economic integeration

8/11/2019 Economic Integeration

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ECONOMIC INTEGRATION

ECONOMIC INTEGRATION

SUBMITTED IN PARTIAL FULLFILLMENT OF THE REQUIREMENTS FOR THE

AWARD OF THE M.COM DEGREE OF

MASTER IN COMMERCE -1

MANAGEMENT)

SUBMITTED TO

UNIVERSITY OF MUMBAI

LALA LAJPAT RAI COLLEGE, MAHALAXMI, MUMBAI

SUBMITTED BY

ZISHAN SIDDIQUI Roll no: 670

SUPERVISED BY

PROF. JANKI ANNANRAJDr. J.Barucha

14 th October 2013


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acknowledgement

I would like to place on record my deep sense of

gratitude to Prof. Janki Annanraj of m-com department

for her generous guidance help and useful suggestions

I am extremely thankful to Dr.Suryakant Kasune co-

ordinator and Principal Neelam Arora for providing me

infrastructural facilities to work in without which this

work would not have been possible


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Contents

Introduction .................................................................................................................................... 4

DEFINITION...................................................................................................................................... 4

WHAT IS ECONOMIC INTEGRATION? ............................................................................................... 5

OBJECTIVES OF ECONOMIC INTEGRATION .................................................................................... 7

BENEFITS OF ECONOMIC INTEGRATION ......................................................................................... 9

Levels of Economic Integration ............................................................................................ 11

Obstacles to economic integration: ................................................................................... 13

Global trade relations ............................................................................................................ 14

India China Relations: ............................................................................................................... 16

China and India: Greater Economic Integration ........................................................... 19

Bilateral trade blossoms ....................................................................................................... 20

Drivers of bilateral trade .................................................................................................... 22

Comparative advantages ........................................................................................................... 22

Rapid economic growth ............................................................................................................. 22

Deeper integration ahead, but distrust lingers ........................................................ 24

FACTS AND FIGURES RELATING TO INDIA CHINA BILATERAL TRADE ................................... 27

FACT 1: ........................................................................................................................................... 27

FACT 2: ........................................................................................................................................... 28

FACT 3: ........................................................................................................................................... 32

FACT 4: ........................................................................................................................................... 33

from china To aSean: rebalancing indiaS Trade .......................................................... 35

INDIA is devising a new strategy to reduce the trade deficits with China. ................ 35

Bibliography .................................................................................................................................. 39


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WHAT IS ECONOMIC INTEGRATION?

Economic integration is the unification of economic policies

between different states through the partial or full abolition oftariff and non-tariff restrictions on trade taking place amongthem prior to their integration. This is meant in turn to lead tolower prices for distributors and consumers with the goal ofincreasing the combined economic productivity of the states.

The trade stimulation effects intended by means of economic

integration are part of the contemporary economic Theory of theSecond Best : where, in theory, the best option is free trade , withfree competition and no trade barriers whatsoever. Free trade istreated as an idealistic option, and although realized withincertain developed states, economic integration has been thoughtof as the "second best" option for global trade where barriers tofull free trade exist

There are varying levels of economic integration, including

preferential trade agreements (PTA), free trade areas (FTA),

customs unions, common markets and economic and monetary

unions. The more integrated the economies become, the fewer

trade barriers exist and the more economic and political

coordination there is between the member countries.

By integrating the economies of more than one country, the

short-term benefits from the use of tariffs and other trade

barriers is diminished.
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At the same time, the more integrated the economies become,

the less power the governments of the member nations have to

make adjustments that would benefit themselves. In periods of

economic growth, being integrated can lead to greater long-term

economic benefits; however, in periods of poor growth being

integrated can actually make things worse.


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OBJECTIVES OF ECONOMIC INTEGRATION

There are economic as well as political reasons why nationspursue economic integration. The economic rationale for theincrease of trade between member states of economic unions thatit is meant to lead to higher productivity . This is one of thereasons for the global scale development of economic integration,a phenomenon now realized in continental economic blocks suchas ASEAN, NAFTA, SACN, the European Union, and the Eurasian

Economic Community; and proposed for intercontinentaleconomic blocks, such as the Comprehensive EconomicPartnership for East Asia and the Transatlantic Free Trade Area .

