Tuesday, 28 August 2012

India- China Trade

India-China trade touched US$ 74 billion in 2011, and there are hopes that it would reach 100 billion USD by 2015.  In 2011 China became India's biggest trade partner, and India too has become one of the principal trade partners for India. To take this potential forward, it is necessary to address the concerns that both sides have. Let us examine this.

The bilateral trade registered a $12.2 billion increase in 2011, taking the total to $73.9 billion as against $61.7 billion in 2010, according to official trade figures for the last year.
The trade deficit in 2011, however, piled up to $27.07 billion even though Indian exports to China went up to $23.4 billion registering a growth of almost 12.26 per cent compared to the same period in year 2010. 3

  1. Growing Trade Deficit with China: The trade deficit widened to a record $ 39.6 billion in the financial year 2011-12, with overall trade rising to $ 75.4 billion, according to Indian government figures. This is despite Indian exports to China showing an increase over 10%.
  2. India is demanding greater market access for Indian companies in the IT and pharmaceuticals sectors.
  3. Concerns over dumping: India initiated 149 anti-dumping cases against China, accounting for more than 50 per cent of all cases India has filed against foreign countries. In recent years, India also filed more anti-dumping investigations against China than any other country at the World Trade Organisation (WTO). India has filed anti-dumping cases on a range of Chinese products, from toys, textiles and mobile phones to tyres and chemicals. China, on its part, has taken anti-dumping measures on Indian antibiotics. Filing of anti-dumping cases has become a concern for China as well. Thus in the August 2012 meeting of ministers, a joint working group was tasked with formulating a mechanism to nip trade disputes in the bud before they lead to the filing of formal anti-dumping investigations.4
  4. Abduction of Indian businessmen by local traders in Yiwu over payment default. Yiwu is world's largest wholesale market, and has attracted Indian businessmen to buy cheap Chinese manufactured articles. In December 2011 two Indian traders, Deepak Raheja and Shyamsunder Agarwal, spend two weeks in captivity and face abuse from local suppliers who accused them of owing more than 10 million RMB ($1.58 million). They are now awaiting judgment from a local court. The Indian embassy in Beijing put out advisories warning Indian businessmen of the dangers of doing business in Yiwu. The Chinese Foreign Ministry here hit out at the advisory, saying it was “not conducive to resolving the relevant issue and will also affect normal trade and economic exchanges between China and India.” 5,6

CHINESE CONCERNS: The investment environment in India, particularly in the power and telecom sectors:
  1. China imports large quantities of iron ore. The imposition of a 30 per cent duty to slow exports has been one cause for falling trade in this area. 
  2. Proposed moves to impose a 21 per cent duty on power equipment
  3. Ban imports of certain kinds of telecom hardware because of security concerns.  
  4. China has voiced objections to visa policies4
The relatively strong foreign exchange reserves of both countries and an increasing desire of businesses to go overseas should drive the future of trade ties. Boosting mutual investments would be one way of shifting the relationship from the current model. 1

Another take on issue of growing trade deficit vis-a-vis China
India’s growing trade deficit with China has become a source of anguish in Indian policy circles. Unfortunately, much of the public discussion on this subject has tended to be shallow. Few people seem to understand the trade deficit’s underlying causes, its implications for India’s economy, and what India should do to create a better balance.

There’s no question that India’s overall merchandise trade deficit is soaring, growing from $13 billion in 2000 to $103 billion in 2010 and an estimated $150 billion in 2011. At more than 6 percent of the GDP, India’s trade gap is huge. The trade deficit has grown even though India over the past 10 years has been the fastest-growing exporter among the world’s top 10 economies. From 2000 to 2010, India’s exports grew at an annual rate of 19.3 percent—more than twice the rate of the 9 percent growth in world trade and about the same as the 20.1 percent average annual growth in China’s exports.
Even if the trade deficit with China were magically to vanish, it would do little to address the country’s trade imbalance. The deficit with China accounts for less than 20 percent of the country’s total trade deficit. More damaging to India’s trade numbers, though, is the reliance on imported oil, gas, and coal from such places as Saudi Arabia, Iran, Australia, and Indonesia. Energy accounts for more than 65 percent of the trade deficit. In sum, the primary trade challenge for India is rooted in its rapidly growing need for energy coupled with the rapidly increasing price of energy resources.
Of China’s total 2010 exports of more than $40 billion to India, more than 60 percent came from capital goods, such as electrical machinery, nuclear reactors, boilers, iron and steel products, ships and boats, and project goods.
Starting in 2007, India’s political leaders finally began a serious effort to address the country’s massive infrastructure deficit. This has meant rapid growth in investment in sectors such as power, telecommunications, ports, roads and highways. Since India’s domestic producers have been unable to keep up with the growing need for machinery and other capital goods, the country has no choice but to import equipment. With prices 30%  or more below those offered by suppliers in the U.S., Europe, or Japan, Chinese companies have been the natural beneficiaries of India’s growing appetite for capital goods. India does have some things that China wants: India is one of the world’s largest producers of iron ore and cotton, and China is a major customer. Not surprisingly, as the world’s largest cotton importer, China has complained about India’s recent moves to ban cotton exports. Given pressure also from India’s cotton farmers, the government has now decided partially to reverse the ban.
What would happen if the Indian government were to restrict imports of Chinese capital goods into the country? Yes, the trade deficit with China would come down, but the country’s overall trade deficit would become even bigger. It would therefore be self-defeating for India to erect artificial barriers to imports from China. Nonetheless, as part of smarter engagement with China, India can and should pursue a number of policies. 
First, given unsettled border tensions and a fluid geopolitical environment, India should continue to emphasize national security issues. National security should not, however, become an excuse for artificial trade barriers.
Second, taking a page from China’s own industrial policies, India’s leaders should demand that Chinese companies wishing to remain major suppliers to Indian companies start manufacturing in India. As the size of India’s market for manufactured goods continues to grow, this would also become an increasingly attractive strategy for Chinese companies.
Third, India must demand reciprocity vis-à-vis market access. For example, consider the auto sector. Chinese auto companies are keen to go global and, outside of China, see India as the hottest and fastest-growing market in the world. With that in mind, India’s leaders should ask their Chinese counterparts why India should open its market to Chinese auto companies when China does not permit foreign auto companies interested in coming to China to take more than a 50 percent equity stake.
During the current decade, India’s top economic priority should be to keep pushing infrastructure buildup at a very aggressive pace. Imports of less-expensive capital goods from China, financed by low-cost capital from Chinese banks, help India accomplish this agenda at an accelerated pace. India’s labor costs are already cheaper than China’s. India’s engineering and management skills are also world-class. The sooner the infrastructure deficit gets addressed, the faster India will start to become more competitive than China on the manufacturing front. By exporting low-priced capital goods to India, China is helping to create an economy that will prove to be its toughest competitor by 2020. Maybe sooner.
1. http://www.thehindu.com/news/national/article3824854.ece
2. http://timesofindia.indiatimes.com/business/india-business/India-China-bilateral-trade-set-to-hit-100-billion-by-2015/articleshow/14323128.cms
3. http://www.rediff.com/business/slide-show/slide-show-1-india-china-trade-hits-a-record-high/20120130.htm
4. http://www.thehindu.com/news/international/article3315474.ece
5. http://articles.economictimes.indiatimes.com/2012-05-31/news/31921808_1_indian-businessmen-india-china-relations-indian-traders
6. http://www.thehindu.com/news/article3456580.ece
7. http://www.thehindu.com/business/article3505538.ece
8. http://www.businessweek.com/articles/2012-03-21/indias-misguided-china-anxiety

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