India’s burgeoning trade deficit with China?that touched $10 billion in 2007?has caused edginess in India Inc with regard to ongoing negotiations to ink a bilateral regional trade agreement. In the ?Shared Vision of the 21st Century? that PM Manmohan Singh signed with his Chinese counterpart Wen Jiabao during his maiden visit to Beijing on January 14, both asked their respective commerce ministers to examine the benefits of an RTA. A joint feasibility study indicates that it would be mutually advantageous.
Is it, in fact, so advantageous? Simply put, India Inc?s concerns are that the bilateral deficit reflects the dragon?s non-transparent pricing mechanism and massive hidden subsidies. The Chinese yuan is also undervalued. For such reasons, India has been reluctant to grant market economy status so far to China, which is a necessary building block for an RTA. The fear is that if it is granted, India will have to accept China?s pricing numbers that can result in further dumping of cheap Chinese goods into India that would hurt local businesses unfairly.
Research by Sandra Polaski of the US-based Carnegie Endowment along with A Ganesh Kumar, Scott McDonald, Manoj Panda and Sherman Robinson indicates, interestingly, that India would benefit more from a multilateral trade agreement at the WTO than from bilateral agreements with countries like China, the US and EU. Although the gains of an accord at Doha are admittedly modest?India?s real income would increase by only $1.2 billion?it is still six times more than the gain from the most beneficial bilateral agreement among these three nations. This is why India has a big stake in Doha?s success.
According to this work, China gains more in real income from the free trade agreement than does India: the former has a $940 million gain when compared with the latter?s gain of $110 million. This is driven almost entirely by India?s elimination of manufacturing tariffs. However, a silver lining is that India sees a greater increase in its exports ($710 million) than does China ($220 million). Moreover, China?s imports increase by $770 million when compared with India?s increase of $480 million. As such increases are less than under other bilaterals, the overall gains for the Indian economy are much less. Therefore, it would be in India?s interests to root for a multilateral deal.
