India-China Trade War: What's at Stake ? March 2018 issue

India-China Trade War: What's at Stake ?

The rhetoric of banning imports from China, citing their longstanding support to Pakistan has been gaining currency over the years. India and China – the two Asian behemoths have had their differences earlier too, including fighting a border war. But economic relationship between the two has always remained strong. However, with the recent Doklam standoff, conflicts at the WTO level and rather acerbic expressions on both sides, their relationship has hit a new low. That raises a question for India. Is it time to reduce its dependence on China and focus on self sufficiency? The Dollar Business analyses what really is at stake when it comes to Sino-Indian trade.

TDB Intelligence Unit | October 2017 Issue | The Dollar Business


Walk into stores across India and you will find the ubiquitous ‘Made in China’ label on products across the spectrum, from low-cost lunch boxes and cutlery sets to high-end mobile phones and televisions! And this trade is not a one-way street. While you may not find many Indian products in Chinese  supermarkets, Indian commodities like iron ore have made their presence felt in Chinese factories. "Hindi Chini bhai bhai still", you just thought? Have no illusions good sir, the two countries have been on the verge of a trade war for months now. Over the years, the India-China relationship has received its fair share of attention. Both have made the right noises about cooperation and open trade. However, China’s ambitious One Belt One Road (OBOR) initiative and its growing bonhomie with Pakistan with the development of China-Pakistan Economic Corridor (CPEC) has been a cause of concern for India. India has expressed its scepticism about China’s OBOR initiative at various fora. Many in India believe OBOR is China's means to achieve its geopolitical goal of emerging as an alternate power center to US by expanding its economic footprint across regions.

While there has been simmering discontent on the Indian side for sometime now, the Doklam standoff near the Sikkim-Tibet-Bhutan trijunction brought matters to a pass with the rhetoric from both sides getting increasingly vitriolic. Many in India took to social media demanding a complete ban on imports from China and politicians on both sides pandered to their local constituencies by supporting a trade ban without looking at the economic fallout of a break in bilateral trade. While good sense and the impending BRICS Summit which was being hosted by China helped thwart a complete breakdown in bilateral ties, it has forced many to ask the question, what really is at stake when it comes to Sino-India trade relationship? Can either party afford a total breakdown?

 

"India's imports from China is dominated by value-added products"

 

Fact of the Matter

The numbers and facts indicate that presently India and China can ill-afford a breakdown in trade and current bilateral relationship between the two nations is still viewed as one with great economic potential. This is despite the bitter truth that the two sides did fight a brief border war in 1962 that led to seesawing of bilateral ties. But, in a case of ‘all is well that ends well’ ,bilateral ties were soon revived and grew stronger by the day, so much so that China became one of India's biggest trading partners. China’s mass manufacturing capabilities with virtues of cost-effectiveness have frequently acted as a lifeline to India’s trade and manufacturing fraternity that looks to China to procure various supplies needed for India’s growing production requirements.

Of course, the balance of trade has been in favour of China and has caused a lot of heart burn in India. If one takes a closer look at the trade balance between the two, the trade imbalance comes to light. While India imports $61.3 billion worth of Chinese products, it manages to ship only $10.2 billion worth of India-made items in return. This leads to the billion-dollar question: Can the two afford a breakdown in trade?

An interesting fact here is that while Chinese exports to India are dominated by value-added products such as electronic equipment, mobile phones, plastics, machinery, etc., India’s exports to China, in contrast, are primarily raw materials like ores, cotton and mineral fuels etc. Not quite a case of ‘Make in India’!

Despite successive Indian government's calls to encourage the idea of import-substitution and achieve self-reliance in manufacturing domestically, (an idea many believe to be past its sell by date) – the paradox is that much of the country’s key foreign exchange earning sectors are dependent on China for various components to produce these India-made, export-worthy products! So, should Indian exporters be wary of a trade war with China?

Let's Talk Numbers

The numbers do indicate that there may be cause for concern! If one were to pick any key sector of the total 25 sectors envisaged under ‘Make in India’, be it leather, pharmaceuticals, chemicals, textiles and garments, automobile or its components or electrical machinery – they all represent a high degree of imports from China. Simply put, for meeting the requirements of all our necessary and critical imports, China’s factories in most cases have so far been the ‘one stop solution’ for Indian firms – both big and small. China, on the other hand, mostly imports raw materials and intermediate goods from India.



