india china trade

7/27/2019 India China Trade

http://slidepdf.com/reader/full/india-china-trade 1/36

ECONOMIC INTEGRATION BETWEEN INDIA AND CHINA

SUBMITTED IN PARTIAL FULLFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF THE M.COM DEGREEOF

MASTER IN COMMERCE -1

(MANAGEMENT)

SUBMITTED TO

UNIVERSITY OF MUMBAI

LALA LAJPAT RAI COLLEGE, MAHALAXMI, MUMBAI

SUBMITTED BY

ANIL MARU Roll no: 629

SUPERVISED BY

PROF. JANKI ANNANRAJ

Dr. J.Barucha

14th

October 2013



CERTIFICATE

I hereby certify that the work which is being presented in the M.Com

internal project report entitled “INDIA TRADE WITH CHINA” in partial fulfilment of the requirements for the award of the Master of

Commerce and Economics, in ‘MANAGEMENT’ and submitted to

the LALA LAJPATRAI COLLEGE OF COMMERCE AND

ECONOMICS, Mahalaxmi, Mumbai-400034 is an authentic record of

my own work carried out under the supervision of Prof. Janki

Annanraj & Dr.j.Barucha. The matter has not been presented by me

for the award of any other degree elsewhere.

SIGNATURE OF THE STUDENT:

SIGNATURE OF SUPERVISORS:

INTERNAL EXAMINER:

EXTERNAL EXAMINER:

COLLEGE STAMP PRINCIPAL



acknowledgement

I express my sincere Gratitude to Prof. Janki Ananraj for her

stimulating guidance, continuous encouragement and supervision

throughout the course of present work

I am extremely thankful to Dr.Suryakant Kasuneco-ordinator and

Principal Neelam Arora for providing me infrastructural facilities to

work in without which this work would not have been possible



Contents

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

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

ECONOMIC INTEGRATION MEANING .........................................6

OBJECTIVES OF ECONOMIC INTEGRATION ..............................8advantages OF ECONOMIC INTEGRATION ..................................10

STAGES of Economic Integration ......................................................12

Obstacles to economic integration: .....................................................14

TRADE BETWEEN INDIA AND CHINA RELATIONS: ...............14

TIES OF ECONOMIC INTEGRATION BETWEEN INDIA AND

CHINA .................................................................................................18

Bilateral trade blossoms ......................................................................19

FORMS of bilateral trade ....................................................................20

Comparative advantages ..................................................................20

Rapid economic growth ....................................................................20

CHINA INDIA BILATRAL TRADE: ...............................................23

1. “India: the world’s 4th

largest economy: World Bank” ..............24

2. China and India have had a long-standing boundary dispute

which involves territories of over 138,000 cities .............................25

3. China-India trade began to return to normal in July 1998. Culture

and commerce has linked these two since then. ...............................26

4. “Indo-China Trade Relations”, Indian Economy Overview .......27

Trends in bilateral trade ties ................................................................28



1.“India, China join hands at WTO ministerial”,The Economic

Times .................................................................................................28

2.“Strategic cooperation defines our ties”, Chinese Ambassador Sun

Yuxi ..................................................................................................29

3.China-India Bilateral Trade diagram: ...........................................29

4. “Let’s shop for oil, gas together: India, China”, The Indian

Express..............................................................................................30

From China To ASEAN: Rebalancing India’s Trade .........................32

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

China. ................................................................................................32

Bibliography ........................................................................................35

Introduction

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior totheir integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the combinedeconomic productivity of the states.

DEFINITION

An economic arrangement between different regions marked by the

reduction or elimination of trade barriers and the coordination of

monetary and fiscal policies. The aim of economic integration is to



reduce costs for both consumers and producers, as well as to increase

trade between the countries taking part in the agreement.

The elimination of tariff and nontariff barriers to the flow of goods,

services, and factors of production between a group of nations, or

different parts of the same nation.

