Financial Express, India
The journey has begun, but it’ll take long to arrive
20 April 2005
“To travel hopefully is a better thing than to arrive,” wrote noted English novelist Robert Louis Stevenson. For me, a free trade agreement (FTA) with China is something similar. A free trade agreement with China could be a final destination and we can travel hopefully to it. But just now, we are not there, because we have to complete many steps before we arrive.
Meanwhile, the good thing is that our trade is rising very fast. It was just about $1 billion annually three years back. Today, it is $1 billion every month, and we hope to surge to about $2 billion a month, or over $20 billion a year, in three years. Going by the long-term trade plan of the two countries, we are looking forward to a trade turnover of $30 billion by 2010. That’s a dramatic improvement by any standards.
Against this background, a move towards an FTA with China should be preceded by a number of preparatory stages. These can hardly be bypassed.
The first step towards these ambitious targets would be for India to diversify its trade basket. If we examine the two-way trade flows, the most obvious characteristics of the trade pattern is that our exports to China are basically raw materials, ores and steel (accounting for roughly 57% of exports), while China’s exports to India are primarily manufactured goods (like electric machinery, electronic and audio-video equipment).
Since manufactured goods have a much higher level of duty compared to raw materials, free trade will mean we give away our advantage more than gaining from them. Besides, unless our exports become more diversified, trade will not be sustainable in the long term.
Second, the two countries must resolve to scrap a whole range of barriers to greater trade. These have been identified with some precision. Non-tariff barriers are a major hindrance to trade. It took painfully long for India to secure the entry of a couple of fruits into China, getting past objections such as fruit flies.
It has also been emphasised that the rules of origin should be examined and reframed so that these do not have “any restricting, distorting or disruptive effects on bilateral trade.” Yet another area, which calls for immediate attention, is the need for harmonisation of the standards, certification and regulatory practices of these two countries. In this context, both India and China should work towards mutual recognition agreements to achieve this. Above all, the India-China joint study group has urged that the two countries negotiate a customs co-operation and mutual assistance agreement to improve the interface between exporters and the customs authorities.
Third, it is only when these have been sorted and the trade flow is smoothened, should we look into the wider prospects of an economic co-operation agreement. Economic co-operation envisages not only trade, but also investment and collaboration in various areas, like energy security, development of small and medium enterprises (SMEs), water resources management to space research and remote-sensing techniques and even urban management and city development and disaster management.
Underlying all these, mutual promotion of investment in each other’s country is a recurrent theme. China is emerging as a major overseas investor and India can profit from its investment in areas like white goods. Similarly, Indian firms are also investing increasing amounts overseas and some parts could just as well go into promoting Chinese facilities.
Once these three stages have been completed and the effects of a far greater level of integration have become fully clear, we should move to examining formation of a preferential trade agreement. However, in doing so, we must recognise that China has emerged as the factory of the world and its manufactured exports have stormed into many countries that are now running huge trade deficits. According to the latest figures, China’s trade surplus has hit $5.7 billion in March alone. When we talk of free trade with China, we should remember these facts and consider the ground reality in India.
Indian industry cannot face such industrial muscle unless we set right our domestic scene. In parallel with trade liberalisation or even before, we have to introduce a clutch of domestic reforms if we have to retain our position even in the internal market.
Indian industry is hobbled by archaic labour laws and unpredictable power supplies, which cost way above international rates, indifferent and non-existent infrastructure facilities, high tax and interest charges. The Chinese industry often pay as low an interest rate as 2%, which is inconceivable for their Indian counterparts. And one has, of course, repeated, ad nauseum, that labour laws of China are not quite comparable with those in India.
In the end, it is inescapable that the two countries have two different systems. In our inveterate pluralistic ways, we are much slower in our decision-making and in introducing reform measures. Our social, economic and political institutions are all, in the end, subject to the vulnerabilities of a staunchly democratic system, of which we are all proud. We must remember all these factors before we conclude any agreements for freer trade, let alone one with China. It is better to be prepared than to face the consequences of walking towards a dead end.
The writer is economic adviser, Ficci