The Deficit War between India & China

By Naimisha Pradhan —

Container vessels and shipping approach Mumbai port in Maharashtra, India. Source: Wikimedia user KuwarOnline, used under a creative commons license.

India and China have had an eventful trade history. Termed the “Factory of the Modern World,” China’s economic model has industrialized into a manufacturing and trading powerhouse. India’s trade deficit with China has expanded over past few years and has now become a matter of serious concern to India. But while China claims to recognize the heavy deficit gap, the deficit has hovered at over $50 billion for the last four years. India’s ambassador to China has asked the two nations to prioritize this trade gap. China’s laid-back attitude towards Indian concerns could have long-term repercussions as China appears to be failing to recognize India’s growing importance as a market.

A bilateral trade imbalance is not beneficial to the long-term sustainable development of economic cooperation between the two countries, either economically or politically. Therefore, reduction of bilateral trade imbalance over the coming years should be identified as the objective of trade and economic cooperation between the two countries. As stated by the Center for International Development at Harvard University, India is the fastest growing economy globally and is on the pathway to becoming a powerhouse on its own.

India’s top five exports to China are organic chemicals, copper, ores slag and ash, mineral fuels, oils, distillation products, cotton. On the other hand, the top five imports from China are petroleum products, telecom instruments, cotton, plastics and iron ore. Most of the exports from India into China are either primary goods or raw materials, whereas the imports are primarily intermediate and finished goods. According to India’s Department of Commerce, Indian manufacturers lag behind their global competition in production planning, supply chain management, quality, and maintenance – areas that contribute to their low productivity. To bridge the trade gap with China there are certain policy and strategy reforms the Modi government needs to legitimize for a successful balanced trade with the emerging superpower.

Strategy for India to Increase Exports

  • Factor market reforms for manufacturers are crucial. Often-cited reforms such as simplified land acquisition, unobtrusive labor reforms, and access to reliable electric power are critical for India’s manufacturing sector.
  • Focus on remaining market access issues in China, such as the market access for Indian pharmaceutical products, agricultural products and animal husbandry products.
  • Pursuing export orders where market access has been obtained such as the ‘Protocol for export of Basmati Rice’ signed between the two countries in November 2006. This protocol was expanded in 2019 to include non-basmati rice. This protocol, however, has not translated to actual exports and remains a “paper reform.” India could also pursue a concessional tariff from China for other potential export products such as sesame seeds.
  • The growth of agricultural product processing industry would be a strong impetus to promote the specialization and standardization of India’s agricultural products and to improve the overall quality for exports to China.

If this strategy is implemented, there are potential gains to be made for India. The recent trade fight between the United States and China seems to be accelerating a manufacturing industry shift away from China. India’s massive population and large consumer market could be an attractive target for companies looking to relocate their manufacturing base, and for Chinese manufacturers looking to start manufacturing in new markets. The sectors more likely to relocate to India are consumer appliances, electronics, textiles & clothing, healthcare equipment and heavy machinery.

Despite a trade imbalance, India-China economic ties are growing. Chinese trade with India has improved to $84.44 billion in 2017, increasing by 18.63 percent, which is well above the $71.18 billion reported in 2016. India and China are working together in forums such as the BRICS New Development Bank, Shanghai Cooperation Organisation and particularly the Asian Infrastructure Investment Bank (AIIB).

By the end of its first term, the Modi government’s  overarching China policy did not have a clear direction. We saw the flashy Wuhan summit, but little practical difference in China’s positions on issues important to India, such as unsparing support to Pakistan. Yet Modi’s promised muscular policies appeared to resonate with voters, as indicated through the BJP’s landslide re-election success. India’s protectionist trade policies are clearly driven by the goods trade deficit with China, an issue on which China appears to have little appetite to accommodate. But this is a very short-sighted view; India’s rise could pose important opportunities for economic engagement, but China must begin learning to cooperate more fully.

Ms. Naimisha Pradhan is a research intern with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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