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Digging Deeper | India's unequal trade with China.

Date: 22-08-2019
Subject: Digging Deeper | India's unequal trade with China
A few weeks ago, India addressed the issue of trade imbalance in Asia. India’s Commerce Secretary told China that the mega free trade agreement RCEP  - Regional Comprehensive Economic Partnership, a free trade agreement between ASEAN member countries and their six FTA partners - should address the causes of high trade imbalances among the member countries.

A joint statement after the RCEP meeting said the ministers from member countries noted that over two-thirds of market access negotiations reached mutually satisfactory outcomes. It also added that work on the remaining areas is being intensified through constructive engagements at all levels.

That meeting turned the spotlight on India’s bilateral trade with our big neighbour on the other side of the Himalayas. To put it into perspective, India’s trade deficit with China is over $53 billion. That trade imbalance was one critical issue addressed by Commerce Secretary Anup Wadhawan in his meeting with Wang Shouwen, the Vice Minister of China's Commerce Ministry. In fact, Wadhwan emphasised the importance of an RCEP agreement that would address the causes of existing trade imbalances in the entire region.

In April 2018, a few weeks after Donald Trump’s trade war with China kicked off, the magazine Foreign Affairs claimed that a US Trade Representative report “argued rather provocatively that the United States had indeed “erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime. “ That was backed up by a piece in the The Atlantic, which made a contentious claim: “...achieving fair trade with China means addressing the single most prominent feature of its economy: the deep connection between the ruling Communist Party and commercial institutions, like banks and other state-owned enterprises. When state-run banks in China provide below-market-rate loans to companies controlled by the government, this acts as an implicit subsidy to those firms’ goods.”

USA’s concerns regarding trade deficit with China are not entirely unfounded. China’s exports to the US were worth approx. $540 billion while imports were around $120 billion, meaning a deficit of nearly $420 billion for the US. One can see why they’d want to fix a deficit that was approaching half-a-trillion dollars. Even so, it is already pushing $200 billion for the current financial year.

According to data from the World Bank website, China has trade surpluses with more countries than it does deficits. It’s largest surpluses are with the US, Hong Kong, India, UK, Netherlands while its largest deficits are with Taiwan, South Korea, Australia, Japan, Germany, Brazil, Switzerland, And Saudi Arabia.

Fun fact: According to the World Bank’s website, China has a trade surplus of 8 dollars with Saint Pierre and Miquelon, a tiny country off the coast of Canada. And a trade surplus of 83 dollars with the Vatican.

India’s China-sized trade problem

Which brings us to India’s trade deficit with China.  China is India’s largest trading partner while we are China’s 11th largest trading partner. A Business Standard report from April this year claimed India is China’s 7th biggest trading partner. As mentioned earlier, India’s trade deficit with the ‘Middle Kingdom’ is reportedly $53 billion. Since China joined the WTO in December 2001, India-China trade has grown from $1.49 billion to $84.4 billion in 2017.

According to the Economic Times, India's exports to China in 2018 totaled $16.5 billion. If you think that’s very little, you’ll be surprised to hear that it was a 30.4% increase over the previous year. During the same period, India's exports to Hong Kong fell from $15 billion to $13.3 billion. Combine those two, and India’s losses stood at around $900 million. India accounted for under 1% of Chinese imports in 2018, the latest year for which data is available from the United Nations Conference on Trade and Development, or UNCTAD.

A report in Financial Express states that while most of India’s exports to China are goods and raw materials, it imports intermediate and finished goods. In 2016-17, the imports comprised of 16% capital goods, 21% consumption goods, and 63% intermediate goods. The main exports to China are petroleum products, cotton, organic chemicals, iron ore and plastic raw materials. The main commodities India imports from China are machines for reception, conversion-transmission, bulk drugs and drug intermediates, consumer electronics, and telecom instruments. Imports of fertilisers from China showed a sharp increase of 233.17% to reach $512.39 million this year. India remained the largest export destination for Chinese fertilizers.

Overall, India’s trade deficit with China did fall by a few billions but there is a catch. For instance, India's import of mobile phone spare parts from China fell by as much as 34.1% in 2018 but the import of those very parts from Hong Kong saw a 728% increase during that period! Similarly, LAN adaptor cards imported from China saw a dip of 32% but import from Hong Kong increased by 173 percent. That’s not the worst of it. The import of digital monolithic integrated circuits, or microchips, from China did rise a bit but the import from Hong Kong went through the roof, going up 6017 percent! That’s right, over 6000 percent. This new situation has led to speculation China might be using Hong Kong to camouflage the actual size of its exports to India. Trade deficit with Hong Kong has risen to $5 billion.

Hong Kong is, of course, an autonomous territory.  Its current troubles and the two-million strong political marches are proof of its “separateness”. It is a special administrative region since the time it was transferred to China by Britain in 1997 - Hong Kong is governed under the "one-country, two-systems" mechanism. However, a government official told ET, India should always regard China and Hong Kong as one entity when calculating trade figures.