William J. Antholis, Managing Director and CEO of the Miller Centre at the University of Virginia, sums up the India-China trade relationship. “India and China complement one another’s strengths and weaknesses,” he says. Similar views are shared by Saakshi Kulkarni, Director, India-China Business Council (ICBC), who states, “Given the very fact that China is India’s largest trading partner, a strong trade relation is in the interest of both nations.” Dr. Zorawar Daulet Singh, Fellow at the Centre for Policy Research, too believes that over the years the two nations have developed ‘a pattern of interdependence’. That sounds all nice and good, but who is more dependent on the other is the question that needs to be answered.


Advantage India?

While there is no denying the fact that Indo-Sino trade relations are indeed characterised by many win-wins, the huge imbalance in trade suggests that while India is more dependent on China, China may have more to worry than India. Considering that while China exports a significant volume of finished goods meant for Indian consumers, India’s exports to China are primarily raw materials meant for businesses. Can China find a market as large as India for its consumer goods? Won't be an easy task we think, considering that a number of these products are customised keeping the Indian consumer and Indian regulations in mind. And what about India? Can India find a market for commodities worth $10 billion in turn. Again a difficult task, but considering that these products are mostly meant for businesses, chances are exports will be hit but not too hard.

This is one part of the story. The other is: Will consumers and businesses in India be hurt by a trade ban? Surely, they will. China, as they say, is the factory of the world, and it will be difficult to find a sourcing destination that can supply India with the diverse products that it needs at prices that it can afford. Experts believe that while the talk of boycotting Chinese goods is good political rhetoric, it’s a mistaken belief that it will be good for India's manufacturing sector. According to Singh, any talk of boycotting Chinese goods would not hold the test of reality. “Boycotting Chinese goods is not viable because the economic cost to India itself is much more, it is more destructive to the Indian economy than theirs as trade allows India to source material at a price which is more competitive compared to its substitutes that are available both here and in the West,” says Singh Atul Kumar Saxena, President, Indian Importers Chamber of Commerce & Industry (IICCI), believes that for Indian importers leveraging the manufacturing capabilities of production hubs not based  in China is not viable in the short run. He says, “Replacing China as a sourcing destination will make our costs go up by three-four times and in today’s gloomy business scenario, no trader would wish for that.” Dr. S. K. Mohanty, Professor at Research and Information System for Developing Countries (RIS), adds, “China is a global player in the manufacturing sector and this reality cannot be overlooked.” While trade bodies and researchers have their opinions on the challenges associated with breaking up trade ties with China, The Dollar Business also reached out to industry leaders across the spectrum, to gauge their opinion on the importance of China in their line of operations. They almost unanimously pointed towards the fact that the absence or reduction in supplies from China would increase production costs. M. Rafeeque Ahmed, Chairman of Council for Leather Exports (CLE), says that as modern machinery is required for capacity building and technological up-gradation of leather sector, CLE has even been requesting Chinese machinery manufacturers and component suppliers to set-up their units in India.

Vaibhav Soni, CEO of Dynamic Engineers Private Limited, a leading fan manufacturer says, “We import quite a few critical components for our fan assemblies from China. We prefer Chinese suppliers because they offer us different designs and cutting-edge technology.” Another sector with high import dependency on China is solar energy. India's import dependency in case of photosensitive semiconductor devices [HS Code: 85414011] that are used extensively in the $2.48 billion worth sector is huge. Making the case worse is the fact that India's domestic manufacturing capabilities in this segment is nothing to write home about. Narender Surana, MD, Surana Solar Ltd. tells The Dollar Business, “The cost of solar energy will go up by at least 75%, if we were to use India-made solar cells”. Surana also cautions against putting any safeguards duties such as anti-dumping on solar modules because protectionist measures might prove to be disastrous for India’s long-term solar programme.




This means while China loses in terms of exports, Indian industry too will be at a disadvantage when it comes to sourcing of goods at a competitive price. Well, this seems to bring us back to what in tennis parlance is 'Love all'.


