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Understanding Future of the India-Korea Free Trade Agreement under CEPA

Monday, September 17th, 2012

India and South Korea have had a very successful run of the CEPA, or the Comprehensive Economic Partnership Agreement (CEPA) that was set up two years ago. Under the deal, bilateral trade between the two countries have grown from US$12 billion in 2010 to US$21.5 billion, a growth rate of more than 70 percent. The agreement has been reassessed and improvements have been implemented since 2010 by director generals of both countries. At the end of the last meeting in September of 2011 in Seoul, both countries were poised to decide on lowering tariff as well as to abolish some of them much before the required deadline of ten years.

The new Indian ambassador to Korea, Vishnu Prakash has expressed that, “India, inspired by the success of the Comprehensive Economic Partnership Agreement with Korea, is eager to expand our ties further. We already want to further upgrade the CEPA, which is just two years old, and that shows how effective it has been. We perceive it as a very successful effort.”

Preview of Indo-Korean CEPA

The CEPA was signed on August 7, 2009, by the governments of India and South Korea, aimed at boosting trade in industrial sectors, as well as engaging in manpower exchange.

In India it was a watershed agreement; only the second in its history after a similar agreement with Singapore in 2005. However, it remains the first-ever free trade agreement with a member of the OECD. After the success of CEPA with South Korea, India has since followed it up with agreements to other important trading partners such as Malaysia and Japan. It is currently reviewing another with Indonesia.

The CEPA with South Korea technically differs from an FTA in the sense that the tariffs would be lowered in phases. Both countries are bound, as per the agreement, to lower their tariffs by ‘85 to 90 percent of the goods traded between the two countries over the course of a decade.’

Analysis of CEPA So Far

In the years following CEPA implementation, various studies have been carried out to understand, assess and evaluate the feasibility of the trade agreement.

Some of these investigated the application of the agreement based on ‘trade indices, partial equilibrium and computable general equilibrium.’ Advanced economic tools such as SMART model and the GTAP model were used to evaluate the immediate as well as long-term impact. The WITSSMART model was applied to evaluate the liberalization process as per CEPA revenues, considering theoretical assumptions of complete liberation in both countries. This model more specifically looked at consumer surplus, trade creation and diversion results as well as the impact on tariff revenues. According to one such study, ‘India is expected to lose US$768 million while Korea will gain by US$1232 million.’

Review of CEPA in Business Terms

The Comprehensive Economic Partnership Agreement came into force from January 1, 2010, following an agreement between the two countries in 2009, to forge stronger economic and strategic ties with each other.

Upon signing the historic CEPA, Anand Sharma, the Union Minister, said that, “We view the agreement with the Republic of Korea to serve as an economic bridge between South Asia and the larger East Asian economy, paving the way for a larger regional economic integration across the Asian continent.”

In September 2011, the maiden joint ministerial committee meeting was held to review and assess the Comprehensive Economic Partnership Agreement. The committee included Kim Jong-Hoon, Korean Minister for Trade, along with a high-level delegation consisting of officials, businessheads as well as professionals.

According to the review, Sharma revealed that Indian investment of US$100 billion FDI was achieved. He specially mentioned that, “the Delhi-Mumbai Industrial Corridor (DMIC) project represents a whole range of opportunity for establishing new urban townships, investment regions, and logistic hubs in an economically vibrant part of India. We welcome the Korean business community to join hands with us in our endeavor to develop this corridor.” Despite, the recessionary economic environment, Mr. Sharma said that trade between the two countries has grown fivefold in the last 8 years and both the governments hoped that the business community would “take advantage of the liberal tariff regime” so as that “the services economy in particular will benefit from a liberalized regime on both sides and will form an important building block for augmenting the bilateral trade between our two countries.” The Korean Minister said that, “India and Korea had increased mutual trade by more than 44 percent to about US$17 billion during the past year alone since the implementation of CEPA. South Korea would like to partner India further in its quest for economic development. Whereas Korea is strong in manufacturing, India has a robust services sector, which complements deeper cooperation.”

The next official review is expected to be held by the Ministerial Joint Committee in Seoul in 2012. Since 2010, the bilateral trade between India and South Korea has grown by 44 per cent from $15 billion.

Has CEPA Proved Profitable in India or South Korea?

Despite government endorsement of the success of CEPA over the past few years, Indian business representatives and consultants such as B. Sriram from the Price Water Cooper Consultancy believe that, “South Korea has agreed to reduce import tariffs on nearly 95 percent of the items whereas India has agreed to limit that to 80 percent of the dutiable products. However, most automobile products have been kept out of the CEPA.” Hence, there is a great need for Indian businessmen be more pro-active and lobby for inclusion of their industry within CEPA. A Research on International Economic Relations (ICRIER) sponsored paper found that “a further 10 percent reduction in tariff on all items except agriculture and fishery products would increase Korea’s exports to India by US$180 million. But it will also lead to increases in India’s exports by US$600 million.”

Trade statistics also reveal that in 2010, “India imported goods worth US$11.4 billion and in the first eight months of the calendar 2011, brought in $8.5 billion worth. But India’s exports to Korea in 2010 were $5.6 billion, which rose to $5.5 billion in the first eight months of 2011.” Hence, the present skew in trade has to be corrected so as to achieve favorable trade revenues for both countries.

CEPA and Future Trade Between South Korea and India

The future of South Korean and Indian bilateral as well as comprehensive relationships was well showcased by the Prime Minister during his historic visit to South Korea in late February, 2012.

Within the backdrop of the Nuclear Security Summit the Prime Minister was attending, he explored all facets of the trade and bilateral relations with South Korea. Addressing various forums and business representatives at various points of his visit, he said that, “Since the implementation of the bilateral Comprehensive Economic Partnership Agreement (CEPA) on January 1st, 2010, bilateral trade between India and South Korea had surged by roughly 65 percent in two years and reached a turnover of US$20.6 billion in 2011.”

Inviting the Korean business community to invest in India, he said that, “Investment from Korea is a priority for India. We will take pro-active steps to address investor grievances and improve the business climate in the country. Many states of our union have been actively encouraging foreign investment and we will support these efforts. I urge Korean industry to have faith in India.”

Drawing attention to the “still below its huge untapped potential” reality, he said that, “The bilateral trade target was revised to US$40 billion by 2015. This is a challenge as well as an opportunity that we must both seize together.”

Appreciating the sustained growth Korea has maintained amongst all the OECD countries, he shared that his countrymen admired the ‘achievements and determination, solid hard work and spirit of enterprise of the Korean people.’

Emphasizing the advantageous Indians would offer Korean business groups, the Prime Minister is giving a detailed report said that, “Firstly, our domestic savings rate is about 33 – 35 percent of our GDP and growing. Secondly, India has a very young population and over half of the working population is in its twenties. Thirdly, over the past few years we have invested heavily in education, health and agriculture to give a new deal to rural India. Our rural markets are now booming and the middle class is growing rapidly. Fourthly, we have been undertaking a huge expansion in our higher education and skill development infrastructure of ports, airports, railways, energy and roads. India is poised to continue to be a frontline player in the global knowledge economy.”

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