Perspectives on India-China Bilateral Trade

On 1 April, 1950, India became the first non-socialist bloc country to establish diplomatic relations with the People’s Republic of China. Prime Minister Nehru visited China in October 1954. While, the India-China border conflict in 1962 was a serious setback to ties, but since 1991 reforms, the engagement has evolved more in terms of economic aspects. 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.

When India initiated its comprehensive reforms in 1991, the level of bilateral trade between the two countries was insignificant as the trade basket was restricted to a limited number of products. However, within a short period, China has become India’s single largest trading partner even though India itself has reached at an unsustainable bilateral trade deficit of US$ 26.3 billion in 2010.

Pattern of India China Bilateral Trade

Indian Exports

The principal items of Indian exports to China are ores, slag and ash, iron and steel, plastics, organic chemicals, and cotton. In order to increase the extent of exporting Indian goods to China, however, there should be a special emphasis on investments and trade in services and knowledge-based sectors. The other potential items of trade between India and China are marine products, oil seeds, salt, inorganic chemicals, plastic, rubber, optical and medical equipment, and dairy products. Great potential also exists in areas like biotechnology, IT and ITES, health, education, tourism, and financial sector.

Chinese Exports

The main items that comprise Chinese exports to India are electrical machinery and equipment, cement, organic chemicals, nuclear reactors, boilers, machinery, silk, mineral fuels, and oils. 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.

Drivers of bilateral trade

There are two primary drivers of the burgeoning trade between China and India: differing comparative advantages of the two countries and sustained, high growth rates in both economies.

• Comparative advantage

The different comparative advantage of the two countries provide grounds for strong economic exchange. Although China’s economy is three times as large as India’s, its manufacturing sector is five times that of India’s. Chinese exports to India thus consist primarily of manufactured goods, especially various types of machinery. Conversely, India has some of the world’s largest reserves of iron ore, bauxite, and manganese, and its exports to China consist primarily of raw materials to feed that country’s expanding steel and automotive sectors. Services trade between China and India remains small. Though India has emerged as a global powerhouse in information technology (IT) and IT-enabled services, language differences create natural barriers to the export of these services from India to China. Thus, many of India’s larger IT companies invest directly in local operations within China.

• Rapid economic growth

The sheer size and growth rates of these economies have boosted bilateral trade, as bigger economies have more to buy and sell. In 2013, China’s economy grew 7.7 percent and India’s grew 5.0 percent—both faster than any other major economy in the world. The two countries could also remain the world’s two fastest-growing economies for the next two to three decades. In this context, the prospects for continued strong growth in bilateral trade appear to be bright.
Imports of lower-priced capital goods from China, such as turbines for electric utilities, can help India address the infrastructure bottlenecks—especially in roads, highways, ports, and electric power—that have appeared as India’s manufacturing revolution gets under way. Because Chinese capital goods are often much cheaper than those from Western or Japanese manufacturers, such imports from China can keep costs low, allowing India to modernize and upgrade its infrastructure more quickly.

• India-China total trade in goods for year 2012 stood at 66.57 billion, recording a decline of almost 10%
• India’s exports to China for 2012 reached US$ 18.8 billion, recording a decline of more almost 20% y-o-y. This decline can be attributed to decrease in the exports of ores, slag and ash (about59%), plastics and articles thereof (about 5%), electrical machinery, sound equipment, etc. (about 14%) and iron & steel (about 20%). Ores, slag and ash; cotton & yarn, fabric; copper and articles; precious stones; organic chemicals; plastic and articles; salt, sulfur, earth & stone; nuclear reactors, boilers, machinery, etc. continued to dominate the Indian export basket. Among the products exported from India to China, iron ores, slag and ash and cotton, including yarn and fabric together constituted a dominant share of 45%.
• China’s exports to India for 2012 China touched a total of US$ 47.75 billion, recording a decline of more than 5% over the figure for 2011. The decline in China’s exports to India can be attributed to decrease in the exports of nuclear reactors, boilers, machinery, etc. (about 10%), electrical machinery, sound equipment (about 7%), fertilizers (about 16%), articles of iron & steel (about 16%) and iron & steel (about 22%). Nuclear reactors, boilers, machinery; electric machinery, sound equipment; organic chemicals; fertilizers; articles of iron or steel dominated the Indian import basket from China.
• Trade deficit for India for 2012 stood at US$ 29 billion.