Comparative advantage refers to the ability of a person or acountry to produce a particular good or service at a lowermarginal and opportunity cost over another. Comparativeadvantage was first described by David Ricardo who explained itin his 1817 book On the Principles of Political Economy andTaxation in an example involving England and Portugal . [3] InPortugal it is possible to produce both wine and cloth with lesslabor than it would take to produce the same quantities inEngland. However the relative costs of producing those two goodsare different in the two countries. In England it is very hard toproduce wine, and only moderately difficult to produce cloth. InPortugal both are easy to produce. Therefore while it is cheaper toproduce cloth in Portugal than England, it is cheaper still forPortugal to produce excess wine, and trade that for English cloth.Conversely England benefits from this trade because its cost forproducing cloth has not changed but it can now get wine at alower price, closer to the cost of cloth. The conclusion drawn isthat each country can gain by specializing in the good where ithas comparative advantage, and trading that good for the other.
http://en.wikipedia.org/wiki/Productivityhttp://en.wikipedia.org/wiki/Trade_blochttp://en.wikipedia.org/wiki/ASEANhttp://en.wikipedia.org/wiki/North_American_Free_Trade_Agreementhttp://en.wikipedia.org/wiki/SACNhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Eurasian_Economic_Communityhttp://en.wikipedia.org/wiki/Eurasian_Economic_Communityhttp://en.wikipedia.org/wiki/Comprehensive_Economic_Partnership_for_East_Asiahttp://en.wikipedia.org/wiki/Comprehensive_Economic_Partnership_for_East_Asiahttp://en.wikipedia.org/wiki/Transatlantic_Free_Trade_Areahttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Marginal_costhttp://en.wikipedia.org/wiki/Opportunity_costhttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/On_the_Principles_of_Political_Economy_and_Taxationhttp://en.wikipedia.org/wiki/On_the_Principles_of_Political_Economy_and_Taxationhttp://en.wikipedia.org/wiki/On_the_Principles_of_Political_Economy_and_Taxationhttp://en.wikipedia.org/wiki/On_the_Principles_of_Political_Economy_and_Taxationhttp://en.wikipedia.org/wiki/Economic_integration#cite_note-3http://en.wikipedia.org/wiki/Economic_integration#cite_note-3http://en.wikipedia.org/wiki/Economic_integration#cite_note-3http://en.wikipedia.org/wiki/Winehttp://en.wikipedia.org/wiki/Clothhttp://en.wikipedia.org/wiki/Clothhttp://en.wikipedia.org/wiki/Winehttp://en.wikipedia.org/wiki/Economic_integration#cite_note-3http://en.wikipedia.org/wiki/On_the_Principles_of_Political_Economy_and_Taxationhttp://en.wikipedia.org/wiki/On_the_Principles_of_Political_Economy_and_Taxationhttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Opportunity_costhttp://en.wikipedia.org/wiki/Marginal_costhttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Transatlantic_Free_Trade_Areahttp://en.wikipedia.org/wiki/Comprehensive_Economic_Partnership_for_East_Asiahttp://en.wikipedia.org/wiki/Comprehensive_Economic_Partnership_for_East_Asiahttp://en.wikipedia.org/wiki/Eurasian_Economic_Communityhttp://en.wikipedia.org/wiki/Eurasian_Economic_Communityhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/SACNhttp://en.wikipedia.org/wiki/North_American_Free_Trade_Agreementhttp://en.wikipedia.org/wiki/ASEANhttp://en.wikipedia.org/wiki/Trade_blochttp://en.wikipedia.org/wiki/Productivity


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Economies of scale refers to the cost advantages that anenterprise obtains due to expansion. There are factors that causea producers average cost per unit to fall as the scale of output is

increased. Economies of scale is a long run concept and refers toreductions in unit cost as the size of a facility and the usagelevels of other inputs increase . [4] Economies of scale is also a

justification for economic integration, since some economies ofscale may require a larger market than is possible within aparticular country for example, it would not be efficient forLiechtenstein to have its own car maker, if they would only sell to

their local market. A lone car maker may be profitable, however,if they export cars to global markets in addition to selling to thelocal market.

Besides these economic reasons, the primary reasons whyeconomic integration has been pursued in practice are largelypolitical.
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BENEFITS OF ECONOMIC INTEGRATION

Economic integration can be defined as a kind of arrangementwhere countries get in agreement to coordinate and manage their

fiscal, trade, and monetary policies in order to be mutually

benefitted by them. There are many degrees of economic

integration, but the most preferred and popular one is free trade.

In economic integration no country pays customs duty within the

integrated area, so it results in lower prices both for the

distributors and the consumers. The ultimate aim of economic

integration is to increase trade across the world. There are many

other advantages associated with this concept.

Some of these are:

1. Progress in Trade:All countries that follow economic integration have extremely wide

assortment of goods and services from which they can choose.

Introduction of economic integration helps in acquiring goods and

services at much low costs. This is because the removal of trade

barriers reduces or removes the tariffs entirely. Reduced duties and

lowered prices save a lot of spare money with countries which can be

used for buying more products and services.

2. Ease of Agreement:When countries enter into regional integration, they easily get into

agreements and stick to them for long periods of time.

3. Improved Political Co-operation:Countries entering economic integration form groups and have greater

political influence as compared to influence created by a single nation.

