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Sino-Indian trade: growing concern

In the new century, the big story when it comes to the Sino-Indian relationship has been the burgeoning economic engagement. Traditional preoccupations and suspicions to do with borders and boundaries have thus had to contend with a powerful, alternative reality of racing bilateral trade and growing economic dynamism.

Recently released statistics from China’s customs authorities reveal that Sino-Indian trade in the first six months of 2006 reached $17.2 billion, up by a sharp 67 per cent over the same period in the previous year. Last year, bilateral trade between the neighbours crossed $25 billion. Thus the trade target set during Chinese Premier Wen Jiabao’s visit to India in April 2005 of $20 billion by 2008 was met well in advance.

Indeed, over the last five years, every ambitious target set for trade has proved not to be ambitious enough, the statistics zooming ever upwards with a momentum seemingly of their own.

In 2006, India-China trade increased by 33.8 per cent over 2005 and in turn the figure of $18.7 billion for 2005 was a 37 per cent climb over the previous year. Just three years earlier in 2002, the total volume of bilateral trade was a paltry $5 billion.

China replaced Japan as India’s top trade partner in North East Asia a few years ago and is now on track to overtake the United States to become India’s number one trading partner in the world. Indo-U.S. trade currently stands at about $32 billion, a quantum that Sino-Indian trade may well cross by year-end.

On the surface then, there appears to be plenty of evidence for optimists who hold that Bangalore and Shanghai, rather than New Delhi and Beijing are the new determinants of the topography of bilateral ties; ties that are increasingly characterised by commerce rather than conflict.

However, in recent months a ballooning trade deficit with China means that grey clouds are threatening to mar the sunshine that India-China trade has been spreading in its wake thus far.

While in 2004 the balance of trade was in India’s favour to the tune of $1.7 billion, by 2006 this surplus had turned into a deficit of $4.12 billion. This year, the deficit is only widening, having reached $3.28 billion in the first six months, up from the $2.66 billion deficit for the same time period in 2006.

Indian exports to China continued to rise, seeing an almost 30 per cent year-on-year increase in the January-June period this year. However, this increase was outpaced by Indian imports from China which scaled up by close to 65 per cent to touch $10.24 billion.

What is truly a matter of concern from the Indian point of view, however, is not the level of Indian exports to China but rather the composition of those exports.

India’s exports to China are overwhelmingly dominated by low-value, primary products with an outsized reliance on iron ore. In 2006, ores, slag and ash comprised more than 50 per cent of India’s exports to the mainland, a trend that has remained unaltered over the last few years.

Despite Indian trade officials repeatedly expressing concern over the lopsided nature of this export composition, in the first six months of this year iron ore continued to account for half of the total exports to China.

The majority of Chinese exports to India, on the other hand, comprise manufactured and value added products. Electrical and other types of machinery for example made up 45 per cent of Indian imports from China in the first six months of 2007.

“India cannot be an exporter of raw materials and commodities to China all the time,” says Nirupama Rao, the Indian Ambassador to China, flagging the rising concern over a situation she says is “unsustainable in the long run.”

The ambassador adds that a “deficit [with China] is tolerable only for a finite period, beyond which we risk seeing a ‘positive’ of the relationship assuming negative tones.”

This is an atypically strong statement from the embassy, which usually tends to focus on the sunnier aspects of cooperation and growth when it comes to trade. It highlights the growing uneasiness in India over what some see as the realisation of long-held fears that trade with China will ultimately be detrimental to Indian industry. It thus calls attention to the serious levels of potential friction that Sino-Indian trade can generate unless carefully managed.

Trade friction including the enormous surpluses that China enjoys is at the centre of several of Beijing’s more weighty bilateral relationships, notably with the U.S. Given that despite still being only in the take-off period, India-China trade has already run into a bumpy stretch, it would perhaps make sense for New Delhi and Beijing to establish a strategic economic dialogue along the line of the Sino-U.S. dialogue initiated last year.

Since 2005, India and China have entered into a “strategic and cooperative partnership.” Setting up a dedicated dialogue on economic issues at the highest level would help put flesh on the bare bones of this partnership, giving the two countries a mechanism through which to manage nascent tensions in what has the potential to become one of the world’s most important economic engagements.

It may be argued that setting up such a dialogue is premature. Indeed even though China is set to emerge as India’s largest trading partner, in 2006 India was only the 18th largest exporter to China and the 13th most significant export destination of Chinese products.

Compared to the India-China bilateral trade of $25 billion plus, Sino-U.S. trade stands at well over $200 billion and in fact China’s trade with a single American company, Wal Mart, was worth a staggering $18 billion last year.

Patently, for China at least, India is still a second-level player when it comes to trade. Longer-term commitments are even less impressive. Actual Indian investment in China until March 2007 stood at a mere $178 million (although contractual investment is valued higher, at $565 million). By contrast, by the end of 2005, U.S. businesses had actually invested $51.1 billion in China and set up 49,000 enterprises in the country.

Chinese investments in India are also less than weighty. According to the Indian government, FDI inflows to India from China between August 1991 and December 2006 worked out to a grand total of $3.61 million. Chinese statistics put the figure considerably higher at about $17 million for actual investments, but even this number is distinctly unimposing.

However, it is precisely because the bilateral economic relationship has still to reach maturity that the time is right for the initiation of a strategic level dialogue. It would be more useful to develop such a mechanism proactively before budding frictions have expanded into serious roadblocks rather than retroactively after the problem sets the two countries on a collision course.

Currently, India and China have a ministerial-level Joint Economic Group (JEG) that is supposed to meet every two years to discuss bilateral issues of economic nature. The JEG last met in 2006 after a gap of 6 years. In addition, a number of sector specific joint working groups on trade, energy, coal, agriculture and so on exist. These dialogue mechanisms however remain sporadic and scattered, reducing their impact and efficacy.

An India-China strategic economic dialogue along the lines of the Sino-U.S. one would bring the diverse facets of bilateral trade and investment under one umbrella. Upgrading the level of the dialogue and increasing its frequency would moreover signal the determination to keep what has been a positive in the bilateral relationship, economic ties, a positive going ahead as well.

India’s growing deficit with its northern neighbour is already leading to edginess in some quarters. Industry organisations such as CII and FICCI, for example, are expressing increasing reservations over the ongoing negotiations for a bilateral RTA (regional trade agreement). A high-level dialogue would help to channel and contain this edginess in addition to providing a forum for both countries to press for policy directives that would be in their national interest.

The Indian embassy in Beijing for example has identified certain sectors and products it believes to have strong potential for growth in exports to China, including processed food products, edible fruits, dairy products and precious jewellery.

Moreover, the embassy believes the two countries to have comparative advantages within certain sectors in which overall the two might be competitors. These include chemicals, machinery and equipment and textiles. The idea according to Ambassador Rao is “to convert competition into new opportunities for cooperation through intra-industrial trade in niche areas.”

However, as things stand, there are scant channels available for pushing the Indian agenda forward with the Chinese government. Although CII and FICCI have representative offices in China, Indian industry lacks a Chamber of Commerce that could potentially lobby on its behalf. By point of comparison the American Chamber of Commerce in China comprises a membership of more than 2,100 individuals from more than 900 companies.

“We [India and China] cannot turn our backs on each other. This is simply not a feasible option. But we also cannot be on a collision course,” sums up Ambassador Rao. “We must find some way of creating the space and width on the highway of our communications,” she adds. “After all the business of diplomacy today, is business.”

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