T C A Srinivasa-Raghavan: Joy for Indian communists

OKONOMOS

Here is a paper that will make the Indian communists deliriously happy. China's accession to the World Trade Organisation (WTO) means that India is going to get hurt. What could be better? Not only does China gain, India also gets hurt. Wah!

This comes out in a recent paper* published by the International Monetary Fund (IMF), written by Valerie Cerra, Sandra A Rivera and Sweta Chaman Saxena. They say that "India is expected to experience a fall in economic welfare, along with a fall in GDP (quantity) by about $ 359 million over the shock period."

They then go on to say that "India may be one of the countries most likely to experience trade diversion to China. India's economic welfare loss is being driven primarily by deterioration in its terms of trade."

India competes with China in textiles, garments, leather goods and light machinery, and in attracting foreign direct investment (FDI). The US is the largest export destination for both countries, accounting for about 20 to 22 per cent of their exports.

The authors say that previous reductions in US tariffs on Chinese imports have led to trade diversion from India. "Overall, India's relative economic welfare is expected to decline modestly owing to loss of market share and deterioration in its terms of trade."

India is not the only country, of course, that is getting hurt. Mexico, Central American/Caribbean, and Indonesia-Malaysia-Philippines also take a hit. But, joy of joys, India gets hurt most. What more can a devout Indian communist pray for?

Why this happens is clear enough. China simply pushes everyone else aside. What makes this paper interesting is the methodology used to prove the point.

The econometrics is rigorous and applied to extensive data. I am not going to summarise it here. Suffice it to say that the various indices used by the authors all point in the same direction.

But then there is also something that could make the Indian communists weep with grief. China sacrificed enormous amounts of sovereignty to enter the WTO. It agreed to things that the patriots of the CPI and CPM, if they had their way, would never permit in India.

Given below is an indicative list as provided by the authors. These are highly discriminatory provisions.

Under the transitional product-specific safeguard mechanism, China's trading partners may impose restrictions on Chinese imports based on "market disruption or the threat of market disruption." This provision will last 12 years after accession and contrasts with the normal WTO standard under which restrictions can be imposed on imports only if there is a more stringent test of "serious injury" or a "threat of serious injury." In addition, the transitional safeguard mechanism can be taken by a third country "" without establishing evidence of market disruption "" to prevent diversion of Chinese exports due to the action of the first country.

A special safeguard mechanism will be in place until the end of 2008 on China's textiles and clothing exports, even though all quotas were phased out on January 1, 2005. This mechanism will allow importing countries to restrict imports from China when they result in market disruption.

WTO members can invoke anti-dumping and subsidy charges based on prices or costs that prevail in other non-market economies.

Would the Communists have kept quiet if this had been agreed to by any Indian government?

The paper is very useful but it does not investigate a rather obvious possibility, namely, that China itself may become a major Indian export destination. Indeed, that process has already begun.

* "Crouching tiger, hidden dragon: What are the consequences of China's WTO entry for India's trade?" IMF working paper, IMF Institute, May 2005