New Delhi: Negotiations for a free trade agreement (FTA) with China may not make much headway during Chinese Premier Wen Jiabao’s three-day visit to India starting Wednesday. Indian commerce ministry officials say China has to first address the near $20 billion (Rs 90,000 crore) trade deficit that India has with China.

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Indian is arguing that China needs to lower non-tariff barriers to facilitate the increased movement of goods over the border in the other direction.

On Monday, China’s ambassador to India, Zhang Yan, had offered to start talks for an FTA with India. “China needs to address the trade imbalance between the two countries first. We had raised the issue 11 months ago and nothing has been done so far on it. They need to explain to us the efforts they have made towards bridging the gap," said a senior ministry official on condition of anonymity.

Trade agenda: Chinese Premier Wen Jiabao. Adam Dean/Bloomberg

India had raised the issue of the trade imbalance at the Joint Economic Group meeting between the two countries in Beijing and had asked China to take steps to close the gap.

“High tariffs are not a barrier for trade either for India or China. It is non-tariff barriers raised by China which come in the way of our exports to that country. Unless those issues are addressed, what is the relevance of either a preferential or free trade agreement?" the official asked.

“The FTA is the next stage. It is our hope that we can start the process. We are very much positive on these issues," Yan said on Monday.

Both countries had completed a joint study in March 2005, when India’s trade deficit with China was $1.5 billion, to examine the potential benefits of greater trade and economic cooperation. The joint study group in its report had recommended that the governments appoint a joint task force (JTF) to study in detail the feasibility and benefits of a possible China-India regional trading arrangement, and also give recommendations on the contours of such a pact. The JTF subsequently finalized its draft report covering trade in goods, trade in services, bilateral investment, trade facilitation and economic cooperation. However, the proposal has been put on the back burner as the relationship has become tense.

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While both countries have sparred on various geopolitical issues, China emerged as India’s second largest trading partner since 2006-07. There has been trade friction along the way. India has continued to impose anti-dumping duties against Chinese products, the highest by any country at the World Trade Organization last year, alleging the prices of some imported goods from China are less than their normal value. China has also raised objections to India’s stringent regulations in sourcing power and telecom equipment, calling them discriminatory.

Anwarul Hoda, professor at the Indian Council for Research on International Economic Relations, said Indian industry is opposed to an FTA with China due to the competitive disadvantage and poor quality of transport infrastructure in India.

“China has become the world’s factory, cornering 12% share of global manufactured goods production. It is now the most competitive country in the world, way ahead of India, which is at second place," he said. “Since we have a long way to go, both industry as well as the government are opposed to FTA."

Hoda also pointed out that because China is a non-market economy, one does not know how much subsidy it provides to its manufacturing sector. “Now they are 10 years into the WTO and in another five years they have to be completely transparent to enjoy market economy status by member countries."

China officially joined WTO in September 2001 after 15 years of negotiations and will only be treated as a market economy starting 2016, according to WTO rules. The non-market economy status allows other countries to impose additional duties on China’s products until 2016.

Federation of Indian Export Organisations director general Ajay Sahai said the inflexible Chinese currency and the time-consuming process for registration by pharma companies limit Indian exports to China.

“The yuan depicts an artificial price, making it difficult for Indian exporters to match it," he said. “The registration process for pharmaceutical companies also takes more than a year in China as against 90 days in other parts of the world."

On the possibility of an FTA, Sahai said exporters may not object to such a deal with China, but domestic industry may have a problem because at present India does not recognize China as a market economy. “It is premature to talk of an FTA with China at this moment."