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Why an FTA gives us cold feet

Times of India, 9 April 2005

Why an FTA gives us cold feet


One of the priority items on the Chinese premier’s agenda for his India visit will be to push for a free trade agreement (FTA) between the two countries.

Beijing has made no secret of its desire for such an agreement, but it would be well aware that New Delhi does not quite share the enthusiasm for an FTA in the conventional sense.

But why is China so keen on an FTA and India less eager? The answer in large measure lies in the significantly different structures of the two economies and their perceptions about their relative strengths. Over 50% of China’s GDP comes from manufacturing and construction, over 30% from services and just under 15% from agriculture. Clearly, therefore, manufacturing is China’s area of strength, the one that it uses as its engine of growth. It is a fact the world is well aware of with China fast becoming the factory floor of the globe.

In contrast, over half of India’s GDP comes from services with industry and agriculture sharing the remaining less than 50% in roughly equal proportions. If China is the world’s factory floor, India is fast emerging as its back office. New Delhi, therefore, understandably sees services as the area of relative competence vis-a-vis China.

That’s where the rub lies. For the Chinese, an FTA focused on trade in goods would enable them to best leverage their comparative advantage. For India, on the other hand, an agreement restricted to or focused on merely free movement of goods across borders would be one that gives Chinese manufacturers ready access to Indian markets without a corresponding benefit for India in its area of strength. In fact, even ignoring China’s relative superiority in manufacturing, India has less to gain from an FTA. This is because Chinese tariffs are already lower in most cases as Beijing was forced to lower them in return for its late entry into the WTO, while India as a developing nation has greater leeway in maintaining relatively high tariff levels.

True, FTAs need not be restricted to goods alone and could extend to services as well. But, as the historical experience globally has shown, genuinely free trade in services is rather more difficult to achieve than free movement of goods.

The experience after the dismantling of quantitative restrictions on imports three years back may suggest that fears about Chinese goods swamping India were exaggerated, but Indian industry continues to be wary of having to take on China’s manufacturing prowess in a no-holds-barred contest. The government, of course, has to factor this in while responding to Beijing’s overtures on the FTA.

It is not surprising, therefore, that New Delhi favours the "comprehensive economic cooperation agreement" concept over the FTA idea. As commerce minister Kamal Nath puts it, India would like agreements with other countries that "build on the strength of both economies". This also allows for greater manoeuvrability than an FTA.

 source: Times of India