Integration is a vital strategy for addressing the effects of politicalinstability and human conflicts that might affect a region.


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4. Employment Opportunities:As economic integration encourage trade liberation and lead to market

expansion, more investment into the country and greater diffusion of

technology, it create more employment opportunities for people tomove from one country to another to find jobs or to earn higher pay.

For example, industries requiring mostly unskilled labour tends to

shift production to low wage countries within a regional cooperation.

5. Greater Consensus:Unlike WTO with huge membership (147 countries), easier to gain

consensus amongst small memberships in regional integration

6. Beneficial For Financial Markets:Economic integration is extremely beneficial for financial markets as it

eases firm to borrow finances at low rate if interest. This is because

capital liquidity of larger capital market increases and the resultant

diversification effect reduces the risks associated with high

investment.

7. Increase in FDI:Economic integration helps to increase the amount of money in

Foreign Direct Investment (FDI). Once firms start FDI, through new

operations or by merger, takeover, and acquisition, it becomes a

international enterprise.


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Levels of Economic Integration

There are about five additive levels of economic integrationimpacting the global landscape :

1. Free trade .

Tariffs (a tax imposed on imported goods) between member countriesare abolished or significantly reduced. Each member country keeps itsown tariffs in regard to third countries. The general goal is to develop

economies of scale and comparative advantages, which promoteseconomic efficiency.

2. Custom union .

Sets common external tariffs among member countries, implying thatthe same tariffs are applied to third countries. Custom unions areparticularly useful to level the competitiveness playing field andaddress the problem of re-exports (using preferential tariffs in one

country to enter another country).

3. Common market .

Factors of production, such a labour and capital, are free to movewithin member countries, expanding scale economies and comparativeadvantages. Thus, a worker in a member country is able to move andwork in another member country.

4. Economic union .

Monetary and fiscal policies between member countries areharmonized, which implies a level of political integration. A furtherstep concerns a monetary union where a common currency is used,such as with the European Union (Euro).
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5. Political union .

Represents the potentially most advanced form of integration with acommon government and were the sovereignty of member country issignificantly reduced. Only found within nation states, such asfederations where there is a central government and regions having alevel of autonomy.

Here is a diagram showing the stages of ECONOMIC INTEGRATION


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Success factors:

Among the requirements for successful development of economic

integration are "permanency" in its evolution (a gradual expansionand over time a higher degree of economic/political unification);"a formula for sharing joint revenues" (customs duties, licensingetc.) between member states (e.g., per capita); "a process foradopting decisions" both economically and politically; and "a willto make concessions" between developed and developing statesof the union.

A "coherence" policy is a must for the permanent development ofeconomic unions, being also a property of the economicintegration process. Historically the success of the European Coaland Steel Community opened a way for the formation of theEuropean Economic Community (EEC) which involved much morethan just the two sectors in the ECSC. So a coherence policy wasimplemented to use a different speed of economic unification(coherence) applied both to economic sectors and economicpolicies. Implementation of the coherence principle in adjustingeconomic policies in the member states of economic block causeseconomic integration effects .

Obstacles to economic integration:Obstacles standing as barriers for the development of economic integration

include the desire for preservation of the control of tax revenues and

licensing by local powers, sometimes requiring decades to pass under the

control of supranational bodies. The experience of 1990-2009 has shown

radical change in this pattern, as the world has observed the economic

success of the European Union. So now no state disputes the benefits of

economic integration: the only question is when and how it happens, what

exact benefits it may bring to a state, and what kind of negative effects may

take place.
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Global trade relations

Until the liberalisation of 1991, India was largely and intentionallyisolated from the world markets, to protect its economy and toachieve self-reliance. Foreign trade was subject to import tariffs,export taxes and quantitative restrictions, while foreign directinvestment (FDI) was restricted by upper-limit equityparticipation, restrictions on technology transfer, exportobligations and government approvals; these approvals were

needed for nearly 60% of new FDI in the industrial sector. Therestrictions ensured that FDI averaged only around $200 millionannually between 1985 and 1991; a large percentage of thecapital flows consisted of foreign aid, commercial borrowing anddeposits of non-resident Indians . India's exports were stagnantfor the first 15 years after independence, due to general neglectof trade policy by the government of that period. Imports in the

same period, due to industrialisation being nascent, consistedpredominantly of machinery, raw materials and consumer goods.

