It is important to have higher tariffs

I found it intriguing that in the recent visit by the Chinese president, Hu Jintao to India, the country's focus was on building trade while ours related more to border issues. This left me wondering if India has a clear idea of issues concerning trade. Be that as it may, conditions in China have not changed much with state-owned enterprises still getting substantial subsidies. Moreover, all the elements of cost do not go into the product and therefore need not be recovered from buyers.

The Chinese still follow old practices like power being negotiated at different rates for different units, subsidised exports and loans disbursed for modernisation and capacity creation with no interest from the state budget. It is abundantly clear that WTO has very little impact on their practices. China has articulated its vision for the auto industry which states that 60 percent of vehicles sold in the country should be of Chinese origin. Can we imagine India making such a statement today?

China is sitting on huge capacities and companies which compete with India are not even listed on the stock exchange. Till these aspects change, I would be wary of any trade agreement with China. The time has come to call a spade a spade. There are no two ways about the fact that China is our competitor and we have no option but to compete. This is the only way we can kick off the process of building our strengths and overcoming some weaknesses. With healthy competition in place, the two countries can contemplate trading with each other.

The concept of an FTA by itself is meaningless. It is better to bring down tariffs to acceptably international levels considering development aspirations as well as tariffs of other countries. Where is the need for a country or government to tell the people that it is imperative to buy only from Thailand or Vietnam? An FTA is nothing but distortion of trade. There is no need for the Indian government to waste so much time and effort in trying to negotiate better terms.

DANGER OF DUMPING

My view may seem radical but I believe that it makes sense to have higher tariffs against China for the next 5-10 years. This may not be acceptable politically but the danger lies in the fact that there is indiscriminate dumping of products in auto and other industries. Till China really plays by the WTO rules I would strongly advocate an extra tariff on the lines of the special tariff imposed on some countries to safeguard against anticipated damage to industry.

To suggest that China will always be low in technology is a myth as the country is catching up fast. With FTA, it will only hasten the process. The Indian automotive industry should focus on high-end customers in Europe and the US where our quality levels coupled with respect for contracts and IPR comfortably surpasses those of China.

Trade between Thailand and India during the last few months clearly shows what happens when FTAs are established between competing countries. Thailand’s exports to India have jumped much more than the other way around. To a large extent, FTAs are driven by multinationals and not governments.

COMPLEMENTARY SKILLS

FTA is also good for countries with complementary skills. The NAFTA between the US and Mexico is a classic example where the former has the capital and technology and shortage of labour while the latter only has labour. This works well as North American companies leverage the low-cost advantage to produce products and export to their desired destinations. On the other hand, India and China will end up competing with each other in getting European and American companies.

In terms of absolute volumes, China is way ahead of India and its skills in low-and and commodity products is quite something else. We are preferred for higher-end and niche customers where quality is paramount. India also has an edge when it comes to language, contracts and legal systems because these become very important issues for foreign companies.

China is aggressive and will eventually catch up with us. We must, therefore, continuously improve process engineering and innovation so that the existing gap is maintained. India should focus on infrastructure and, in my view this does not mean creating special economic zones but roads, electricity, ports and airports. An SEZ is an unnecessary tax sop given to a privileged set of people who corner land at the expense of others.

It may even cause social problems at a later stage as there will be phenomenal development in islands surrounded by slums and undeveloped areas. Infrastructure should be available to everybody. The government should give this top priority.