Improving India-China trade relations is key for Asian century
Asian equations, specially between the two giant economies of China and India will be in focus with the installation of Donald Trump as the 45th US president.
Trump’s belligerent ‘America First’ foreign and commercial policy stance, will in all likelihood, force China to curb its manufactured goods exports to the US, with whom it has a whopping and patently unsustainable trade surplus of nearly half a trillion dollars! It is unlikely that even US MNCs, which have huge export bases in China, could prevail upon Trump to not push back imports from China. This should push Chinese exporters to look for alternate markets during the next five to 10 years, during which China completes its planned switch to greater reliance on domestic consumption. India, with its growing and potentially large domestic markets and long track record of trade deficits, would offer a tempting opportunity for Chinese exporters looking to divert their exports and utilising their installed capacities.
In this scenario, we could expect a more aggressive Chinese push for capturing market shares in India and South Asia more broadly. This is also evident to some extent with the continuing deterioration in India’s already large deficit with China. This push from Chinese exporters will surely be resisted by the range of stakeholders in India. These include organisations like the Swadeshi Jagaran Manch, with their overt protectionist stance; apex industry associations as they strive to protect their members’ interests; and even the government of India, which faces tremendous and rising pressure for generating employment for the burgeoning number of young entrants to the workforce and for increasing the share of manufacturing in India’s GDP.
The Chinese need for finding new markets and the Indian imperative of expanding domestic employment and manufacturing output could imply a direct conflict of interests between the two large neighbors. Bilateral commercial relations could deteriorate. This could have a negative fallout for the overall relationship, which in any case, is rather fragile for all the well-known reasons. China’s financing and chaperoning of 52 projects as part of the China-Pakistan Economic Corridor, and its overt opposition to India’s entry both into the NSG and the UN Security Council, would only ratchet up mutual mistrust.
In these rather testing circumstances, can something be done to improve Indo-Chinese commercial relations in the remaining two years of Modi’s first term? It is clear that this will not be easy and will certainly not be achieved either by benign neglect or business as usual.
These are options that India should try its best to avoid. The costs of rising tensions with its northern neighbour could have serious consequences for India’s current priority of completing its transition from a low to a middle income economy. For China too, this would be an avoidable option as it will have its hands full during the Trump presidency with its more assertive approach in Asia. The short point is that it may well be in both countries’ interests to try and prevent a ratcheting up of negative sentiments at this stage.
There is significant inequity in the Indo-Chinese bilateral trade. India imports nearly three times as much as China does from India, with the resultant huge trade surplus in favour of China. More worryingly, the trade pattern is reminiscent of colonial trade flows with India being at the receiving end as the exporter of primary products and importer of processed and manufactured products. This iniquitous bilateral trade is surely unsustainable.
Therefore, steps would have to be taken to correct this imbalance and also ensure that bilateral trade continues to grow. This can be achieved perhaps only by India replicating what the Chinese achieved with the US during nineties. This would imply export oriented Chinese investment into India and encourage them to establish production networks with Indian component and input suppliers. Hopefully, some of these exports will be redirected to the Chinese markets, just as American MNCs, supplied the US markets with production bases in the Pearl river delta.
India should, therefore, take all possible measures to attract export oriented investment from China. This will serve several Indian policy goals. Most importantly, it will help generate much needed good quality employment opportunities and the share of manufacturing output in the economy. Both these are stated objectives of Modi’s flagship program, Make in India. This will also rectify the imbalance in India’s exports to China that are currently dominated by primary goods. Quite importantly, this will address growing anxieties in India of Indian markets being swamped with Chinese imports. Chinese investments, if undertaken with due sensitivity to India’s security concerns, would then put Indo-Chinese bilateral trade on a rising trajectory.
Chinese firms could also use their manufacturing capacities in India to expand their exports to South Asian, West Asian, and African markets. Locations in India will offer better transport connectivity to Chinese firms who could also benefit from rather substantial trading networks in these regions established over the years by Indian businessmen. It will also dilute the perception that the two giant economies are in a zero-sum competition in these markets.
Other than inviting export oriented Chinese investment, India should also prevail upon Chinese authorities to allow greater market access to India’s service and pharmaceuticals exports. These are currently faced with rather severe tariff and non-tariff barriers and consequently unable to achieve their potential. Being clearly the senior trading partner, China would do well to open these markets for India’s competitive exports.
The present Chinese approach of ratcheting up their manufactured products to Indian markets and only encourage primary imports from India is clearly untenable. For the successful conclusion of RCEP in the near future, it is important that Indo-Chinese bilateral commercial relations are put on a more sustainable footing.
Steps suggested above will help achieve the needed improvement in bilateral relations and thereby also contribute to a healthier Asian economic architecture.
Dr Rajiv Kumar is Vice-Chairman of Niti Aayog, the Indian government’s policy think tank.