Trading places

India8217;s record as a free trader is patchy. Its general tariff levels are higher than China8217;s and ASEAN8217;s and it prefers negotiation overkill during bilateral trade talks. So it is unsurprising that the level of official and industry scepticism about an FTA with China is as intense as the rhetoric on 8216;Chindia8217; is over-blown. Hu Jintao8217;s visit was anyway not expected to yield anything concrete on an FTA. Unless India gets more enthusiastic, the second round of FTA talks slated for December may yield as little as Sino-Indian border talks have of late.

There are however two peculiarities to an India-China FTA. First, a trade pact between Asia8217;s two fastest growing economies is not only about economics. There8217;s a strong strategic-economic element. Since the creation of NAFTA, the expansion of EU and the birth of several Latin American FTAs, one of which also has the US as a partner, Asia has seen trade diverted away from it. FTAs make trading between members more attractive than trading with non-members. There8217;s therefore a case for an Asian FTA, and China and India are much better placed to start that process 8212; via a bilateral pact that will expand to accommodate others 8212; than the ASEAN. The latter has less economic clout than China, India combined. Strategy is also important for India, because China is dangling FTAs all over India8217;s neighbourhood. The most important example is Pakistan, with which FTA talks are 8220;complete8221;, according to Beijing. India can8217;t allow China to use trade as leverage in its backyard. An India-China FTA is important for that reason.

Having said all that, India must be careful of the second peculiarity: China as a commercial entity is still opaque by the standards of capitalist democracies. It was only in July 2004 that China passed an amended foreign trade law that sought to comply with WTO rules China joined WTO in 2001. India, as its businessmen know to their cost, is no stranger to strange official practices. But China is in a different league altogether. Indian industry is right to be concerned about a partner that hasn8217;t yet fully learnt to play by the rules. During FTA talks, Beijing must be asked to provide a better regulatory environment. It will help, of course, if India is less paranoid about free trade.