Since liberalisation, the value of India's international trade hasincreased sharply, with the contribution of total trade in goodsand services to the GDP rising from 16% in 1990 91 to 47% in2008 10. India accounts for 1.44% of exports and 2.12% ofimports for merchandise trade and 3.34% of exports and 3.31% ofimports for commercial services trade worldwide. India's majortrading partners are the European Union , China, the United Statesof America and the United Arab Emirates . In 2006 07, majorexport commodities included engineering goods, petroleumproducts, chemicals and pharmaceuticals, gems and jewellery,textiles and garments, agricultural products, iron ore and otherminerals. Major import commodities included crude oil andrelated products, machinery, electronic goods, gold and silver. In
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November 2010, exports increased 22.3% year-on-year to850.63 billion (US$13 billion), while imports were up 7.5% at1251.33 billion (US$19 billion). Trade deficit for the same month

dropped from 468.65 billion (US$7.2 billion) in 2009 to 400.7billion (US$6.1 billion) in 2010.

India is a founding-member of General Agreement on Tariffs andTrade (GATT) since 1947 and its successor, the WTO. Whileparticipating actively in its general council meetings, India hasbeen crucial in voicing the concerns of the developing world . For

instance, India has continued its opposition to the inclusion ofsuch matters as labour and environment issues and other non-tariff barriers to trade into the WTO policies.
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India China Relations:

China India relations , also called Sino-Indian relations or Indo-China relations , refers to the bilateral relationship between thePeople's Republic of China (PRC) and the Republic of India . Historically, India and China have had relations for more than2,000 years but modern relationship began in 1950 when Indiawas among the first countries to end formal ties with the Republicof China (Taiwan) and recognise the PRC as the legitimate

government of Mainland China . China and India are two mostpopulous countries and fastest growing major economies in theworld. The resultant growth in China and India's internationaldiplomatic and economic influence has also increased thesignificance of their bilateral relationship.

China and India are two of the world s oldest civilisations andhave co-existed in peace for millenniums . [1] Cultural andeconomic relations between China and India date back to ancienttimes. The Silk Road not only served as a major trade route between India and China, but is also credited for facilitating thespread of Buddhism from India to East Asia. During the 19thcentury, China's growing opium trade with the British Raj triggered the Opium Wars . During World War II , India and Chinaplayed a crucial role in halting the progress of Imperial Japan .

Relations between contemporary China and India have beencharacterised by border disputes , resulting in three major militaryconflicts the Sino-Indian War of 1962, the Chola incident in1967, and the 1987 Sino-Indian skirmish . However, since the late1980s, both countries have successfully attempted to reignitediplomatic and economic ties. In 2008, China emerged as India's
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largest trading partner and the two countries have also attemptedto extend their strategic and military relations.

Despite growing economic and strategic ties, there are severalhurdles for India and the PRC to overcome in order to establishfavourable relations. Though bilateral trade has continuouslygrown, India faces massive trade imbalance heavily in favour ofChina. The two countries have failed to resolve their long-standing border dispute and Indian media outlets have repeatedlyreported Chinese military incursions into Indian territory. Both

nations have steadily established heavy military infrastructurealong border areas. Additionally, India remains weary aboutChina's strong strategic relations with Pakistan while China hasexpressed concerns about Indian military and economic activitiesin the disputed South China Sea .

In June 2012, China stated its position that "Sino-Indian ties"could be the most "important bilateral partnership of the century".That month Wen Jiabao , the Premier of China and ManmohanSingh , the Prime Minister of India set a goal to increase bilateraltrade between the two countries to US$100 billion by 2015.

According to a 2013 BBC World Service Poll, 36% of Indians viewChina positively, with 27% expressing a negative view, whereas23% of Chinese people view India positively, with 45% expressinga negative view.
http://en.wikipedia.org/wiki/People%27s_Republic_of_China_%E2%80%93_Pakistan_relationshttp://en.wikipedia.org/wiki/People%27s_Republic_of_China_%E2%80%93_Pakistan_relationshttp://en.wikipedia.org/wiki/People%27s_Republic_of_China_%E2%80%93_Pakistan_relationshttp://en.wikipedia.org/wiki/South_China_Seahttp://en.wikipedia.org/wiki/South_China_Seahttp://en.wikipedia.org/wiki/South_China_Seahttp://en.wikipedia.org/wiki/Wen_Jiabaohttp://en.wikipedia.org/wiki/Wen_Jiabaohttp://en.wikipedia.org/wiki/Wen_Jiabaohttp://en.wikipedia.org/wiki/Premier_of_Chinahttp://en.wikipedia.org/wiki/Premier_of_Chinahttp://en.wikipedia.org/wiki/Premier_of_Chinahttp://en.wikipedia.org/wiki/Manmohan_Singhhttp://en.wikipedia.org/wiki/Manmohan_Singhhttp://en.wikipedia.org/wiki/Manmohan_Singhhttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/BBChttp://en.wikipedia.org/wiki/BBChttp://en.wikipedia.org/wiki/BBChttp://en.wikipedia.org/wiki/BBChttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/Manmohan_Singhhttp://en.wikipedia.org/wiki/Manmohan_Singhhttp://en.wikipedia.org/wiki/Premier_of_Chinahttp://en.wikipedia.org/wiki/Wen_Jiabaohttp://en.wikipedia.org/wiki/South_China_Seahttp://en.wikipedia.org/wiki/People%27s_Republic_of_China_%E2%80%93_Pakistan_relations


