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Understanding India’s trade deficit with China
By Ishu Jain | Source:Global Times Published: 2016/12/7 21:08:40
Illustration: Peter C. Espina/GT
India and China are two of the world's largest emerging markets and are set to be among the world's four largest economies by 2020. Bilateral ties between the countries have increased as their respective governments pursue economic growth. As a result, China is now India's largest trading partner and India ranks within China's top ten trading partners. India's trade deficit with China increased to $52.69 billion in 2015-16 from $48.48 billion the previous financial year. The increasing deficit with China can be attributed primarily to the fact that Chinese exports to India rely strongly on manufactured items to meet the demand of India's fast expanding sectors like telecom and power.
Many Indians complain that China is flooding the market with cheap products and driving local manufacturers out of business, resulting in a growing trade deficit. The US also maintains a large deficit with China, but unlike the US, a too-large trade deficit poses an imminent risk for India.
Imports into India are paid for using foreign currency obtained from the central bank. If the central bank starts running out of foreign currency - or if investors sense that this point is approaching, and conduct a speculative attack on the central bank - the government may have to default and revalue its currency, probably at great loss to creditors.
A previous balance of payments crisis forced the country to take liberalizing measures in the 1990s. To insulate against this threat in the future, India has mechanisms to limit imports and stave off another balance of payments crisis. Yet these barriers also shut out cheap goods that could benefit Indian consumers and might spur faster development among Indian companies.
With economists, politicians and even casual observers agreeing that the current trade mix between China and India is unsustainable, discussions on improving the trade imbalance have taken place both publicly and privately within the respective governments. China's imports from India mainly comprise raw materials, like cotton and iron ore. India, in comparison, imports a large number of manufactured capital goods, which are much cheaper to purchase from China than elsewhere. The underlying cause for the trade deficit is that China out-competes India in manufactured goods.
The possibility that a trade imbalance could lead to protectionist tendencies is understandable though probably not advisable, but the continuation of an unequal trade balance between China and India provides ammunition for calls for protectionism.
Many experts suggest that India should not be fixated on trade deficit figures with China. India buys more from the rest of the world than it sells. It runs deficits with 16 of its top 25 trade partners. One reason is India's weak manufacturing sector, which stems from restrictive labor, land and tax laws, rickety infrastructure and inadequate power supplies. India simply doesn't produce enough goods, or goods of high-enough quality, to meet the demands of its billion-plus consumers.
That said, bilateral trade figures don't represent the true picture all the time. The presence of global supply chains and regional hubs of production mean that balanced bilateral trade is neither possible nor desirable.
This is especially true for China as the last stop in the East Asian manufacturing supply chain. China is the place where high-tech components are assembled and shipped out for sale. As many economists have observed, trade figures record the total value of the exported good as a "Chinese export," even though China is responsible for only a small proportion of the added value. Take the iPhone, for example. Countries that buy iPhones and other goods assembled in China run large bilateral trade deficits in part because China is just the last stop on the manufacturing train. Korea and Japan, meanwhile, run a trade surplus with China. The only way for India to circumvent this process would be to integrate itself into the East Asian supply chain.
To a certain extent, Chinese imports are beneficial both to Indian consumers and companies. Cheaper Chinese consumer goods allow Indian living standards to rise. Chinese imports also provide more competition for local products and encourage innovation.
Trade between China and India may have exploded, but there is a huge opportunity to expand these figures. Instead of limiting imports, India should unravel onerous regulations to increase its manufacturing capacity and its exports. While we can argue that tariff and non-tariff barriers that China imposes on Indian exports leave plenty to complain about, India could benefit far more from putting its own house in order.
China will import $10 trillion worth of goods and invest $500 billion overseas in coming years. India should make an effort to take a proportionate share of this. China and India should work together to tap into the potential for bilateral trade and better promote two-way investment to gradually resolve the trade deficit.
The author is an India-born Shanghai-based international business consultant. He can be reached at ishujain@163.com. bizopinion@globaltimes.com.cn
********
This Indian writer is spot on. Very good analysis.
