Conclusion

Regional cooperation and integration in trade, investment, and infrastructure development can foster outward-oriented development and generate economic and social benefits. Integration will bring reduced transaction costs; greater productive infrastructure services; lower trade barriers; faster communication of ideas, goods and services; and rising capital flows. Integration requires a strong political will not only at the national level, but also at the regional level (Bhattacharyay and De, 2005). The environment for a PTA/FTA is better than ever between the PRC and India. The trade cooperation will improve the quality of life of common people in both countries. With the recent breakdown and suspension of the Doha negotiations and aggressive pursuit of these bilateral trade deals worldwide, the opportunity costs of not accelerating bilateral and regional integration are high for Asian economies, particularly for the fastestgrowing, large, and neighboring countries like the PRC and India.

If bilateral and subregional RTCAs are compatible with each other and with the WTO agreements, then these will be building blocks for worldwide multilateral agreements. Asian countries recognize that bilateral and subregional trade agreements can contribute toward accelerating regional and global liberalization and can act as building blocks within the framework of multilateral trading system. PRC-India cooperation will build "bridges" and "linkages" between East and South Asia and could facilitate the formation of an Asian Economic Community.

The PRC and India are two largest and fastest-growing economies in Asia. An FTA between the PRC and India certainly goes in favor of the PRC and is disadvantageous to India at least in the short run. This is because of the high tariff regime in India and the low tariff regime in the PRC. An FTA between the PRC and India may affect the economic efficiency between these countries because they would exclude and discriminate against the countries accounting for nearly 99% of the world trade. This discrimination works particularly to the disadvantage of India because of its high tariff barriers. The PRC will gain from this process because of its much lesser tariff compared to India.

When India gives duty free access to the PRC, tariff revenue previously collected on its imports from the PRC turns into exports revenues for the exporting firms of the PRC, which is obviously very high because of the high tariff regime in India compared to that of the PRC. In this process, Chinese firms will be gain more compared to Indian exporters whereas Indian exporting firms have less to gain from the tariff free access in the PRC. Conversely, when the PRC gives duty free access to India, tariff revenue previously collected from India's imports turns into export revenues for the export firms of India, which is obviously very low because of lower tariffs in the PRC. Since tariffs in India are very high, Chinese exporting firms have more to gain from the duty free access to India while Indian exporting firms will gain much less from duty free access to the PRC because of the latter's very low tariffs. As a second best solution, increase in duty free imports from the PRC might translate at least partially to a reduction in consumer prices, which will be substantially high, compared to a reduction in prices to the Chinese consumers. Therefore, welfare gains of Indian consumers will be higher than welfare gains of Chinese consumers. As long as India continues to have higher tariffs than the PRC, the danger of potential losses from the transfer of tariff revenue to the Chinese firms in the form of higher profits will remain. As Panagariya (2005) suggested that while thinking of an India-PRC FTA, India should remain committed to nondiscriminatory liberalization and make all out efforts to bring down its tariff to the PRC levels in 2–3 years.

To balance the adverse situation that Indian exporters mostly belonging to the manufacturing sector face. The FTA should focus on complementarity between the PRC and India. The PRC should open up its service sectors so that India can utilize its comparative advantage and balance of trade between them will not be skewed towards the PRC. India can start exporting new services to the PRC market. They can work together by pooling financial and manpower resources to form a partnership for competing with other developing countries in the world market in several manufacturing and service areas, such as IT services and textiles.

Trade integration between the PRC and India is going to be stronger through private sector initiatives irrespective of whether an FTA is signed or not. In view of the recent wave of FTAs, the importance of a PRC-India FTA should be viewed on economically and politically grounds. This FTA could also be a countervailing power to withstand the excesses of economic globalization.

The first step to create a vibrant regional trading bloc between the PRC and India is to move toward a PTA with reduced tariffs in a phased manner covering commonly agreed, selected, and manufactured services and agricultural products over a long time horizon and then to form FTAs. The ultimate goal should be an FTA with a free flow of goods, services, investment, labor, and capital.

