Time not yet ripe for FTA with China: ASSOCHAM

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SME Times News Bureau | 05 May, 2015
Time is not yet ripe for India to go ahead and sign a Free Trade Agreement (FTA) with China even though such an arrangement with world's second largest economy is a key issue of economic cooperation in order to face Chinese competitiveness in the international markets, an ASSOCHAM study has noted.

While the potential of Sino-Indian economic cooperation is huge and the opportunity cost of non-cooperation is substantial, "at this juncture, a free-trade agreement with China would bring gains skewed in favour of China and will reinforce the existing trade asymmetries between the two countries," the ASSOCHAM Paper on 'Should India sign a Free Trade Agreement with China?, pointed out.

It said China's substantial edge in the manufacturing sector is in a large measure rooted in its better and extensive infrastructure (a non traded input), labour laws, productivity and an import tariff regime conducive for efficient manufacturing

"Given the different tariff rates and structural features of the economy between India and China, the benefit of FTA would not be equally shared. India will face some challenges in reducing and eliminating tariffs over a short time horizon. India China FTA cannot afford accelerated elimination of tariffs. It has to be gradual with reduction in tariffs in a phased manner covering commonly agreed, selected, and manufactures, services and agricultural products. Negotiations should take into account interests, sensitivities and specific differences between the two economies. The ultimate goal should be an FTA with a free flow of goods, services, investment, labor, and capital", it said.

Commenting on the findings, ASSOCHAM spokesman said, "In view of the comparative advantage China enjoys in manufacturing any form of trade agreement between the two has to tread cautiously. India's opening up of the trade sector has to be carefully calibrated to balance the interests of domestic manufacturing over the medium term".

The opening up of the India's trade sector will have to be complemented with greater openings for India's commercial services market so that overall bilateral trade and services balance with China is sustainable notwithstanding large trade deficit. This will also make trade negotiations smooth and easy and will not be viewed as a negative sum game where one partner loses and the other gains, he said.

Under an FTA or PTA gain or loss of the sector depends on its trade structure and initial import tariff rate. Commodities being exported to China facing tariffs will gain. On the contrary, those industries with more imports from China and protected by tariffs may face challenges. An FTA between the PRC and India certainly goes in favor of the PRC and is disadvantageous to India at least in the short run. This is because of the high tariff regime in India and the low tariff regime in the PRC. FTA negotiations pose serious challenges on import tariff issues.

The six main categories of goods receiving duty-free status are computers, telecommunications equipment, semiconductors, semiconductor manufacturing equipment, software, and scientific equipment. India's import tariff regime continues to be beset with a large number of anomalies with higher tariff rates for intermediates and lower for the final products leading to negative protection to the latter. This needs to be rectified as early as possible to strengthen India's negotiating stand in any FTA negotiations.

The restructuring of the manufacturing industry will take time and, therefore, in the short run the costs will be borne by Indian industry. Indian exports to China will need to expand beyond primary goods. Resource exports have weak linkages and neither benefit local communities if the process of resource extraction is low labor intensive. One should not overlook the fact that China is a huge market. To tap these market Indian exporters should: (a) target China's demand for consumer goods which it cannot produce; and (b) plug into China's supply chain networks, adds the ASSOCHAM study.

One needs to keep in view the disparity in size of the economy and production capacity between India and China. India needs to negotiate receiving similar (or higher) concessions that have been offered to other similarly placed partner countries which enjoy preferential treatment in accessing China. The negotiations on preferential market access to China must enable Indian exports to be as competitive as those from China or its other FTA partners. Secondly, rather than agreeing on a general rules of origin criterion, the negotiations should focus on achievable product-specific rules of origin requirements, as the requirements differ from product to product. Thirdly, the vulnerabilities of domestic industries to imports from China also need attention when formulating and negotiating India's negative list.