By Siddharth Subudhi
While the government has taken a positive step by introducing temporary safeguard measures, these changes are only applicable for two years. A more comprehensive and sustainable solution is required to secure India’s strategic interests and prevent the compromise of its defence supply chain.
Trade between India and Korea grew by 9% YoY in 2022-23. In the same assessment period, exports from Korea have grown by 21%, while India’s exports contracted by 18%.
An analysis of the situation has revealed that a poorly negotiated India-Korea Comprehensive Economic Partnership Agreement (CEPA) of 2009 is a major reason for the distortion of trade we are seeing. This is not a one off situation, as India’s historic experiences with Free Trade Agreements (FTA) have often had undesirable outcomes for the country’s merchandise trade.
The review and upgrade to the CEPA with Korea is urgently required. The agreement has especially affected certain industries with strategic applications.
One of the product categories that the agreement has caused significant damage to India’s domestic industry is that of Ferro Molybdenum (FeMo). FeMo has critical strategic applications such as in the rocket nozzles of currently launched Agni V missiles with MIRV.
It is heartening to note that India has sufficient and more capacity for FeMo production than the domestic requirements. However, we are importing almost 50% of our FeMo requirements from Korea due to price distortions resulting from the CEPA.
At present, there is no Regional Value Content (RVC) criteria for FeMo in the agreement. Both India and Korea have no Molybdenum deposits, or Roasted Molybdenum Oxide (RMOC). This implies that Koreans import the same raw material that Indian manufacturers import for manufacturing FeMo but they do it at an effective zero tariff whereas Indian manufacturers have to pay 2.5% on the same raw material.
Korea thus freely imports the raw material without any duty, makes a minimal value addition of only around 10% (conversion from RMOC to FeMo), and exports to India with a significant cost advantage. This as well as tariff concessions, and non-application of Rules of Origin (minimum 35% value addition within the country), has had detrimental effects on the domestic FeMo industry.
FeMo plays a crucial role as a strategic input in the manufacturing of alloys for defence and strategic hardware, including gun barrels, rocket nozzles, muzzlers, shipping, and turbines. Its properties, such as resistance to high temperatures, improved hardness, and corrosion reduction, make it indispensable for the production of goods for India’s defence sector.
This situation has resulted in a serious blow to India’s strategic supply chain from Korean imports even though Korean manufacturers are not more competitive than Indian manufacturers. The price advantage of Korean manufacturers comes solely from trade distortion introduced by the CEPA. Korean exports to India have risen from a mere 3% pre-CEPA to around 50% post-CEPA trade distortions. These imports have eaten the market share of India’s domestic industry, and therefore impacting India’s installed capacity.
The Directorate General of Trade Remedies (DGTR) conducted an investigation in 2023 and recommended imposition of safeguard duties, finding that the import surge was due to tariff concessions and a lack of value addition conditions, causing material injury to the Indian industry.
While the government has taken commendable action by removing tariff concessions until October 2025, reviewing the India-Korea CEPA to include RVC conditions is necessary to create an equal playing field.
As per India’s CAROTAR 2020 regulations, countries can get tariff concessions, only if atleast 35% of the value addition has happened in that country. Excluding this from any trade agreement, severely distorts the market to the disadvantage of Indian manufacturers.
Therefore, the 35% value addition criterion, as per India’s CAROTAR 2020 regulations, needs to be immediately added to the CEPA. In fact, all carve-outs in the CEPA, that allow bypassing of rules of origin or are in conflict with India’s CAROTAR 2020 regulations, need to be removed from the CEPA.
While the government has taken a positive step by introducing temporary safeguard measures, these changes are only applicable for two years. A more comprehensive and sustainable solution is required to secure India’s strategic interests and prevent the compromise of its defence supply chain. This can be done by simply following the regulations.
Enforcing the value addition clause in the CEPA is a simple solution. It is high time to strengthen India’s Free Trade Agreements, ensure fair competition, and protect the vital industries that contribute to India’s national security.
This article first appeared in ET Government,
https://government.economictimes.indiatimes.com/blog/impact-of-india-korea-fta-on-ferro-molybdenum-other-minerals-crucial-for-defence-sector/108601670?utm_source=latest_news&utm_medium=homepage
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