While moving toward this objective, many complicated problems of other related arrangements will be faced. First is the definition of the "rules of origin" then harmonization of the rules of origin and other issues relating to investment regimes. According to Panagariya (2005), given the already operational regional arrangement in this region, this is bound to result in a "spaghetti bowl" type of phenomenon where, for a given product, there could be several different tariff rates depending on what origin is assigned to it. Another related problem is the harmonization of standards between the PRC and India and uniform certification procedures, which are vital to any kind of trade liberalization that lead to PTAs and FTA. A third problem is identifying a negative list of commodities of the respective countries and a detailed plan to prune it in a phased manner followed by the preparation of comprehensive national schedules of items to be offered for concession similar to the India-Sri Lanka FTA. This may not be an easy task when the tariff levels are asymmetrically distributed between these two countries.

In this paper, simulations are based on tariffs only on the basis of presumption that tariff is the only barrier to trade, and the success of an FTA depends on the removal of tariffs only. Therefore, every country should present a comprehensive list of concessions and offer items for duty free treatment. However, nontariff barriers existing in these two countries are not taken into account. It is to be noted that nontariff barriers are more trade restrictive and its distortion power is much more than tariffs. The success of an FTA depends on how the nontariff barriers to bilateral trade have been addressed and what measures each country is taking to remove such labyrinthine nontariff barriers to bilateral trade.

In this study, simulations have been done in a static framework. Simulations will give better result if the entire exercise is carried out in a dynamic framework. An attempt should also be made to estimate the welfare gains due to an FTA between the PRC and India. Future research should attempt to estimate trade potentials of these two countries by estimating stochastic frontier production function using Gravity Model, which provides an empirically tractable general equilibrium framework for bilateral trade flow analysis.

If bilateral and subregional RTCAs are compatible with each other and with the WTO agreements, then these will serve as building blocks and contribute toward accelerating regional and global liberalization within the framework of multilateral trading system. An FTA will contribute, through trade creation, to structural reforms in participating countries. Economic integration of a country requires that it should open to foreign investment, adhere to flexible labor laws, and practice careful fiscal policies. Countries with strong reservation against openness of domestic economy have to open their market. Therefore, the PRC-India FTA will lay the foundation for more open economies, induce domestic structural reforms, and create open and competitive market environments in both countries, particularly in India. This example will be followed by other Asian countries. An India-PRC FTA may act as a catalyst to strengthen multilateralism under the WTO and to formation of the Asian Economic Community. This cooperation will build bridges and linkages between East and South Asia, which is crucial for the formation of the Asian community. A more formal East Asian Summit is expected to supersede the ASEAN+3 framework and underscore the region's seriousness in pursuing goals to achieve an EU-style single Asian market and community by 2020.

Finally, an advocacy of enhanced cooperation between the PRC and India does not imply any restriction upon multilateral WTO global trade framework or other existing regional cooperation in Asia and the rest of the world. Cooperation among major Asian countries is sustainable regardless of operation of other regional cooperation initiatives and should not be perceived as constraints in developing potential cooperation among Asian economies.

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Comment(s)

There are [2] comment(s) for this entry. Post a comment.

1. S.N.Singh
   (posted 17 May 2007 / 06:34:01 PM)
   
   I reviewed the paper thoroughly and based on the hypothetical model, we cannot access the actual scenario of trade among countries. Several hidden and more effective factors should also be brought into consideration.
   
   Thanks
   Singh S.N
2. Geethanjali Nataraj
   (posted 23 February 2007 / 05:38:04 PM)
   
   I have gone through the article. I think the data on India's trade with China can be easily updated by another year to 2005-06. The ministry of commerce, government of India has posted data up to 2005-06 in its data base. Secondly, the source of most of the tables is also mentioned as CMIE. I am not sure whether it is a good idea to use CMIE database. It is generally considered to be unreliable . To depict trade between two countries, it would be advisable to use international trade sources say for instance COMTRADE.
   Thanks
   geethanjali.