ASEAN Free Trade Area Blues: Struggles in Regional Trade Agreement

ASEAN Free Trade Area Blues: Struggles in Regional Trade Agreement

The 10th review meeting of the Association of Southeast Asian Nations (Asean)-India Trade in Goods Agreement (AITGA) is upcoming, and India is focusing on making the pact work to its advantage. The strategic importance of AITGA lies in its economic integration potential and geopolitical significance in the Indo-Pacific region.

India, currently broadening its economic cooperation and trade agreement with Australia and negotiating an FTA with New Zealand, has participated in the US-led Indo-Pacific Economic Framework for Prosperity but has opted out of its trade pillar. However, the ASEAN region remains a vital market for Indian exports and investment, with bilateral trade under AITGA reaching about $122.67 billion in 2023-24, accounting for 11% of India's global trade.

The partnership supports India’s geopolitical aim to balance China’s influence in Southeast Asia through enhanced supply chain collaboration, maritime security cooperation, and defense ties such as arms exports to ASEAN countries. Initiatives like the India-Myanmar-Thailand Trilateral Highway, the Kaladan Multimodal Transit Project, and integration of India’s UPI with ASEAN’s payment systems enhance physical and digital connectivity critical for regional integration.

However, India faces challenges in maximizing benefits from AITGA due to structural issues such as the difficulty in tracing raw material origins, cumbersome compliance costs, and low tariff differentials that reduce exporters’ incentives to use preferential provisions. These have limited India's export performance and the full utilization of trade preferences. Domestic industry has expressed concerns over AITGA’s weak “rules of origin” provisions, which have facilitated Chinese dumping through ASEAN countries, adversely impacting Indian manufacturers.

To address these issues, India's strategic approach should focus on pushing for the early completion of the review, leveraging developmental partnerships in digital, maritime, health, and innovation sectors, enhancing exporters’ ability to utilize preferential benefits, using India’s growing influence and economic weight to negotiate more balanced terms, and exploring how connectivity projects can translate into improved trade logistics and supply chain efficiencies.

Failure to achieve meaningful reforms might lead India to contemplate terminating the pact, as suggested by the pressure from domestic industry and persistent trade imbalances. However, terminating the AITGA is not a realistic option for India as it would leave the country without participation in any mega regional trade grouping in the Indo-Pacific region.

In light of these challenges, India is also considering a Free Trade Agreement with the EU and has relatively greater comfort levels with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as it has a larger two-way trade with member nations but a smaller trade deficit than with ASEAN. The NITI Aayog's recommendation for a service-sector-focused trade deal with the US indicates a shift in India's trade strategy towards services.

In summary, the strategic importance of AITGA lies in its economic integration potential and geopolitical significance in the Indo-Pacific region. India can make the agreement work at the 10th review meeting by insisting on fairer trade terms, restricting misuse, enhancing trade facilitation, and broadening cooperation areas, thereby transforming it into a mutually beneficial framework that supports India’s broader regional ambitions.

1. To improve its financial standing and investment prospects, India is considering a Free Trade Agreement with the European Union, showcasing a shift in its trade strategy towards services.
2. The technology sector, with initiatives like integrating India’s UPI with ASEAN’s payment systems, plays a crucial role in enhancing physical and digital connectivity, instrumental to regional integration.
3. The upcoming review meeting of the ASEAN-India Trade in Goods Agreement (AITGA) is an opportunity for India to address structural issues and push for more balanced terms, ensuring fair trade and preventing Chinese dumping.
4. Sports and other areas of cooperation, such as health and innovation sectors, could be leveraged to broaden the scope of India’s collaboration within the ASEAN region, enhancing economic integration and strengthening ties beyond pure trade.

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