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Tuesday, August 04, 2020

India’s trade agreement with China was one-sided to begin with

If you scrutinise the schedules, you will find non-manufacturing items in China’s miscellaneous list, but many manufactured items in India’s miscellaneous list (light engineering, plastic manufactures, cement, agricultural implements, paper). By any yardstick, the 1954 agreement was one-sided.

Written by Bibek Debroy | Updated: July 9, 2020 9:43:46 am
india china trade relations Trade is not based on narrow notions of comparative advantage. A country can simultaneously export and import the same item. However, if an item figures in one country’s list and not on the other’s, that suggests an odd kind of preference. (File)

Bilateral agreements are an outcome of negotiations. To get something you want, you yield on others. There is quid pro quo and reciprocity. Thanks to the General Agreement on Tariffs and Trade (GATT), since 1948, reciprocity has been built into the World Trade Organisation (WTO). Gains and losses needn’t always be defined in narrow economic terms — the quid and the quo can be strategic. However, a quid without the quo doesn’t sound rational. Outside the then socialist bloc, India was the first country to establish diplomatic relations with the People’s Republic of China (PRC). This happened on January 1, 1950. Pakistan followed a few days later. India followed through, in October 1954, with a trade agreement with PRC, apparently based on “equality and mutual benefit”. At least, that’s what the preamble to the agreement said. This trade agreement over-rode many historical rights India possessed (trade missions/trading posts) in Tibet. They were signed away. Therefore, for the benefit to be mutual and not unilateral, India must have gained something. This was a narrow trade agreement. Unlike contemporary times, there was no talk of cross-border labour or capital movements. The gains could have been trade, or non-trade.

In any such trade agreement, while negotiating, negotiators try to identify products where their country has a comparative advantage, though comparative advantage is necessarily dynamic and changes over time. I try to get market access for items where my country is competitive and try to bargain and prevent market access for items where my country is relatively uncompetitive. This is the principle behind trade negotiations. As broad heads, China was allowed to export — cereals, machinery, minerals, silk and silk piece-goods, animal products, paper and stationery, chemicals, oils, and miscellaneous items. India was allowed to export — grams, rice, pulses, kyanite, unmanufactured tobacco, raw materials and unmanufactured ores, wood and timber, hides and skins, chemicals, vehicles, and miscellaneous items. At that time, both countries were planning to industrialise, China with a first five-year plan in 1953, India with a first five-year plan in 1951. That being the case, you would expect industrialisation aspirations, and moving away from agriculture, to be reflected in items either side was trying to push. If you look at those broad heads, this is not the impression you get. For example, India would export wood and timber, but China would export paper and stationery. China would export machinery, but India would export raw materials and unmanufactured ores. That is, barring chemicals and vehicles, India would remain a primary produce exporter to China, a continuing trend this trade agreement contributed to. However, China’s exports would be broad-based and have manufacturing items.

So far, I have stuck to broad heads and these are heads as mentioned in the trade agreement. Those weren’t days when trade negotiators followed harmonised customs nomenclatures with digits pinning down items. Such physical descriptions sufficed. Let’s look at sub-heads, under those broad heads.

Under paper and stationery, we find newsprint, mechanical pulp-free printing paper, packing paper, stencil paper, blotting paper, fountain pens, pencils, ink, printing ink, and numbering machines. At that time, India had a strong domestic base in producing all these. Indeed, when Article XVIII of GATT was amended in 1954 to introduce Article XVIIIB, justifying quantitative restrictions (QRs) on imports on the balance of payments grounds, one of the eight items India imposed QRs on was fountain pens. China’s fountain pen manufacturing base in Shanghai, other than Hero, is of later vintage. The Shanghai Hero Pen Company traced its antecedents back to 1931. That is when the Wolff Pen Manufacturing Company was founded, renamed Shanghai Hero Pen Company later. Companies like Jinhao didn’t exist then. Given India’s fountain pen and ink base, it was a bit strange that in 1954, it was pre-decided that China would have a comparative advantage in exporting fountain pens and ink and India would not. To reiterate, we clamped down on imports of fountain pens from the rest of the world, allowed them specifically for China and didn’t wish to export our own to China. If Hero pens became ubiquitous in later decades, that wasn’t only due to smuggling through Nepal. Those were legitimate imports. This is only an example to illustrate the broader point about a biased trade agreement.

Trade is not based on narrow notions of comparative advantage. A country can simultaneously export and import the same item. However, if an item figures in one country’s list and not on the other’s, that suggests an odd kind of preference. In market access schedules, items specifically mentioned are important. What’s dumped into a “miscellaneous” basket is relatively insignificant. If you scrutinise the schedules, you will find non-manufacturing items in China’s miscellaneous list, but many manufactured items in India’s miscellaneous list (light engineering, plastic manufactures, cement, agricultural implements, paper). By any yardstick, the 1954 agreement was one-sided. Today, any negotiator who agreed to this would be hauled over coal. Nor, since GATT was already been established in 1948, could one claim that India lacked in relative negotiating capacity.

I mentioned the quid pro quo gains of trade or non-trade. Obviously, there were no trade gains. One gave away and received little in return. Non-trade gains are also dubious. “Equality and mutual benefit” was picked up from the trade agreement and incorporated into Panchsheel later in the same year.

This article first appeared in the print edition on July 9 under the title “Quid without a quo.” The writer is chairman, Economic Advisory Council to the PM. Views are personal.

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