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Proceed with care:There’s no need to rush into an FTA with China

Financial Express, India

Proceed with care

There’s no need to rush into an FTA with China

19 July 2005

Commerce minister Kamal Nath’s position that a Free Trade Agreement (FTA) with China would not work until it becomes a market economy is not unreasonable. The seemingly unbeatable global competitiveness of China’s manufacturing sector is attributable, in large measure, to the huge subsidies extended by Beijing to industries like steel and textiles. Add to this its policy of keeping the yuan deliberately undervalued, and China’s advantage in global markets is not surprising. In such a scenario, an FTA with China is likely to tilt the playing field against India and may end up hurting our industries.

To be sure, fear of a backlash by domestic industry may also have been a factor in Kamal Nath’s desire to go slow. But that is not the only reason. For all the hype in the West about China and India and the tendency to speak of both countries in the same breath, the two are not comparable. Delhi has a long way to go to catch up with its nimble-footed neighbour. Make no mistake: des-pite the higher growth in recent years, the Indian economy is an economic dwarf in comparison to China. In 2004-05, India’s total GDP at factor cost grew by 6.9%, not much slower than China’s 9%, but its GDP is less than half of China’s and its share of global trade was 0.8% against China’s close to 5%.

Moreover, notwithstanding Bei-jing’s grudging espousal of trade multilateralism, its track record in transparency on economic matters is dismal. Despite Delhi’s considerable experience in conducting itself in the WTO fora, it is likely to find bilateral trade negotiations with China’s communist government a different ball game. Beijing has been a tough and intractable negotiator in the sphere of political diplomacy. Things are unlikely to be different in the economic domain.

This is not to say that we will necessarily come worse off in an FTA with China. Its overheated economy is not exactly in the pink of health. Efforts are already on to curb bank loans and excessive investments in industries. India has a headstart in services, but in manufacturing it lags China. Manufacturing constitutes just 17% of India’s GDP, while it accounts for more than 30% of China’s GDP. In the circumstances, it is better we set our house in proper order by increasing the competitiveness of our manufacturing, instead of rushing headlong into an FTA with China at this juncture.