What’s Going on with India-China Preferential and Free Trade Agreements?

Posted by Reading Time: 5 minutes

Op/Ed by Chris Devonshire-Ellis 

With the Chinese and Indian military pulling back from their respective positions in Ladakh, and the Indian Minister of Commerce, Som Parkash, stating that “FDI from all members of the WTO, including China, continues to be permitted”, it is now time for both parties to finally settle down and deal with the pressing matter of trade. 

India has got off to a serious start with trade negotiations in 2021, making agreements to secure trade deals with EU and the UK, and seeking greater trade concessions from ASEAN, Japan, and Korea. Currently, nearly 30 trade agreements of various types are ‘under discussion’ with different countries – including China. But there are problems. 

China and India share a common border, although most of this is in difficult terrain. China also supports Pakistan’s, and not India’s claims to territories, and this is the main reason India refuses to acknowledge China’s Belt & Road Initiative. Part of the China-Pakistan Economic Corridor (CPEC) passes through disputed lands; India’s view is that officially recognizing China’s BRI equates to officially recognizing Pakistan as a legitimate claimant to these territories. It is unsatisfactory for all concerned. Yet, the reality is that disputed lands have been so for over 70 years. The winners in this debilitating saga are the respective militaries, who see their annual budgets increase. These are a significant drain – not just on budgets but upon potential business and trade lost. 

The Asia-Pacific Free Trade Agreement 

India and China do have an agreement as part of the 1975 Asia-Pacific Trade Agreement (APTA), a preferential trade arrangement formerly known as the Bangkok Agreement. That was an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), being a preferential trade arrangement among developing countries. Signatories to the APTA include China, Bangladesh, India, Lao, South Korea, and Sri Lanka. 

At the First Session of the Ministerial Council of the Bangkok Agreement in Beijing in late 2005, representatives from the member countries endorsed a revised text of APTA and to conduct tariff cut talks, which were concluded in 2006. That agreement can be accessed here and includes concessions given by both India and China. 

A fourth round of negotiations is supposed to be underway, involving tariff concessions on trade in goods, services, investment, trade facilitation, and non-tariff measures. But to date there has been no further development. 

India-China Free Trade Agreement 

In addition to this, a free trade agreement between India and China was discussed with the Asian Development Bank’s involvement as recently as 2006. An impact paper was released by the ADB at the time and is downloadable here.

At the time, the ADB stated “Open regionalism and trade cooperation between the world’s two largest developing countries, the People’s Republic of China (PRC) and India, can foster outward-oriented development and intra-regional trade based on comparative advantage and available factor endowments. In view of the recent wave of worldwide subregional and bilateral trade cooperation, the opportunity costs of not moving toward greater trade integration between the PRC and India could be increasing.” That was 15 years ago, and the opportunity costs have indeed been lost. 

India and the Regional Comprehensive Economic Partnership 

Since then, further attempts have been made to involve India and China in some semblance of Free Trade, most recently with the RCEP free trade deal, which India pulled out of in 2019, although member states have said the door is still open should India reconsider its position. The reason for the Indian withdrawal was the position of Indian domestic conglomerates and manufacturers, whose hold on the Indian market would be threatened by ‘cheap Chinese imports’. In fact, the RCEP deal as at 2020 was worth some US$186 billion and covers 30 percent of global trade that India doesn’t have full access to. 

The ASEAN-China example

It is a story that has been told before. In 2010, the ASEAN-China Free Trade Agreement (ACFTA) came into effect, with the four smaller ASEAN nations joining in 2015. That gave the economies of Cambodia, Laos, Myanmar, and Vietnam additional time to prepare.  

I recall many businesses across ASEAN in 2011, from Indonesia, Malaysia, Philippines, Singapore, and Thailand, complaining that they were suffering because of Chinese competition. In fact, this was pure bad planning and a lack of foresight on their part. In concentrating only on their respective domestic markets, they failed to look at the opportunities in China despite the FTA agreement being ratified in 2002 and having plenty of time to prepare. The businesses who did prepare were the Chinese. 

Manufacturers across ASEAN who had become lazy and only looked at their local markets took a hit, but this was largely their own fault. Some went under, no doubt blaming China. Others adapted and as a result, prospered, because from 2010 onwards, the average tariff rate on ASEAN goods sold in China decreased from 9.8 to 0.1 percent. By 2015, ASEAN’s total merchandise trade with China reached US$346.5 billion (15.2 percent of ASEAN’s trade), up from US$192.5 billion in 2010. ACFTA accelerated the growth of direct investments from China and commercial cooperation. Today, I do not hear businesses from ASEAN complain about Chinese competition in their local markets. Instead, I hear, and we are actively involved with as a firm, stories about cooperation, and pooling resources, and new markets (such as RCEP). 

The Indian Government then need to be wary of their own corporates telling them that they are afraid of Chinese competition. Because if true, it means they are weak, under-prepared, and lazy. That is a situation that will, after time, lead to stagnation and the prospect of falling behind. 

There has already been damage done. Because of Indian intransigence in embracing free trade, Africa is poised to become a major competitor. The African Continental Free Trade Agreement (AfCFTA) came into effect on January 1 this year. That deal eliminates tariffs on 95 percent of all goods traded across African borders, meaning component parts can be sourced from across Africa duty free, consolidated into manufactures from other origins, and then either resold on the respective African domestic markets or exported. China, which helped broker the deal, has responded to this opportunity by developing Special Economic and Free Trade Zones throughout Africa. 

Make in India cannot succeed without decent SEZ incentives  

India has also looked at setting up SEZ’s to help matters along. Yet again, it has failed. Legislation was in fact passed in 2005 permitting SEZs to offer tax breaks to foreign investors. Sixteen years has now passed since its inception, but the SEZ Bill omitted key provisions that would have relaxed rigid labor rules. This has negated any Indian chance of emulating the success of the Chinese SEZ model through foreign direct investment (FDI) in export-oriented manufacturing. 

The impact of this is that denied access to India and its massive labor pool of workers, available at less-than-China rates, and lack of any SEZ’s – Chinese and other Asian and international investors are bypassing India altogether and investing in trade and manufacturing elsewhere in Asia and Africa instead. If the situation continues, African manufacturing will be competing with India inside a decade. What happened to the dream of ‘Make in India’ and of inheriting the mantle of ‘Workshop of the World’? 

To get the policy of ‘Make in India’ right, India needs to engage in Free Trade, and a good place to start with that would be China. A deal can be phased in, and India plc prepared. The danger for India is that if it does not engage, it will be left behind. If that happens, the Chinese may not come, but Indian corporates won’t be going anywhere meaningful either. 

The Indian government says a China preferential trade deal is ‘being negotiated’. They’ve been saying that since 2005. Now it is time some progress was made.  


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India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.

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