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Indian Prime Minister Manmohan Singh with ChinesePremier Wen Jiabao .
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China and India: Greater EconomicIntegration

Economic ties between China and India will play a large role in

one of the most important bilateral relationships in the world by

2020. Bilateral trade has already surged from under $3 billion in

2000 to nearly $52 billion in 2008 . Though last years figure

equals only one-eighth of total US-China trade in 2008, China-

India trade is growing at nearly three times the pace of US-China

trade, and rapid growth will likely continue. Even conservative

estimates suggest that, by 2020, China-India trade could surpass

last years US -China total of $409.2 billion and more than half of

total projected US-China trade in 2020. Such trade expansion

would affect every major world economy, including the United

States. Though foreign direct investment (FDI) between China and

India trails trade growth, it too will likely surge in the years tocome.


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Bilateral trade blossoms

As neighbors and two of the worlds oldest civilizations, Chinaand India have shared a long history of cultural, scientific, andeconomic linkages. In modern times, economic ties between thetwo countries were almost completely severed from 1949 to1978. Following a brief border war in 1962, bilateral trade andinvestment came to a halt. Economic ties officially resumed whenChina embarked on economic reforms but remained largelyinsignificant for the next two decades. The last 10 years,however, have seen a transformation of the economic relationshipbetween China and India. Since the 1990s, both countries havebecome increasingly outward-looking in their economic policiesand have embraced deeper economic integration with the rest ofthe world. China and India are also members of the World TradeOrganization (WTO) India as a founding member and China since2001.

Indian Prime Minister Atal Behari Vajpayees visit to China in June2003 accelerated the momentum for economic integration. Thevisit led to a pragmatic decision by both countries politicalleaders to cultivate economic ties without being constrained byunresolved border disputes. After this visit, the two sides set up a

joint study group to examine how China and India could expandtrade and cooperation.

The reduction and elimination of trade barriers has helped tostimulate economic exchange. Since 2000, trade between Chinaand India has grown nearly twice as fast as each countrys tradewith the rest of the wo rld, and since 2001, Chinas trade withIndia has grown more rapidly than its trade with any of its top 10

trade partners.


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In 2008, China surpassed the United States to become Indiaslargest trade partner. Last year, India was Chinas tenth -largestexport market.


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Drivers of bilateral trade

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

Comparative advantages

The different comparative advantages of the two countries

provide grounds for strong economic exchange. Although Chinaseconomy is three times as large as Indias, its manufacturingsector is five times that of Indias. Chinese exports to India thusconsist primarily of manufactured goods, especially various typesof machinery. Conversely, India has some of the worlds largestreserves of iron ore, bauxite, and manganese, and its exports toChina consist primarily of raw materials to feed that countrys

expanding steel and automotive sectors. Services trade betweenChina and India remains small. Though India has emerged as aglobal powerhouse in information technology (IT) and IT-enabledservices, language differences create natural barriers to theexport of these services from India to China. Thus, many ofIndias larger IT companies invest directly in local operationswithin China.

Rapid economic growth

The sheer size and growth rates of these economies have boostedbilateral trade, as bigger economies have more to buy and sell. In2008, Chinas economy grew 9.0 percent and Indias grew 7.3percent both faster than any other major economy in theworld and these countries will likely continue to grow faster than


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other major economies through 2010, according to InternationalMonetary Fund projections. The two countries could also remainthe worlds two fastest -growing economies for the next two to

three decades. In this context, the prospects for continued stronggrowth in bilateral trade appear to be bright.

Imports of lower-priced capital goods from China, such asturbines for electric utilities, can help India address theinfrastructure bottlenecks especially in roads, highways, ports,and electric power that have appeared as Indias manufacturing

revolution gets under way. Because Chinese capital goods areoften much cheaper than those from Western or Japanesemanufacturers, such imports from China can keep costs low,allowing India to modernize and upgrade its infrastructure morequickly.


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Deeper integration ahead, but distrustlingers

Two developments could lead to even greater momentum forSino-Indian economic integration. Larger companies in bothcountries are increasingly acquiring third-country companies thatalready have a presence in China and India. For example, TataSteel Ltd. in 2004 acquired NatSteel Holdings Pvt Ltd., aSingapore-based steel manufacturer that already had two steelmills in China; Beijing- based Lenovo Group Ltd.s acquisition ofIBM Corp.s personal computer business in 2005 gave it access tothe Indian market; and Tata Motors Ltd.s acquisition o f Jaguarand Land Rover in 2007 gave it a nearly $1 billion revenuebusiness in China. As more third-country acquisitionsmaterialize, investment linkages between India and China willdeepen.