The Investment Angle

With China's economy increasingly showing signs of maturity, it is but normal that the growth rate will stabilise to what is being called the 'new normal'. This would mean a consumer-led economy rather than a domestic investment driven economy. It will also mean that going forward wages will rise and China would lose its low-cost labour advantage. And as has been seen in other mature or maturing economies, this would mean China will now seek to increase its overseas presence, either through the foreign direct investment (FDI) route or by entering into joint ventures to take advantage of low-cost economies across the globe. Indeed, China has already been aggressively investing in pursuance of this strategy and as such has been investing in India too. Considering that India is on the cusp of rapid industrialisation, Chinese investments offer a win-win situation. It gives Indian industries capital for infrastructure development and technology upgradation while giving China access to a large consumer market without having to deal with tariff and non-tariff barriers. As per a Department of Industrial Policy & Promotion (DIPP) report, India received $60 billion as FDI in FY2017, of which a good chunk came from China and went to sectors like automobiles (60%), metallurgical industries (14%), electrical equipment (4%), industry machinery (4%), and power (3%) industries. Many of the current government’s flagship projects such as the various industrial corridors and the multi-billion 'Smart Cities' projects have been major recipients of Chinese FDI. Many Chinese companies have also expressed interest in setting up manufacturing facilities in India. A trade ban will obviously put these projects in jeopardy, not something that India would want at a time when the economy is sluggish and private investment has been hard to come by.

 

"The real sufferers of a trade ban will be consumers and small traders"

 

RCEP Matters

The other big factor that one needs to keep in mind when talking about trade restrictions is the mega-trade agreement – Regional Comprehensive Economic Partnership (RCEP) – that India is negotiating and which China is a driving force behind. In today’s global trade environment, free trade agreements are increasingly playing a big role in bringing down trade barriers. And RCEP is important for India because not only does it include China as a party but also includes the ten-member states of the Association of Southeast Asian Nations (ASEAN) and the six states with which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea and New Zealand). RCEP therefore has the potential to bring home a market whose total combined GDP is more than $17 trillion and collectively account for 40% of world trade. India could gain a lot if it negotiates a fair deal in the services sector, which is its major strength. And being a party to RCEP would mean China doing away with the present roadblocks that it has put for India's services exports when it comes to mobility of talent in the services sector.

Trade restrictions from either side will be the end of the dream of enhanced access to China as well as other countries who are members of RCEP. Again not something India would want, nor for that matter would China. All said and done, both are facing economic and social challenges, and this would be as bad a time as any to jeopardise their hard earned positions in the world of trade.


Tit for Tat

While we have established that it makes little sense for either country to break trade ties, the two also justified grievances against each other when it comes to trade. China makes use of non-tariff barriers (NTBs) such as sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT) to discourage Indian exports into the market.

Chinese authorities claim that this is because of the low-quality of Indian products. This is at a time when, on the contrary, India has been enjoying a positive balance of trade with many advanced and open economies like US. Of course, China has also gone to town about the anti-dumping duties that have been imposed by India on many Chinese products. But these small skirmishes are part of the negotiation tactics that countries usually employ. Nothing that a small dose of diplomacy cannot overcome.


Better together

Diplomacy did win the day during the Doklam standoff. And now that matters are returning to normal, the industry hopes to see mature decisions on both sides to leverage the enormous potential  that the two countries have. K. K. Lalpuria, Executive Director, Indo Count Industries Limited, a leading exporter of home textile products feels that soon there will be win-wins taking shape out of the Indo-China trade basket. He believes a fair bit of the crisis was posturing for the benefit of restive domestic audiences on both sides, and soon economics will trump over rhetoric. D. K. Sareen, Executive Director, Electronics and Computer Software Export Promotion Council (ESC), adds, “While China is strong in hardware, India has an edge in software. The two can together capture the trillions of dollars-worth embedded technologies market. Several such trade complementaries can be tapped if the two nations work in the spirit of partnership.”   


