Introduction

With the failure of multilateral trade negotiations under the aegis of the World Trade Organization (WTO) in Cancun and Hong Kong Ministerial Conferences and collapse of negotiations on agriculture in the ministerial level talks in Geneva in July, the world has witnessed a recent wave of bilateral, trilateral, subregional, and regional trade and cooperation agreements (RTCAs) involving both developing and developed countries. These agreements have mushroomed in recent years, particularly since 1990. By July 2005, the WTO (and its predecessor, the General Agreement on Tariffs and Trade [GATT]), ¹ had been notified of 330 agreements compared to 130 in January 1955. Of these, 180 are currently in force. Additional RTCAs are believed to be operational but are not yet notified. ² The global trade talks were suspended in Geneva on 24 July 2006 after key players in WTO failed again to reach a consensus on agricultural subsidies and nonagricultural market access. The General Council of WTO, at its meeting on 27–28 July 2006, supported a recommendation by the Director General to suspend the negotiations on the Doha Development Agenda. This breakdown of WTO talks is likely to encourage more bilateral trading agreements worldwide, particularly in Asia to enhance intraregional trade through preferential and free trading arrangements in the sideline of the multilateral system.

Following the global trend, particularly the examples of the United States (US) and European Union (EU), Asia has also witnessed a shift in regional trade strategy from multilateral to subregional and bilateral trade agreements. Bilateral trade accords are on an upward trend over the years, marking a shift from the multilateral approach to regionalism. There are aggressive pursuits of these deals among Asian countries and between Asian and non-Asian countries. Around 175 bilateral and regional trade agreements are in existence or under negotiation compared to just a handful a decade ago. ³ While multilateralism is always favored by economists, there is a difference in opinion as to whether or not regionalism in the form of bilateral or subregional cooperation is a building block or a stumbling block for global free trade framework.

Subregional and bilateral regional economic cooperation and integration can help maximize the benefits of globalization while minimizing its risks. On a broader scale, the impetus for further regional integration in Asia is a result of the relatively slow progress in global multilateral trade talks, and the benefits of free trade agreements (FTAs) in Europe and the Americas. In view of the rapid integration activities in other regions and the risk of trade isolation, the opportunity costs of not accelerating subregional and bilateral regional integration are high for Asian countries.

If bilateral and subregional RTCAs are compatible with each other and with WTO agreements, these will be building blocks for worldwide multilateral agreements. Asian countries recognize that bilateral and subregional trade agreements can contribute towards accelerating regional and global liberalization and are building blocks within the framework of multilateral trading system and toward the formulation of an Asian community. In general, a subregional/bilateral RTCA will contribute, through trade creation, to structural reforms in participating countries, which in turn will facilitate multilateral trading system. However, countries with strong reservation against openness of the domestic economy have to open their market to participating countries and to multilateral trading framework.

New economic dynamics are rising in Asia as a result of the emergence of the PRC and India as major economic powers. For sustainable development of the world economy, the PRC and India should be properly integrated into the Asian economy and simultaneously with the rest of the world. During the past 25 years, real gross domestic product (GDP) growth of the PRC has been on an average of more than 9% a year, whereas the growth of external trade was over 14%. Following its reforms that started in the early 1990s, India's growth rate was on an average around 7%–8% in recent years. Goldman Sach's study (Wilson and Purushotaman, 2003) concludes that the GDP of these two largest countries in Asia, the PRC and India will surpass those of other major industrialized economies of the world in the coming decades.

The PRC and India have strong historical and cultural links and share many similarities. They possess centuries-old civilizations and unique histories. After pursuing inward-oriented policies in the early years of their development, the PRC (since 1978) and India (since 1991) have increasingly deepened their economic integration and with the rest of the world. While the PRC has emerged as one of the world's fastest-growing economies, India's economy with a robust average annual growth rate of 6% in the 1990s is also showing healthy growth momentum. Bilateral trade and investment links between the two countries have grown rapidly over the past few years, suggesting the presence of complementarities and unexploited potentials (Bhattacharyay and De, 2005).

In spite of the odds and negative publicity about their bilateral relationship, which was taken hostage by political animosity for a long time, Indo-PRC relationship has turned 180 degrees. This is because of the paramount importance of economic factors, keeping the political interest in the back seat. The PRC and India have begun to slowly open their borders for trade and human traffic. After more than 44 years, on 7 July 2006, the PRC and India opened the famed Silk Road through Nathula Pass, an ancient trading route that once connected the PRC with India, West Asia, and Europe. This development becomes very important in the light of the recent opening of the Beijing-Tibet rail service. Located some 460 kilometers (km) from the Chinese city of Lhasa in Tibet, and 550 km from the Indian coastal city of Kolkata, the Pass will be an important trade route between the PRC and India. It will enhance bilateral trade between the two countries, particularly the border regions, thus helping the poor traders living in this area.

The strong economic tie-up between these two countries made the PRC, in 2004-2005, the third largest importer of India's goods next to the US and United Arab Emirates. This performance is spectacular compared to the state of almost nonexistence a few years back. During 2004-2005, the PRC's share in India's imports was 6.30%, the highest of all trading partners. From January to May 2005, PRC-Indian trade reached $7.71 billion, which was more than the total trade in 2003. The trade was 41.1% higher than the same period last year. The PRC has made unbelievable progress in its market penetration in India surpassing all its past predictions. Currently, the PRC is also the largest exporter to Indian market surpassing the traditional alleys of the US and the United Kingdom. The PRC's exports to India amounted to $3.09 billion, 65% up over the same period last year while imports stood at $4.62 billion, 29% more during the same period last year. India became the 10th biggest trading nation of the PRC overtaking Canada.

Trade cooperation and integration between the PRC and India can foster outward-oriented development and generate economic and social benefits, which could also be a countervailing measure to withstand the excesses of economic globalization. In the age of mushrooming growth of regional trading blocs, there is no alternative to FTA, especially when multilateralism under the WTO is getting weaker because of divergence of opinions and lack of consensus among members. In comparison to the huge economies of the PRC and India, their bilateral trade is insignificant. Bilateral trade has increased but only accounts for a little more than 1% of PRC's total trade volume and more than 8% of India's trade. Therefore, a bilateral FTA has a huge potential. Furthermore, the PRC-India cooperation will build "bridges" and "linkages" between East and South Asia and could facilitate the formation of an Asian Economic Community. A PRC-India FTA would be the largest in the world as it would covers two-fifths of the world's population.

This article is organized into five sections. The first section deals with the trading trends and patterns of the PRC and India. The second section analyzes the prospects and feasibility of India-PRC FTA. The third section measures the likely impact of preferential trade agreement (PTA) and FTA between these two countries under different comparative-static scenarios and presents the gains and losses of both countries under different tariff-reduction scenarios. The fourth section discusses the implications of the India-PRC trade cooperation to the formation of an Asian Economic Community. The last section provides the concluding observations.

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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.