The future of India-China trade
 |
Economic ties between India and China are rapidly emerging as one of the most important bilateral relationships in the world. We address three questions of utmost interest to policy makers in both countries: Is the current magnitude of trade between India and China too little or too large? Should India grant Market Economy Status (MES) to China? Finally, what are the prospects for investment links between India and China? Regarding the magnitude of India-China trade, several observations are in order.
First, trade between the two countries has grown very robustly. Each country’s aggregate international trade is expanding by 23-24% annually. In comparison, India-China trade grew at a 50% rate during 2002-2006 and will increase by a further 54% during 2007 to reach $37 billion.
Second, after adjusting for partner GDP (i.e., bilateral trade divided by the trading partner’s GDP), India’s trade with China is greater than that with Japan, the US, or the entire world. After similar adjustments, China’s trade with India is only slightly below that with Japan, the US, or the entire world.
Third, China already is (or will shortly become) India’s number one trading partner. From China’s side, India already is one of its top ten trading partners. Also, China’s trade with India is growing much faster than with any of the other nine. Thus, India is rapidly becoming an increasingly important trading partner for China.
Fourth, India’s overall international trade is significantly below that of China’s, in terms of both absolute figures (for 2006, $306 billion vs $1,760 billion) as well as relative to GDP (34% of GDP vs. 65% of GDP).
Fifth, even if the growth rate in India-China trade slows down to 25% annually (a conservative projection) from the current rate of over 50%, bilateral trade between them will be almost $75 billion in 2010 and $225 billion in 2015, i.e., as large as China-US trade just three years ago. These are very large numbers. Political and business leaders need to start getting ready now for this radically different world.
Trade theory tells us that, in an increasingly flat world, trade between two countries should be a multiplicative function of their GDPs. Since it is almost certain that, by 2050, China and India will be the two largest economies in the world, it is inevitable that bilateral trade between them will become the most important economic relationship in the world.
We look now at the current hot subject and one that may be part of Prime Minister Manmohan Singh’s discussions during his visit to China: should India grant Market Economy Status (MES) to China? We believe that the correct answer is “Yes.” True, some of China’s major trading partners (the US, the EU, and Japan) have not yet granted MES to China. However, it is in India’s own best interests to grant MES to China — now. Here’s why.
While government subsidies do remain an issue in some industries in China, there is no evidence that this problem is endemic throughout large sectors of the Chinese economy. Also, other countries (such as Russia) which suffer from similar problems already enjoy a Market Economy Status.
Whether or not a country grants MES to China has minimal impact on trade balance with China. Take the US as an example. Even though the US has not granted MES to China, its trade deficit with China was $162 billion in 2004, $202 billion in 2005, and $232 billion in 2006. Thus, from China’s point of view, whether or not a country grants MES to it has little substantive value. The value is entirely “symbolic” and, as we know well, symbolism is a hugely valued commodity in China.
In any case, China will automatically get the Market Economy Status around 2015-16. Thus, for China, the symbolic value of getting MES goes down with each passing year. If India were to grant MES to China now (rather than after Japan, the US, or the EU have done so), the symbolic value to China will be much greater than if India were to be a mere follower.
Granting MES to China will not take away India’s rights to file legitimate anti-dumping cases. Even after China is granted MES, it has to provide verifiable information to the country filing an anti-dumping complaint. If such information is not provided, the latter retains the right to use the best information available, including third-country (surrogate) information. As it is, the current anti-dumping cases filed by India against China total less than 5% of China’s annual exports to India. In short, the substantive value of granting or not granting MES to China is insignificant not just for China but also for India. Yes, India will have a $9-10 billion trade deficit with China in 2007; however, MES has little if anything to do with the trade deficit.
Substance aside, if India were to grant MES to China before Japan, the US, and the EU do so, the symbolic value to China will be very high. If India is smart, it should exploit this opportunity to the maximum by getting quid-pro-quo concessions from China on issues that matter enormously to India (e.g., a settlement of the border disputes). In essence, India should look at MES for China as an issue whose salience rests almost totally in non-economic rather than economic domains.
We agree that, at the margins, granting MES to China will put greater pressure on Indian manufacturers to become more efficient (and on the Indian government to accelerate the elimination of India’s disadvantage in infrastructure).
However, this pressure is likely to be a net plus. India’s political and business leaders have always responded with vigour to external economic pressures and competition. Look at the country’s response in 1991. Or, look at the accelerated pace with which India’s IT giants are globalising their footprint and moving up the value chain in response to an appreciation of the rupee and growing competition from other countries.
In any discussion of the growing economic integration between India and China, it is important to remember also that trade is only one of the two major economic ties that bind nations. The other is investment. At present, investment links between the two countries are relatively modest. Haier and Huawei have significant presence in India. Similarly, Bharat Forge, TCS, and Infosys are building a noteworthy presence in China.
These types of greenfield investments will continue to grow. However, the quantum leap will come as some of the bigger companies from India and China acquire third-country companies that already have a significant presence in the other country (e.g., if an Indian auto company were to acquire a western auto company with significant presence in China). It is certain that, over just the next five years, we will see a growing number of foreign acquisitions by Indian and Chinese companies. As these acquisitions materialise, it is inevitable that investment linkages between India and China will grow rapidly.
The world is watching the rise of China and India with fascination and awe. However, most people do not realise that the implications of tighter economic links between the two could be even more profound.
