into force of the Agreement for ASEAN 6 and five (5)

years from entry into force of the Agreement for Cambodia, Lao PDR,

Myanmar and Viet Nam. The AIFTA preferential tariff rate for these tariff

lines are further reduced to four (4) per cent in accordance with the end-

date set in subparagraph (i).

(iii) Applied MFN tariff rates on four (4) per cent of the tariff lines placed in

the Sensitive Track, as will be identified by each Party on its own accord and

exchanged with other Parties, will be eliminated by:

31 December 2019 for Brunei Darussalam, Indonesia, Malaysia, Singapore3

and Thailand, and India

31 December 2022 for the Philippines and

India

31 December 2024 for Cambodia, Lao PDR, Myanmar and Viet Nam

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(c) Special Products

(i) Special Products refer to India’s crude and refined palm oil (CPO and

RPO, respectively), coffee, black tea and pepper.

(ii) Applied MFN tariff rates for the Special Products will be reduced in

accordance with the following tariff reduction schedules:

AIFTA Preferential TariffsNot later than 1 January

Tariff

Line

Base

Rate201020112012201320142015201620172018201931.12.2019

CPO 80 76 72 68 64 60 56 52 48 44 40 37.5RPO 90 86 82 78 74 70 66 62 58 54 50 45Coffee 100 95 90 85 80 75 70 65 60 55 50 45Black

Tea

100 95 90 85 80 75 70 65 60 55 50 45

Pepper 70 68 66 64 62 60 58 56 54 52 51 50

(iii) Any better offers made by India to other competing oils/fats shall

also be duly offered to palm products.

(iv) If the applied MFN tariff rate for CPO and RPO is lower than the

preferential tariff under the AIFTA, the lower applied rate shall

prevail.

(d) Highly Sensitive Lists

Tariff lines placed by the Parties in the Highly Sensitive List are classified

into three (3) categories, i.e.:

(i) Category 1: reduction of applied MFN tariff rates to 50 per cent;

(ii) Category 2: reduction of applied MFN tariff rates by 50 per cent; and

(iii) Category 3: reduction of applied MFN tariff rates by 25 per cent, and

such tariff reduction shall be achieved by 31 December 2019 for Indonesia,

Malaysia and Thailand, 31 December 2022 for the Philippines, and 31

December 2024 for Cambodia and Viet Nam.

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(e) Exclusion List

Exclusion Lists shall be subject to an annual tariff review with a view to

improving market access.

2. No applied tariff among the Parties shall exceed the rates scheduled in

this Agreement. However, if the applied MFN tariff rate is lower than

the scheduled rate, it shall be applied to all Parties.

3. For tariff lines subject to specific tariff rates, tariff reduction and/or

elimination are in accordance with the modality and timeframes of the

category within which such tariff lines are placed. The proportion of

tariff reduction for these tariff lines is equal to the average margin of

tariff reduction of the tariff lines with ad-valorem tariff rates that are

subject to tariff reduction in the same year.

4. Notwithstanding the Schedules in this Annex, nothing in this Agreement

shall prevent any Party from unilaterally accelerating the tariff

reduction or unilaterally transferring any of the products or tariff lines

in the Highly Sensitive or Special Product Lists to the Sensitive Track or

Normal Track, or tariff lines in the Sensitive Track to the Normal Track.

5. Parties shall enjoy the tariff concessions made by the other Parties for

tariff lines as specified in and applied pursuant to the relevant tariff

reduction/elimination schedule in this Annex together with the

undertakings and conditions set out therein as long as that Party

adheres to its own commitments for tariff reduction/elimination for that

tariff line.

6. The tariff rates specified in the Schedules in this Annex set out only the

level of the applicable AIFTA preferential tariff rates to be applied by

each Party for the tariff lines concerned in the specified year of

implementation and do not prevent any Party from unilaterally

accelerating its tariff reduction or elimination at any time.

7. For a Party for which this Agreement enters into force at a date later

than 1 January 2010 , the initial reduction or elimination of customs

duties shall be implemented at the level specified in that Party’s

schedule of tariff commitment for the year in which the Agreement

enters into force for that Party.