How have India-China trade dynamics played out since early 2000s

One of the disquieting aspects of India’s foreign trade is the rapidly growing imbalance with China, its largest trade partner. 

This is an issue that has reverberated repeatedly through the concerns raised by a number of sectoral interests, the textiles industry being one of the more recent ones having petitioned the government for higher tariffs in order to protect their sector. 

At the same time, however, there seems to be very little, if any, overall understanding about the implications of the imbalance in India-China trade, specifically the growing penetration of the Chinese products in the Indian economy.

In order to put the India-China trade imbalance in perspective, it necessary to see how the trade policies of the two neighbours have evolved since the beginning of this millennium. 

This cut-off has a special significance for China; it became a member of the World Trade Organization (WTO) in 2001. With this step, China realised the goal of almost fully integrating with the global economy, which was set after Deng Xiaoping brought the country out of its isolation and triggered the process of economic reforms in 1978. 

That a confident China had emerged following its WTO accession was to be proven by its trade performance in the 2000s. Before it joined the WTO, China’s share in global exports had not reached 4 per cent, but by 2006, the share had doubled and by the end of the decade it was 10 per cent. These were definite signs that China had the momentum to capture global markets.

India, on the other hand, fast-tracked its trade liberalisation agenda by the turn of the millennium. The trigger for doing so was provided by India’s accession to the Information Technology Agreement (ITA) in 1998, under which commitments were taken to eliminate tariffs on information technology products by 2005. 

Alongside, a decision was taken to unilaterally lower tariffs on most manufacturing products, which incidentally coincided with the phase of high growth. Thus, average tariffs on industrial products, which was 31 per cent in 2000-01, was slashed to less than 12 per cent by 2006. 

It is pertinent to note here that this sharp decline in the levels of tariffs happened when the National Manufacturing Competitiveness Council (NMCC), which was established by the UPA Government in 2004, sounded alarm bells over the near stagnant share of manufacturing. 

In its “The National Strategy for Manufacturing” unveiled in 2006, the NMCC argued that “one of the major reasons for the reduced level of contribution by manufacturing has been the inability of the country to build and maintain competitiveness needed to meet the global challenges as well as to develop a larger domestic market through low-cost production”. 

To this day, and after several initiatives to make the manufacturing sector more competitive in the past 12 years, NMCC’s observation remains true.

How have the India-China trade dynamics played out since the early 2000s? Before India began its deep tariff cuts, China was outside the list of top five import sources for India, having a share of less than 3 per cent in India’s total imports. 

In 2000-01, India’s imports were $1.5 billion and exports were $831 million, and the trade deficit was a modest $671 million. Imports from China recorded a dramatic increase from 2003-04, up from $4 billion to $32 billion in 2008-09. By 2014-15, Chinese imports were above $60 billion, and in the previous financial year, it had exceeded $76 billion. 

On the other hand, India’s exports to China remained extremely sluggish, which was hardly surprising in light of the comments by NMCC. From $3 billion in 2003-04, exports reached $10 billion in 2007-08. In 2012-13, Indian exports peaked at $18 billion, but five years thereafter it could export no more than $13 billion. 

Consequently, the trade deficit expanded drastically to over $63 billion in 2017-18. In 2016-17, India’s trade deficit with China accounted for over 47 per cent of its overall trade deficit; declining a tad in the following year.

More than the increase in imports, it is its composition of trade that is of serious concern. China has targeted the Indian market primarily in two commodity groups, namely electrical and electronic equipment and pharmaceuticals. 

Almost 60 per cent of India’s import requirements of electrical and electronic equipment were met by China, and more than 75 per cent of the active pharmaceutical ingredient, the raw material used by India’s generic pharmaceutical industry, were imported from China. 

In 2017-18, China supplied 80 per cent of the antibiotics imported by India, besides supplying the bulk of electronic products and components. 

Clearly, some of the key sectors of the Indian economy are critically dependent on China. In sharp contrast, India’s top exports were mostly intermediate products and raw materials. These included cathodes, petroleum oils, intermediate products for the producing films, plastic and iron ore and concentrates.

The United Nations Commodity Trade Statistics database provides a useful way of assessing the pattern of trade between countries by classifying trade flows by the levels of technology and production sectors. 

According to the figures from this database for 2017, manufactured products constituted 55 per cent of India’s non-oil exports to China, while the corresponding figure for China was as high as 95 per cent.

This implies that primary commodities were a significant share of India’s exports to its largest trade partner, which is consistent with China’s strategy to function as the “factory of the world” by sourcing raw materials from its trading partners. 

But for India, this pattern of trade is reminiscent of its colonial past, when Britain fuelled its industries by exploiting its colonies and used the latter as captive markets for its finished products.

(This article was originally published on The DNA. Read the original article)

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)