The 1980s, the focus shifted gradually to

The
legacy of relations between India and China began to change in the 1980s, with
the opening of both economies. As long as their relationship was seen through a
geopolitical prism, it was easy for both countries to view it as a zero-sum
game. With the shift in both countries from an import substitution to an export
promotion strategy during the 1980s, the focus shifted gradually to economics.
With the acceleration of globalization during the 1990s, the imperatives of
global interdependence and an appreciation of the possibilities of mutual gain
have also increased. This is particularly so in China, whose share of world
trade is now about eight times that of India; they have similar shares of
foreign direct investment (FDI) and capital flows. Starting in 2000 these
developments led to the establishment of an India-China Joint Study Group (JSG)
on accelerating bilateral economic cooperation, of which I was a member as
Director and Chief Executive of the Indian Council for Research on
International Economic Relations (ICRIER). ICRIER also did a number of
background studies for JSG, covering goods and services. After the presentation
of this report to the two governments, the two countries formed an agreement
for economic cooperation when Premier Wen Jiabao visited India in April 2005.
However, the following discussion has nothing to do with that group or the
government; these are my personal views

 

India-China
Trade In 2004, India was among China’s top 20 trading partners, fifteenth in
imports, and eighteenth in exports. China was a much more important trade
partner for India in 2004, ranking in the top five, second in imports, and
third in exports. The details of India’s trade with China, from India’s
perspective, are shown in Table 13.1. Trends in the export, import, and trade
shares are depicted in Figure 13.1. China’s shares in India’s overall imports
and exports have been rising rapidly over the past six years. It is interesting
to note that the gap that opened up between the import share and the export share
in the middle of the period has now closed. Figure 13.2 gives the rate of
growth of trade as well as the growth of China’s share in India’s international
trade from 1997–98 to 2004–05. The main point is that normally we look at the
growth of trade, which for India is somewhat faster than the rise in the trade
share of China. That is because India’s trade has been growing quickly over
this period. But still the trade share has been rising and accelerating over
this period at 3.4 percent per annum, as you can see from the bottom line in
the figure. Figure 13.3 depicts the volatility of exports and imports along
with the rate of growth of total trade. The figure shows that there is much
less variability in India’s imports from China than in India’s exports to China.
There is much more fluctuation in the rate of growth of the export trade. The
precise degree of volatility is shown in the second column of Table 1, which
shows that the coefficient of variation of the export growth rate is double
that of the import growth rate. More precisely, the coefficient of variation of
exports is 1.2 and that for imports is 0.6. This can bring up a number of
hypotheses. One is that India’s imports are driven by normal market
considerations. In contrast, there is much more implicit or explicit government
intervention in China’s imports from India; there is an element of government
signaling to the socialist/public sector part of the economy. These signals
have apparently turned positive over the past few years. This is probably also
the reason for the closing of the gap between the import and export shares that
had opened up in the middle of the period (Figure 13.1). So perhaps the
positive signals from the Chinese government have been partly responsible for
this growth in trade.

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TABLE
FROM ABOVE ARTICLE

 

The
commodity composition of trade in Table 13.2 lists India’s top 10 exports to
China and top 10 imports from China. Similarly, Figure 13.4 depicts the
concentration ratio for exports and imports at the two-digit level by ordering
them from those with the highest to the lowest share and then cumulating the
share. So, on the horizontal scale, if we look at the number five and track it
to the graph, we get the five-product concentration ratio at the two-digit
level. The bottom line in Figure 13.4 shows the concentration with respect to
imports. The concentration is very high: the top five commodities account for
almost 70 percent of India’s imports from China. The concentration in India’s
exports to China is even higher. The top five exports account for more than 80
percent of the exports from India to China. Now we return to Table 13.2 to see
the list of commodities. The top export from India to China is the two-digit
category “ores, slag, and ash” (26) with 52 percent of total export value. The
category of salt, sulfur, lime, and cement (25) has another 2.6 percent of
export value. So there is a very high concentration of basic raw material
exports.

