Trading places

a trade pact between Asia’s two fastest growing economies is not only about economics. There’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. There’s therefore a case for an Asian FTA, and China and India are much better placed to start that process — via a bilateral pact that will expand to accommodate others — 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 India’s neighbourhood. The most important example is Pakistan, with which FTA talks are “complete”, according to Beijing. India can’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 hasn’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.