[Answered] Analyze how tariff asymmetries in Free Trade Agreements incentivize Make in ASEAN, Sell in India. Evaluate its impact on domestic manufacturing and employment. (500 Words)

Introduction

As India expands its FTA network to nearly 69 countries covering around 75% of exports, pushing its global trade toward a targeted $1 trillion milestone. The Economic Survey 2025-26 highlights the need for trade agreements that strengthen domestic value addition rather than import dependence.

Tariff Asymmetries and the Make in ASEAN, Sell in India Phenomenon

Free Trade Agreements are intended to enhance mutual trade and production integration. However, India’s experience with ASEAN-India Free Trade Area (AIFTA) and other Asian FTAs reveals a structural asymmetry wherein imports have outpaced exports, incentivizing firms to locate production in ASEAN while targeting India’s vast consumer market.

How Tariff Asymmetries Create Offshore Manufacturing Incentives

1. Asymmetric Tariff Compression: India enters FTAs with relatively high MFN tariffs (trade-weighted tariff around 12.6%), whereas ASEAN economies already maintain low tariff regimes. Tariff elimination provides significant gains to ASEAN exporters in India. Indian exporters receive limited additional market access because partner-country tariffs were already low. Example: ASEAN imports surge post-AIFTA.
2. Inverted Duty Structure and Cost Disadvantage: A major distortion arises when raw materials and intermediate goods attract duties. Finished products enter duty-free under FTAs. Consequently, domestic manufacturers face higher production costs than importers. Steel and aluminium inputs attract duties, while finished machinery enters at zero duty. Example: Engineering Goods Sector.
3. Weak Rules of Origin (RoO) & Trade Diversion: Insufficient verification enables third-country goods to exploit ASEAN routes. Chinese firms establish assembly operations in Vietnam, Thailand, and Indonesia. Minimal value addition secures preferential access to India. Example: Electronics Assembly Networks.
4. Global Value Chain Relocation: FTAs combined with lower logistics and production costs encourage firms to relocate manufacturing. “Make in ASEAN, Sell in India” becomes commercially attractive. Example: Consumer Electronics Manufacturing.

Impact on Domestic Manufacturing and Employment

1. De-industrialization Pressures: Domestic industries lose competitiveness against tariff-free imports. Trade deficit with ASEAN increased significantly after AIFTA; capacity utilization declines in vulnerable sectors. Example: Chemicals and Plastics.
2. Erosion of MSMEs: MSMEs face severe competitive disadvantages due to high compliance costs, limited economies of scale and inability to absorb tariff distortions. Example: Small Engineering Units.
3. Job Leakage: When production shifts abroad employment generation occurs in ASEAN rather than India, labour-intensive sectors are particularly affected. Example: Textiles and Footwear.
4. Informal Sector Vulnerability: Small ancillary suppliers dependent on domestic manufacturing clusters suffer income losses. Example: Auto Components Ecosystem.
5. Technology Gap: Relocation weakens India’s industrial learning curve. Reduced domestic production limits technology absorption, slows movement up global value chains. Example: Electronics Value Chain.
6. Supply Chain Vulnerability: Excessive import dependence exposes India to external shocks, geopolitical tensions and disruptions in critical sectors. Example: Semiconductor Components.
7. Policy Contradiction: Offshore manufacturing undermines domestic value addition, industrial resilience and national manufacturing ambitions. Example: Make in India and Atmanirbhar Bharat.

Way Forward

1. Strengthen Rules of Origin: Strict implementation of Customs (Administration of Rules of Origin under Trade Agreements) Rules (CAROTAR). Higher Regional Value Content (RVC) thresholds and digital origin verification systems.
2. Correct Inverted Duty Structures: Reduce duties on inputs before final products and align customs policy with industrial policy.
3. Strategic FTA Design: Expand sensitive-sector exclusion lists, introduce phased tariff liberalization and conduct periodic impact assessments.
4. Deploy Trade Remedies: Faster anti-dumping investigations, safeguard duties against import surges and robust Quality Control Orders (QCOs).
5. Integrate FTAs with Industrial Policy: Synchronize FTAs with PLI schemes. Promote domestic manufacturing clusters and encourage GVC participation from India-based firms.

Conclusion

Echoing Dr. A.P.J. Abdul Kalam’s vision of economic self-reliance, India’s trade strategy must transform FTAs from mere market-access instruments into catalysts for domestic manufacturing, employment generation, and resilient supply chains.