A Shared Future

The significance of bilateral trade between India and China is clear. With both economies targeting an annual growth rate of more than 8%, they need to find markets which are also growing at the same pace to absorb their products and services. For sustainable growth of both economies, it is essential that their huge markets remain open for trade to each other. Yifan Zhang, Associate Professor at the Chinese University of Hong Kong agrees that both countries will lose from a trade war. “Economic theory tells us, moving from trade to autarky causes efficiency losses," he adds. Consumers, Zhang says, will be the ultimate sufferers from a broken trade relationship as they will bear the burnt of the loss in efficiency by paying higher prices.

The case for maintaining bilateral relationship is strong. Yes, with countries the size and complexity of India and China there will be differences in opinion and domestic political compulsions that may force certain decisions, but it is time to separate politics from economy for the benefit of both countries. Both China and India are precariously positioned in terms of their respective economies, and will be ill-advised to allow politics to define the contours of trade. They say this is the Asia's century. But then, what is Asia without China and India bonhomie?


 

 “Economic relationship should be a win-win for both nations"




Timothy Cheston, Research Fellow, Center for International Development,
Harvard University

 

 

TDB: India has been focusing on strengthening its domestic manufacturing sector. How important is a strong Indo-China economic relationship in this context?

Timothy Cheston (TC): Past research found that a country is more likely to start entering the production of those products which its neighbouring countries are competitive at producing and that is true in India's case too. India's challenge though is the rising inequality amongst the states within India. The products which are being exported from India are not being produced across the country, but in small pockets of a few rich states equipped with specialised knowhow required to manufacture these products which are complex in nature. However, other states remain stuck with low manufacturing capability and make do with the slow trickle of knowledge spreading from the richer states. We expect the states, particularly those with strong social and business relationship with high-income countries, to percolate that knowhow to other parts of India. On paper, the economic relationship between India and China should be a win-win for both. India could benefit significantly from attracting the knowhow of its neighbour to spur its entry into new product segments. As growth slows in China, China will be increasingly looking to serve the rising demand for goods and services in high-growth states in India.

TDB: What’s your outlook on India’s economic growth?

TC: India’s economic growth is likely to outpace China’s growth over the coming decade. However, India has a significantly lower per capita income which is less than half of China’s per capita income. So, it will take several decades for India, at the predicted growth rate for both countries, to surpass China’s per capita income level.

Having said that, we believe the next decade belongs to India. India will be the fastest growing economy in the coming decade, according to our measure of economic complexity. Economic growth will result from the diversification of manufacturing knowhow particularly into more specialised expertise which will facilitate the production of a wider variety of products of increasingly greater complexity. India ranks as the 48th most complex economy in the world based on the Economic Complexity Index by the Center for International Development at Harvard University. Our analysis predicts India should soon have a higher per capita income as per its current complexity level.

TDB: The 2025 Global Growth Projections by Harvard’s Centre for International Development talks about a decline in China’s export complexity. Will this impact global trade?

TC: The initial dip reported in China’s exports, which is smaller than the decline in India’s exports, is largely driven by global declines in oil prices and China’s presence as a net importer of oil as compared to the significant share of refined petroleum in India’s exports. Significantly, China’s complexity also declined. China’s exports showed the greatest declines in jewellery, gold as well as textiles. Machinery and electronics exports have also declined slightly. This has allowed regional neighbours to increase their share. A slowdown in China’s exports and its resulting economic outcome will undoubtedly redefine the contours of the global economy.

   




 


“Political standoffs won't affect trade ties between India and China”




Atul Kumar Saxena, President, Indian Importers Chamber of Commerce & Industry

 

 

TDB: What makes China such a behemoth in exports?

Atul Kumar Saxena (AKS): China has quite methodically employed the business model that Japan has been successfully practising. Across various markets around the globe, the Chinese products are characterised with the 3A-advantage – affordability, acceptability and availability. Apart from being cost-effective due to the economies of scale, the Chinese products are customised because the Chinese manufacturers have their fingers on their customers’ pulse. They carry out a lot of research prior to product development and market expansion. All in all, effectively armed with such advantages, Chinese manufacturers and exporters are ruling various world markets.

TDB: Will issues like the Doklam standoff affect trade ties?