.
By Ishu Jain | Source:Global Times Published: 2016/12/7 21:08:40
Illustration: Peter C. Espina/GT
India and China are two of the world's largest emerging markets and are set to be among the world's four largest economies by 2020. Bilateral ties between the countries have increased as their respective governments pursue economic growth. As a result, China is now India's largest trading partner and India ranks within China's top ten trading partners. India's trade deficit with China increased to $52.69 billion in 2015-16 from $48.48 billion the previous financial year. The increasing deficit with China can be attributed primarily to the fact that Chinese exports to India rely strongly on manufactured items to meet the demand of India's fast expanding sectors like telecom and power.
Many Indians complain that China is flooding the market with cheap products and driving local manufacturers out of business, resulting in a growing trade deficit. The US also maintains a large deficit with China, but unlike the US, a too-large trade deficit poses an imminent risk for India.
Imports into India are paid for using foreign currency obtained from the central bank. If the central bank starts running out of foreign currency - or if investors sense that this point is approaching, and conduct a speculative attack on the central bank - the government may have to default and revalue its currency, probably at great loss to creditors.
A previous balance of payments crisis forced the country to take liberalizing measures in the 1990s. To insulate against this threat in the future, India has mechanisms to limit imports and stave off another balance of payments crisis. Yet these barriers also shut out cheap goods that could benefit Indian consumers and might spur faster development among Indian companies.
With economists, politicians and even casual observers agreeing that the current trade mix between China and India is unsustainable, discussions on improving the trade imbalance have taken place both publicly and privately within the respective governments. China's imports from India mainly comprise raw materials, like cotton and iron ore. India, in comparison, imports a large number of manufactured capital goods, which are much cheaper to purchase from China than elsewhere. The underlying cause for the trade deficit is that China out-competes India in manufactured goods.
The possibility that a trade imbalance could lead to protectionist tendencies is understandable though probably not advisable, but the continuation of an unequal trade balance between China and India provides ammunition for calls for protectionism.
Many experts suggest that India should not be fixated on trade deficit figures with China. India buys more from the rest of the world than it sells. It runs deficits with 16 of its top 25 trade partners. One reason is India's weak manufacturing sector, which stems from restrictive labor, land and tax laws, rickety infrastructure and inadequate power supplies. India simply doesn't produce enough goods, or goods of high-enough quality, to meet the demands of its billion-plus consumers.
That said, bilateral trade figures don't represent the true picture all the time. The presence of global supply chains and regional hubs of production mean that balanced bilateral trade is neither possible nor desirable.
This is especially true for China as the last stop in the East Asian manufacturing supply chain. China is the place where high-tech components are assembled and shipped out for sale. As many economists have observed, trade figures record the total value of the exported good as a "Chinese export," even though China is responsible for only a small proportion of the added value. Take the iPhone, for example. Countries that buy iPhones and other goods assembled in China run large bilateral trade deficits in part because China is just the last stop on the manufacturing train. Korea and Japan, meanwhile, run a trade surplus with China. The only way for India to circumvent this process would be to integrate itself into the East Asian supply chain.
To a certain extent, Chinese imports are beneficial both to Indian consumers and companies. Cheaper Chinese consumer goods allow Indian living standards to rise. Chinese imports also provide more competition for local products and encourage innovation.
Trade between China and India may have exploded, but there is a huge opportunity to expand these figures. Instead of limiting imports, India should unravel onerous regulations to increase its manufacturing capacity and its exports. While we can argue that tariff and non-tariff barriers that China imposes on Indian exports leave plenty to complain about, India could benefit far more from putting its own house in order.
China will import $10 trillion worth of goods and invest $500 billion overseas in coming years. India should make an effort to take a proportionate share of this. China and India should work together to tap into the potential for bilateral trade and better promote two-way investment to gradually resolve the trade deficit.
The author is an India-born Shanghai-based international business consultant. He can be reached at ishujain@163.com. bizopinion@globaltimes.com.cn
********
This Indian writer is spot on. Very good analysis.
.