Economic integration is the unification of economic policies between

different states through the partial or full abolition of tariff and non-

tariff restrictions on trade taking place among them prior to their

integration.



ECONOMIC INTEGRATION MEANING

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior totheir integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the combinedeconomic 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, with freecompetition and no trade barriers whatsoever. Free trade is treated asan idealistic option, and although realized within certain developedstates, economic integration has been thought of as the "second best"option for global trade where barriers to full 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. Themore 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.



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 canactually make things worse.



OBJECTIVES OF ECONOMIC INTEGRATION

There are economic as well as political reasons why nations pursueeconomic integration. The economic rationale for the increase of trade

between member states of economic unions that it is meant to lead tohigher productivity. This is one of the reasons for the global scaledevelopment of economic integration, a phenomenon now realized incontinental economic blocks such as ASEAN, NAFTA, SACN, theEuropean Union, and the Eurasian Economic Community; and

proposed for intercontinental economic blocks, such as theComprehensive Economic Partnership for East Asia and theTransatlantic Free Trade Area.

Comparative advantage refers to the ability of a person or a country to produce a particular good or service at a lower marginal andopportunity cost over another. Comparative advantage was firstdescribed by David Ricardo who explained it in his 1817 book On the

Principles of Political Economy and Taxation in an exampleinvolving England and Portugal.

[3]In Portugal it is possible to

produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of

producing those two goods are different in the two countries. InEngland it is very hard to produce wine, and only moderately difficultto produce cloth. In Portugal both are easy to produce. Thereforewhile it is cheaper to produce cloth in Portugal than England, it ischeaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because itscost for producing cloth has not changed but it can now get wine at alower price, closer to the cost of cloth. The conclusion drawn is thateach country can gain by specializing in the good where it has

comparative advantage, and trading that good for the other.

Economies of scale refers to the cost advantages that an enterpriseobtains due to expansion. There are factors that cause a producer’saverage cost per unit to fall as the scale of output is increased.Economies of scale is a long run concept and refers to reductions inunit cost as the size of a facility and the usage levels of other inputs



increase.[4]

Economies of scale is also a justification for economicintegration, since some economies of scale may require a larger market than is possible within a particular country — for example, itwould not be efficient for Liechtenstein 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 additionto selling to the local market.

Besides these economic reasons, the primary reasons why economicintegration has been pursued in practice are largely political.



advantages OF ECONOMIC INTEGRATION

Economic integration can be defined as a kind of arrangement where

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 andservices.

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 political instability and human conflicts that might

affect a region.

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 to move from one country to another to

find jobs or to earn higher pay. For example, industries requiringmostly 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.



STAGES of Economic Integration

There are about five additive levels of economic integration impacting

the global landscape:

1. Free trade.

Tariffs (a tax imposed on imported goods) between member countries are abolished or significantly reduced. Each member country keeps its own tariffs in regard to third countries. Thegeneral goal is to develop economies of scale and comparativeadvantages, which promotes economic efficiency.

2. Custom union.

Sets common external tariffs among member countries,implying that the same tariffs are applied to third countries.Custom unions are particularly useful to level thecompetitiveness playing field and address 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 tomove within member countries, expanding scale economies andcomparative advantages. Thus, a worker in a member country isable to move and work in another member country.

4. Economic union.

Monetary and fiscal policies between member countries are

harmonized, which implies a level of political integration. Afurther step concerns a monetary union where a commoncurrency is used, such as with the European Union (Euro).

5. Political union.



Represents the potentially most advanced form of integrationwith a common government and were the sovereignty of member country is significantly reduced. Only found withinnation states, such as federations where there is a central

government and regions having a level of autonomy.



Success factors:

Among the requirements for successful development of economicintegration are "permanency" in its evolution (a gradual expansionand over time a higher degree of economic/political unification); "aformula for sharing joint revenues" (customs duties, licensing etc.)

between member states (e.g., per capita); "a process for adoptingdecisions" both economically and politically; and "a will to makeconcessions" between developed and developing states of the union.

