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India-Korea Business Ties after CEPA

Monday, September 17th, 2012

An economic agreement between India and South Korea, the Comprehensive Economic Partnership Agreement (CEPA) went into effect in January of 2010. The agreement got its unique name at the request of the Indian side, and it basically means a free trade agreement.

It was not an easy path for these nations to reach their eventual destination. The whole negotiation process took three and a half years since the first session took place in February 2006.

The agreement between Asia’s third and fourth largest economies was originally signed on August 7, 2009. The signing ceremony took place in Seoul, Korea, between Indian Commerce Minister Anand Sharma and South Korean Commerce Minister Kim Jong-Hoon. Indian lawmakers ratified the agreement in 2009, after which the South Korean National Assembly ratified it. The pact took off 60 days later in Jan. 2010, after it earned approval from the lawmakers.

Under the CEPA, South Korea needs to eliminate tariffs on 90 percent of Indian products over 10 years while India reduces tariffs on 85 percent of South Korean exports within the same period. Also, South Korea is privileged for a reduction of 4459 types of tariffs imposed on major export items to India such as auto parts, steel and machineries. Experts foresaw in particular that the country’s biggest trade sector auto industry would have a one to five percent tariff reduction over eight years from the current 12.5 percent level. Tariffs on refrigerators and color televisions were lowered by fifty percent from the previous 12.5 percent.

Auto parts are one of South Korea’s biggest exports to the world. South Korea sold US$1.13 billion worth to India before CEPA and firms in that sector are believed to benefit substantially from the deal. According to the South Korea Institute for International Economic Policy, the CEPA was expected to increase bilateral trade by US$3.3 billion and increase South Korea’s gross domestic product by 1.3 trillion won (US$1.05 billion).

Both countries are anticipating stronger economic ties through the CEPA. It seems like so far the results have met the expectations, as exports by both countries have risen. According to the joint statement issued by the two countries after the Indian Prime Minister Singh and South Korean President Lee met in Seoul, Korea in March of 2012, the two leaders were satisfied that the bilateral trade had been increased by around 70 percent in two years since the activation of the India-South Korea CEPA on January 1st, 2010. Whereas Indian trade with South Korea stood at US$7.1 billion in 2006, increased trade activity had propelled the number to US$17.5 billion in 2010, about a 46 percent increase from the previous year.

Very much satisfied with these results, the two nation leaders decided to set a new bilateral trade target. The previous one was US$30 billion for 2014, yet it was decided to push the target higher up to US$40 billion by 2015. Also they agreed to enhance business cooperation and strengthen trade ties. Prime Minister Singh and President Lee also welcomed the growing presence and investment of Korean companies in India and those of Indian companies in South Korea, which had been promoted by the bilateral CEPA. The Indian Prime Minister highlighted the desirability of balanced trade relations, mentioning how it would facilitate a robust growth rate for both countries in the long term. It was agreed that both sides would facilitate greater market access to each other’s products and services. Prime Minister Singh also stressed that the Indian side was hopeful of providing South Korea with pharmaceutical and agricultural products, as well as IT-enabled services.

However, there are still problems that need to be sorted out. Although bilateral trade has increased significantly, the presence of Korean companies in India hasn’t. According to the Export Import Bank of Korea, the number of newly established Korean companies in India during Jan. to Sept. of 2010 was only 41. During the previous year, there were 44 newly established Korean companies in India. It is expected that approximately 60 new Korean companies have established themselves in India in the year 2010. In comparison, the number of new Korean corporations in India was 68 in 2006, which increased to 85 in 2007. Considering these numbers, there does not seem to have been a significant benefit from CEPA in terms of Korean companies’ access to the Indian market.

The tariff reductions also do not immediately benefit companies. Under the CEPA South Korea needs to eliminate tariffs on 90 percent of Indian products. India needs to reduce tariffs on 85 percent of South Korean exports. But the tariffs are going to be eliminated over 10 years. For example, auto parts (the biggest South Korean exports to India) get a tariff deduction from the current 12.5 percent down to 1 - 5 percent over an 8 year period. Thus the tariff deduction that companies will experience is only 1 - 2 percent annually. Furthermore, there were some complaints from companies that some government employees, who were not familiar with the CEPA, still apply the old tariff rate for some products.

According to a survey done by the Export Import Bank of Korea and the India Economy Research Institute, of 82 South Korean companies which are already present in In- dia or are planning to enter Indian market, 54 percent responded that the CEPA hasn’t impacted their businesses. 33 percent of the companies answered that the CEPA was very positive to their businesses while 12 percent of them replied that they are unsure of the CEPA impact. 2 percent saw the CEPA as negative to their businesses. The India Economy Research Institute concluded that there were not enough follow-up programs to facilitate the CEPA to working levels.

When the survey asked companies whether the CEPA needs improvement, nearly half of the respondents (46.9 percent) agreed that the bilateral agreement needs an upgrade. 10.9 percent of companies felt confident that the current CEPA is good enough, with 37.5 percent answering that they are not sure. Thus with many companies feeling that the CEPA is lacking, they want more follow-up programs or policies to support South Korea and India economic relations.

Dr. Oh Hwa-suk, director of the India Economy Research Institute, advised that both the Indian and South Korean government should make an effort to offer exact and clear information of the CEPA for corporations. He also added that focusing on the follow-up of the CEPA and checking the problems that companies confront are important matters to promote the two countries’ healthy and long term economic relationship.

So what, then, are the points that need to be improved? For one thing, companies wanted to have a simplified process of obtaining certificates of origin. The current procedure is quite complicated, involving far too many steps (this problem is characteristic of economic agreements between other countries as well).

Companies stated that they also want to know the exact range of the CEPA applications. The current CEPA range is rather vague, which only causes confusion. Easy to follow working level guidelines would benefit everyone involved. The companies wanted to have a sort of guide book which explains about the CEPA as well as how they can benefit from it and target products and tariff rates. Also, the relative lack of CEPA publicity was considered a shortcoming, and Korean companies hoped the process of employment visa issuance could be made more simple than the current process.

Professor Ahn Byung-soo of Seoul Digital University is advising companies to be patient. He mentioned that the CEPA is relatively slow in opening up compared to other free trade agreements that South Korea has signed. “Companies will feel the impact of the CEPA gradually, not instantly. India has a high economic growth rate and the number of its middle class is growing, statistics which bode well for the Korean economy and Korean companies. I strongly believe the CEPA will benefit Indian companies as well as Korean companies for mutual economic growth eventually.”

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