India and Japan Sign CEPA

By Viola Tang, BASC Research Assistant

On February 16, 2011 India and Japan signed a Comprehensive Economic Partnership Agreement (CEPA) that will remove tariffs on 94% of trade between the two countries by 2021. The agreement aims to boost bilateral trade between the two countries, from the current amount of US$10.36 billion to US$25 billion, in four years. India will gain from removed tariffs on food products (including pepper, tea, and curry), textiles and pharmaceuticals, as well as the new allowance of ‘commercial presence’ of Indian working professionals in Japan to set shop and provide services. Japan will gain from reduced barriers on products (including auto parts, steel imports, electronics and machinery) and greater opportunities to invest, with ensured protection of intellectual property, in key resources and mega industrial and infrastructure projects in India. The agreement also enables Japan to develop its production networks in Asia via relaxed restrictions on single brand companies. However, neither side has given leeway on sensitive sectors, such as rice and spices.

The pact highlights the advent of increasing strategic trade partnerships in response to changing power dynamics in Asia. For Japan, CEPA provides a counter-balance to its increasing economic dependence on China and diversifies the risk of diplomatic flare-ups. The agreement is also a move for Japan to remain competitive against South Korea, which has utilized free trade to improve its global competitiveness. Having just fallen to the number three spot in global GDP ranking, the pressure is on the Japanese government to boost growth. For India, the pact is the first with a developed country, providing a market for its booming economy. The agreement also led to proposals to create a US$9 billion revolving fund with Japan to finance an industrial corridor, which could fundamentally improve India’s infrastructure for economic development. Finally, the pact provides India with a competitive edge over China, South Korea and Vietnam, which do not have FTAs with Japan.