A "coherence" policy is a must for the permanent development of economic unions, being also a property of the economic integration

process. Historically the success of the European Coal and SteelCommunity opened a way for the formation of the EuropeanEconomic Community (EEC) which involved much more than justthe two sectors in the ECSC. So a coherence policy was implementedto use a different speed of economic unification (coherence) applied

both to economic sectors and economic policies. Implementation of the coherence principle in adjusting economic policies in the member states of economic block causes economic 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 astate, and what kind of negative effects may take place.

TRADE BETWEEN INDIA AND 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 than 2,000

years but modern relationship began in 1950 when India was amongthe first countries to end formal ties with the Republic of China (Taiwan) and recognise the PRC as the legitimate government of Mainland China. China and India are two most populous countries and fastest growing major economies in the world. The resultantgrowth in China and India's international diplomatic and economicinfluence has also increased the significance of their bilateralrelationship.

China and India are two of the world’s oldest civilisations and haveco-existed in peace for millenniums.[1] Cultural and economicrelations between China and India date back to ancient times. TheSilk Road not only served as a major trade route between India andChina, but is also credited for facilitating the spread of Buddhism from India to East Asia. During the 19th century, China's growingopium trade with the British Raj triggered the Opium Wars.DuringWorld War II, India and China played 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 in 1967,and the 1987 Sino-Indian skirmish. However, since the late 1980s,

both countries have successfully attempted to reignite diplomatic andeconomic ties. In 2008, China emerged as India's largest trading

partner and the two countries have also attempted to extend their strategic and military relations.

Despite growing economic and strategic ties, there are several hurdlesfor India and the PRC to overcome in order to establish favourablerelations. Though bilateral trade has continuously grown, India facesmassive trade imbalance heavily in favour of China. The twocountries have failed to resolve their long-standing border dispute andIndian media outlets have repeatedly reported Chinese military



incursions into Indian territory. Both nations have steadily establishedheavy military infrastructure along border areas. Additionally, Indiaremains weary about China's strong strategic relations with Pakistanwhile China has expressed concerns about Indian military and

economic activities in the disputed South China Sea.In June 2012, China stated its position that "Sino-Indian ties" could bethe most "important bilateral partnership of the century". That monthWen Jiabao, the Premier of China and Manmohan Singh, the PrimeMinister of India set a goal to increase bilateral trade between the twocountries 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, whereas 23%

of Chinese people view India positively, with 45% expressing anegative view.

HERE IS A MAP SHOWING HOW CLOSE IS INDIA ANDCHINA AND THUS THEY HAVE REGIONAL TRADE.

INDIA IS TO THE SOUTH-WEST OF CHINA



TIES OF ECONOMIC INTEGRATION BETWEEN INDIA AND

CHINA

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 year’s 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 year’s 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 to come.



Bilateral trade blossoms

As neighbors and two of the world’s oldest civilizations, China andIndia have shared a long history of cultural, scientific, and economic

linkages. In modern times, economic ties between the two countrieswere almost completely severed from 1949 to 1978. Following a brief

border war in 1962, bilateral trade and investment came to a halt.Economic ties officially resumed when China embarked on economicreforms but remained largely insignificant for the next two decades.The last 10 years, however, have seen a transformation of theeconomic relationship between China and India. Since the 1990s, bothcountries have become increasingly outward-looking in their economic policies and have embraced deeper economic integrationwith the rest of the world. China and India are also members of theWorld Trade Organization (WTO)—India as a founding member andChina since 2001.

Indian Prime Minister Atal Behari Vajpayee’s visit to China in June2003 accelerated the momentum for economic integration. The visitled to a pragmatic decision by both countries’ political leaders tocultivate economic ties without being constrained by unresolved

border disputes. After this visit, the two sides set up a joint study

group to examine how China and India could expand trade andcooperation.

