IR

India- China trade – A win- win situation or a different ball game?


Deepanshu Kabdola*

New Delhi, November 30, 2016 (Alochonaa): India & China signed a Trade Agreement in 1984 which provided for Most Favored Nation Treatment and later in 1994, the two countries signed an agreement to avoid double taxation. In the last decade, commerce between the nations has failed to match its peak of $79 billion in 2011, according to data. China’s trade with the United States has grown 21 percent in that time to $627 billion. Moreover, India has a trade deficit with China of nearly $53 billion, its largest with any country. Singapore, with a population about 240 times smaller than India, sells twice as many goods to China each year. The large trade deficit makes any future opening politically difficult for Prime Minister Narendra Modi. Lawmakers keep urging him to take protectionist measures against China, and the gap routinely comes up in Modi’ s meetings with President Xi Jinping. Indian policymakers realize that little can be done in the short term.
For one, both nations are members of the World Trade Organization, which doesn’t allow governments to discriminate against specific countries in setting trade policy. A bigger problem, however, is India’s own roads, ports and railways. In 2014 it cost $1,332 on average to export a container from India, compared with $823 to ship from China. The solution is the need to increase India’s domestic competitiveness and that is far not been done by them . The Chinese goods have become costlier but still they are getting more sold in Indian markets.  It means goods produced in China despite getting costlier in Indian markets with appreciation of Yuan have seen enormous increase in their shipment to India. Either the realized price (for Indian customer) for Chinese goods has decreased in order to remain in market or Indian consumers do not mind paying more to varieties of Chinese. In subsequent years, the import basket too has broadened and now more and more goods are imported so that reduction in ones sale is offset by increased sale by other goods. It is possible and also with improvement in technology and production efficiency, costs are declining and exporters can still maintain their profit margin without increasing the price.
One way to help eliminate the trade deficit is to get China’s manufacturers to start making goods in India. So far, Chinese foreign direct investment into India has been miniscule: $1.36 billion over the past 16 years. Even the Regional Comprehensive Economic Partnership, a 16-country trade deal that aims to unify a market of more than 3 billion people, has problems. India wants moderate import tariff on goods rather than complete elimination of duties, while China is pushing to increase number of products that will attract zero duty. India is also pushing for easier access to overseas markets for its service professionals, “and we are going to see how much appetite our RCEP partners have, The  impression that India is creating obstacles, the chance of a breakthrough isn’t very high.

The main items that comprise Chinese exports to India are electrical machinery and equipment, cement, organic chemicals, nuclear reactors, boilers, machinery, silk, mineral fuels. Value added items like electrical machinery dominates Chinese exports to India. This exhibits that Chinese exports to India are fairly diversified and includes resource-based products, manufactured items, and low and medium technology products. It is said that if India is to capture the markets of China and enjoy profits, then it would have to discover new merchandise and branch out its exports to China, which has not be done in recent times.
Since the 1990s, this has been accompanied by a reorientation of production and trade in global supply chains, as China has become the premier assembly hub for manufactured exports. Via processing trade, China runs deficits with other east-Asian countries and surpluses with Europe and the USA. Correspondingly, other east Asian countries have seen their trade surpluses increase with China and decrease with the West. All this suggests that most of China’s trade surplus – the biggest chunk of its current-account surplus – is the result of “unfair trade ”. There are various ways by which it is done,

Currency Manipulation – China manipulates its currency to keep the U.S. dollar value high, so that Chinese companies have a 30% to 40% cost advantage. This undervaluation is illegal and should be considered to be a direct export subsidy, yet the Commerce Department has refused to treat currency undervaluation as actionable under the law.

State-Owned Enterprises (SOE) – China owns and subsidizes many companies, as in the steel industry example, above. Through the subsidized companies, China can target a market with low-cost products, capture market share and drive competitors out of business.

Technology Theft – China knows that technology and innovation is what can make them the  No. 1 manufacturer in the world, and they are prepared to get it any way they can. They have been accused of using espionage, counterfeiting and buying American technology companies as standard strategies.

Technology Transfer – As a condition of accessing the Chinese markets, China requires U.S. companies that build plants in China to create joint ventures with local companies—and share with them their latest technologies.

Research & Development Facilities – China requires foreign companies with plants in China set up R&D facilities in China. As a result, foreign companies have built more than 1,000 R&D labs in China.

 

The primary thrust of trade-related reform must be unilateral, i.e. outside trade negotiations, and hitched firmly to domestic reforms to improve the business climate. Put another way, trade policy should be embedded in domestic economic policy and its institutional framework rather than being driven by external negotiations and international institutions. Trade-related regulatory reforms are bundled up with domestic politics and economics; initiating and implementing them is overwhelmingly a domestic affair; and the scope for productive international negotiations and agreements is restricted.

