Deep integration in free trade agreements in China and India

Ganeshan Wignaraja 04 July 2012

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Since the 2000s, creeping protectionism and the stalled WTO Doha Round trade talks have prompted China and India to pursue a variety of bilateral and regional free trade agreements (FTAs). Before 2000, the sole FTA involving China and India was the Asia-Pacific Trade Agreement. By February 2012, the Asian giants were among the region’s leaders in trade agreements with 12 FTAs in effect in China and 13 in India. These figures are likely to rise as both giants are presently negotiating increasingly ambitious FTAs. Since 2007, India has been involved in negotiations with the EU on an FTA that seeks to sharply reduce tariffs on goods and liberalise services and investments provisions. China is in talks with Japan and Korea on a trilateral FTA, which some see as a rival to the US-led Trans-Pacific Partnership (TPP) process.

These moves have prompted concerns about the shallow coverage of the giants’ FTAs, which are said to be quite liberalising when it comes to trade in goods, but quite thin and vague in services as well as new issues compared to most agreements formed in the Americas or across the Pacific (e.g. Dent 2006; Suominen 2009). Are these concerns valid? And what should be done?

Criteria for assessing depth of FTAs

Evaluating the depth of given FTAs against best practices is difficult for two reasons.

  • First, it requires detailed and often painstaking examination of the legal texts of FTAs. This requires specialist legal skills and the ability to generalise across agreements.
  • Second, there is no internationally-accepted methodology for assessing the depth of FTA provisions against best practices.

One way forward is to attempt to evaluate the compatibility of China’s and India’s FTAs against existing (or future) global rules. This approach has shed light on the depth of FTAs in Asia (Plummer 2007; Wignaraja and Lazaro 2010). Following in this tradition, my recent research has used some simple legal and economic evaluation criteria to assess the giants’ FTAs according to tariff elimination on the goods trade, coverage of services sectors, and coverage of trade issues beyond goods and services (Wignaraja 2011 and 2012):

  • The tariff elimination criteria reflected Article 24 of the General Agreement on Tariffs and Trade (GATT). FTAs that eliminated tariffs on at least 85% of tariff lines (of either or all FTA partners) within ten years are WTO-compliant. Thus an FTA that eliminates 85% of tariff lines within ten years is classed as a relatively fast approach to tariff liberalisation, while others are considered gradual.
  • The criteria for services liberalisation relied on the coverage of sectors included in the General Agreement on Trade in Services (GATS). FTAs that covered five key sectors of the GATS were considered comprehensive. Those with less than five sectors were categorised as partial, and those without any coverage as “no provision.”
  • New trade issues are those regulatory issues beyond goods and services. The four so-called Singapore issues in the context of WTO negotiations – investment, competition policy, government procurement, and trade facilitation – are convenient for examining trade issues beyond goods and services. FTAs that covered three or four Singapore issues were regarded as comprehensive, and the remainder as partial or no provision.

The Singapore issues refer to four working groups set up during the WTO Ministerial Conference of 1996 in Singapore. These groups are tasked with four key issues: (1) transparency in government procurement, (2) trade facilitation (customs issues), (3) trade and investment, and (4) trade and competition. The four Singapore issues were conditionally included in the work programme for the Doha Development Round global trade talks, but were dropped at the WTO Ministerial Conference in Cancún in 2004.

Key findings

The results of the evaluation of the giants’ FTAs in terms of existing or future global rules are shown in Figure 1. Legal texts from the Asian Development Bank (ADB)’s FTA database were used for the evaluation. The key findings are below.

Figure 1. Depth of FTAs in the China and India as of February 2012

Source: Author's updates based on Wignaraja (2011 and 2012).

The overall depth of giants’ trade agreements varies considerably, encompassing a mix of deep FTAs and shallower FTAs. Of the giants’ 25 FTAs in effect, 13 have a relatively fast approach to tariff liberalisation, four comprehensively cover services, and three comprehensively cover the Singapore issues. The remaining FTAs were of two main types: (i) those that had a gradual approach to tariff liberalisation and partially covered services as well as Singapore issues; or (ii) those that had a gradual approach to tariff liberalisation but typically excluded services and Singapore issues.

Encouragingly, the giants’ recent FTAs typically show more depth than earlier agreements. The giants’ deepest agreements have a relatively fast approach to tariff liberalisation, comprehensively cover services, and comprehensively cover the Singapore issues (covering three or all four issues). This category includes: the 2011 China-Costa Rica FTA, the 2011 India-Korea Comprehensive Economic Partnership Agreement (CEPA) and the 2011 Japan-India CEPA. The conclusion of these deep agreements suggest a conscious move by the giants towards the comprehensive liberalisation standards for new issues visible in best FTAs in the Asia-Pacific (e.g. the Korea-EU FTA). This is indeed a step in the right direction.