The reduction and elimination of trade barriers has helped to stimulateeconomic exchange. Since 2000, trade between China and India hasgrown nearly twice as fast as each country’s trade with the rest of theworld, and since 2001, China’s trade with India has grown morerapidly than its trade with any of its top 10 trade partners.

In 2008, China surpassed the United States to become India’s largesttrade partner. Last year, India was China’s tenth-largest exportmarket.



FORMS of bilateral trade

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

Comparative advantages

The different comparative advantages of the two countries providegrounds for strong economic exchange. Although China’s economy isthree times as large as India’s, its manufacturing sector is five timesthat 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 automotivesectors. Services trade between China and India remains small.Though India has emerged as a global powerhouse in informationtechnology (IT) and IT-enabled services, language differences createnatural 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. In2008, China’s economy grew 9.0 percent and India’s grew 7.3

percent—both faster than any other major economy in the world—and

these countries will likely continue to grow faster than other major economies through 2010, according to International Monetary Fund

projections. The two countries could also remain the world’s twofastest-growing economies for the next two to three decades. In thiscontext, the prospects for continued strong growth in bilateral tradeappear to be bright.



Imports of lower-priced capital goods from China, such as turbinesfor 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 importsfrom China can keep costs low, allowing India to modernize andupgrade its infrastructure more quickly.



CHINA INDIA BILATRAL TRADE:

Booming bilateral trade has come to be the strongest pillar of China-India rapprochement. This has not only since overtaken the pace of

political confidence-building but also has a substantial impact on their mutual perceptions. Their border trade has especially brought about anoticeable transformation in their remote and problematic border regions. This has contributed to overall tranquillity and peace in thearea and has as well facilitated progress in their border negotiations.

This boom in trade has also introduced new trends. The two states areno longer only recipients on foreign direct investment but haveentered into a new phase of being investors, both mutually as in other

regions. In this new context, the increasing deficit in the energy sector and the competition to capture new markets present major challengesto sustaining this boom in their bilateral trade.



1. “India: the world’s 4th

largest economy: World Bank”

China and India today represent Asia’s two largest and mostdynamic societies which are emerging as new trend setters ininternational relations. Especially, with their annual GDP

growth rates standing respectively at 9.1% and 8.5% for 2003and at 9.5% and 6.9% for 2004, China and India have sincecome to be recognised as the fastest growing economies.According to World Bank estimates, and assessed on the basisof purchasing power parity, China and India have already

become respectively the second and fourth largest economies of the world surpassing developed countries1.From the global perspective, China and India today representtwo unique new players—presenting an extraordinarycombination of a very large GDP and still with significant

poverty and pockets of unrest and a very low per capita incomeand living standards. This unique combination raises severalquestions about their becoming major drivers in internationaleconomic trends. However, in the politico-strategic sphere, their recent economic success has resulted in both seeking anexpanded space in regional as well as international decision-making, something that is becoming a matter for worldwide

concern.



2. China and India have had a long-standing boundary dispute which

involves territories of over 138,000 cities

To their colonial and cold war legacies, their economic success had,

for a long time, remained a mutually exclusive exercise thus slowing

down its pace of progress and its global impact. It is only rather

recently that their political initiatives at confidence-building began to

expand their areas of mutual co-operation, which now remains

premised on their new mantra of mutual accommodation and mutual

benefit2. Their bilateral trade has since come to be recognised as the

most reliable as also the most agreeable instrument of China-India

rapprochement. Their long-term potential as trade partners, however,

remains yet to be fully explored and exploited and their politicalequations remain yet vulnerable to their problematic legacies.



3. China-India trade began to return to normal in July 1998.

Culture and commerce has linked these two since then.

It is in this context of their fast changing equations that this articlemakes an attempt to hypothesise how their bilateral trade promises to

become the most potent instrument for resolving their politicaldifficulties and facilitate progress in actualising their strategic

partnership for the future. This China-India economic partnershipremains an essential prerequisite for the success of their regional andglobal political initiatives.

