[Viewpoint] Realistic expectations for India deal

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[Viewpoint] Realistic expectations for India deal

Korea has finally signed the Comprehensive Economic Partnership Agreement (CEPA) with India after more than three years of negotiation. As we can see from the eagerness displayed by government agencies promoting the outcome, the Korea-India CEPA has a different meaning from the free trade agreements Korea has made with other countries.

Just as the government announced, signing an FTA with an emerging economic power that has a population of 1.16 billion and the fifth-highest GDP in the world is significant by itself.

The Indian market, however, makes up less than 3 percent of Korea’s exports, so it might be rather rash to raise high expectations, despite the size of India’s economy.

Aside from the sheer scale of the country’s economy, the CEPA is meaningful for three reasons.

First, Korea aggressively pursued the negotiations with the intentions of advancing a new market.

This differs from the purposes of the two major free trade agreements that had been at the top of Korea’s priority list ? the Korea-U.S. FTA and the Korea-EU FTA, which included the advancement of Korea’s economic structure and reshaping the country’s image as a developed trade partner.

In contrast, the prime focus of the CEPA negotiation with India was to expand the export market.

Since over 60 percent of the country’s exports are to developing countries, this move should rightfully heighten government morale; Korea made a pre-emptive move on the Indian market, whose imports are increasing by over 20 percent in the last few years, a pace exceeding rivals such as China and Japan.

Second, Korea and India can mutually benefit from the comprehensive economic partnership, as the two countries’ industrial structures supplement each other. The Indian economy is still largely dependent on primary industry, with an emphasis on agriculture. India, therefore, can be an export market for Korean manufacturing industries, and will have great potential as a production base with inexpensive labor for manufacturers.

Just as the “comprehensive economic partnership” suggests, India seems to have greater hopes for industrial and technological cooperation in Korean manufacturing industries, rather than directly competing in the Korean market.

By including the possibility of aggressively utilizing the outstanding IT manpower and software technology of India, Korea will be able to improve competitiveness in its own manufacturing sector.

In the course of industrial cooperation, Korean companies will be bound to increasingly make investments in India, and the CEPA notably includes clauses on protecting investors and providing Korean investors with the same conditions as Indian citizens in order to boost Korean companies’ investments in India.

Third, we have to take note that despite the high expectations, compared to the free trade agreements Korea has made with other countries, the CEPA with India is considerably limited to minor market openings.

Many items have been excluded from tariff exemptions, and the schedules of tariff reduction and elimination on the agreed items are over an extended period of time.

While the agreement contains outcomes that are far better than other agreements India has made in the past, Korea, inevitably, will not be fully satisfied, since our primary goal was to expand the export market.

The silver lining is that the CEPA will translate into a considerable increase in exports, despite the limited tariff reduction, since India’s tariffs are very high and the prices of goods exported to India are flexible.

Hopefully, the Comprehensive Economic Partnership Agreement with India will be a touchstone, making Korea stand out to the developing countries that are emerging as Korea’s major export markets, opening the door to negotiations of future free trade agreements and making these countries more aggressively open up their markets.

The writer is a senior research fellow and chief of the Free Trade Agreement Taskforce at the Korea Institute for Industrial Economics and Trade.

by Kim Do-hoon
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