In terms of the speed of tariff liberalisation, FTAs in China seem better than in India. Eight (67%) of China’s FTAs have a relatively fast approach to tariff liberalisation compared with only five (39%) for India. Some examples are useful to highlight differences in the giants’ approaches with their trading partners. Under the China-Singapore FTA, 95% of China’s tariff lines are eliminated within one year. Singapore, of course, has virtually zero tariffs for most items, and tariff elimination is not considered a major trade policy issue. The New Zealand-China FTA allows for immediate elimination of 35% of China’s tariff lines upon entry into force (i.e. when the agreement became legally binding on 1 October 2008) and 96% within eight years. The ASEAN-China Comprehensive Economic Cooperation Agreement (CECA) allows for longer adjustment periods for least developed countries (LDCs) and, accordingly, eliminates 90% of the tariff lines of China and the ASEAN-6 economies within five years, while the economies of Cambodia, Myanmar, Laos, and Vietnam have ten years. Meanwhile, the India-Korea CEPA liberalises 75% of India’s tariff lines within eight years and 93% of South Korea’s. The India-Singapore CECA immediately eliminates tariffs on 80% of the value of India’s imports from Singapore.

Services coverage seems better in China’s FTAs but India is making progress. The China-Singapore FTA allows for comprehensive coverage of services, while another nine of China’s FTAs partially liberalise services. The China-Singapore agreement significantly builds on the ASEAN-People’s Republic of China CECA by allowing for the movement of natural persons. Otherwise known as “Mode 4”, this covers the international supply of services through the movement of service suppliers (e.g. independent professionals) or those who work for a service supplier. Many of India’s early agreements typically placed little emphasis on services with eight FTAs excluding provisions on services. Nonetheless, India’s newer agreements have sought to rectify this issue. India’s FTAs with major east Asian economies (Japan, Korea and Singapore) provide for comprehensive services coverage while the agreement with Malaysia provides for partial coverage. Furthermore, in a move to extend services coverage to the South Asian level, the SAARC Agreement on Trade in Services was signed in April 2010.

There is selective coverage of the Singapore issues in the giants’ FTAs, indicating a cautious approach to new trade issues. Seven of China’s FTAs cover one or two Singapore issues. For instance, investment and trade facilitation are both covered in the New Zealand-People’s Republic of China FTA and the China-Peru FTA, while the China-Pakistan FTA and China-Taipei Economic Cooperation Framework Agreement (ECFA) cover only investment. The newer China-Costa Rica FTA goes even further by including provisions on trade facilitation, investment and competition policy. More sensitive issues of government procurement and competition policy, however, are typically absent from China’s FTAs. Meanwhile, the newer India-Korea CEPA and the Japan-India CEPA comprehensively covers three Singapore issues. While there is no separate chapter on government procurement in India-Korea CEPA, there is a cooperation provision on government procurement that opens the door for liberalisation in this difficult area. Another four of India’s FTAs, including the South Asia Free Trade Area (SAFTA), only cover trade facilitation, while the India-Singapore CECA covers both trade facilitation and investment. China’s and India’s remaining FTAs exclude the Singapore issues altogether.

Implications

With little end in sight for the decade-long Doha Round trade talks, FTAs are here to stay in Asia. China and India, like many Asian economies, are increasingly adopting a multi-track trade policy of multilateralism and regionalism. It is vital to ensure that the giants’ FTAs are a tool to further multilateral liberalisation as well as Asia-wide liberalisation. In this vein, a focus on deep integration beyond goods in FTAs is the key. FTAs are a relatively recent phenomenon in Asia and the giants’ FTA strategies appear to be in the formative stages. It was perhaps inevitable that the early FTA focus was on shallower rather than deep integration as the giants learnt to manage FTAs and balance competing business interests. Encouragingly, there are signs that the giants have moved towards deeper FTAs over time emphasising services and new trade issues. Nonetheless, room exists for improving the depth of China and India’s future FTAs.

References

Dent, CM (2006), New Free Trade Agreements in the Asia-Pacific: Towards Lattice Regionalism, Palgrave Macmillan Press.

Plummer, M (2007), “Best Practices in Regional Trade Agreements: An Application to Asia”, World Economy, 30(12):1771-1796.

Suominen, K (2009), “The Changing Anatomy of Regional Trade Agreements in East Asia”, Journal of East Asian Studies, 9(1):29-56.

Wignaraja, G (2011), “Economic Reforms, Regionalism and Exports: Comparing China and India”, East-West Center, Policy Studies, 60.

Wignaraja, G (2012), “Commercial Policy and Experience in the Giants: China and India”, in ME Kreinin and MG Plummer (ed.), The Oxford Handbook of International Commercial Policy, Oxford University Press.

Wignaraja, G and D Lazaro (2010), “North–South vs. South–South Asian FTAs: Trends, Compatibilities, and Ways Forward”, UNU-CRIS Working Papers W-2010/3, United Nations University Comparative Regional Integration Studies: Bruges (Belgium).

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Topics:  International trade

Tags:  China, India, free trade agreements

Director of Research of the Asian Development Bank Institute (ADBI)

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