By Srikanth Kondapalli, IANS
By all accounts, the recent visit of Indian Prime Minister Manmohan Singh to Beijing is considered successful in the matter of expanding bilateral trade. With an impressive Rs.1.5 trillion ($38.6 billion) in bilateral trade, investments contemplated in each other’s markets and physical connectivity explored between the two countries, bilateral engagement in these fields is poised to expand in the short-to-medium terms.
When compared to the relative stagnation or even a stalemate on other issues such as the border dispute, economic issues promise to broaden the bilateral interaction between India and China.
That the bilateral economic relations are headed for a more systematic and comprehensive relationship is indicated by the joint declaration. Prime Ministers Manmohan Singh and Wen Jiabao stated on Jan 14, 2008, that they welcomed the conclusion of a feasibility study set up by the two countries in April 2005 on a possible “high-quality” Regional Trade Agreement (RTA) provided such an arrangement is “mutually advantageous”. It appears, on the latter phrase, there has been no consensus so far on the cost-benefit equation.
To situate the issue in a wider context, the urge for setting up Free Trade Areas (FTA) is increasing in the world today as exhibited by the success of the European and North American integration processes. Today, these FTAs have proliferated to nearly 200 such regional/bilateral agreements encompassing more than half of global trade. China had concluded or is in discussions to set up FTAs with about 30 countries, including members of the Association of South-East Asian Nations (ASEAN) (in 2002), Chile and Pakistan (in 2006).
While China is widely known to have exerted pressure on India for an FTA, the latter is wary of jumping into the fray as the proposal is fraught with long-term consequences impacting not only domestic economic sectors but also the larger strategic landscape of Asia and beyond. As a large country, with more than a billion population (that is exhibiting a younger profile – and hence with the drive) and posting near double-digit economic growth rate figures along with mature service and software sectors, India needs to study carefully such proposals.
Indeed, India currently has concluded FTAs with five countries (with Sri Lanka in 1998) and six preferential trade agreements, although with ASEAN it has been in discussions for the last three years to initiate an FTA. Indeed, Indian proposals for FTA with ASEAN were making less progress due to difference of opinion on the “negative” and “sensitive” lists, although the Indian side attempted to accommodate the ASEAN members by reducing the sensitive list of items from 854 to 560 with further discussions in reducing them.
The India-China differences on FTA have several dimensions. First, reportedly opposed by the “Mumbai Club”, the indigenous producers are wary about competition from the Chinese goods not only in their influx into the Indian market (thereby displacing indigenous products) but also in posing stiff competition in other global markets. Despite relative opening up of the Chinese economy from 1978, but reinforced from the southern tour of Deng Xiaoping in 1992, this section argued that Chinese products are heavily subsidised, costing procedures not fully compatible with free market mechanism, Yuan currency convertibility issues persistand a weak system of rule of law prevails. While these are common global complaints against China, in the Indian context, other issues such as high transportation costs (in terms of land routes between the two countries complicated further by Chinese intransigence in regard to the border dispute) and insurance rates have added fuel to the fire in stalling FTA proposals with China. I eed, the Federation of Indian Chamber of Commerce and Industry (FICCI) was lukewarm to the idea of an FTA arrangement with China while the Shanghai Chamber of Commerce is widely believed to be exerting pressure on the Chinese leadership to explore more business opportunities with India.
Second, while the Indian side had called for a pan-Asian FTA (by Manmohan Singh at the second East Asian Summit at Cebu in Jan 2007), the Chinese side along with South Korea and some ASEAN countries opposed the idea. The Indian proposals were backed by Australia, New Zealand, Malaysia and Indonesia. It appeared that the South Block was concerned about the uninterrupted Chinese inroads into Central, South and Southeast Asia through infrastructure projects and the marginalisation effect they could have on India.
A pan-Asian FTA could avoid such pitfalls, as there could be a better level-playing field. In this scenario the “rules of origin” principle could stall Chinese influx of cheaper goods into the Indian market. In this context, the American retailer Walmart, which predominantly dishes out cheap Chinese products, was reportedly blocked by the Indian government to protect Indian industry.
Third, India-China economic relations, while on the upswing in bilateral trade figures, have not provided much comfort for the Indian side. With negative balance of trade position for India and in favour of China (to the tune of about Rs.400 billion – $10 billion – in 2007), the trade basket confined to predominantly raw materials or low end products, along with more Indian investments in China (an estimated Rs.38 billion – $954 million – as compared to less Chinese investments in India (an estimated Rs.21 billion – $54 million -, drastic measures were called for but with no way ahead to redress such phenomena.
Meanwhile, Indian anti-dumping duties on Chinese products are increasing while China for the first time in late 2006 imposed duties on Indian chemical dyes. This could lead to further friction between the two sides. Again, border trade (estimated to be above Rs.4 billion – $100 million) is minuscule when compared to the overall bilateral trade ($38.6 billion in 2007).
In this context, border trade through Shipki La, Lipulekh and Nathu La has not shown substantial increases. The 2006 agreement to open Demchok is also unlikely to radically change this situation. Indeed, as the Chinese violated the 2006 understanding on trading “local” products and attempted to export electronic and other goods produced elsewhere in mainland China, these were swiftly sent back. As mentioned above, the dragging border dispute also implies that both sides could not set up customhouses for regulating trade on the border areas.
(Srikanth Kondapalli is associate professor in Chinese studies at Jawaharlal Nehru University, New Delhi. He can be contacted at [email protected])