Amidst the euphoria over the ASEAN-India FTA, Vietnam’s refusal to sign the FTA was received with a great deal of surprise, especially among the advocates of the Look East Policy. Why would Vietnam, India’s strategic partner and one of its closest friends, refuse to sign one of the most definitive documents of India’s Look East Policy? The issue became more conspicuous when it came to be known that Vietnam took offense at not being recognized as a market economy by India and, therefore, did not sign the FTA. After all, why would an ardent advocate of communism and a staunch symbol of anti-capitalism demand market economy status?

This episode is symptomic of all those WTO member states which have been granted non-market economy status. All former socialist economies were categorized initially as non-market economies. Though Russia is now universally recognized as a market economy, former socialist economies like Vietnam and the People’s Republic of China are still lobbying hard to be recognized as market economies. While a few economies like Australia, Singapore and South Korea have recognized China and Vietnam as market economies, major economies, such as USA, European Union and India have refused to grant market economy status to them. The question arises as to why several economies have refused to accord market economy status to these former socialist economies? Does the status involve more than simple labeling. As one looks into the details of the concept, it becomes obvious that the simple change of nomenclature in reality involves questions of pricing mechanism of exports, WTO norms over dumping and anti-dumping, protectionism and economic transaction of significant proportion.

The issue essentially involves two inter-related concepts - the pricing of the export-products from a non-market economy perspective and anti-dumping measures from the market economy perspective. A non-market economy can arbitrarily fix low prices for products, which may not reflect the ‘normal value’ of the products in the country. A market economy, on the other hand, fixes the price based on the factor cost and the demand-supply dynamics of the market, without state or government interference. The administered low-pricing structure can give a greater degree of competitive advantage to the non-market economies while trading with the market economies.  

In order to counter the unfair trade benefits accrued to non-market economies and ensure the competitiveness of domestic goods, the WTO, under the provision of 'Trade Remedies', has entitled market economies to consider such imports as product-dumping and impose anti-dumping duties against such products. Being the largest non-market economy in the world and also identified as an Economy-in-Transition, China has faced a large number of allegations and litigation regarding the creation of unfair competitive advantage for its goods through administered pricing structure. With approximately 650 cases of anti-dumping litigation, China tops the list of economies facing anti-dumping investigations against administered prices in the WTO.

 

Similarly, Vietnam has also faced anti-dumping litigation. During the last few years, India has initiated a few anti-dumping investigations against Chinese and Vietnamese products and applied duties on the import of some of these goods. India has already imposed in 2009 anti-dumping duties on three items – threads and fabrics, CD-R, and fluorescent lights – imported from Vietnam.  Vietnam’s insistence on being granting the market economy is essentially an effort to reduce these anti-dumping litigations, retain the competitive advantages of its exports and effectively exploit the Indian market in the aftermath of the FTA. The non-Market economy status of Vietnam has restricted the volume of Vietnamese exports to the Indian market.

If India accepts Vietnam as a market economy, the former has to accept the pricing structure of the latter, making it difficult to impose anti-dumping duties on exports. Moreover, the non-market economy status offers India an important leverage to protect its primary industries and the small and medium enterprises, enabling India to take anti-dumping measures against Vietnamese low-priced agro-products. Moreover, India has faced tough competition from Vietnam in products like tea and coffee, which reportedly dragged the ASEAN-India FTA negotiations for a few years along with other items falling in the sensitive category.

A scrutiny into the filing of India’s anti-dumping litigations reveals that India with its 42 cases topped the list of countries filing maximum number of anti-dumping litigations before the WTO during the second half of 2008. This trend points at a tendency towards greater protectionism in the aftermath of the onset of the global economic crisis. Moreover, the signing of the ASEAN-India FTA has already raised hackles among certain agro-product lobbies, putting the ruling regime on the defensive.

It remains to be seen whether India offers the market economy status to Vietnam and completes the FTA with all ten ASEAN member states. The Vietnamese Vice-President, during her visit (2-7 October 2009) had also requested India to consider giving Vietnam the market economy status. Sending a positive signal in this regard, the Indian government is reportedly working on ironing out the procedural hassles, assuring quicker consideration of the issue by the Cabinet.