A second possibility is that Chinese capital could help Indiaaccelerate its infrastructure revolution. China has an abundanceof capital looking for attractive investment opportunities. Overthe next 10 years, Indias infrastructure projects will provideperhaps one of the largest such opportunities.

Not all is smooth sailing, however. Concern over Chinas

expanding trade surplus has grown in India over the last twoyears. The recent global economic crisis, which has slowedeconomic growth in China and India, appears to have exacerbatedthe severity of these concerns.


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Over the last 24 months, India has issued several antidumpingmeasures against products such as yarns and fabrics, nylon tirecords, and aluminum products from China. Both governments

appear keen to resolve these issues through mutual discussionsrather than taking them to the WTO, however.

A major obstacle to bilateral investment that needs to be bridgedis one of lingering distrust stemming from the brief war of 1962and unresolved border disputes. In an example of this distrust, in

July 2008, the Indian government prevented companies from

China and two other countries from investing in portinfrastructure projects in the country for security reasons.

It is important to note, however, that well-establishedmechanisms exist that enable parties that do not fully trust eachother to do business. For example, Chinese investors could enterIndia as limited partners in India -focused infrastructure funds

managed by trusted third parties such as Morgan Stanley, JPMorgan Chase & Co., and the Goldman Sachs Group, Inc. In thecoming decade, it may be possible for tens of billions of dollarsfrom China to find their way into India.


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FACTS AND FIGURES RELATING TO INDIA CHINABILATERAL TRADE

FACT 1:

The largest Indian partners with their total trade (sum of importsand exports) in millions of US Dollars for calendar year 2012 2013 are as follows:

Country Exports ImportsTotal

Trade

Trade

Balance

United Arab

Emirates 36,265.15 38,436.47 74,701.61 -2171.32

China 13,503.00 54,324.04 67,827.04 -40,821.04

United States 36,152.30 24,343.73 60,496.03 11,808.57

These are the top three countries whom India has its trade with.

Currently India has a trade Deficit with China.
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FACT 2:INDIA CONSTANTLY HAS TRADE DEFICITS WITH CHINA AS SHOWN IN THE GRAPH.


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India's trade with China, including both exports and imports, havebeen cooling for several months, and may dip further this year,according to Q1 numbers.

India's trade deficit with China may also dip this year for the firsttime in many years.

That may be good news for the rupee, which has been hit hardover deficit concerns, as China accounts for about one-fifth of thetotal trade deficit that India has with the rest of the world.

India's imports from China peaked in 2011-12 at $57.5 billion, jumping by a breath taking 32.2% from the previous year. In theprevious year, Chinese imports into India had jumped 41% to$43.5 billion. Not surprisingly, both India's total trade deficit andits trade deficit with China rose during the period as well.

In 2010-11, India's trade with China contributed about 23.5% to

India's total trade deficit (see chart.) However, since then, China'sshare of India's trade deficit has been falling, as oil and goldstepped into the role of deficit drivers.

Indian exports to China include cotton raw & yarn, non-ferrousmetals, iron ore, other ores and minerals, plastic& linoleumproducts, spices, Dyes/intermediates, machinery & instrumentsand petroleum (crude& products). Major imports from Chinainclude electronic goods, machinery, organic chemicals, projectgoods, fertilizers, iron and steel, transport equipments, electricmachinery (except electronics) and manufactures of metals.

While India's trade deficit (the gap between exports and imports)with China has been growing, as a proportion of the total tradedeficit, it has been declining from the peak of 2010--11,


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indicating that the sources of India's worry lies more in its goldand oil trade than in trade with China.

For example, China's share in India's total trade deficit grew from17.6% in 2009-10 to 23.52% in 2010-11 (see chart above). But itfell to 21.3% in 2011-12 in 2011-12 - not because trade deficitwith China fell, but because India's overall deficit zoomed by 55%in that year to a record $185 billion.

So, while its deficit with China also rose by 41%, the growth wasovershadowed by the overall jump in deficit. It may be noted thatgold and oil prices rose sharply during this period.

2012-13 (last financial year) saw an interesting development. Forthe first time ever, India's trade with China, both imports andexports, fell.

But the new year has thrown up more interesting statistics.

Imports from China fell more than 5%, while exports to thatcountry fell more than 25%. Part of the reason may be the fall inthe value of the rupee (as all these figures are tallied in dollars.)

According to numbers for the June quarter, that trend maycontinue this year as well. The quarter saw exports of $2.44billion and imports of $12.08 billion. On an annualized basis,they point to a fall of 11% in imports and 28% in exports.

