The Chinese conundrum: India’s road ahead

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Updated: June 29, 2018 4:01:48 PM

While Narendra Modi and Xi Jinping addressed the ‘trust deficit’ that has crept in the Sino-Indian relations, addressing the burgeoning ‘trade deficit’ between the two countries is also crucial.

India China, Modi, Xi Jinping, Institute of South Asian Studies, Wuhan meeting, BRICS,India exports primary materials such as ores, minerals and cotton to China, whereas Chinese exports to India are a wide variety of sophisticated products higher up in the value chain.

Indian Prime Minister Narendra Modi’s ‘Informal Summit’ with the Chinese President Xi Jinping in Wuhan stoked a lot of attention among the commentators in both the countries. While some have hailed this as a major icebreaker post the Doklam standoff, others have urged a more guarded approach to Chinese overtures.

Also, the latest round of the Regional Comprehensive Economic Partnership (RCEP) negotiations was held in Singapore in the first week of May. The RCEP is a proposed free trade agreement (FTA) between the 10 ASEAN countries and their six FTA partners—Australia, China, India, Japan, South Korea and New Zealand. It accounts for 25% of global GDP, 30% of global trade, 26% of FDI flows and 45% of the world’s population.

From India’s point of view, the RCEP is critical, more so because China is part of the trade bloc. The RCEP countries account for almost 27% of India’s total trade. Exports to the RCEP account for about 15% of India’s total exports and imports from the RCEP comprise 35% of India’s total imports. India runs a trade deficit with the ASEAN as well as the partner countries of the RCEP.

India’s trade deficit with the bloc has risen from $9 billion in FY05 to $83 billion in FY17, of which China alone accounts for over 60% of the deficit. India already has bilateral FTAs with the ASEAN, South Korea and Japan, and negotiations are under way with Australia and New Zealand. Most RCEP countries see India has a huge potential market for their exports. In the past RCEP rounds, India has faced a lot of pressure to give market access to partner countries for trade in goods.

Indian industry, on the other hand, feels that RCEP negotiations, especially with China, need a careful evaluation as it may have more to lose than gain if it agrees to a liberal tariff elimination schedule, with respect to China. A three-tier approach of a separate tariff schedule for different partner countries has been rejected by member countries.

It’s worth noting that India’s trade deficit with the ASEAN, South Korea and Japan has increased to $24 billion in FY17 from $15 billion in FY11 (with the signing of the respective FTAs) and $5 billion in FY06. This includes value-added sectors like chemicals and allied, plastics and rubber, minerals, leather, textiles, gems and jewellery, metals, vehicles, medical instruments, and miscellaneous manufactured items. These sectors account for 75% of India’s exports to ASEAN.

India China, Modi, Xi Jinping, Institute of South Asian Studies, Wuhan meeting, BRICS,

Moreover, given India’s inability to negotiate a good services deal in the past, Indian authorities may be treading a cautious path this time on trade in goods. Meanwhile, the growing wave of protectionism by the US has forced trade blocs like the EU to devise a strategy to check diversion of imports into the EU—the EU is already contemplating “safeguard” measures on imports of steel and aluminium. India, too, has a lot to worry in the current context given the nature of bilateral trade between India and China.

China is India’s biggest trading partner, accounting for almost 10% of India’s overall trade. The Sino-Indian bilateral trade increased from a mere $1.8 billion in FY2000 to $72 billion in FY17, making China India’s biggest trading partner. The trade especially picked up after China’s accession to the World Trade Organisation (WTO) in 2001. China’s trade surplus with India rose from $0.6 billion in FY01 to touch $52 billion in FY17.

China accounts for almost half of India’s total trade deficit. India’s exports to China have grown at an average of 13% since FY04, while Chinese imports into India have increased at 26% year-on-year (almost double that of export growth). This has led to a widening trade gap between the two countries.

India’s overall trade deficit with China has risen 13-fold in the past decade. In fact, China now accounts for about 50% of India’s trade deficit. This trade asymmetry is compounded by the nature of goods flow. India tends to export primary materials such as ores, minerals and cotton, whereas Chinese exports to India are mostly a wide variety of sophisticated products higher up in the value chain (with higher profit margins and which create more jobs at home) like capital and manufactured goods.

China’s export basket is better diversified than that of India’s. Export of non-ferrous metals, iron ore and cotton constituted almost 50% of Indian exports to China, whereas about half of the total share of the imports from China comprised of electrical machinery and telecom equipment, nuclear reactors and boilers.

To sum it up, India’s exports to China are significantly different from its exports to the rest of the world. In fact, for India, China is yet to emerge as an important destination for its most significant exports.

American economist and MIT professor David Autor, who is the co-author of ‘The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade’, reasons out some worrying implications of increased trade integration of the US economy with China. While there are consumer benefits of increased trade, addressing the substantial distributional consequences is always a challenge.

Local labour markets in the US have adjusted slowly to Chinese imports, coupled with greater job volatility and reduced permanent incomes. While the structure of the US economy is different from India’s, not taking lessons from the US experience might be a folly.

At a time of growing protectionism and the US’s stance towards China, opening our market to China can be prove to be detrimental for the domestic industry given proper standards and processes are not in place in India. In other words, the US experience—as is documented by Autor—may very well see a repeat in the Indian scenario. China’s capacity overhang in most sectors is a serious concern, especially for MSMEs.

While the two leaders address the ‘trust deficit’ that has crept in the Sino-Indian relations, addressing the burgeoning ‘trade deficit’ is also crucial. While politics and diplomacy are a multidimensional game of their own, looking at the economics of bilateral trade between the two Asian powers is also a need of the hour.

By Prachi Priya & Aniruddha Ghosh

Prachi Priya is a corporate economist based in Mumbai. Aniruddha Ghosh is a Delhi-based economist and LSE alumni.

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