Second, China-induced unilateral liberalization is not a panacea. It does not lock in liberalization against future backtracking. Nor does it provide fair, stable and predictable rules for international commerce. That leaves room for reciprocal negotiations and international agreements, particularly in the WTO.

Thirdly, the Chinese governing elite is too preoccupied with domestic political and economic issues to be willing and able to exercise external power strongly and responsibly. Its main concern is to keep its external environment safe for China’s economic development, not to act as a regional or global policeman. Underlying economic policies relating to savings, investment and consumption, notably under-pricing of capital, land and energy, probably have a greater effect on external imbalances than exchange rate valuations. So do other structural factors.

China’s “double transition” – rural-to-urban migration and fast-paced industrialization, combined with a condensed demographic dividend (a large increase in the working-age ratio, speeded up by China’s one-child policy) – gives it huge, long-lasting comparative advantage in labour-intensive exports which India thinks to exploit but has not been able to do in recent times.

What matters most is how to control this growing imbalance. What India can do is to exploit the limited opportunity it has at its disposal.  Just coming to know where India can produce cheaply than its counterpart, would be done, we can’t replicate what china has already done but we can do whatever is necessary but the first thing is to have a consensus that a wrong doing is being done, that is the tedious task our policy makers have yet to figure out. The next step would be of aggressive economic diplomacy that ensures Indian goods traverse Chinese borders and other areas. GOI has to pressurize their Chinese counterparts to relax import restrictions and give hassle free access to Chinese markets. China too worry about the imports of goods as it may lead to reduced sale for domestic producers and benefit foreign producers(India).

Since, China already sells more goods to India by a wide margin it makes a case for Indian policymakers to get approval of selling such goods on Chinese soil. The appreciation of Yuan has been partly responsible for increased exports to China in recent decade from India. This must have helped Indian exporters as they have got competitive advantage once their products become cheaper. But Chinese counterparts have made rapid gains in trade and have come out winner as they made drastic gains in exports to India.

As for the longer term, the scenarios usually outlined are deepening cooperation, increasing competition that might lead to conflict, or continuity with both competition and cooperation in evidence. There is a debate in India—inside and outside government—about China, which scenario might prevail, the future of the relationship and what approach to take with China.  Whether it should join with other countries to limit China’s influence or should cooperate with China to play a leading role in the world together. In India there’s much concern about the trade imbalance. The overall trade deficit has gone from  $44.7 billion in 2014-2015 to $52.26 billion in 2012-2013. While investments have grown, they remain limited compared to the investment relationships that both China and India have with other countries. In India, there have also been complaints about market access in China and the treatment of Indian labor there, concern about Chinese investment in “strategic” sectors in India, accusations about visa abuses by Chinese companies and restrictions on Chinese labor. Indian companies also privately express concerns about cyber-espionage. Overall, reports of cyber-attacks on Indian government and military networks—allegedly emanating from China—have done nothing to decrease distrust that persists, especially among the public.

China’s growing political and economic ties with India’s neighbors are also a subject of concern. Policy makers in New Delhi  watch warily increasing Chinese interactions—political and commercial—with and involvement in countries like Afghanistan, Bangladesh, Myanmar, Nepal and Sri Lanka. Concern about a military dimension being added persists. Beijing’s increasing interest in operating in the Indian Ocean, which India has traditionally considered its backyard, has also not gone unnoticed. Even beyond the neighborhood, there are concerns about competition with China for markets, influence and resources across the globe. While China emphasizes that these activities have benign goals—economic development, security for its ships, etc.—some in India who tend to take a hawkish position are not convinced; others are taking a wait-and-see attitude. In these times one has to ask the question is the trade with china really a driving force for India and is landing it in a win- win position or rather just helping the causation of China’s rise in the world and its “unfair trade” which might not be touted as unfair until it is read between the lines . We should really stop the argument of biding time in the name of solving arguments or not upsetting  the neighbor along border issues but rather should stand up to  what is going around at the present times where one notices China to be a biggest  gainer in the trade.

*Deepanshu Kabdola, PhD student, Department of East Asian Studies, University of Delhi.

**Alochonaa.com is not responsible for any factual mistakes (if any) of this analysis. This analysis further is not necessarily representative of Alochonaa.com’s view. We’re happy to facilitate further evidence-based submissions on this topic. Please send us your submission at alochonaa@gmail.com

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Categories: IR

2 replies »

  1. Interesting article indeed. Wonder what trajectory our government policy is taking. Selling Indian products in China has never been easy. While Chinese may manufacture goods in India, shouldn’t our companies in China also be doing manufacturing in India?

  2. It is most important that India continues to develop and become a strong economy so it can export quality products to its neighboring countries. Indian manufacturers must learn to thrive in the competitive world market. Accurate R & D, hard work and authenticity is the key to survive in the market with head above waters.

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