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Strategies & Market Trends : India Coffee House -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (9620)	11/17/1999 8:37:00 AM
From: Elsewhere	Respond to of 12475

India: China's WTO Agreement: Implications for India Vikram Goyal (Hong Kong) Morgan Stanley Dean Witter Economists Global Economic Forum Nov 17, 1999 msdw.com China's trade agreement with the US paves the way for its entry to the WTO: a positive development for China's economy. What are the implications for India? The primary channels of transmission are likely to be through trade and investment. Impact on Trade Under the terms of its trade agreement, China would reduce its average tariff rate from 21% to 17%, eliminate export subsidies and phase out quotas. The likely direct impact on India will be small. Trade links between the two countries are minimal, with exports to China making up less than 2% of exports and only 2.5% of imports being sourced from China. The indirect impact is potentially greater, given the likely boost of proposed reforms to the relative competitiveness of China's exports. China already competes internationally with India in textiles and ready-made garments, India's second and third largest export categories, which, respectively, account for 14% and 13% shares of total exports (gems and jewelry rank at the top with an 18% share). China has made significant inroads in gaining global market share for some of these exports at India's expense. China is also a major exporter of other labor-intensive, low-end manufactured goods, such as toys and footwear, which are potential high-growth areas for Indian exports. By undertaking trade reforms, China will strengthen its export profile. Tariffs act as a tariff on exports because they raise the domestic price of imported goods that are used as export inputs. With tariffs in India averaging over 33%, China's exports already enjoy a price advantage. The phasing out of quotas, including those on textiles, would provide further market access to China. However, the potentially negative fallout on India's exporters could be partially offset with the elimination of tax exemptions and other subsidies offered to China's exporters. Generous state support for the export sector has partly enabled China to undercut the competition and penetrate global market shares across several products. Furthermore, the process of phasing out quotas will only be gradual. Nevertheless, the event raises pressure on India to speed up reforms that strengthen its own external competitiveness. India removed quotas on more than 1,300 items in April, exceeding WTO requirements for the year. That was positive. But India needs to lower tariff rates that are still among the highest in the developing world (largely due to the reliance on customs duties for fiscal revenues). Another major reform area is allowing large firms to compete in (and export out of) sectors currently reserved only for small-scale industries that find it difficult to compete in export markets. Impact on Foreign Investment China's agreement also opens up new investment opportunities for foreigners. China already attracts more than 10 times the amount of foreign direct investment (FDI) that India receives -- partly because of China's headstart with globalization reforms. China started its integration with the world economy in the early 1980s while India's reform experience is less than a decade old. Although FDI into India has trailed China, a positive trend has coincided with the liberalization of India's trade and investment regime . WTO membership will force China to open its doors to foreign investment in previously restricted sectors such as telecoms and financial services -- areas where India also hopes to attract foreign capital and technology. WTO will also help anchor China's structural reforms, thereby mitigating investor uncertainties about policy direction. But China's developments need not take away capital from India. FDI still accounts for less than 1% of GDP in India, compared with over 5% for China, suggesting that there is significant scope for India to catch up. India has already opened up its doors to foreign investors. And, with the recent electoral verdict in India promising increased political stability and accelerated structural reforms, it is in a good position to strengthen its presence on the global investor map. Strong foreign investor interest has been expressed towards sectors such as infrastructure, telecoms and insurance. However, sustaining India's attractiveness will require faring favorably when compared with other potential FDI destinations such as China. This means stepping up efforts in addressing issues that concern foreign investors, such as infrastructure development and removal of red tape. Bottom Line While the process of implementing trade and investment changes in China will be gradual, and the potential fallout on India not that significant, the event should serve as a reminder to India's policymakers that sustaining access to global capital and markets will require staying committed to aggressive structural reforms.