The context of China-India bilateral trade itself—bilateral as well asregional and global—has been changing rapidly. At the bilateral level,

this is self-evident in the way their rapidly growing trade partnershiphas provided a great boost to their ongoing political confidence-

building. In the wake of their diplomatic stand-off following India’snuclear tests of May 1998, their bilateral trade was the first to bounce

back to its normal pace4. However, this boom in their bilateral tradecould not have been possible in absence of bold political initiativesyet, in recent years, it is the role of their business communities thathas become far more influential in determining the tone and tenor of their political interactions.



4. “Indo-China Trade Relations”, Indian Economy Overview

Their recent signing of the April 2005 “general parameters”

agreement for their boundary settlement, their opening of a third

border trade route through Sikkim in June 2003, and now their

discussions for evolving a China-India Free Trade Area (FTA) remainsome of the examples which have been accompanied by a reduction in

forces deployment on their border and revival of several cottage

industries among border communities in remote and inaccessible

regions. Apparently, policy-makers from both sides have begun to

increasingly focus on the social and political spin-offs of their

bilateral trade. The last five years have witnessed China-India trade

quadruple and the expectation that it will reach US$30 billion by 2010

appears increasingly credible.However, for both China and India, their rise to stardom is no without

its share of pitfalls, puzzles and challenges. Much of the

aforementioned success remains particularly true of China with India

slightly behind. India’s Prime Minister Manmohan Singh is seen as an

architect of India’s economic reforms and opening up7. However,

even without government initiatives, several sectors in India have

picked up momentum and will continue to grow helping New Delhi to

catch up with Peking. For example, the number of skilled professionals from India are growing at enormous speed. They mainly

work in the software industry, and Chinese enthusiasm for India’s

information technology sector clearly recognises this new trend



Trends in bilateral trade ties

1.“India, China join hands at WTO ministerial”,The Economic Times

Nothing compares to the China-India bilateral trade when itcomes to evaluating the positive trends in post-1962 China-Indiarelations. Starting with an extremely slow pace with an annualturnover of only a few million dollars, and then staying on themargins for much of the 1980s, their trade has gradually come tooccupy the centre stage of their interaction. The target of reaching US$20 billion in bilateral trade by 2008—set by thetwo prime ministers in their meeting in Delhi in April 2005—isnow expected to be reached before end of 2005. Similarly, the

target of US$30 billon of bilateral trade set for 2010 is nowexpected to be reached by 2008. At least in the short-run, their current institutional arrangements and enthusiasm augurs verywell for their continued trade boom, which can contribute agreat deal to their growing confidence one in the other and their evolving long-term strategic partnership.

Especially, China’s foreign trade stood at US$851 billion for

2003 and exceeded US$1 trillion for 2004. India’s foreign trade,

by comparison, reached only about US$180 billion for 2004. If

the East Asian financial crisis had diverted China’s trade to

India then the countertrends in the wake of India’s nuclear tests

of May 1998, resulted in India’s total foreign trade sliding from

US$86.86 for 1998 to US$81.84 billion for 1999. However, this

general slide was not proportionally reflected in the China-India

bilateral trade though China this was perhaps one area most

directly affected by India’s nuclear tests



2.“Strategic cooperation defines our ties”, Chinese Ambassador Sun

Yuxi

Positive trends in the bilateral trade have been particularly shaped bythe economic reforms on both sides and the consequent search for new business partners. As a result of this, their complicated politico-strategic equations, that had continued to slow the rising enthusiasm,have come to be underplayed and marginalised. To cite someexamples of China using trade as its diplomatic tool, its trade withother problematic neighbours like Japan and South Korea hasincreased respectively from US$16.8 billon and US$0.7 billion for 1990 to a whopping US$99.6 billion and US$36.2 billion for 2002,making them each other’s most valued trade partners. China’s

combined trade with Japan and South Korea reached US$212 billionfor 2004. For the same period, China’s bilateral trade with India grewfrom US$0.2 billion for 1990 to US$5 billion for 2002, though it hasincreased much faster since then reaching US$7.6 billion for 2003 andUS$13.6 billion for 2004.

