The Telegraph
Since 1st March, 1999
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Atal Bihari Vajpayee’s recent visit to southeast Asia may well herald a new chapter in India’s external economic relationship. Till recently, India relied mainly on the World Trade Organization’s multilateral trade negotiations to liberalize trade with its trading partners. To some extent it was by compulsion rather than design. India’s efforts to join any major Asian trading bloc was frustrated by the lukewarm attitude of the major Asian nations. Now, for the first time, things seem to have changed in India’s favour.

Several developments have helped the process. First, the breakdown of Cancun talks and the threat by the trade negotiators of the United States of America and the European Union to go for more bilateral and regional agreements to pursue their objectives. This has made it imperative for the Asian developing countries to hasten the process of liberalizing trade and investment among themselves through preferential arrangements.

Second, the decline of US economic power, as evidenced by its massive current account deficit and the steadily falling value of dollar against euro and several other major currencies. Both American and foreign investors are no longer willing to pump in money at an ever increasing rate to finance US trade deficit and prop up the value of the dollar. Asian governments and private investors would now like to invest more in countries other than the US through bilateral and regional investment agreements. The continuing slowdown in the US economy has also made it necessary for others to reduce their dependence on the US and diversify their markets and sources of supply. Increasing intra-regional trade in Asia is the safety valve needed.

Third, the emergence of China as the rising global economic power and the perception that the 21st century will be the century of Asia with China at the centrestage. Most Asian countries, including Japan, are facing strong competition from Chinese goods in their export markets. China is attracting more foreign direct investment than all the other Asian countries combined. Possibly the most important incentive behind the declaration by the 10-nation Association of Southeast Asian Nations to complete an EU-type economic integration by 2020 is to counter the threat of competition from China. They believe that by clubbing their economic strength they would be able to withstand the competitive pressure from China. Moreover, China may provide them the much needed market for their goods. ASEAN nations feel confident enough to let China join the ASEAN free trade area in 2010, India in 2011 and Japan in 2012.

Meanwhile, the perception about India is changing. India has been one of the fastest growing economies of the world for more than a decade now. Its prowess in software and pharmaceuticals is well established. Its advantages in other areas such as information technology-enabled services, higher education and medical services are also being recognized. Even in manufacturing, it has successfully withstood the competition from Chinese goods and may well be on the way to becoming a manufacturing hub for automobiles and auto parts for much of Asia, Europe and Africa.

India has also brought down restrictions on international trade in goods and foreign investment in many areas, though its tariff rates are still higher than the ASEAN countries. Moreover, India (and Japan and Korea) would provide competition to China and to each other and would prevent monopolization of the market by any particular country. The original rationale for ASEAN as an anti-communist political alliance is no longer valid. Consequently, the earlier baggage of India as an ally of the Soviet bloc is irrelevant now. Both China and Vietnam are basically following the capitalist path. So, in future, economics rather than politics, would determine the alliances in Asia.

India is starting with a free trade agreement with Thailand. Import duties on some 80 tariff lines will be brought down by 50 per cent from next year, 75 per cent before March 2005 and totally eliminated by March 2006. The pact with Thailand will be followed by similar agreements with Singapore and, ultimately, the entire ASEAN region plus others like China and South Korea. India has also pledged $1 billion to the Asian Bond Fund launched by a few Asian central banks to help countries in financial difficulty.

How are India and the other Asian countries going to benefit' Basically, these FTAs will open up new opportunities as well as challenges. Along with competition from cheaper goods from other Asian countries, Indian industry will have unhindered access to much bigger Asian markets. There will be scope for cost reduction through economies of scale, sourcing materials and components from the cheapest Asian market and learning, by direct contact, about how to produce and sell in the competitive international markets. Indian companies will also find it easier and profitable to set up factories in other Asian countries to cater to local customers, specially if they can make use of better infrastructure available in some of those countries. The Indian consumers will undoubtedly benefit through lower prices and a greater variety of consumer goods.

Once India becomes part of the Asian trading bloc, more foreign investment should come to India if India can prove to be a low- cost production location in Asia. For this, we need to make significant improvements in our infrastructure, labour productivity, tax regimes and general administration. The chances of such things happening may increase as a result of greater exposure to better standards and the pressure to improve things for survival. We must remember that despite the initial apprehensions about globalization, Indian industry has so far withstood increasing global competition fairly successfully. It not only learnt to survive but also to prosper by working out strategic alliances with foreign companies and by networking with global supply chains and marketing channels. Despite import liberalization, the Indian economy’s problem now is how to prevent appreciation of the rupee in the face of mounting foreign exchange reserves.

Of course, there will be more imports if India joins the Asian trading bloc. But that is no problem so long as Indian exports also go up. Trade balanced at a higher level benefits all trading partners. After the formation of EU, deindustrialization has not occurred in any member country. A lot of intra-industry specialization has taken place. More efficient firms have taken over the less efficient ones. For example, instead of producing a car from start to finish, the automobile industry in most countries have specialized in components or assembly operations, thereby reaping economies of scale and cost reduction. The automobile industry in no European country has suffered a major decline. They have all survived but their specialization patterns have changed. By the same token, there has been no major job loss for auto workers in any EU country. To the extent such intra-industry specialization takes place in Asia too, the adjustment cost for industries and workers would be correspondingly less.

Finally, is the goal of global free trade going to suffer as a result of the increasing tendency of regionalism' Today, more than 50 per cent of world trade falls under some kind of preferential trading arrangements. There are two schools of thought here. A regional free trade arrangement is a movement towards free trade within the bloc but it discriminates against more efficient non-member countries. According to one school, as the different trading blocs will be more self-sufficient, the incentive to liberalize global trade in a non-discriminatory manner will be reduced. The second school thinks that it may be more practical to first liberalize trade and investment flows among a group of countries under a regional arrangement.

At the next step, the three or four major trading blocs may negotiate freer trade between them. This could be easier than trying to liberalize trade and investment through multilateral negotiations among some 140-odd WTO members. The breakdown of the Cancun talks could be a pointer to the fact that the regional option may be more realistic than the others.

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