[Analytics] An free trade agreement with Beijing can facilitate Modi’s economic goals

Xi Jinping-PM Narendra Modi, PTI. Sketched by the Pan Pacific Agency.

US President Donald Trump’s decision to end US preferential trade treatment for India as of Wednesday is not surprising. The US merchandise trade deficit with India was $21.3 billion in 2018. Prime Minister Narendra Modi’s new government must prepare for a trade conflict with the US as Trump tries to reduce that deficit. Hu Weijia specially for the Global Times.

As the Indian economy slows down, Modi is looking to the manufacturing sector to drive economic growth and create jobs. However, it is unrealistic to expect the US to digest India’s excess industrial capacity by shoring up its exports. With trade protectionism as a guiding principle, the US is unlikely to import products from Asia as generously as it used to. Modi’s new government must find new export avenues for made-in-India products if it pursues an export-led growth strategy.

In this regard, the Modi administration does not have too many choices other than China, the world’s second-largest importer after the US. Modi’s ambition to generate growth in the country’s manufacturing sector is prompting India to push up exports to China. The most efficient way to further open up the Chinese markets for made-in-India products is to sign a free trade agreement (FTA) with China. The explosive growth of China’s emerging middle class helps create a stable bull market. Amid an escalating trade row with the US, India is among a handful of countries that can fill gaps in the Chinese market left by US products. We believe there’s a willingness on the Chinese side to study issues related to reaching an FTA with India.

It has become clearer that Trump’s trade war targets not only China but also India and Mexico. For now, China and India have common ground on which they can push forward free trade to fight US protectionism. India may have to abandon unrealistic ideas that it can be immune to Trump’s trade war. Now the world is focusing on whether New Delhi will take revenge on the US decision to end its preferential trade treatment for India. The best response will perhaps be to upgrade its trade relations with China and establish an FTA to fight against protectionism.

During Modi’s second term, many “big-bang” economic reforms are expected. The US trade war is pressuring India to respond by diversifying its export destinations, and establishing an FTA or negotiating a bilateral investment treaty (BIT) with China can be an option. Some Indian people may worry that an FTA with China could widen India’s trade deficit but the concern is unnecessary. The main reason behind the deficit is that India lags behind China in productivity. An FTA or BIT can propel the general trend of industrial transfer from China to India, help competitiveness in India’s manufacturing sector and eventually reduce its trade deficit.

The author is a reporter with the Global Times.

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