Prospect of PRC-India FTA

In June 2003, the PRC and India formed a Joint Study Group (JSG) to expand trade and economic cooperation between the two countries. The mandate of JSG was to recommend policy changes required to enhance bilateral economic cooperation and to present a report and recommendation on comprehensive trade and economic cooperation. On 21 March 2005, the JSG prepared a report on the India-PRC JSG on Comprehensive Trade and Economic Cooperation. It recommended a PRC-India Regional Trading Arrangement, covering trade of goods, services, and investments, identified common ground for trade and investment promotion and facilitation, and proposed measures for promoting economic cooperation in identified sectors. The JSG also recommended the appointment of a Joint Task Force (JTF) to study in detail the feasibility and benefits of the regional trading arrangement that may derive from PRC-India regional trading arrangement. A JTF has been set up and its first meeting was held in New Delhi on 13 March 2006 wherein its Terms of Reference were finalized to prepare a 5-year blueprint for enhanced bilateral cooperation to be presented to the two governments.

India is a founding member of the Bangkok Agreement since its inception in 1975, where the PRC has recently joined as the sixth member. The Bangkok Agreement has not achieved its desired success because of very low coverage of items offered for concession despite two PTAs. Besides, the 13–30% margins of tariff preferences were small and the scope of the PTA was limited to tariff concessions with nontariff barriers kept outside its purview.

The PRC is much ahead of India in terms of degree of openness. This is because of PRC's incredible record of economic liberalization initiated in 1978, long before India's foray into economic reforms since 1991. Trade/GDP ratio of the PRC was 59.8% during 2004 compared with India's 25% during this period. Surprisingly, trade/GDP ratio of the US was only 20% during this period. In spite of all odds, Indo-PRC bilateral trade has grown at a faster rate, which stood at $18 billion in 2005 with the objective of achieving $50 billion in the next 5 years.

To enhance bilateral trade and promote economic cooperation, the PRC is very keen to conclude an FTA with India based on complementary and comparative advantage, the way India has concluded with the host of other countries (viz. Sri Lanka and partially with Thailand, Singapore). Despite this fact, the Indian Government has expressed reservation to conclude a bilateral FTA at this moment because of its high tariff wall in the domestic economy. The Indian business community feels that bilateral agreement is justified when there is a level playing field.

The business community has expressed apprehension that since India's tariff level is much higher than the PRC, any reduction in tariff will open the floodgate of cheaper imports from the PRC. On the other hand, PRC's tariffs are already fairly low vis-a-vis the rest of the world and are much lower than India. Therefore, Indian producers can expect no serious market benefits after an FTA. Any reduction in PRC's tariff will not increase India's exports to the former in a significant way. In 2004, PRC's simple mean tariff was 9.8% and weighted tariff was 6.0%, whereas the corresponding figures for India were 28.3% and 28.0%, respectively, during the same period. Apart from that, India's bound tariff is very high. It is 100% for primary goods, 150% for process goods, and 300% for edible oil. However, India has reduced its custom tariffs significantly in its successive budget proposals. Presently, peak tariff is 12.5%, nearer to the 12% level of the Association of Southeast Asian Nations (ASEAN). Despite this, India's average collection rate is among the highest in the world. Despite this, the average collection rate of India is among the highest in the world. Therefore, Indian exporters cannot expect significant market benefits after an FTA whereas Chinese producers can expect good gain from their exports, particularly in electronic goods and steel products. In terms of exports, the PRC is expected to get more benefit from the FTA. The rising PRC exports to India can be largely attributed to tariff cuts. At the same time, India can not levy anti-dumping duties on selected Chinese imports, such as chemicals.

India has a comparative advantage in services but significantly lags behind PRC in the manufacturing sector. India's strengths in software and services complement the hardware and manufacturing prowess of the PRC. Manufacturing goods accounts for only 17% of India's GDP, while the same constitutes more than 30% of PRC's GDP. It could be argued that India would be able to export services to the PRC. But services are usually protected by domestic and not trade barriers, and language could be a big problem for Indian exporters in this regard. International competitiveness of PRC's manufacturing sector (partly due to government subsidies to steel and textile industries) is of great concern to Indian industries. Furthermore, the yuan is still undervalued. In this situation, India needs to enhance its competitiveness in the manufacturing sector prior to tariff liberalization under the FTA coming into effect. In order to balance the adverse situation that Indian exporters–mostly belonging to the manufacturing sector–face, the FTA should focus on complimentarity between the PRC and India. The PRC should open up its software and service sectors so that India can utilize its comparative advantage in the service sector, resulting in the balance of trade not being skewed towards the PRC. India can start exporting new services to meet the huge demand of the PRC market.

