Event ReportsPublished on May 13, 2019
In order to get an accurate picture of trade in India’s neighbourhood, one has to look beyond Free Trade Agreements.
India needs to be ‘vigilant, pro-active’ in regional trade viz China

“India’s trade with South Asia cannot be compared to that of China. China simply dominates the region,” said Somi Hazari, Chennai-based regional trade analyst, while exploring India’s trade challenges with its immediate and extended neighbourhood vis-à-vis China’s. “To understand the full picture, it is important to go beyond mere statistics and official trade figures. Informal and illegal trade are not captured by official ministry reports,” he said at an interaction held at Observer Research Foundation, Chennai, on 4 May 2019.

Somi Hazari presented a more nuanced picture of trade in the region, by touching upon several examples of informal trade that escape official reports and documentation. He argued that in order to get an accurate picture of trade in India’s neighbourhood, one had to look beyond Free Trade Agreements (FTA) that mainly dealt with tariff reduction and did not touch upon Non-Tariff Barriers (NTB).

India-Pakistan trade is oft-quoted as a classic example of a trend in South Asia where informal trade is thriving while formal trade remains at terribly low levels, he said. Informal trade between the two countries is frequently reported as being twice the value of formal trade. Most of the informal trade between India-Pakistan is routed through a third country, often Dubai.

Border trading posts

Similarly, Indo-Nepal informal trade is said to be almost as large as the formal trade figures due to the porous nature of the border which is 1,800-km long and ning four Indian States of West Bengal, Sikkim, Bihar and Uttar Pradesh. The India-Bangladesh border tells a different story where ‘border haats’ or trading-posts, are set up to facilitate the formalisation of informal trade.

According to the MoU signed between the two countries in 2010, these border haats are also aimed at “promoting the well being of people in the remote areas across the borders.” People who live within 5 km of the border are given licenses as vendors and buyers, said Hazari. While India’s bank officials are to regulate currency-exchange, Hazari said that more clarity was required on what the rules of exchange are and whether they are even applicable in such remote parts of the country. “More information and research are required here,” he said.

FTAs, no solution

India-Sri Lanka trade has been facilitated by the FTA signed between the two countries. Here, Hazari believed that simply signing an FTA did not necessarily mean smoother trade relations. Unfortunately, FTA do not provide a direct solution to the problem of informal trade which continues to take place outside the sphere of formal trade. In addition, the existence of several NTBs continue to restrict trade and in effect, NTBs simply replace tariffs in many instances, Hazari lamented.

The problem of value-addition also had to be urgently addressed, said Hazari. Under the India-Sri Lanka FTA, value-addition is fixed at 35 percent. However, this is not the case for several products across the board. First, one had to ask — what value has been added to the product in question. The idea is that whatever has been done to the product, it should be value-enhancing. How do you determine what is enhancing? These aspects of trade need more transparency,” Hazari said, and referred to the earlier problems relating to copper and vanaspati in India-Sri Lanka FTA trade.

Expanding on this point, Hazari used the early example of copper. Sri Lanka imported copper from third party countries and then exported it to India, at times in the same containers. Indian-owned companies aided this trade by putting up shacks and cheap warehouses to fudge the certificate of origin, because copper under the FTA carried no duty. This affected the sale and price of domestic copper in India, leading to serious protests by the copper lobby.

Vanaspati was similarly being imported to India because of a huge duty deferential. Sri Lanka does not impose duty on palm oil, from which vanaspati is made, while in India, the duties are as high as 80 per cent. This used to put Sri Lanka at an advantage, which resulted in many Indian producers setting up units there. Sri Lankan-imported vanaspati flooded the Indian market, affecting domestic manufacturers. As in the case of copper, there was no value-addition, but companies would fudge documentation to show value addition, said Hazari.

As the speaker pointed out, the two governments worked out acceptable solutions to the problems when they arose. His regret was over the traders in the two countries abusing a facility for short-term gains and sought to defeat the very purpose of the FTA, the oldest one India has signed with any country or regional grouping.

Trade deficit with China

“The fact that India has a huge trade deficit with China is not particularly new information,” said Hazari. However, there is a great deal of informal trade between the two countries that does not get captured by official reports where again China is at an advantage. For instance, according to a report in the Global Times, Chinese wigs are bought every two seconds on an online global retail platform with customers from across the world, including the UK, the US, France, the Netherlands and several African countries, especially South Africa, Nigeria, Kenya and Zambia. However, since fewer Chinese sell their hair, wig-producers from Xuchang (Henan Province known as the ‘city of wigs’) collect hair from India and Pakistan.

“The hair for these wigs are not collected from Palani or Tirupati temples alone, where tonsuring one’s head is an offering and a vow, as one might expect,” explained Hazari. “In fact, local Chinese agents on bicycles go door-to-door on a weekly basis.” At 25 paise or so for each unit of hair, it may seem like a negligible amount. However, according to the Global Times report, revenue from Xuchang’s wig sales reached $223 million in 2018. “Often these don’t even go directly to China but enter through third countries. This type of trade, say in other products, too, doesn’t figure on the books but can be substantial,” noted Hazari.

‘Untrue’ in SE Asia

The influence of China on the Southeast Asian countries can be seen mainly in countries like Cambodia and the Philippines, particularly under President Rodrigo Duterte, said Hazari. In any case, this idea that any of these countries will keep China out is untrue, despite vociferous promises being made during election time while campaigning. Though Malaysian PM Mahathir did cancel Chinese projects after being elected, “often this is just a slogan and they quickly set out to mend fences,” said Hazari.

Countries like Singapore, Malaysia and Indonesia, due to its historical ties with India and sizeable Indian diaspora, are keen to foster closer trade ties with India. “There is a great deal of respect for Indian products in Indonesia; the Bajaj bikes are especially popular,” Hazari pointed out. India also enjoys a certain amount of soft-power (through the popularity Bollywood films and music) in these countries, Hazari said.

In conclusion, Hazari reflected, “In the light of the US-China trade war, India needed to be vigilant and pro-active. India’s trade imbalance could worsen if China decides to redirect and dump their products in India to deal with US tariffs.”

More research is also urgently needed into India’s trade challenges in the region. India’s challenges are varied and they need to be looked at in minute detail. Further, trade is in itself a dynamic activity. Research into these areas “cannot be a one-time thing; it needs to be constant and on–going,” commended Hazari.

Looking to the future, Hazari said, it was important to address the continuing presence of NTBs in South Asia that undermine long term thinking about trade and the future of this region. “If India wants to improve trade with its neighbourhood, both immediate and extended, it needs to address directly the problem of NTBs which plays spoilsport in regional trade,” Hazari said.

This report was written by Dr. Vinitha Revi, Research Associate, Observer Research Foundation, Chennai.

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