3.China-India Bilateral Trade diagram:



4. “Let’s shop for oil, gas together: India, China”, The Indian Express

China’s trade with India have witnessed impressive increases defying

all suspicions about China’s special relationship with Pakistan or

China’s encirclement of India. To highlight some other strong

fundamentals that promise to sustain their current trade boom, while

China continues to enjoy a huge favourable balance of trade vis-à-vis

most other smaller states of the South Asian region, it is only the

China-India trade that has remained to be China’s most balanced trade

in South Asia and often the balance has been in favour of India. This

clearly reflects strong mutual stakes which promise to sustain this

trade boom at least in the short term. Indeed, the two seem to be

becoming increasingly relaxed about their bilateral ties and are nowthinking of building joint strategies towards their regional and global

initiatives. No-one today talks of a China-India clash in South-East

Asia where both have built flourishing engagement without any

mutual friction or scepticism. While so far they have not allowed this

to become a major stumbling block yet their intensifying search for

energy sources abroad is lately seen as one area that could post a

serious challenge for their economic engagement

It is the nature of China-India bilateral trade as a confidence-building

measure that must be underlined to appreciate its interface with their

political relations which remains so critical for its long-term

prospects. Therefore, more than being measured in terms of statistics

and profits, it is the political impact of trade which remains the

barometer of their economic engagement. Both sides clearly display

that understanding at least in their more recent initiatives. Moreover,

with the inclusion of India’s trade with Hong Kong and Macao (as

also India’s rising trade with Taiwan, and the possibility of aneventual unification of Taiwan), Greater China has already emerged

as India’s largest trading partner and one of its kind.

Major items of export from India to China remain iron and chromeore, plastic and linoleum, marine products, cotton yarn and fabrics,



organic and inorganic chemicals, dye intermediates, bulk drugs and pharmaceuticals, construction quality wire rods, tobacco and tea,while China’s exports to India include items like raw silk and silk yarn, coking coal, some types of chemicals, pulses, mercury and

antimony, freshwater pearls, pig iron, newsprint and several low-technology consumer items. Gradually, many new sectors—like border trade or high-tech trade—are being also explored whileinformation technology and infrastructure development are alreadyemerging as major areas for co-operation.



From China To ASEAN: Rebalancing India’s 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-ChinaJoint Group on Economic Relations, Trade, Science and Technologyin New Delhi, the main point of concern for India’s Minister of Commerce and Industry, Anand Sharma, was the widening tradedeficit between the two countries – $40 billion for the year ending inMarch 2012. India’s trade deficit with China has increased by amassive 4,000% in the last 10 years.

At the meeting, the Indian and Chinese commerce ministers agreed toset up a joint working group to address trade issues, including thetrade deficit. However, India has another option. Instead of relying onthe working group to fix India’s trade woes, New Delhi can activelyseek greater economic integration with the Association of SoutheastAsian Nations (ASEAN). It is important for India to pursue thisoption at the next ASEAN-India Summit scheduled to be held in NewDelhi on December 20-21.

Nearly all the goods that India imports from China could potentially be imported from ASEAN countries. Substituting Chinese importswith ASEAN imports will not decrease India’s absolute trade deficit,

but it will reduce the enormous bilateral trade deficit with China. Thiswill result in a more equal trading relationship. UN data indicates thatcurrently more than 50% of India’s imports in 36 product categoriescome from China. For trade security and diversification, it isimportant for India to find more sources for some of these products.