TABLE
FROM ABOVE ARTICLE

China’s
Share in India’s Total Trade (In percent) Source: www.dgft.delhi.nic.in,
Department of Commerce. Trade Export Import 274 INDIA-CHINA ECONOMIC
COOPERATION It seems that this has a more general implication beyond India.
China is now drawing many raw materials from all over the world—from Latin
America, Africa, and Asia. Thailand, for example, is a raw materials exporter
to China. Indonesia, another raw materials exporter, has seen a surge in
exports to China. I think this is going to be a factor around the world. A
theory that was very prominent in Latin American economist literature
envisioned countries in the “center” as an exporter of industrial goods and the
periphery as an exporter of raw materials. I think some element of that
arrangement is emerging with respect to China and other developing countries.
The second noteworthy point is with respect to intermediate goods. The
next-largest exports from India to China are iron and steel, followed by
plastics. There are a number of undifferentiated products, and this, again, has
certain implications for India and for other countries. That is, intermediate
goods industries are subject to much cyclical fluctuation. In recent years, the
fluctuation has been driven by very high aggregate investment rates in these
products. High aggregate investment creates a

 

 

 Figure 13.2. TABLE FROM ABOVE ARTICLE

demand
for these commodities, which results in a jump in investment in these
industries, so the supply rises eventually. Thus, temporary imbalances lead to
higher imports, but these are eliminated by higher supply, and could even be
followed by exports of the same intermediate goods. Figure 13.3
TABLE FROM ABOVE ARTICLE

Over
time, perhaps during the next 10 years, all countries, including India, may
face this fluctuation in intermediate goods trade with China. That is, the net
demand for these undifferentiated, intermediate products will sometimes be
converted to net excess supply turning to net exports. Future Potential Before
examining the future potential of India-China trade, it is useful to take stock
of the existing position from another perspective. China’s trade with India is
less than 1.5 percent of its trade with the world, whereas India’s trade with
China is over 6 percent of its total trade. Consequently, India’s exports to
China constitute 6.6 percent of its total exports, whereas they make up only
1.4 percent of China’s imports. China’s exports to India account for 1 percent
of its total exports, but constitute 6.2 percent of India’s imports. This is
simply a reflection of each country’s share of world trade, with India’s being
about 0.8 percent and China’s about 6.4 percent. Figure 13.4. TABLE
FROM ABOVE ARTICLE

 

