Monday, October 20, 2003

FTA Agreement With Thailand

The free trade agreement with Thailand has to be viewed in the background of the ‘look East policy’ initiated by India in the early nineties and deepened and widened over the last five years. With minor fluctuations and diversions India has actively pursued since the 1990 a policy of establishing closer economic and political relations with ASEAN. The attitudes of different member countries of ASEAN towards India have however changed at a different pace. Singapore was the first country to recognise the benefits to ASEAN of closer ties with India. It has been actively pursuing FDI opportunities in India since the new reforms and helped India in getting the status of dialogue partner and member of the ASEAN security forum. The “ASIAN crisis” of 1997-1998 has accelerated the transformation of other ASEAN country’s attitude towards India-ASEAN co-operation. The earlier resistance of Malaysia has mellowed with the recognition that it faces much greater competition from China as a destination for FDI (and particularly export-oriented FDI). This was brilliantly encapsulated in a statement by the Singapore Prime minister at an earlier ASEAN summit that, ASEAN was like the body of a plane with China as one wing. Without India as the other wing ASEAN could not fly and would crash. Malaysia’s recognition of India’s prowess in software and IT enabled services has also contributed to the change in mindset towards India as a potential contributor to the growth of modern service exports from Malaysia.
Thailand’s approach to closer ties with India has also evolved. The first major breakthrough was the establishment of BIMSTEC in 1997 (BISTEC in June, addition of Myanmar in December & change to BIMSTEC). Thailand’s Deputy Prime Minister and DG WTO (designate) reportedly played a major role in this initiative. Mr Thaksin Shinwatra who become PM of Thailand after the Thai elections in January 2001 has also taken a very positive approach to Indo-Thai and Indo-ASEAN relations. The India-Thai FTA agreement is a culmination of this process. Thailand’s recognition of the benefit of ties with India has also facilitated the signing of India-ASEAN framework agreement for establishment of FTA by 2011 (2016 for new ASEAN & Philippines)). Because the India-Thai agreement has a faster schedule of tariff reductions than the India-ASEAN FTA it will act as a precursor and trial blazer for the latter. It will help demonstrate to apprehensive countries such as the Philippines the minimal costs and clear benefits of greater opening to India. The signing of these two agreements will also (incidentally),
(a) Put pressure on Bangladesh to accelerate formation of an India-Bangladesh FTA/PTA (which is currently under discussion in Dacca),
(b) Revive efforts for greater co-operation within the BIMSTEC framework (for instance on establishing road-rail-waterway links between India and Thailand through Myanmar and Bangladesh).
(c) Provide greater flexibility to India in multilateral negotiations under the ages of the WTO.

Over the 23 years since 1980 Thailand’s GDP has grown at an average of 6.1% per annum 0.4% points faster than India’s GDP growth rate of 5.6% per annum. This made Thailand the fourth fastest growing economy in the world relative to India, which was at ninth position during this period. Hidden behind this average is the fact that the position has changed considerably since the Asian crisis. Pre-crisis for almost three decades the Thai economy was either the second or third fastest growing economy in the world, a remarkable achievement. India therefore has a lot to learn from closer interaction with Thailand. Its ranking has, however, deteriorated sharply since the crises. In terms of 10 year moving averages it fell to 7th position in 1998, 11th in 1999, 14th in 2000, 22nd in 2001 and 28th in 2002. India’s ranking in contrast was 12th in 1997, 2001 and 2002 with a temporary worsening during 1998 to 2000. India’s attraction to Thailand as a trading partner has therefore increased. Thailand along with Indonesia and China is one of the closest competitors of India in World trade. Contrary to popular conception, this means that in purely economic terms the trade creation effect of the FTA are likely to be greater than the trade diversion effects. In other words both countries will benefit from the FTA in terms of peoples welfare. The flip side of this consumer benefit is the fact that selected industries such as SUVs will face intense competition from Thailand and will have to adjust and adapt to this competition. Research at ICRIER has shown that Indian industry is quite capable of doing this through specialisation and increased intra-industry trade.

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