Trade policies of both India and the PRC are evolving toward deepening integration through regional trading arrangements as a complement to multilateral trading system under the auspices of the WTO. However, there is no official text of any pre-FTA agreement yet. Both countries are now aggressively concluding FTAs with neighboring countries and developing countries in other regions, such as Latin America and Africa. The PRC signed an FTA with Chile in November 2005 and is currently negotiating FTAs with eight countries/regions, such as the ASEAN, Australia, Iceland, Malaysia, New Zealand, Pakistan, Singapore, and Thailand. On the other hand, India signed PTAs with Afghanistan and Chile, a Compressive Economic Cooperation Agreement (CECA) with Singapore, and limited FTAs with Sri Lanka and Thailand. It is also negotiating six agreements with ASEAN, Bangladesh, Chile, Mauritius, Thailand, and Mercado Común del Sur (MERCOSUR). ⁵ The PRC is studying the feasibility of FTAs with India, Japan-PRC-South Korea (trilateral), Gulf Cooperation Council, and Southern African Customs Union (SACU) whereas India has proposed FTAs with Brazil-India-South Africa (trilateral), Egypt, PRC, Indonesia, Japan, South Korea, Malaysia, and SACU. The PRC signed the Closer Economic Partnership Arrangement with Hong Kong, China and Macao, China effective from 1 January 2004. Initial frameworks of agreements are now in place with the ASEAN, Australia, and New Zealand. As a result of these bilateral trade and cooperation agreements, the PRC and India are becoming more open, undertaking more domestic structural reforms, and creating open and competitive market environments.

The acrimonious relationship between the PRC and India due to their border dispute is now a thing of the past. The initiative to foster economic relations started after the Indian Prime Minister's visit to the PRC in June 2003. In a declaration, both countries expressed their intention for good bilateral relations through enhancing economic cooperation. In the area of trade, the PRC and India plan to take measures consistent with national laws and international obligations to remove impediments to bilateral trade and investment. Both countries have started discussing possible bilateral trade arrangement on preferential tariffs more than most favored nation tariffs on a wide range of products including paper, steel, chemicals, and food. The list includes 217 Indian exports and 188 Chinese exports facing lower-than-average tariffs in the other market.

The China Council for Promotion of International Trade, the largest trade and investment promotion organization of that country, called for expediting the process of an FTA. India is seriously interested to finalize a Bilateral Investment Promotion and Protection Agreement (BIPA) with the PRC but is still hesitant to sign an FTA. BIPA, a necessary precondition for an FTA, would give the PRC a most favored nation status and allow free repatriation and transfer of returns on investment. One of the problems delaying the signing of the proposed BIPA is the delay in amending the Foreign Exchange Management Act (FEMA), which contains restrictions on setting up a branch or liaison office in case of Chinese citizens. ⁶

In view of the presence of substantial complementarities and unexploited potentials, a PTA/FTA in manufacturing, services, and investment will significantly enhance bilateral trade between the two countries. This will help poverty reduction in these countries, particularly in border regions, where a relatively high incidence of poverty exists. They can form a partnership by pooling financial and manpower resources to compete with other developing countries in the world market in several manufacturing and service areas, such as information technology (IT) services and textiles.

Even if India becomes the 10th biggest trading nation of the PRC, in comparison to huge economies of the PRC and India, their bilateral trade is insignificant. Cross-border initiatives relating to trade facilitation and investment promotion can be instrumental in generating jobs, increasing trade and economic growth, and building the critical need of energy security. Therefore, the potential of a PTA/FTA is enormous and the opportunity cost of not moving toward greater trade cooperation is significant. In view of the comparative disadvantage of India's manufacturing sector, a much lower tariff structure in the PRC and its higher degree of openness, a PRC-India FTA trade cooperation should start with a PTA with reduced tariffs in a phased manner covering selected manufactured, services, and agricultural products over a longer time horizon. The ultimate goal should be an FTA with a free flow of goods, services, investment, labor, and capital.

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

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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.