The
bilateral trade potential is very high, given the size and economic dynamism of
the two economies. Since 1980, China’s average growth rate has been the
highest, whereas India’s has been the eighth or ninth highest. They are among
the 10 largest economies in terms of current exchange rates and among the five
largest in terms of purchasing power parity. They are also neighbors sharing a
long border, although this border consists of the highest mountain range in the
world; and the sea route between the two countries is long. Both countries are
signatories of the Bangkok Agreement and already participate in the Asian
currency union mechanisms. More formally, Dr. Amita Batra at ICRIER has built
an augmented gravity model that provides quantitative estimates of the gap
between actual trade and trade potential between India and other countries. It
finds that the potential for trade between India and China is between two and a
half times and six times the actual trade in the year for which the model was
estimated. The data used were for the year 2002. Some of this potential has
already been actualized in the subsequent three years to 2005 and is in the
process of being realized more fully. There are also a few other related
studies by Batra that have been published as ICRIER working papers and are
available on the ICRIER website (www.icrier.org). These papers, as well as our
analysis for the India-China study group, show the scope for intra-industry
trade. Both countries are highly diversified economies with very diversified
manufacturing structures. Thus, there is considerable scope for intra-industry
trade in intermediate manufactured goods. The share of private consumption in
India’s GDP is relatively high compared with other emerging economies, whereas
that of China is perhaps the lowest in the world. As consumer goods grow in
importance, there will also be increasing scope for intra-industry trade in
differentiated products and intermediate goods specialization. There are
identifiable differences in export specialization in the two countries, based
on natural resource endowments, skills, and policy. The most interesting and
important resource-based difference is in textiles. Given the abundance of
cotton in India, India’s exports are heavily concentrated in cotton textiles
and garments, whereas China has a commanding position in textiles and garments
based on man-made fibers. An ICRIER study some years ago showed that the two
countries’ exports were largely noncompeting because of this. Among the reasons
for this divergence in skill development were a highly rigid labor policy for
organized industry, small-scale industry reservations, and exorbitant indirect
(excise) taxes on man-made fibers in India. One of the indirect consequences of
the rigid labor policy has been a greater use of educated labor and higher
value-added niche products in India. There are also differences in skills,
because of either cultural or historical development. In the case of general
skills, India has a comparative advantage in the English language and in
dealing with multiethnic, multireligious workforces. These strengths could
enable a clear advantage in industries such as advertising and entertainment.
China has developed a lasting advantage in labor-intensive mass manufacturing,
based on the virtual absence of labor laws for the FDI export sectors, the
single-party system of government, and the organization and management of the
socialist investment system. There are also differences in sector-specific
skills. India has developed, over the past half century or more, skills in
engineering/automobiles, specialty chemicals, and pharmaceuticals. China, by
contrast, has developed over the past 25 years skills in consumer electronics,
telecommunications, and other consumer durables. On the other hand, China and
India are similar in that the labor force in each country has strong math and
science skills. The ICRIER studies also identified at the two-digit and
six-digit levels a list of commodities with the greatest export potential from
India to China and vice versa. Among the former are agriculture and allied
products, iron and steel and articles thereof, nuclear reactors, boilers and
machinery, man-made steel fibers and man-made filament yarns, organic
chemicals, and cotton. Among the categories that have potential for exports
from China to India are nuclear reactors, boilers and machinery, organic
chemicals, silk, and electrical and electronic equipment. Nuclear reactors and
boilers and machinery appear in both lists and indicate the potential for
intra-industry trade. Barriers and Constraints To realize the full potential of
India-China trade, remaining barriers and constraints have to be relaxed. These
include customs rules and procedures, standards, certification and regulatory
practices, nontariff barriers, and rules of origin. Some of the problems that
have arisen with respect to customs valuation are (1) the use of a minimum
reference price instead of the World Trade Organization–sanctioned transaction
cost method; (2) a variation of customs valuation across ports, resulting in
additional costs to exporters; and (3) a lack of clarity in guidelines and
procedures relating to imports for exporters. Though some of these things apply
to all trade, there are some changes that may be more acute in a bilateral
context that would lead to an increase in India-China trade. Thus there is a
need to evolve a mutual consensus on customs valuation, clarify guidelines,
facilitate uniform documentation across ports, and increase the efficiency of
handling at ports and customs. An existing mechanism, the India-China Customs
Cooperative Group, can be used for this purpose. To illustrate, variation
across ports creates special problems for small exporters. For a large
exporter, like the United States to China, these problems are minor; but if you
have many small exporters, as we have in India-China trade, these variations
create additional costs for both sides. Similarly, there are problems related
to imports for exporters. This may be very simple for, as an example, traders
in Taiwan Province of China or Hong Kong SAR, but not for those in India. We
need more clarity and guidelines. Also, there are certain problems related to
standards, certification, regulatory practices, rules, and regulations in terms
of national treatment and accessibility. The Chinese language poses a problem
for Indian traders, because most Indian trade is in English. It is difficult
for them to keep up with the Chinese regulations. This situation creates an
extra problem for Indian traders that could be easily remedied if the rules and
regulations were published and updated regularly, preferably in English, the
language of international commerce. The certification process, including with
respect to sanitary and phytosanitary standards (SPS), also involves delays and
high costs. SPS requirements generally exceed what is necessary to protect
consumer health. India has a great interest in certain agricultural
commodities, the standards for which need clarification. Certain other
standards related to commodities such as granite are not available.
Harmonization of technical and agricultural standards would greatly facilitate
India-China trade. Certain nontariff barriers (NTBs) are also hindering the
growth of trade between the two countries. There are problems related to tariff
quotas, preshipment inspection, and definitions of rules of origin. For
example, there are NTBs on automotive parts and components, and a tariff-quota
on agricultural products. These barriers need to be eliminated. A preshipment
inspection agreement between the two countries could help reduce NTBs and
related barriers. Problems relating to rules of origin can be sorted out by
agreeing on clear definitions. This in turn could result in smoother movement
of goods between the two countries. Removal of these constraints and barriers
in a spirit of cooperation and mutual accommodation will set the stage for a
quantum jump in economic cooperation between the two countries. Next Steps
Going forward, from a global perspective, everybody knows that China has been
the fastest-growing economy, averaging 9.5 percent for the past 25 years, but
not many people know that India has been the eighth- or ninth-fastest-growing
economy over the past 25 years. This is because many people think that India’s
reforms started in 19

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