Indian concerns

INDIAN industry is worried about the Chinese proposal for a Free Trade Agreement (FTA) between the two countries. It feels any discussions on an FTA are premature. Instead, industry representatives say, the process needs to go through a number of preparatory stages that cannot be bypassed. Moreover, India needs to diversify its export basket, which is now confined to a few sectors. Although the general level of tariffs is higher in India than in China, Indian industrialists assert that there are significant barriers to entry of its goods into China. Referring to non-tariff barriers, Anjan Roy, economic adviser to the Federation of Indian Chambers of Commerce and Industry (FICCI), pointed out: "It took a long time to secure the entry of a few fruits into China because of objections like fruit flies. Just removing tariff barriers does not amount to anything if this aspect is not looked into."

Indian industry claims that there is not enough transparency in the pricing mechanism in China. An FTA with China implies removing the anti-dumping measures on Chinese imports - a move that domestic industry feels is not advisable unless there is more transparency about Chinese policies. For instance, it alleges that there is little information on the role that the Chinese financial system plays in subsidising manufacturing activity. It fears that it will not be able to compete with Chinese products. Indian industry believes that Chinese manufacturers enjoy an unfair advantage in terms of far superior infrastructure, low interest rates and not having to negotiate fairly with workers or follow environmental standards, something that cannot be avoided in India. Roy said: "Look at the impact Chinese products have already had. The rise in import of batteries from China led to a number of Indian battery units pulling down their shutters."

The perceived advantage that India has in the services sector is not seen as incentive enough to enter into an FTA with China. Besides, China's exports from its services sector amount to more than $120 billion. India is strong in its Information Technology-related services but there is an entire gamut of services that need to be looked at for which the government is likely to set up a Services Export Promotion Council.

The Joint Study Group (JSG) set up by both the countries at the Commerce Ministry level points out the preparatory work that needs to be done before entering into an FTA. The JSG says that India and China should negotiate a customs cooperation and mutual assistance agreement to improve the interface between the exporters and the customs authorities. The JSG suggested that in keeping with the principle of "national treatment", technical standards should be applied uniformly across imported and domestic products. It recommended increasing the frequency of direct shipping routes and expanding air cargo facilities between the two countries. The JSG emphasised that the rules of origin should be examined so that they do not have a distorting effect on bilateral trade.

India's FTA with Thailand is seen by Indian industry as an example of what could go wrong with such a deal. In the automobile industry, many high-value components such as gear systems and engine blocks are imported from Thailand, where the cost of production is low, thereby affecting Indian companies manufacturing these products. Another concern is that many goods imported from Thailand originate in China; they are only converted into finished goods in Thailand. The rules of origin that stipulate a certain percentage of local content or local value addition for the finished products are difficult to enforce unless customs officials in India are able to distinguish which country the product originally comes from and estimate the value addition from the country it is being imported from.

Roy said: "Economic cooperation envisages not only trade, but investment and collaboration in various areas. Once the effects of increased levels of integration between the two economies become clear we can move towards examining the formation of a preferential trading agreement. But we must recognise that China has become the factory of the world and its manufactured exports have flooded countries that are now running huge trade deficits."