sector supply response to reforms, the long process of creating market institutions, and the social consequences of economic adjustment.
China and India differ, however, in their processes of implementing a gradual approach to reforms, which include timing, speed, stages, and specific measures adopted. Accordingly, differences in trade and investment policies have influenced China’s rise as a massive global exporter of manufactures and India’s expansion into high-skill service exports alongside manufactures.
China was swifter, more coordinated, and more credible in its overall reform process than India. It introduced an open door to FDI in 1978, while India’s major reforms came as late as 1991. At-tracting export-oriented FDI into the manufacturing sector became the cornerstone of China’s trade and investment policies in the early years of reform, and it underlies China’s success in manufactured exports. China evolved a comprehensive FDI policy that enabled it to attract record inflows of export-oriented FDI into manufactur-ing and to technologically upgrade it over time (via joint ventures and technology transfer). This comprehensive FDI policy included the deregulation of entry rules, as well as the introduction of active policies such as incentives, infrastructure, and technology support.
Another FDI spillover is the growth of Chinese outward invest-ment to Asia and the rest of the world. Over time, Chinese outward investment is expected to become a major driver of global FDI in manufacturing industries, as large Chinese firms seek new market opportunities.
India was slower in adopting a comprehensive policy frame-work for export-oriented FDI. It initially focused on liberalizing restrictions on foreign ownership, which is perhaps insufficient in a highly competitive international environment for attracting export-oriented FDI. For instance, other measures like SEZ legislation only date to 2005. Moreover, the somewhat cumbersome process of reforming FDI rules led to criticisms by foreign investors that the country’s FDI regime was complicated and non-transparent. FDI inflows increased but remained below expected levels in the first de-cade after the reforms indicating caution about foreign investment in the Indian economy. Nonetheless, an improvement in India’s in-vestment climate in the second reform decade was accompanied by a surge in FDI inflows, particularly into services. If the FDI surge
continues, India has the potential to become a significant global services hub with a respectable manufacturing export base.
Export promotion via FDI took place in China alongside con-trolled liberalization of a protected domestic sector. China was cau-tious in reforming its import control regime during the early transi-tion years, but the process was strengthened from 1992 onwards by reforms to accede to the WTO. Steady progress in tariff reform oc-curred, so that China has presently emerged as one of the more open economies in the developing world. Increased import competition induced increased efficiency, industrial restructuring, and exporting in a formerly protected domestic enterprise sector. India dramatically abolished import licensing on machinery and raw materials in 1991, and tariff reform has resulted in a far more open import regime than ever before. Nonetheless, India’s average tariffs and their dispersion still remain higher than China’s.
In an environment of gradual tariff reform, exchange rate man-agement became a critical tool to encourage exporting activity in the giants. China introduced currency convertibility on current account transactions, while India unified the dual exchange rate and com-menced current account convertibility. Following improved access to foreign exchange, the giants both pursued managed floating exchange rate policies to maintain relatively stable and predictable nominal ex-change rates. Both also had some success in maintaining a favorable REER for exporting activity during the 2000s, but China seems to have done somewhat better than India in this regard.
5. Regionalism and FTAs
This section considers the question of whether the giants’ recent em-phasis on FTAs is detrimental to exports. In another marked shift in trade and investment regimes since the early 2000s, the giants have each pursued bilateral and regional trade agreements alongside multilateral-ism. These moves have promoted some concerns about the possible detrimental impact of FTAs on exporting for two reasons. One is the shallow coverage of FTAs, which are said to be quite liberalizing when it comes to the trade of goods, with the exception of agriculture, but quite thin and vague in scope compared with most agreements formed in the Americas or across the Pacific (Suominen 2009). Second, there is the problem of the so-called Asian “noodle bowl” of FTAs. Informed
by Jagdish Bhagwati’s famous insight of a spaghetti bowl of FTAs and applied to Asia, the noodle bowl description suggests that different tar-iffs and rules of origin in
mul-tiple FTAs have resulted in the problem of criss-crossing agree-ments, which are characterized by excessive exclusions and spe-cial treatment (Baldwin 2008).
Quite apart from a potential distortion of trade toward
bilat-eral channels, it is suggested that firms face large administrative bur-dens, such as the need to deal with multiple rules of origin, which results in the FTAs being little used. Are these concerns valid?
Rationale for FTAs
By June 2011, the giants were among the region’s leaders in FTA activity, with 11 FTAs in effect in both China and India (table 11).
The number of FTAs under negotiation and FTAs proposed suggests that such activity will rise in the future, as China has another 13 agree-ments in the pipeline and India another 20. Meanwhile, a relatively limited (goods only) Asia-Pacific Trade Agreement (APTA) is the only FTA between China and India.
The giants’ interest in FTAs may seem somewhat surprising. While India is a founding WTO member, China only joined the WTO in 2001. This interest can be attributed to three main causes:6 (1) the expansion of European and North American FTA-led regionalism, which highlights large economic gains (e.g., economies of scale, spe-cialization, and inward investment) available from integrating frag-mented regional markets; (2) the lack of progress in the multilateral WTO Doha Round trade negotiations, which has encouraged FTAs to be considered as an alternative means of securing market access for goods and services, as well as venturing into new trade issues not covered by the Doha Round; and (3) increasing recognition that FTAs are part of a supporting policy framework for deepening production networks and supply chains formed by global multinational corpora-tions (MNCs) and emerging Asian firms.
Reflecting its relatively recent FTA experience, China has FTAs with trading partners in the near vicinity and developing world—