In short, we import way more from China than we export to them.

What’s the remedy?

India’s ambassador to China Vikram Misri told Chinese state-run newspaper China Daily in July, “That kind of deficit is not economically sustainable, and it can also become politically sensitive if we don't take steps to address the deficit.” India also said its industry is not convinced that RCEP will create a win-win situation for all by ensuring balanced outcomes across the key pillars, particularly goods and services.

The government has been tentative about dealing with this issue. Commerce and Industry Minister Piyush Goyal had said India had been trying to push its agricultural, dairy and pharmaceutical products to China. He also claimed that several protocols have been signed to help export rice, rapeseed meal, tobacco and fish-meal to China.

A week ago, China assured India it would address the growing concerns over the deficit, and suggested expanded cooperation in industrial production, tourism, border trade etc. to

"balance" bilateral commercial relations.

But it remains to be seen if such platitudes translate into actual improvements. For instance, even as the government announced the signing of export protocols with China, the same press release from June this year states, “A section of the industry has opined that some of the conditions like requirements of local experience, are limiting their participation in the Chinese procurement process. Government of India has been engaging with the relevant Chinese Government entities to ensure that Indian companies get market access for its products. Such issues are also discussed in the bilateral meetings from time to time to find solutions to any such restrictions in market access.”

The centre claims progress is being made. External Affairs Minister S Jaishankar, who visited China around India’s Independence Day, said, “We appreciate the steps taken in the last few months by the Chinese side to enhance imports from India. These efforts could expand to include measures to enable greater access for our pharmaceutical and IT products and services in the domestic Chinese market.”

But there is some good news as well. There is an opportunity in the ongoing US-China Trade War. According to Mint, the data on recent trade patterns shows the trade conflict between the US and China has actually helped India gain a bigger toehold in the Chinese market. Operative word - toehold. While exports to the US haven’t risen by much, exports to China have gone up substantially, according to a 29 July SBI research report.

In sectors where China imposed retaliatory tariffs on US goods and services, like live animals and animal products, vegetable products, and plastic and rubber, Indian exports to China grew 335%, 134%, and 93.7% respectively in FY19 as compared to FY18. However, in sectors like base metals, which also saw China impose retaliatory tariffs, Indian exports dropped. In sectors where such tariff walls have not been raised - gems, jewellery, footwear etc. -  Indian exports either dropped or rose at a relatively slower pace.

China is a big importer of farm products which feed its massive population. That import is almost 10% of global trade. With exports of agricultural products reaching $40 billion, India has a major stake in gaining access. India is the world’s largest producer of rice, whereas China is the biggest importer of this commodity. But that opportunity is mired in a regulatory maze, as we mentioned earlier. China imports 3.4 million tonnes of raw sugar per year, subject to a quota system providing concessional tariff. India’s sugar industry should be able to negotiate a way into this sector. Similarly, export of sesame seeds has not made much headway as Indian export attracts 10% duty. On the other hand, African countries enjoy zero duty and have captured 90% of that market.

India press statement after the RECP meeting said, "India's concerns regarding market access and other issues leading to imbalanced trade between some of the partner countries was specifically flagged during the meetings.”

It’s Complicated

The trade war also presents complications. Many Indian internet firms have challenged the dominance of American tech companies in India’s internet economy with the help of Chinese firms. One example is Ola, backed by Chinese ride-sharing business Didi, taking on Uber.  Alibaba-backed BigBasket is challenging Amazon in the online groceries business.

It’s all a complicated tangle. The only major Asian economy that’s grown its export share since the start of the tariff wars in 2018 is India, the one with the fewest trade links to China. According to Business Line, India’s share of world exports rose to 1.71%  in the first quarter of 2019 from 1.58% in the fourth quarter of 2017. The share of every other economy among Asia’s 10 biggest exporting nations fell in the same period. Part of the reason for India’s outperformance is that it’s not as integrated into global manufacturing supply chains as its Asian peers, which means exporters are cushioned from rising trade tensions in the region.

That said, a large swathe of the manufacturing sector in India is dependent on China for capital goods and industrial supplies. Ironically, data indicates that India’s ambition to be the factory of the world is unlikely to materialize without Chinese imports. As far back as 2016, according to an analysis in Mint, Indian equities increasingly began moving in tandem with Chinese markets even as India’s dependence on China for technology-heavy imports rose sharply. Of all the capital goods imported by India in 2015, 42% came from China. Another 14% of imported industrial raw materials are sourced from China.

With all that in mind, an analysis in Mint also recommends that India must keep a close eye on currency movements - because they can change the cost-benefit matrix for the economy significantly. If the yuan continues to depreciate, the rupee might need to fall in tandem if Indian exports are to remain competitive against Chinese goods and services in both Chinese and global markets.

So even as the trade war between the two biggest economies opens up new opportunities for India, what with China agreeing to open up more sectors to Indian exports, it should ideally avoid policy adventurism, and consider the costs and benefits for the economy as it frames new rules of engagement with trade partners.

Source: moneycontrol.com

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