Impact Of India Singapore Free Trade Agreement Economics Essay

The India-ASEAN Free Trade Agreement came into effect on 1 January 2010 with regard to Malaysia, Singapore and Thailand. It is expected to be in place with all member countries by 2016.The FTA collectively covers a market of nearly 1.8 billion people and proposes to gradually slash tariffs for over 4,000 product lines. This study analyses the impact of free trade agreement (FTA) on India and Singapore by establishing a close bilateral relationship between these countries based on convergence of their economic interests.

Singapore is India’s largest trade and investment partner in ASEAN. Economic and commercial ties have expanded significantly, particularly after the conclusion of the CECA (Comprehensive Economic Cooperation Agreement) in 2005. Bilateral trade between the countries reached US$24.05 billion in 2012. India ranked 11th in Singapore’s top 15 trading partners contributing 3 per cent of Singapore’s total trade whereas the latter emerged as the 4th largest export market for India contributing to 4.5% of total exports.

The CECA with Singapore was the first such agreement to be signed by India with any country. It integrates agreements on trade in goods and services, investment protection, and economic cooperation in fields like education, intellectual property and science & technology. It also provides Mutual Recognition Agreements (MRAs) that eliminates duplicative testing and certification of products in sectors where there are mandatory technical requirements.

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India’s main exports to Singapore include mineral fuels and distillation products, gemstones, machinery, ships and other floating structures, electrical equipments, organic chemicals, whereas among Indian main imports from Singapore- mineral fuels, pharmaceutical products, tanning or dyeing extracts, perfumery, cosmetic or toilet preparations, plastics, paper and paperboard, printed books, newspapers, iron & steel.

From the trade data, it can be seen that many items are included in both the import and export list. This is due to the significant role of “re-exports” in the Indo-Singapore trade, which indicates that goods imported by Singapore are re-exported to India to take advantage of lower tariffs under CECA.

Introduction

What is Trade?

Trade occurs between two parties when they exchange goods and services at a price determined before the trade occurs. E.g. A manufacturer sells its product to a buyer at a pre-determined price. Trade can happen between countries, states and people.

International trade occurs when two or more countries get into an agreement to exchange goods and services. The countries who are trading with each other generally apply tariffs and non-tariff barriers. But there are trade agreements between the countries where they exempt the tariffs or give concession on the trade. This is generally done to enhance the country’s Balance of Payment and also enhance relations with the country with whom the trading takes place.

Trade agreements are of different types:

Global Agreement: In this type of an agreement the countries come together for trade in order to promote public welfare. E.g. WTO(World Trade Organization)

Regional Agreement: It is an agreement between governments in order to liberalise and encourage foreign investments. E.g. NAFTA, APEC, EU, etc.

Bilateral Agreement: It is an agreement between two nations that gives both countries favoured trade status to allow concessions, removal of tariffs, etc. E.g. CECA, CERTA, etc.

Impediments to Free Trade

Free trade, in its purest form, refers to the unfettered export and import of goods and services between one country and another with no government intervention on either country’s side. However, there are some barriers to free trade such as:

Tariff barriers: Tax on imports that are invoked by countries mainly to protect the domestic industries from the possible consequences of greater competition.

Non-tariff barriers: These can be in form of quantitative restrictions on imports/exports (quotas) or existing government regulations governing technical and safety standards for products that can have the effect of restricting imports. Another form of non-tariff barrier to free trade is found in “Domestic Content Requirements” that are regulations wherein importers are forced to import goods that contain minimum prescribed amounts of domestically produced components. Such restrictions are commonly imposed on the domestic operations of foreign firms that engage in foreign direct investment in production facilities in the regulating country.

AIFTA (ASEAN-INDIA Free Trade Agreement)

India announced its “Look East” policy in 1991 in an attempt to increase its engagement with the East Asian countries. Consequently, in 1992, it became a sectoral dialogue partner of the Association of Southeast Asian Nations (ASEAN). ASEAN, which is a geo-political and economic organization with 10 member countries, was formed in August 1967 by Indonesia, Malaysia, Philippines, Singapore and Thailand. Since then, the membership has expanded to include Brunei Darussalam, Cambodia, the Lao People’s Democratic Republic, Myanmar and Vietnam. ASEAN’s objectives are to accelerate economic growth, social progress and cultural development among its members, protect the peace and stability of the region, and provide opportunities for the member countries to discuss their differences peacefully.

India became a Full Dialogue Partner of ASEAN in 1995 and the India-ASEAN Free Trade Agreement (AIFTA) was signed on 13 August 2009. The agreement, which only covers trade in goods between India and the ASEAN members, came into effect on 1 January 2010. India’s trade with ASEAN is mainly concentrated in Indonesia, Malaysia, Singapore and Thailand. These four countries remain the largest markets for Indian trade in the ASEAN region.

Among the ASEAN, Singapore is the largest destination for Indian goods (45.3% of total exports to ASEAN in 2011) and 3rd largest source of imports for India (20.2% of total imports from ASEAN in 2011). The Union Minister for Commerce, Industry & Textiles Shri Anand Sharma has expressed confidence that the two-way trade between India and the ASEAN countries will increase from USD 75 billion to USD 100 billion by 2015.

India-Singapore CECA Agreement

India has signed the Comprehensive Economic Cooperation Agreement (CECA) with Singapore in the year 2005. A JSG (Joint Study Group) was formed to study the benefits of the agreement. The JSG concluded that the CECA agreement would be beneficial for both the countries in terms of increased trade and investment by economic cooperation. This free trade agreement has been signed to shape up the trade of goods and services of the two nations. It also comprises of a bilateral agreement on investment cooperation, protection and promotion. An integral part of the CECA was the double taxation avoidance agreement which ensures that the companies should be taxed in those countries from where they have been originated. It also included Mutual Recognition Agreements on quality of goods and services, liberalized visa rules, and undertakings to cooperate on different areas of dispute settlement, education, etc.

