logo logo

Would a free trade agreement with China be a sensible move?

Financial Express, India

Would a free trade agreement with China be a sensible move?

Gains for India will be more political than economic

By Manoj Pant

20 April 2005

I recall two incidents. One, a meeting with a senior functionary in the Chinese embassy in 2002. His comment: China’s main grouse with Pakistan after 9/11 was that they had allowed the US into our backyard. Second, the same year, at a seminar in JNU, a Japanese delegate was explaining why the Japanese were cutting aid to India-India’s nuclear explosion was difficult to justify to the paranoid Japanese public. When asked why similar actions were not contemplated against China, the answer was frank: China scares Japan but India doesn’t!

Cut to the present. In the last week, the Chinese public has been demonstrating against Japan’s bid for a permanent seat on the UN Security Council.

What does this have to do with a free trade agreement (FTA) between India and China? Given the evolving scenario in international politics, it is silly to evaluate all FTAs in pure economic terms, as these have altered drastically over the last 10 years.

As an economic instrument, FTA derives its value from the height of tariff barriers. The higher the tariff barriers between countries, the greater the benefit of an FTA to its constituent countries. High tariffs imply that with free trade, prices of imports of one country from another would decline steeply. In addition, since tariffs with the rest of the world remain high, the possibility of diverting trade to producers within the FTA countries is high. This makes producers and consumers both gainers from an FTA and reduces political opposition.

Today, China already has fairly low tariff barriers vis-a-vis the rest of the world. So no serious market benefits can be expected by Indian producers after an FTA. On the other hand, Indian tariffs in the 20% range are reasonably high, so that there are some expected gains to Chinese exporters of electronic goods and steel products.

The opposition from Indian producers is also obvious, given that 80% of India’s anti-dumping duties are levied on Chinese imports of chemicals in particular. It is argued that India would be able to export services to China. But services are protected by domestic and not trade barriers.

While WTO membership mandates China to bring its import tariffs and customs procedures in line with the rest of the world (and they have largely done so), this is not true for domestic regulations. For example, will China end its domicile policy, which restricts labour movement within the country? If not, then how does one compare labour costs in the two countries?

At best, one can expect an FTA like that with Thailand which, after the rules of origins and exclusions, is not worth much.

What about the much talked partnership in IT services and textiles? This is going to happen irrespective of whether an FTA is signed or not. The Chinese know this. This is obvious from the preferred ports of call of the Chinese Premier-he would rather talk business than waste time in good diplomatic photo ops in Delhi. In textiles, too, we will see a similar scenario.

So, is an FTA with China meaningless? Today, an FTA is as much a political as an economic statement. This is why we have a plethora of FTAs signed after 1991, including seemingly meaningless ones like the US-Jordan one: the two countries barely trade!

With their political system, there is no domestic political baggage for the Chinese. For Indians, there is. In the past few months, the Chinese have made their play in the field of international politics, be it in issues involving Taiwan, Japan or Korea. The ball is now in India’s court.

The writer is professor of economics, School of International Studies, JNU