While the falling exports may not be good news, the figures pointto the possibility of a 5.5% fall in India's trade deficit with China in2013-14.

India recently inked a deal with China to promote the export ofbuffalo meat, and feed and feed ingredients to China. Indian

generic drugs are also expected to get better market access in


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China with the operationalization of the MoU on co-operation onPharma between CCCMHPIE and the Pharmexcil - twoorganizations located in the two countries.


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FACT 3:

India-China trade hits all time high of $ 73.9 bn in 2011.

India-China bilateral trade hit a record USD 73.9 billion last year,but the ballooning trade deficit in Beijing's favour rose to overUSD 27 billion, raising concern among Indian authorities.

The bilateral trade registered a USD 12.2 billion increase in 2011,taking the total to USD 73.9 billion as against USD 61.7 billion in2010, according to official trade figures for the last year.

The trade deficit in 2011, however, piled up to USD 27.07 billioneven though Indian exports to China went up to USD 23.4 billionregistering a growth of almost 12.26 per cent compared to thesame period in year 2010.
http://economictimes.indiatimes.com/topic/bilateral%20tradehttp://economictimes.indiatimes.com/topic/bilateral%20tradehttp://economictimes.indiatimes.com/topic/trade%20deficithttp://economictimes.indiatimes.com/topic/trade%20deficithttp://economictimes.indiatimes.com/topic/trade%20deficithttp://economictimes.indiatimes.com/topic/bilateral%20trade


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FACT 4:

Indias trade with China falls 12 %

Indias bilateral trade with China has fallen by 12 per cent to $ 66billion in 2012, driven by a record slump in exports, which hasexpanded the trade deficit to $29 billion despite the decline inoverall trade and cast doubt on the sustainability of anincreasingly strained trade relationship.

Figures released by Chinas General Administration of Customs(GAC), on Thursday, showed that Indian exports to China hadfallen by as much as 19.6 per cent year-on-year in December,reflecting the challenge faced by both countries to find a newdriver of trade after iron ore exports have slumped followingbans.

Indias exp orts in 2012, comprised largely of ores, cotton,chemicals and raw materials, reached $18.8 billion, while importsfrom China driven by growing demand for power and telecomequipment and machinery reached $47.7 billion. Bilateral tradelast year reached $66.47 billion, down from $73.9 billion in 2011when China became Indias biggest trade partner.

The gloomy outlook for Indias future trade ties with China cameeven as overall exports out of the worlds second -largesteconomy rebounded last month, recording a higher thanexpected 14.1 per cent growth, suggesting a revival whethertemporary or permanent in the Chinese economy following thedownturn last year.


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Chinas exports last year rose by 7.9 per cent despite adeepening debt crisis in the Eurozone, a sharply slowing worldeconomic recovery, continuously sluggish demand on the global

market and big downward pressure on the domestic economy,said Zheng Yuesheng, a spokesman at the GAC.

He forecast that trade in 2013 would be slightly better t han lastyear, pointing to the 14.1 per cent surge in exports in Decemberthat followed a 2.9 per cent rise the previous month.

On the India-China trade front, however, the coming year isexpected to be a difficult one. With bans on iron ore exports,import duties on power equipment, and likely restrictions in thetelecom sector, the outlook for bilateral trade and thelikelihood of meeting the $100 billion target for 2015 remainsuncertain


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from china To aSean: rebalancing indiaS

Trade

INDIA is devising a new strategy to reduce the trade

deficits with China.

Dec. 19 In August 2012, at the ninth meeting of the India-China Joint Group on Economic Relations, Trade, Science andTechnology in New Delhi, the main point of concern for Indias

Minister of Commerce and Industry, Anand Sharma, was thewidening trade deficit between the two countries $40 billion forthe year ending in March 2012. Indias trade deficit with Chinahas increased by a massive 4,000% in the last 10 years.

At the meeting, the Indian and Chinese commerce ministersagreed to set up a joint working group to address trade issues,

including the trade deficit. However, India has another option.Instead of relying on the working group to fix Indias trade woes,New Delhi can actively seek greater economic integration with theAssociation of Southeast Asian Nations (ASEAN). It is importantfor India to pursue this option at the next ASEAN-India Summitscheduled to be held in New Delhi on December 20-21.

Nearly all the goods that India imports from China couldpotentially be imported from ASEAN countries. SubstitutingChinese imports with ASEAN imports will not decrease Indiasabsolute trade deficit, but it will reduce the enormous bilateraltrade deficit with China. This will result in a more equal tradingrelationship. UN data indicates that currently more than 50% ofIndias imports in 36 product categories come from China. For

trade security and diversification, it is important for India to findmore sources for some of these products.