As China emerges the largest trading partner of India, there are bilateral issues that require close scrutiny.  The most important issue is that of trade imbalance.

India's trade deficit with China has jumped from a mere $1.08 billion in 2001-2 to a whopping $40.77 billion in 2012-3 as Beijing has been shipping high-value engineering and electronic goods to the domestic market while New Delhi in return has been exporting low-value goods such as iron ore.

India has been unsuccessfully pushing for more access to the Chinese market for its goods even as the huge trade imbalance has only been worsening over the years. While the bilateral trade between has gone up from $2.09 billion in 2001-2 to $67.83 billion during 2012-3, it is China, which has been the beneficiary as its high-value goods such as telecom and power equipment find a ready market in India, and its flood of cheap electronic goods only make matters worse.

The decline in exports can be attributed to decrease in the exports of iron ores, cotton raw including waste, plastics & linoleum products, petroleum (crude & products), electronic goods, drugs & pharmaceutical products, transport equipments, gems & Jewellary, chemicals & allied products etc. The decline  in imports  from  China can be attributed to decrease in the imports of machinery except electrical & electronics, project goods, iron & steel, transport equipment, gold, petroleum, crude & products, non-ferrous metals, inorganic chemicals, chemical material & products, machine tools  etc. The decline in bilateral trade can be attributed to overall negative global sentiment because of economic recession and low demand all over the world. Ban of exports of iron-ore from Karnataka and Goa has also contributed to decline in India’s exports to China.

To meet the issue, India and China have signed three Memorandum of Understandings (MoUs) on buffalo meat, fisheries, and pharmaceuticals, and one agreement on feed and feed ingredients. These MoUs will address the growing trade deficit between the two countries. A MoU for the export of buffalo meat from India to China was signed between Chinese General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and India’s Agricultural and Processed Food Products Export Development Authority (APEDA). The export of buffalo meat is not allowed from India to China and this has been a long pending issue between two countries. With the resumption of trade, India hopes a big merchandise trade that will not only be helpful in reducing trade imbalance of India but also in China’s food security by providing quality and hygiene meat products.

The Marine Products Export Development Authority (MPEDA) and AQSIQ signed a MoU on cooperation for import and export trade of fishery products. The MoU aims to institutionalize cooperation in promoting trade of fishery products and healthy development of trade between India and China. India is expecting more exports to China through this cooperation.

A MoU was also signed between Pharmaceuticals Export Promotion Council of India (Pharmexcil) and The China Chamber of Commerce for Import and Export of Medicines and Health Products (CCCMHPIE). India has been finding it difficult to expand its trade with China in the pharmaceutical sector. The signing of the MoU is expected to facilitate access to the China market in pharmaceuticals. The average imports of medicinal and pharmaceutical products from China during last five years were USD 4332.37 million vis-à-vis exports from India of USD 692.44 million.

An agreement was also signed between Export Inspection Council of India (EIC) and AQSIQ on trade and safety of feed and feed ingredients. India hopes a big merchandise trade for feed & feed ingredients after the resumption of trade as China has suspended import of feed and feed ingredients since January 1, 2012.
The Government of India has also formulated a strategy paper for diversifying the product basket as well as the traditional markets for exports from India. The strategy focuses on moving up the value chain in respect of traditional Indian exports of Engineering, Textiles, and Gems & Jewellery with special focus on non-traditional sectors like leather, electronics and chemicals where there is a lot of potential for export from India. Focus Market Scheme is designed for diversifying India’s exports to different markets. A variant of this is the Market Linked Focus Product Scheme. Export to such markets is given benefit in the form of Duty Credit Scrip.

Mains questions:

Trade imbalance between India and China occurs due to anti dumping. Illustrate the statements explaining the meaning of anti dumping and measures taken by government to meet it.

The bilateral trade with China is beneficial for India, despite the sustained trade deficit for India. Critically evaluate.

Manoj K. Jha