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What Is India News Service
Thursday, December 14, 2006



 

 

 

   Global Trust Deficit on China FDI

  As China's major allies in India, the Communist Party (M) of India (CPM) seem to have given up their campaign to gain economic access for Beijing, there is increasing evidence that India has many economic reasons not trust China yet.
 

 

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As China's major allies in India, the Communist Party (M) of India (CPM) seem to have given up their campaign to gain economic access for Beijing, there is increasing evidence that India has many economic reasons not trust China yet.

India's anti-dumping history shows that India initiated 89 cases against Chinese companies out of the 188 anti-dumping cases. Chemical and petrochemical industry affected the most (40 cases), followed by pharmaceuticals (17), consumer goods (9), textiles (6), and steel and metal (6) (balance in miscellaneous). Even these cases are filed based on data available from third nations as it does not have solid economic intelligence information as China has one of the most non-transparent systems of accounting and price determination mechanisms. Hence, even if the prices use third nation data, there is a large scope for error.

The communist parties in India have been vocally advocating the Chinese cause in India ignoring that recognition of China as a market economy may cause Indian companies to lose all anti-dumping cases at the World Trade Organization (WTO) as the basis of comparison will be data provided by China.

With a strong message from the Navy Chief Suresh Mehta about China getting access to hydrological maps used by submarines, public opposition by the National Security Adviser (NSA) M.K. Narayanan to Chinese participation because of their involvement with Pakistani companies, the Defense Minister A.K. Antony's approval of the NSA appraisal, and adequate criticism in the media seems to have cooled CPM's enthusiasm to get clearance for the Chinese consortium's bid to develop the Vizhinjam port in Kerala. However, the Federal Government has not issued a notice barring Chinese companies and the State Government run by the CPM says it will not re-tender the project till it gets such a notice. Indian compulsions not to issue such as notice is that it does not want to sound adversarial to Beijing by issuing a high-profile note but at the same time is unable to officially say no.

At the same time, there have been ridiculous arguments from the Trade ministry that the opposition to FDI needs to be classed for nations that could bar their investments in all industries. Their argument is that if a nation was allowed to invest in one sector, then they should be allowed to invest in other sectors too. Further, they say that if FDI is allowed in one part of India, it needs to be allowed in any part of the nation. Motivated to move proposals from the Ministry, officials have lost sight of the larger picture. If the policy is country specific and not project specific, then China will be allowed to invest in extremely sensitive sectors as and when they open up such as defense, retail, and communications. They would also be allowed to invest in ultra-sensitive border areas such as Jammu & Kashmir or Sikkim. This is definitely not advisable at this stage of bilateral relations.

Imbalance in China's commercial rise has affected not just India but also the strongest economy in the world-the United States. Since China's entry into the World Trade Organization (WTO), US-China trade has tripled and is valued at USD 328 billion (10 times the 1992 level). Both nations have profited by both nations although China has a large trade surplus in the equation and has bought several billion dollars worth of US Treasury bonds to finance the US's consumption-driven economy. The US supported China's entry into the WTO after Beijing committed to follow international trading rules, including lowering tariffs on imported products and lifting requirements for import licenses and quotas. While some tariffs have been slashed, many complain that Chinese has flouted other commitments, notably protection for intellectual property of foreign copyright holders. Despite government's promises of a crackdown, movies, music, and software are pirated with impunity. Others complain that the Chinese unfairly subsidize their exports through cut-rate financing from state-owned banks and through value-manipulation of its currency at artificially low levels. US Trade Representative Susan Schwab accepts that China has made good progress in tariff reforms but says that its WTO compliance is "decidedly mixed" due to "excessive Chinese government intervention." Several US industry experts want Washington to formally complain to the WTO about Beijing's subsidies and currency manipulation.

Analysts say that with Chinese per capital having quadrupled in the past 15 years catapulting it to the fourth largest behind the US, Japan, and Germany, Beijing must undertake more reforms to shift its export-driven economy to a balance driven by domestic consumption. This shift, some say dangerous, they say will allow other nations to sell Beijing valued add goods and not just raw materials that it buys now. To try influencing Beijing's behavior, the US Treasury Secretary Henry Paulson visited China for a new "strategic economic dialogue" accompanied by an unusually high-powered delegation including Federal Reserve Chairman and 6 Federal Cabinet members.

Such sustained pressure is seeing a gradual shift in Chinese policy. Chinese buyers have acquired a number of U.S. companies across different sectors including auto parts, computer, energy, etc. In addition, Chinese companies are also trying to set up operations such as the Okalahoma auto assembly plant. However, some Chinese initiatives to buy US companies have been spurned such as the bid to buy Unocal. Despite halting starts of Chinese economic reforms and attempts to address US concerns, distrust of Beijing's intentions and protectionists in the US have introduced 27 separate legislations to crack down trade with China. However, the US Administration is continuing its push to better relations that would no doubt include a more transparent subsidy regime and investment protection to inch towards the sort of arrangement that the US has with Japan and its European allies.

The moral of the story is clear. China, with a rapidly expanding economy with the second largest investment in research and development, is a rising power and it is more important to stay engaged and influence opinion and policy there than trying to isolate it. At the same time, there is caution, pressure, and incentives for good behavior coupled with slow-down, bars, and standards for bad behavior. Despite a larger economy, stronger bargaining position, and more entrenched economic interests, Washington is guarded and measured in its progress of economic relations with Beijing.

And, this is good lesson for India.

 

 

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