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In addition to the financial imbalances created by the tradedeficit, there is another major problem with the current tradingrelationship between India and China. According to the United

Nations Conference on Trade and Development, the mainproducts that India exports to China are primary commodities,which are subject to greater price fluctuations and are low on thevalue chain. In 2011, iron ore alone accounted for 41% of Indias$23 billion worth of exports to China, while cotton and copperaccounted for 11.5% and 9% respectively.

According to UN data, China exported more than $7 billion worthof telecommunications equipment and $2 billion in computers toIndia in 2011, which represents 55% of total imports in these twoproduct categories. Huawei and ZTE, two of the largest Chinesetelecommunications companies and major exporters to India, areat the centre of a recent report by the Intelligence Committee ofthe U.S. House of Representatives that highlights the potential

security risks to the U.S. of equipment imported from the twofirms. These risks might be overestimated, but it is in Indiasinterests to be cautious. To reduce its reliance on Chineseequipment, India can look to ASEAN nations, which exportedtelecommunications equipment worth $25 billion and $33 billionin computers across the world in 2011.

India also heavily reliant on chemical imports from China, whichare essential to make fertilisers. In 2011, more than 50% of Indianimports of four product categories that include chemicals likenitrogen compounds, heterocyclic compounds, and metallic saltscame from China. This reliance on a single source can eventuallyimpact food security in India. ASEAN countries export more thanenough of the chemicals in these categories for India to begin

diversifying its import sources to ASEAN.
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A similar situation exists in other high-value product categoriessuch as electrical machinery, boilers, and medicinal andpharmaceutical products each of which represents over a billion

dollars in imports a year from China.

In April 2002, the Indian governments overtures resulted in theComprehensive Economic Cooperation Agreement (CECA) withSingapore, followed by a Framework Agreement on Free TradeAreas with Thailand in October 2003. However, even after a raftof trade negotiations, culminating in the 2009 India-ASEAN Free

Trade Agreement (FTA) in Goods and infrastructure projects toincrease connectivity, trade between India and ASEAN remainsmoribund.

Despite its enormous market, India is still only the ninth largestexport destination for ASEAN, purchasing just 3% of ASEANs totalexports. Meanwhile, China has become Indias number one

source of im ports after Chinas entry into the World TradeOrganisation in 2001 and due to the sheer size of the Chineseexport market relative to other countries.

But there are signs that things are changing in addition toSingapore and Thailand, New Delhi now has bilateralarrangements with other Asian countries including Myanmar, Sri

Lanka, Bangladesh, Japan and Malaysia. Evidence suggests thatsuch trade agreements have had a positive, sometimes dramatic,impact on trade.

For example, after the Delhi Declaration in 2005 and the RiyadhDeclaration in 2010, bilateral trade between Saudi Arabia andIndia rose from $13 billion in 2006 to $32 billion in 2011 (though

this was partly driven by Indias increasing demand for oil).


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Following the Singapore-India CECA deal in 2004, bilateral tradegrew from $7.5 billion in 2004 to $13 billion in 2007. After the1999 Sri Lanka-India trade deal bilateral trade rose from just over

$400 million in 1999 to $2.5 billion in 2006.

For now, the Indian government has focused on FTA for services,rather than goods, because it sees this is as a strong export area.Although increasing exports is important, reducing Indiasreliance on Chinese imports is also important. To achieve this,India will have to massively boost its infrastructure to reduce the

cost and ease with which goods from ASEAN can be imported.Myanmar and Thailand, for example, have recently signed anagreement to develop an $8.6 billion port facility at Dawei 155miles from Bangkok which will allow ASEAN shipping to avoidthe congested Malacca straits.

India can also cultivate private investment to construct and

expand existing port facilities, especially to supplement theterminals at Chennai and Haldia. India will also require sustainedinvestment in road transport infrastructure; in the short termIndia can construct roads linking the poorly-connected North Eastwith Myanmar and the rest of India. This will provide an importantland route to the ASEAN economies. In addition, industry groupslike the Federation of Indian Chambers of Commerce and Industry

(FICCI) can play a role in making FTAs more transparent to Indianbusinesses, especially small and medium enterprises (SMEs),which are usually less likely than multinationals to take advantageof Indias trade agreement s


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1. http://www.chinabusinessreview.com/china-and-india-greater-economic-integration/

2. http://www.thehindu.com/business/Economy/indias-trade-

with-china-falls-12/article4295117.ece

3. http://en.wikipedia.org/wiki/File:Manmohan_Singh_and_We

n_Jiabao.jpg

4. http://en.wikipedia.org/wiki/China%E2%80%93India_relation

s

5. http://rtn.asia/1661_indias-trade-deficit-china-set-

narrow-year

6. M-COM PART 1, ECONOMICS BOOK
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