Doing business with China is far from easy
Tariff is only a small part of the story. There are regulatory, political and internal market barriers too
We often hear this argument. China’s annual imports exceed $2 trillion. Half of this is in products India exports globally. So if China reduces import duties on such products, our exports to China will rise. Alas, the real world is far too complicated.
There are many more barriers than tariffs. Some are needed to ensure health and quality, but most are in place just to restrict imports. A firm aspiring to export to China must be aware of four significant barriers besides tariffs — regulatory, internal market, trade defence, and political. A brief look at each of these.
A firm needs to register its product with the specified Chinese authority. This means submitting a large number of documents, including details about the firm and its products.
The next step is meeting the inspection, product testing, and quality certification requirements. Chinese experts would visit and inspect Indian factories. The costs are to be borne by the Indian side. Only Chinese labs do product testing. And there can be no appeal on their decisions. Let us take the case of medicines, industrial and food products.
India imports 90 per cent of bulk drugs or APIs from China and allows it easy access through a simple registration system. After registration, there’s no rule for checking off each consignment at the time of imports.
Not so in China, though. Registration takes one to three years. Testing takes place again at the time of imports. And, China cancels registration even if one batch has issues.
The provinces do not recognise USFDA certificates and need new clinical trials even on generic drugs. This increases the cost.
Coming now to the export industrial products such as electric wires cables, IT products, motorcycle parts/accessories and electrical tools to China. One has to first get an NOC from the China compulsory product certification system or CCC. The NOC may come after detailed laboratory testing, factory inspection, and labelling.
More stringent processes await exporters of food, meat, fish, and dairy products. They have to get NOC from the General Administration of Customs China (GACC) and relevant administrative ministries.
They will also have to follow the China food safety standards and applicable sanitary and quality regulations. Products like oilmeal need further clearance from China’s Agriculture Ministry.
After obtaining all the NOCs, it is still not done. For products like rice and sugar, a firm needs import quota to avoid exorbitant tariffs. And state agencies get most of the quota.
The complicated and non-transparent system ensures that it takes years to get the green signal. Or it may never come.
Only a limited part of China’s imports enter into the domestic market. Most imports act as inputs for making export products. Most electronics and machinery trade between China and Japan-Korea-ASEAN falls in this category.
Much of this trade happens at zero duty outside the FTAs (free trade agreements). Internal market barriers also apply to firms producing in China.
They have to clear extra barriers to sell in the Chinese domestic market. Preference is always to domestic firms.
Trade defence measures
An importing country can impose anti-dumping, countervailing, or safeguard duties. If a foreign firm exports at a price lower than it charges in its domestic market, the importing country can impose anti-dumping duty.
Countervailing duty neutralises the effect of any government subsidy provided by the exporting country. Safeguard duties contain any general surge in imports of a product. China is not alone here. These duties are also levied by the US, Japan, Korea, India, and many other countries. These duties are generally higher than the normal import duties and hence restrict the imports. Factor this into the costing.
Business is politics
China used to buy a large number of bananas from the Philippines regularly. But when the Philippines questioned China’s claim over Scarborough Shoal in the South China Sea, China suddenly stopped buying its bananas. Most firms have political affiliations. Other countries have started taking notice. For example, when China bought a few German high-tech MSMEs last year, Germany introduced a law to allow greater scrutiny of such deals. The US restricts imports from China on the grounds of industrial espionage and other manipulations.
The Indian situation
In contrast to China, where most foreign firms need a lengthy approval process, India provides an easy entry. It has less than 150 products that have mandatory technical standards. This provides easy passage to cheap, low-quality products. Here is the broad evidence.
Listed are a few products imported into India, with the figures in brackets indicating the difference by which the Chinese price is lower than the world price: pesticides (720 per cent), embroidery machines (130 per cent), gear boxes (22 per cent); select organic chemicals and bulk drugs (20-90 per cent); urea (15 per cent); computer printers (20 per cent), washing machine parts (142 per cent); petroleum coke (57 per cent); refrigerators (52 per cent); solar cells (136 per cent); lithium battery (60 per cent); copper foils (30 per cent); and air purifier (83 per cent). Many of these are sold as Indian products with some packaging. But China is not alone. The world has moved from tariff barriers. Simple average import duties are less than 5 per cent in Canada, Japan, Australia, the US, and the EU. These countries realised that while the earlier 100 per cent tariffs could stop imports, today’s 5 per cent cannot. So they switched to non-tariff measures to control unwanted imports.
China’s example details the type of systems India needs to create. Good news is, India has taken baby steps to expand quality and standard infrastructure. And, finally, most FTAs cut only customs duties. They do not deal with other barriers adequately. The exporter has to comply with each.