CECA has been penned by both the countries to bring mutual benefits. From Indian prospective it brought a gateway pass for trading with Southeast Asian countries. Also India looked upon this opportunity to bring in more FDI’s and portfolio investments which helped her to develop crucial sectors of the economy like telecommunication, SEZs, infrastructure, etc. India also saw the option of rendering its services in which it has a comparative advantage because of cheap and skilled labour especially in area of IT. Moreover, the transfer of Human Resource practices were seen as an again for Indian businesses.

From Singapore’s point of view it has gained mainly from the removal of tariffs on goods because India had high tariffs on more goods than Singapore. So, the reduction on the tariffs has been done from India’s side. This agreement has acted as a catalysing factor to enhance the bilateral ties between the counties in terms of the trade, investments, ideas and people.

Benefits of CECA between India and Singapore

Trade in Goods

Eligible goods are being offered at ‘discounted ‘ rates instead of MFN rates (given to all members countries of WTO)

Tariff Savings= (MFN rate- Discounted rate) *Export value

Lower import costs help to keep a check on trade balance

Trade in Services

Improved and preferential Market Access for both countries

Investment

Singapore has become India’s 2nd largest source of FDI Inflow

India offers national treatment to Singaporean investors in some committed sectors, so they do not need approval for investing

Intellectual property Protection

Mutual Recognition of IP registration in both countries

Movement of Business persons

Free movement of professionals and workers across borders

Mutual Recognition of Standards and Qualifications

Recognition of testing standards of exporting country (negate the need for exporters to test products in partner country, reduce costs)

Double Tax Avoidance Agreement

Singaporean investors face no tax for their investments in securities

in India which has contributed to rising FDI from Singapore

India-Singapore Trade Data (Year to Year Trends)

Value in US $ thousand

S.No.

Year

2007

2008

2009

2010

2011

1.

India’s Export to Singapore

6,390,068

8,853,900

6,827,539

9,066,230

15,627,481

2.

% Growth

–

38.55

-22.88

32.78

72.37

3.

% Share in India’s Total Exports to the world

4.37

4.86

3.86

4.11

5.18

4.

India’s Import from Singapore

6,901,607

8,304,751

6,141,634

7,263,136

8,155,302

5.

% Growth

–

20.33

-26.04

18.26

12.28

6.

% Share in India’s Total Imports from world

3.15

2.63

2.30

2.07

1.76

7.

Total Trade

13,291,675

17,158,651

12,969,173

16,329,366

23,782,783

8.

% Growth

–

29.09

-24.41

25.91

45.64

9.

% Share in India’s Total Trade with world

3.64

3.44

2.92

2.86

3.11

10.

India’s Trade Balance with Singapore

-511,539

549,149

685,905

1,803,094

7,472,179

11.

India’s Trade Balance with World

-72,747,241

-133,851,208

-89,636,517

-129,620,891

-160,919,541

Source: International Trade Centre trade maps

Key Notes: Trade Balance= Value of exports – Value of Imports

Analysis of Trade Data

Since CECA, there has been a significant growth in trade flows pertaining to merchandise/goods between the two countries

Total trade between India and Singapore in 2011 represents 1.3% of India’s GDP and 7.5% of GDP of Singapore

Singapore has moved up as the 4th biggest destination for India’s exports in 2011 and is placed in the 18th position on India’s imports. On other hand, India is one of Singapore’s fastest growing trade partners among major economies

India’s export to Singapore has increased by almost 150% from 2007 to 2011

Trade with Singapore has almost doubled during this span of five years

Among the major trading partners of India, Singapore is the only country after US with whom India has a healthy positive trade balance

India’s Trade Balance with Singapore has increased from a deficit of US $ 511 million to a surplus of US $ 7472 million between 2007 and 2011

India’s Trade Balance with the world has increased in deficit from US $ 72 billion to US $ 160 billion between 2007 and 2011

All values in US $ billion

Impact of CECA on the Trade Basket

On % share of total imports to India from Singapore (Year-wise)

Note:

2003 & 2004 : Before CECA between India and Singapore

2005: CECA was signed

2006-2007: Post CECA between India and Singapore

When it comes to goods imported by India from Singapore, the most notable change is that import of mineral oil had gone up considerably, while shares of other goods such as printing products and electrical machinery that previously formed a larger chunk of imports have declined. Mineral oil imports constitute 25.9% of total imports in 2007, up from just 0.30% in 2005. Superior kerosene oil is a major part of this group of imports. Other goods imported in large amounts include personal computers, payments for IT software rights documents, cellular phones, styrene, airplane parts and integrated circuits.

On Growth rates of export from India to Singapore (Year on Year)

Note:

2003 & 2004 : Before CECA between India and Singapore

2005: CECA was signed

2006-2007: Post CECA between India and Singapore

In exports, there was a very volatile movement in growth rates of the top 5 commodities. For example, gemstones and precious metals had 2 successive years of more than 100% growth, which was followed by a 89.82% drop in 2006 that brought the value of export back to around the original level. Mineral oil and fuel products (motor oils, fuel oil, petroleum products, diesel, ATF, etc.) increased to become 55% of all exports from India to Singapore. Shipping and boat goods (such as floating/ submersible drilling/ production platforms, small vessels for transport of persons and goods) registered huge growth in export around time of CECA’s launch and grew to 7.3% of India’s exports to Singapore from 1.14% in 2003-04.