In addition to the financial imbalances created by the trade deficit,there is another major problem with the current trading relationship

between India and China. According to the United NationsConference on Trade and Development, the main products that Indiaexports to China are primary commodities, which are subject togreater price fluctuations and are low on the value chain. In 2011, iron



ore alone accounted for 41% of India’s $23 billion worth of exports toChina, while cotton and copper accounted for 11.5% and 9%respectively.

According to UN data, China exported more than $7 billion worth of telecommunications equipment and $2 billion in computers to India in2011, which represents 55% of total imports in these two productcategories. Huawei and ZTE, two of the largest Chinesetelecommunications companies and major exporters to India, are atthe centre of a recent report by the Intelligence Committee of the U.S.House of Representatives that highlights the potential security risks tothe U.S. of equipment imported from the two firms. These risks might

be overestimated, but it is in India’s interests to be cautious. To

reduce its reliance on Chinese equipment, India can look to ASEANnations, which exported telecommunications equipment worth $25

billion and $33 billion in computers across the world in 2011.

India also heavily reliant on chemical imports from China, which areessential to make fertilisers. In 2011, more than 50% of Indianimports of four product categories that include chemicals like nitrogencompounds, heterocyclic compounds, and metallic salts came fromChina. This reliance on a single source can eventually impact food

security in India. ASEAN countries export more than enough of thechemicals in these categories for India to begin diversifying its importsources to ASEAN.

A similar situation exists in other high-value product categories suchas electrical machinery, boilers, and medicinal and pharmaceutical

products – each of which represents over a billion dollars in imports ayear from China.

In April 2002, the Indian government’s overtures resulted in theComprehensive Economic Cooperation Agreement (CECA) withSingapore, followed by a Framework Agreement on Free Trade Areaswith Thailand in October 2003. However, even after a raft of tradenegotiations, culminating in the 2009 India-ASEAN Free Trade



Agreement (FTA) in Goods and infrastructure projects to increaseconnectivity, trade between India and ASEAN remains moribund.

Despite its enormous market, India is still only the ninth largest

export destination for ASEAN, purchasing just 3% of ASEAN’s totalexports. Meanwhile, China has become India’s number one source of imports after China’s entry into the World Trade Organisation in 2001and due to the sheer size of the Chinese export market relative toother countries.

But there are signs that things are changing – in addition to Singaporeand Thailand, New Delhi now has bilateral arrangements with other Asian countries including Myanmar, Sri Lanka, Bangladesh, Japan

and Malaysia. Evidence suggests that such trade agreements have hada positive, sometimes dramatic, impact on trade.

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

partly driven by India’s increasing demand for oil). Following theSingapore-India CECA deal in 2004, bilateral trade grew from $7.5

billion in 2004 to $13 billion in 2007. After the 1999 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 India’s reliance onChinese imports is also important. To achieve this, India will have tomassively boost its infrastructure to reduce the cost and ease withwhich goods from ASEAN can be imported. Myanmar and Thailand,

for example, have recently signed an agreement to develop an $8.6 billion port facility at Dawei – 155 miles from Bangkok – which willallow ASEAN shipping to avoid the congested Malacca straits.

India can also cultivate private investment to construct and expandexisting port facilities, especially to supplement the terminals at



Chennai and Haldia. India will also require sustained investment inroad transport infrastructure; in the short term India can constructroads linking the poorly-connected North East with Myanmar and therest of India. This will provide an important land route to the ASEAN

economies. In addition, industry groups like the Federation of IndianChambers of Commerce and Industry (FICCI) can play a role inmaking FTAs more transparent to Indian businesses, especially smalland medium enterprises (SMEs), which are usually less likely thanmultinationals to take advantage of India’s trade agreements

Bibliography

1. http://chinaperspectives.revues.org/2853#ftn1

2. http://en.wikipedia.org/wiki/File:Manmohan_Singh_and_Wen_J

iabao.jpg

3. http://en.wikipedia.org/wiki/China%E2%80%93India_relations

4. http://en.wikipedia.org/wiki/File:India_China_Locator.svg

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

india china trade

Documents