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You can choose your friends but not your neighbours. But if your neighbour is four times bigger, is the second largest economy in the world, and growing nearly as fast as you, then that would be a recipe for your export bonanza. China’s domestic consumption market is greater than the size of India’s entire economy. Both these giant neighbours of Asia will be the world’s two largest economies in the next four decades. Hence there is great promise of a dynamic and robust economic relationship, never mind other mutual geo-political concerns. India China bilateral trade was supposed to race to 100 billion dollars by 2015. This target was missed partly because of the recent global slowdown. But more worryingly, the trade instead of showing balanced and healthy growth has become extremely lopsided. India’s trade deficit with China is now close to 50 billion dollars. Its exports to China were less than 10 billion dollars last fiscal, whereas Chinese imports into India kept galloping.
Everything from electronics, mobile phones, even pharmaceutical API’s is coming in. There’s also a glut of steel and non-ferrous metals pouring in, prompting Indian authorities to swing into action (more about this later). A few years ago, when capex spending was robust in India, we also saw big Chinese imports of telecom and power equipment, capital goods and machinery coming into India. And of course there’s also sundry stuff like Ganesha idols and Rakhi’s that are imported. It is possible that as e-commerce companies flourish, a lot of the consumer goods they sell might very well be sourced from China and sold in India.
India’s trade deficit with China is now close to 50 billion dollars. Its exports to China were less than 10 billion dollars last fiscal, whereas Chinese imports into India kept galloping.
No wonder the Chinese giant Alibaba has taken a strategic equity stake in companies like Snapdeal and Paytm. Of course it doesn’t have to be this way. The Chinese domestic market, served increasingly by their own e-commerce companies is ten times as big. On November 11 (it is 11/11 hence called Singles Day) Alibaba alone raked in sales of 15 billion dollars last year, which is ten times bigger than the biggest single day sale in America. Surely Indian exporters can grab a share of that big pie? The fact is that in the past ten years, since 2006, India’s exports to China have grown just about 22 percent in total. On the other hand China’s imports into India have grown by more than 500 percent during that same period.
China’s economic development rode on export led growth. It was the world’s factory, offering cheap labour, special economic zones and welcoming FDI. Real wages stayed constant for nearly three decades, even as GDP, and investments grew spectacularly. That single minded focus on domestic investment and job creation led to massive overcapacity in all sectors, ranging from steel, cement, mining to textiles and chemicals. But China’s ticket to prosperity was trade with the world. Hence it came knocking on the doors of the World Trade Organization. After a five year wait it was allowed entry to WTO but not given “Market Economy Status” (MES). This meant that the rest of the world was not convinced that China’s internal economy was working on market principles. Even as China exported everything from toys to tyres, there was always a suspicion that the government was subsidizing inputs and helping producers. Hence, the argument goes, that the “low cost manufacturing” story was based on subsidized credit, electricity, energy and currency. Some of this may be exaggerated, but is supported by the hundreds of “trade remedy” measures that have been initiated against China by other members of WTO. These include anti-dumping duties (ADD) and anti-subsidy duties. The ADD requires the importing country to prove that the selling price is below the domestic cost of production.
China’s economic development rode on export led growth. It was the world’s factory, offering cheap labour, special economic zones and welcoming FDI. Real wages stayed constant for nearly three decades, even as GDP, and investments grew spectacularly.
In China’s case the accusing country is allowed to use data from a third country, since Chinese data is “unreliable” and not market based, i.e. it does not have MES. Recently the flood of Chinese steel imports has spurred India to slap ADD and also special safeguard duties. India has also imposed a Minimum Import Price requirement on China’s import of steel that ensures that the price is not undercut below a threshold. Much of these trade actions against China are made easier due to its being non-MES. Similar action has been taken or expected in textiles, non-ferrous metals and chemical sectors. The excess capacity in these manufacturing sectors in China puts pressure and hence leads to undercutting of prices, which eventually earn anti-dumping duties.
This year China completes fifteen years of its WTO membership. According to the conditions of its entry, it was guaranteed an MES latest by the end of 15 years, no matter what. Many members of WTO especially the European Union and USA are uncomfortable about granting MES to China (even though the rules might force a fait accompli). China says it has undertaken market reforms and has fulfilled conditions and deserves MES. And simultaneously, having grown weary of WTO delay, China has launched the Silk Road Economic Belt and Maritime Silk Road initiative to link countries in trade, commerce and investments. These initiatives increase connectivity, build (Chinese funded) infrastructure and will surely boost trade.
India is a focus country for China, and is now the sixth most important export destination. India needs to leverage this to its advantage, and use it to pry open the Chinese market for export of IT services, pharmaceuticals and healthcare.
India is a focus country for China, and is now the sixth most important export destination. India needs to leverage this to its advantage, and use it to pry open the Chinese market for export of IT services, pharmaceuticals and healthcare. Much of this involves procurement by their government or state owned enterprises. India also has great potential in taking a large slice of China’s huge outbound tourism. Some of the bilateral trade deficit can also be offset with inflow of Chinese capital into India’s infrastructure. The world’s second largest economy beckons our exports, and we can’t afford to scorn it with our protectionism. As China turns more market oriented, these opportunities will only get better.
Ajit Ranade is a senior economist based in Mumbai