FTA with China is not a wise option

Autocar Pro News DeskBy Autocar Pro News Desk calendar 26 Feb 2007 Views icon5582 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
Before I get into the issue of FTA in the particular context of China, I would like to preface this by two statements. One, we must remember that even under the Doha Declaration, we have actually committed ourselves to the elimination of tariffs over the years.

This means that even in a multilateral system, we are going to be eventually eliminating tariffs and make this into a flat world. We are signatories to this Declaration and though no date has been fixed for this, we are committed to ‘moving towards elimination of tariffs’. There is no a priori reservation. There is absolutely no possibility of putting a certain reserved list away without tariff elimination. In the undefined long-term, therefore, all tariffs must go. This is the crux of the multilateral system.

Within that, we must plan our course in relation to the kind of items that we want to be moving into a tariff-free zone and the countries that we want to be dealing with on a bilateral basis while the multilateral system is on its way forward. The second point I would like to make is that given the situation, the right kind of a template for a free trade agreement is where you have complementary competencies. In other words, two countries where the overlap of competition is minimal will be the best suited in terms of an FTA.


For example, if the US or European Union have technology and capital and you have labour-intensive capability on the one hand, the fit would be complementary in nature with very little of overlap in terms of competition. It might be a good way of moving forward.

However, FTA is not such a good idea where you have competing competencies. The arc of overlap, in this case, is very large between two countries because they have competencies in the same kind of areas and you are, of course, into a much larger kind of conflict area. Therefore, when you move towards an FTA in such a scenario, you find that competition in both ways has the effect of hurting some segments in the industry.

In such a context, Thailand truly is not the best start ingpoint for an FTA because like India, it has a lot of competencies which are common. In that sense, China is not the best candidate for an FTA either because, again, we have more or less similar competencies.

We certainly have better competencies in services while they have better competencies in manufacturing but there is no doubt that a very large part of our playground is going to be common. In other words, Chinese goods coming into India will end up hurting those very industries which are competitive for the Indian and overseas markets and vice-versa.

Therefore, it is such not a great idea to be looking for an FTA with these countries. These are the two general points I would like to make. In particular, in the case of China, we have two issues. One is that clearly, we do not yet have the confidence that China is a market economy in the sense that it is not subject to pricing/accounting transparencies and a free market situation which is not, in any manner, distorted by any governmental interference.


Therefore, it will always be an issue for India to be doing an FTA with China until we have the comfort that it is a market economy. If I were to sum it up, FTA multilateral is a long-term goal and FTA with China could be a long-term goal too. In the short term, FTA with China is not going to happen and is not the wisest thing to do given that it is not a market economy and that we have too many overlapping competencies.

In some sense, however, China would certainly look forward to an FTA with India and other countries too for that matter. This is because it believes that it has the scale and the competitive advantage in many areas. However, we need to move ourselves to a much higher level of preparedness before we even begin to talk about this. This would include getting rid of a lot of embedded taxation that we have as also our inflexible labour laws.

On the issue of overlapping competencies, which I dwelt on earlier, I admit that this is equally unavoidable. The whole theory of free trade rests on the fact that each country will finally look at what is going to be the most competitive advantage to itself. This is based on both the comparative advantage that it has as well as in terms of its focus on particular industries with a competitive edge. Over time, all countries will have to move to their respective niches.

However, in so doing, we need to have in each country the flexibility of capital to move away from Product A to B. So long as we have the problems of exiting, which is the case in India, we are not ready for that kind of movement. We cannot close down shop or contemplate exiting. Therefore, we cannot move from manufacturing one product to another all that easily. We have a much greater problem getting into an FTA with a country like China.

I do not disagree with the view that Indian industry is seen to be being more paranoid about China than the other way around. Yet, I do not see why we should look at India’s attitude in any disparaging manner either. China is, undoubtedly, a tough competitor because of the huge scales of operations it has in any area. In any industry, the capacity that it has is several multiples higher than ours. It also has a cost advantage which comes about partly because of the contract labour they have and partly, to some extent, due to non-transparent accounting.


Needless to add, their productivity is very high too. Therefore, to be obsessed by a formidable competitor and to try and measure up to that kind of level is a very good thing to happen. To my mind, it is the sceptre of China looming around us that has driven many manufacturing industries to get even more competitive.

As to China not caring two hoots about India, from the Chinese point of view, they are looking at maximising their trade advantage and, clearly, where would you go for this? To the more expensive countries where you will trade much better! It is very natural that they do not look at the Indian market as assiduously as they look at the US or European markets.

Each country, eventually, will have to develop its own niche presence as well as its own strategy. This is on the lines of what any company would do in terms of its positioning in the global marketplace. Where would India place itself in such an arena? To my mind, we have stumbled on a position, more by default than design, of being a knowledge economy. I do not think we reached this position because we articulated a strategy 10-15 years ago. It simply happened!

However, the world itself is becoming a knowledge company. Keep in mind that the services content of the world GDP is significantly higher than the manufacturing content. And it will continue to be so because of digitisation. The moment you talk of semiconductors and storage of knowledge in chips, the knowledge part of any product keeps walking away from the manufactured product into the service area.

Therefore, services will continue to grow more and more because you are putting multiple chips in every product and knowledge of the product is being transferred into a chip. All the brainpower that gets into the chip is going to come through service. We are going to see an increasingly larger proportion of service and knowledge economy and India is beautifully positioned here, albeit by accident.

Forward looking, therefore, the strategy for India should be to strengthen its knowledge position and work towards becoming a knowledge power because that is going to be our core competence. Our strategy should be to focus on adding knowledge content in every area right up to the top end in terms of intellectual property.

So, while we will have the skills at the bottom end of the pyramid, the top end of the pyramid is IPR. If we can then carve out a vision where we say that this is our global positioning, we will be able to protect our turf by doing more and more in terms of knowledge economy and then compete with the global market.
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