Tuesday, 31 January 2017

Dealing With China--Part-II

                                        The offer of a Free Trade Agreement

      In his remarks at the University of Mumbai recently the Chinese Ambassador to India Luo Zhaohui, apart from taking the initiative for a proposed Friendship Treaty, also referred to the need for a Free Trade Agreement with India. It is not in the public domain whether the Chinese authorities have officially proposed the same to India, but nevertheless it is an important development, as far as trade relations between the two countries are concerned. Before an assessment can be made on India’s response, it is imperative to first evaluate the present state of the trade relationship between the two countries.

     India’s trade relations with China have had a checkered history and unfortunately continue to remain hostage to political developments between the two countries; albeit considerably less so now than earlier. It is to the enormous credit of Rajiv Gandhi that he was the first Indian leader to realize that a solution to the vexed issue of the boundary issue was not imminent in the near future and therefore to delay normalization of trade and economic relations with China would only be counter-productive. It was Rajiv Gandhi who took the decision to de-link the two issues. It was also during his visit to China in December 1988, that for the first time a ‘Joint Economic Group’ was established. However it must be pointed out that no one in the Indian leadership, at that time, paid much attention to this aspect of the relationship, for no one anticipated or expected that bilateral trade volumes would develop so fast. And develop they did with bilateral trade that mushroomed exponentially from a paltry US$265m in 1991 to US$ 70.73 billion by 2015-16. An interesting fact is that India’s current bilateral trade with China is larger than India’s combined bilateral trade with Britain, Germany and Japan! But the main problem area is that India’s trade deficit with China is unusually high and in 2015-16 it stands at US$52.69 billion. And it is expected that this will go up even further this year. This by itself should not be a cause for worry, as India runs deficits with sixteen out of its top twenty five trade partners. The inescapable fact is that India buys more than it sells world- wide.

    Almost everyone recognizes where the real problem lies behind this massive trade deficit. India’s trade basket consists of cotton, gems and precious metals, copper and iron ore. All are commodities. China on the other hand, exports manufactured capital goods mainly for the power and telecom sectors. The fact is that India just does not produce enough high quality manufactured goods even for its own billion plus consumers, let alone for exports and therefore it has to rely on quality imports from abroad. There are many experts who feel that the inordinately high trade deficit between India and China of US$ 52.73b, is not a very serious issue; for a country such as India that is on its way to establishing an industrial base and seeks high growth rates, a larger import profile is but unavoidable. Since China is the major source of technology intensive products that are cost effective, running a high deficit with China is but inevitable.

    However running trade deficits with China may not be necessarily inevitable as presumed. According to the Chinese, the problems faced by India are elsewhere and essentially relate to restrictive labor practices, land and tax laws, rickety infrastructure and inadequate power supply. In addition while China is a part of the global supply chain, being the last stop of the manufacturing chain in East Asia; India is no- where near being a part of this global chain.

   Therefore what would a Free Trade Agreement with China entail and what would be its implications? Empirical studies show that for India any such agreement would be a non-starter, for India is not competitive at all. A FTA would not have any major impact on increasing Indian exports to China, for the tariffs that China levies on most items, in the Indian export basket, are already near zero. Further the manufacturing skills and abilities at present available in India, as compared to those available in China are rather low. Indian manufacturing industry, as presently constituted, would be badly hit. Although overall trade between the two countries might grow at a healthy pace, yet it would be mostly to the advantage of the Chinese. If for example, tariffs levied were to be reduced to say by 5 per cent across the board, then the increase in India’s exports would be negligible, whereas those of China would increase by an estimated 18 per cent.[i] From the Indian point of view, therefore, this proposal is a non-starter. However one way forward could be to go for a selected sector wise free trade agreement, rather than one across the board. It is for this reason also that progress in negotiations in the RCEP are slow and tedious, as both India and China find it hard to reconcile their respective positions.

    One area where India needs to press the Chinese is in opening more facilities and for increasing border trade. At present the trade between India and Tibet across the land borders is very modest; in contrast to which Sino-Nepal border trade is thriving at US$542m.There are several reasons. Firstly, the lists containing items that can be traded are outmoded and not commensurate with modern requirements. Secondly, the timings when traders can conduct trade are very unsuitable, particularly since they cannot stay overnight in either country. Most border trade points are open only four days in a week. The time taken to reach border points is also a factor since the infrastructure, particularly on the Indian side is very rudimentary. For example, the road connecting Siliguri, the last railhead to Sikkim and onto Nathu La is about 143 kilometers long, it is a single lane and often subject to landslides. Sikkim has no airports, nor any railheads.

     The importance of border trade should be recognized as it is an important catalyst for poverty reduction in the border areas. Border villages are becoming de-populated on account of lack of jobs; thus posing security concerns for India. In the past many towns such as Kalimpong, Darjeeling or even Tawang, thrived due to the border trade with Tibet. Thus if border trade is revived, it can once again serve as a significant dynamic in their economic development.   

      In 1988 when a significant shift in Indian policy took place, it was the fervent hope that the goodwill thus generated with normalization in all other sectors, it would facilitate the settlement of the boundary issue. Those hopes have to some extent been belied, but what has also emerged is that the massive trade deficit generated has added an altogether new issue between the two countries. By 2030 the economies of both China and India are expected to be amongst the top four economies of the world, but unfortunately India still does not have a full time independent trade negotiator on lines of USTR.  

[i] India-China Free Trade Agreement [FTA]: Viability, Prospects and Challenges. [Rupa Chanda/IIMB Management Review]

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