When Chinese Premier Wen Jiabo visited India last week, he called for a Free Trade Agreement (FTA) between the two Asian economies. And this is not the first time China has called for a FTA with India. But India does not view this FTA as an agreement that would work in its favor. While both China and India have separately concluded or are in discussion on FTAs with multiple countries and trading blocs, why hasn't a FTA gone through between these two nations?
There are various reasons to this - both politic and economic. But it's mostly been economical than political factors. India does not consider that there is a level playing field for this agreement to be done. Now what's the level playing field that India is talking about? - 1. Chinese currency, the renminbi, is undervalued thereby giving an "unfair" advantage to its products; 2. Chinese import tariffs are already very low, the further reduction of which would not really turn into a benefit for Indian products to penetrate deeper into the Chinese market; 3. Chinese govt. indirectly subsidizes many of its industries thereby making it tough for the Indian companies to compete. 4. China's tough rules and regulations favoring procurement from Chinese companies. From China's side, it is also true that the Indians are increasingly wary of investments done by state-run or state-affiliated Chinese companies, thereby making it difficult for Chinese companies to operate freely in the Indian market.
The trade between the two nations has grown sharply in the last decade which now stands at around $60 billion annually. But many experts have long complained that this trade is unbalanced and more in favor towards China. If one looks at the trade basket, it can be seen that most of the Indian exports to China are raw materials (as per 2005 data, iron ore was at the top of the list) and most of the Chinese exports to India are finished or processed goods (as per 2005 data, electronic goods were at the top of the list). There hasn't been much change to the 2005 data even after five years in terms of the goods and their relative weight in the trade basket.
China has used its manufacturing expertise, the supply chains it built to become a global manufacturing hub, coupled with cheap labor, to increasingly source raw materials from India, process them, manufacture and ship the finished product back to India. While there is nothing wrong with that, this pattern of trade has also resulted in a huge trade gap, with deficit largely falling on the Indian side. So, a FTA would just open the flood gates for cheap manufactured products from China that might erase some Indian industries. Well, there is nothing wrong in efficient use of scarce resources - that is, making products where it is cheaply and efficiently produced. But then trade works as a two-way street. One country's strengths and expertise should be used to offset the other country's weaknesses and vice-versa. So, while China efficiently manufactures products, India efficiently provides services. But many times, services are hindered by language and geographic barriers whereas manufacturing is not. This makes it even more difficult for Indian companies to penetrate the Chinese market in addition to all the protection that the Chinese govt. gives to its own services industries.
One way or the other, both China and India, having a large number of poor people, still have lots of protectionist policies in place. Both countries provide some level of protection either in the form of tariffs or incentives to many of their domestic industries. And with China's dominant role in manufacturing and India's worry about the extent to which it's services can be taken to the Chinese market due to various barriers, getting a FTA done is becoming increasingly difficult - and all this is in addition to the complaints of the Chinese renminbi being undervalued.
But when you consider not just economical reasons but also political and strategic reasons (where the two countries still have a lot of mistrust on each other), it's the trade that should bring the two countries closer, which is vital for global peace and security in the twenty-first century. I have always thought that nothing brings two nations closer than people-to-people contacts. And people-to-people contact itself increases when the trade between the two nations increases.
So then, should they go for a FTA? Or is a FTA even possible? Well, the answer is - the situation is still not ripe for a FTA but definitely the two nations should go for a PTA - Preferential Trade Agreement. In a PTA, the two nations can identify each other's strengths and weaknesses by individual sectors and can facilitate trade accordingly through reduction in import-tariffs and greater market access. For example, when China can supply cheap but efficient computer hardware to India, India can provide cheaper but efficient software services to Chinese businesses. Going even deeper, the deficiencies within individual sectors could also be identified and rules worked out for the benefits of both the people. Starting with PTA, we can hope for a FTA sometime in the future.
The re-opening of Silk Road's Nathu La pass in 2006, after 44 years since it had been closed due to a brief China-India border war in 1962, had been beneficial to many poor traders and farmers who live in the border areas of both the countries and so would be a PTA to a greater section of the society in both the countries (together where around 36% of the human population live). It's worrying that trade between the two of the fastest growing economies is so little (compared to the actual size of the total trade in China and India) and it is even more worrying that there hasn't been a trade agreement between the two nations yet. A PTA would go a long way in making roads for achieving a FTA at the right time in the future. Increased trade between China and India would also connect the rest of the Asian community to this trade link and would possibly form a mega Asian trade zone. This is needed not just to bring the millions and millions of people, who live in those regions, out of poverty but also to achieve global prosperity, peace and security in the twenty-first century.
