India-Korea CEPA: How has the country fared?

Authors: Nihit Gupta, Joint Partner ,Tushar Sehgal, Business Analyst

Comprehensive Economic Partnership Agreement (CEPA) was signed between India and South Korea in August 2009, which marked a new era of greater economic exchanges, cooperation and beneficiation between the two countries. After over 12 rounds of negotiations that spanned over 3 years, it came into effect from 1st January 2010. The objective of this Agreement was to liberalise and facilitate trade in goods and services, expand investment between the two countries and establish a cooperative framework for strengthening the economic relations among the them. Both countries  agreed to facilitate their import export process of goods traded under the Agreement.

India and Korea agreed to reduce or eliminate customs duties for a large number of products. India and Korea jointly agreed on 100% tariff reduction of custom duties for goods like journals, newspapers, glass chimneys, pressure vessels, boilers, nuclear reactors, typewriters, all computer appliances, and crude oil. The goods which had been considered for tariff reduction up to 50% were agricultural goods such as spinach, chicken, beans, guava, mango, green tea, black tea, and coffee beans.

–      Impact of Agreement on bilateral trade

India had a trade deficit of around USD 4 billion with South Korea at the time of signing of the Agreement. This has now  increased to more than USD 9 billion. While some of these imports might be essential products, due to insufficient production capacities in the country; there has been a significant increase in non-essential imports as well. Further, there has been a significant diversion of trade from other countries to Korea. In some products, the domestic industry approached DGTR for imposition of bilateral safeguard measures, such as on imports for Phthalic Anhydride and Polybutadiene Rubber, while the domestic industry sought anti-dumping or anti-subsidy duty in case of some products.

–      Major areas of impact

Analysis of top products traded between India and South Korea shows that while South Korean industry gained reasonably by utilizing the benefits under the Agreement, Indian industry has not been able to utilize the benefits to similar extent. The fact is evident from increasing trade deficit.

Exports from India to Korea are well diversified. Major export items from India to Korea are: –

•           Petroleum oils and bituminous minerals

•           Aluminium articles

•           Iron and steel articles

•           Heterocyclic compounds.

 On the other hand, major items imported by India from  Korea are:

•           Modern Processor

•           Electronic cables and appliances

•           Plastic articles

•           Iron and steel articles

  • Challenges faced by the industry

With the increase in imports from South Korea, the Indian industry has faced a couple of challenges under the Agreement, with a couple more challenges round the corner:

  1. In multiple cases, the industry in India has suffered due to high volume of impots. In fact, the domestic producers have often applied for trade remedial measures against imports from South Korea. Since 2012, India has initiated 75 trade remedial measures which include anti-dumping, anti-subsidy and bilateral safeguards measures against South Korea. The industries that majorly suffered an impact as a consequence of the Agreement belong to Electronics, Steel and Petrochemicals sectors.
  2. While the Agreement provides for Rules of Origin, there have been several instances of products getting concession despite not meeting the Rules of Origin. The Government introduced CAROTAR 20201 and Regulations to curb such practices, in the year 2020.
  3. Although the Agreement provides for invoking bilateral safeguards, the measure can be exercised only during the transition period, that is, within 10 years from the date of duty elimination or reduction. This implies that once the transition period is over, the option of seeking bilateral safeguard measures is not available to the industry.
  4. There have also been many instances where tariff concessions on certain products have led to an inverted duty structure. As a result, while the Indian producers import inputs or raw materials upon payment of duties, the finished goods produced by them compete with duty free products, resulting in incompetitiveness.
  • Need for review

The India-Korea CEPA is now being considered for a re-negotiation. The Government of India has sought inputs from the industry with the view to include and address the concerns and challenges faced. Among other factors, the following factors require re-consideration.

  • Correction of inverted duty structure – While the inverted duty structure has been affecting competitiveness of the Indian industries for some time, there is no resolution at present. The re-negotiations should focus on resolving such issue.  
  • Revision of offer lists – The Agreement came into force in 2010. In 12 years, the Indian industry has evolved with increased capacities and fresh investments in products, which were not being produced in the country earlier. Exemption of duties on such products might no longer be in best interests of the country. While a review mechanism is available under the Agreement, revision of offer lists might need very detailed study and deliberations. This may require regular reviews followed by modifications in the offer lists or a detailed review every 5 years to realign tariff lines as per product profile, capacity, production, and trade.
  • Transition period – The provision for bilateral safeguards requires revision such that relief under bilateral safeguards are available even after completion of transition period, or applicability of the clause should be extended for the duration of the Agreement.
  • Auto-trigger provision for safeguard – Further, an auto-trigger provision for safeguards may be considered under the Agreement. This could include pre-decided threshold quantity being specified against each of the tariff lines. If imports into any partner country crosses that threshold, the duties should be brought back to MFN levels automatically through customs notification.

It is imperative that the challenges being faced by the industry be brought to the notice of the Government, to allow them to adequately consider the same in the process of re-negotiations. Addressing these challenges may pave the way for India to tackle the growing deficit with South Korea.