(The author is Ralph J Tyler Professor of Strategy & Organisation and Research Director, Center for International Business Education & Research Robert H Smith School of Business, University of Maryland)
First, trade between the two countries has grown very robustly. Each country’s aggregate international trade is expanding by 23-24% annually. In comparison, India-China trade grew at a 50% rate during 2002-2006 and will increase by a further 54% during 2007 to reach $37 billion.
Second, after adjusting for partner GDP (i.e., bilateral trade divided by the trading partner’s GDP), India’s trade with China is greater than that with Japan, the US, or the entire world. After similar adjustments, China’s trade with India is only slightly below that with Japan, the US, or the entire world.
Third, China already is (or will shortly become) India’s number one trading partner. From China’s side, India already is one of its top ten trading partners. Also, China’s trade with India is growing much faster than with any of the other nine. Thus, India is rapidly becoming an increasingly important trading partner for China.
Fourth, India’s overall international trade is significantly below that of China’s, in terms of both absolute figures (for 2006, $306 billion vs $1,760 billion) as well as relative to GDP (34% of GDP vs. 65% of GDP).
Fifth, even if the growth rate in India-China trade slows down to 25% annually (a conservative projection) from the current rate of over 50%, bilateral trade between them will be almost $75 billion in 2010 and $225 billion in 2015, i.e., as large as China-US trade just three years ago. These are very large numbers. Political and business leaders need to start getting ready now for this radically different world.
Trade theory tells us that, in an increasingly flat world, trade between two countries should be a multiplicative function of their GDPs. Since it is almost certain that, by 2050, China and India will be the two largest economies in the world, it is inevitable that bilateral trade between them will become the most important economic relationship in the world.
We look now at the current hot subject and one that may be part of Prime Minister Manmohan Singh’s discussions during his visit to China: should India grant Market Economy Status (MES) to China? We believe that the correct answer is “Yes.” True, some of China’s major trading partners (the US, the EU, and Japan) have not yet granted MES to China. However, it is in India’s own best interests to grant MES to China — now. Here’s why.
While government subsidies do remain an issue in some industries in China, there is no evidence that this problem is endemic throughout large sectors of the Chinese economy. Also, other countries (such as Russia) which suffer from similar problems already enjoy a Market Economy Status.
Whether or not a country grants MES to China has minimal impact on trade balance with China. Take the US as an example. Even though the US has not granted MES to China, its trade deficit with China was $162 billion in 2004, $202 billion in 2005, and $232 billion in 2006. Thus, from China’s point of view, whether or not a country grants MES to it has little substantive value. The value is entirely “symbolic” and, as we know well, symbolism is a hugely valued commodity in China.
In any case, China will automatically get the Market Economy Status around 2015-16. Thus, for China, the symbolic value of getting MES goes down with each passing year. If India were to grant MES to China now (rather than after Japan, the US, or the EU have done so), the symbolic value to China will be much greater than if India were to be a mere follower.
Granting MES to China will not take away India’s rights to file legitimate anti-dumping cases. Even after China is granted MES, it has to provide verifiable information to the country filing an anti-dumping complaint. If such information is not provided, the latter retains the right to use the best information available, including third-country (surrogate) information. As it is, the current anti-dumping cases filed by India against China total less than 5% of China’s annual exports to India. In short, the substantive value of granting or not granting MES to China is insignificant not just for China but also for India. Yes, India will have a $9-10 billion trade deficit with China in 2007; however, MES has little if anything to do with the trade deficit.
Substance aside, if India were to grant MES to China before Japan, the US, and the EU do so, the symbolic value to China will be very high. If India is smart, it should exploit this opportunity to the maximum by getting quid-pro-quo concessions from China on issues that matter enormously to India (e.g., a settlement of the border disputes). In essence, India should look at MES for China as an issue whose salience rests almost totally in non-economic rather than economic domains.
We agree that, at the margins, granting MES to China will put greater pressure on Indian manufacturers to become more efficient (and on the Indian government to accelerate the elimination of India’s disadvantage in infrastructure).
However, this pressure is likely to be a net plus. India’s political and business leaders have always responded with vigour to external economic pressures and competition. Look at the country’s response in 1991. Or, look at the accelerated pace with which India’s IT giants are globalising their footprint and moving up the value chain in response to an appreciation of the rupee and growing competition from other countries.
In any discussion of the growing economic integration between India and China, it is important to remember also that trade is only one of the two major economic ties that bind nations. The other is investment. At present, investment links between the two countries are relatively modest. Haier and Huawei have significant presence in India. Similarly, Bharat Forge, TCS, and Infosys are building a noteworthy presence in China.
These types of greenfield investments will continue to grow. However, the quantum leap will come as some of the bigger companies from India and China acquire third-country companies that already have a significant presence in the other country (e.g., if an Indian auto company were to acquire a western auto company with significant presence in China). It is certain that, over just the next five years, we will see a growing number of foreign acquisitions by Indian and Chinese companies. As these acquisitions materialise, it is inevitable that investment linkages between India and China will grow rapidly.
The world is watching the rise of China and India with fascination and awe. However, most people do not realise that the implications of tighter economic links between the two could be even more profound.
(The author is Ralph J Tyler Professor of Strategy & Organisation and Research Director, Center for International Business Education & Research Robert H Smith School of Business, University of Maryland)
Comments