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Does China deserve to be ‘market economy’?

Does China deserve to be ‘market economy’?
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First Published: Fri, May 04 2007. 01 14 AM IST
Updated: Fri, May 04 2007. 01 14 AM IST
Indian industry groups are split over the question, posed by the commerce ministry, on whether to grant China a ‘market economy’ status, a move that would help Beijing avoid punitive anti-dumping measures.
The government’s proposal comes against the backdrop of the joint study group, which is studying the feasibility of a trade pact between India and China. The group is expected to submit its report in October. The two countries would be able to hold trade talks only after India grants China ‘market economy’ status. But industry lobbyists, who have been asked to respond by the ministry in a letter reviewed by Mint, are polarized on the issue.
While the apex industry body, Confederation of Indian Industry (CII), supports the move, the Federation of Indian Chambers of Commerce and Industry (Ficci), said China cannot be treated as a market economy since it provides subsidized capital to its domestic companies. “How can we grant ‘market economy’ status to China when it does not operate according to free-market principles,” said Anjan Roy, advisor to Ficci.
CII, meanwhile, backs the ministry’s view that there is a need to expedite the process of granting market economy status to China. But “we need to understand more about pricing, investment pattern and capital subsidies in China”, said a CII spokesperson. “Once we understand this, we’ll be happy to take it forward.”
A third lobbying body, the Associated Chambers of Commerce and Industry (Assocham) wants the government to be cautious. “We need to examine all pros and cons before we decide in favour of it,” said D.S. Rawat, secretary general of Assocham.
Bilateral trade between India and China touched $25 billion (Rs1.15 lakh crore then) in 2006, according to most recent government data.
China has been seeking ‘market economy’ status for years, as its cheap exported goods have been the target of many anti-dumping measures by India. According to the 2004-05 annual report of the commerce ministry, India had initiated 80 anti-dumping cases against China, the highest against any single country. The cases were initiated in India as WTO’s anti-dumping agreement allows governments to act against dumping after doing a thorough investigation of the charges made by firms.
Selling under the normal value, or price at which products are sold in the domestic market, and damage to Indian industry are two elements that are considered in deciding an anti-dumping case. Currently, since India has not granted China ‘market economy’ status, the production costs offered by Chinese companies are not accepted when calculating the normal value of products, which means that China cannot prove that their products were not sold under the normal value.
‘Market-economy’ status would help China avoid anti-dumping cases because it would mean that India could impose penalties on Chinese goods only if the export price was below the normal value, which would have to be calculated using the production cost that China gives.
Ficci cited reasons such as state interference in China, its currency system and lack of clear labour laws as reasons for not granting the status to China. Also, Chinese companies have a cost advantage of 30% over Indian firms, said Ficci. Granting such status to China would put Indian firms in direct competition with Chinese ones. “It will be unfair to let the Indian industry compete with Chinese companies, given the advantages China enjoys,” noted Roy.
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First Published: Fri, May 04 2007. 01 14 AM IST