AKS: Keeping the political rhetoric aside, I feel supplies of Chinese products to India are governed mainly by 3As. And, products that fulfill those criteria will always keep coming in from China. One cannot deny the fact that products and materials made in China as well as Chinese investment are present in every sector of the Indian economy. This scenario can’t be altered or replaced overnight. Issues like the Doklam standoff doesn’t bother a trader much, as for him/her economic interests remain paramount. Despite prevailing tensions, India’s trade with Pakistan continues. My honest view is that such issues won’t affect trade ties between India and China.

TDB: Do you think BRICS summit, held at Xiamen in China, acted as a catalyst in defusing the Doklam standoff?

AKS: China views BRICS as a platform to challenge US’ global economic hegemony. In Asia, US has a cordial relationship with Japan, South Korea and India and China doesn’t like South Asian countries in particular having such favourable relations with US. So, with BRICS, China believes it can build an alternative global trade framework, moving beyond the influence of US. And, amongst all the member countries, China finds Russia and India’s role to be the key to achieving that mission. China shares its boundaries with India and Russia and it knows very well that a standoff with either of these countries would not be beneficial in the long run. Given such wider geopolitical ramifications of BRICS, I feel the decision to end the standoff served multiple objectives for both China and India.

TDB: Who stands to lose more if there is any stalemate in Indo-China bilateral trade?

AKS: From the trade point of view, it’s China that stands to lose more than India because China exports more to India. I am sure Chinese President Xi Jinping knows the priority of his nation well. However, a complete breakdown in bilateral trade can’t happen because both countries are signatories to World Trade Organisation (WTO) framework. And, even if India imposes non-tariff barriers, and countervailing duties like anti-dumping duties on imports from China, it would be China that would be affected more because India imports value-added products from China in large numbers.

   

 

“Co-existence of many geopolitical visions is possible”


Dr. Zorawar Daulet Singh, Fellow, Centre for Policy Research, New Delhi

 

 

TDB: How practical is the ‘boycott Chinese products’ rhetoric from certain sections in the country?

Dr. Zorawar Daulet Singh (ZDS): This is not practical if you have developed a pattern of interdependence, which in some sense we have. In the ideal state, every country would like to make all the things it consumes and buys. But, that has not happened in India, and is a wider policy dilemma. The government has been trying to improve the infrastructure to increase manufacturing in India, but that does not mean that you can turn back the clock on the India-China relationship which is actually a win-win in many cases as it allows you to source material at a price which is more competitive than its substitutes that are available both here and in other countries. During the crisis, many spoke about a boycott of Chinese products. But, I don't think that is a very viable solution because the economic cost to India itself will be very high. But, I agree with those who feel that there needs to be a more balanced relationship between the two nations. For instance, the large trade deficits can be negated. But for that you actually have to double down on the economic relationship, not to dilute it or sever it but to actually invite those Chinese companies that have been operating as suppliers from afar to come to India through market-seeking FDIs.

TDB: How should the government work towards attracting Chinese FDI to India?

ZDS: The government should consult industry and sectoral stakeholders to make trade agreements with the Chinese companies sustainable. Involving various stakeholders is necessary because finding a common ground while signing trade agreements is critical. Negotiations between the two countries are always driven by various priorities. It’s important to address the spill-over effect of such trade agreements beforehand.

Having said that, I don’t think India is ready for any free trade agreement (FTA) with China. But, an investment agreement is something that the government should be looking at far more seriously to attract Chinese FDI to the domestic market.

TDB: What’s your opinion on the government’s argument against joining China's One Belt One Road initiative?

ZDS: I think India’s stance on One Belt One Road (OBOR) is not sustainable. OBOR, being an extremely vast project, is still amorphous and leaves a lot of room for other actors to shape the process. There is space for revision and adaptation in the OBOR policy framework while maintaining the sovereignty and other critical issues. For instance, despite being a part of Eurasian Economic Union which has a different geopolitical vision, Russia is engaging with OBOR.

So, India joining OBOR does not mean endorsement of a Chinese or any other geopolitical vision. Co-existence of many geopolitical visions is possible. Both India and China have a competing influences in the South Asian region. They should work together to produce more prosperous and sustained development across South Asia.

   

 

“India and China can collaborate in various areas”



Dr. Liu Zongyi, Senior Fellow, Institute for International Strategic Studies and
Centre for Asia-Pacific Studies, Shanghai Institutes for International Studies (SIIS)

 

 

TDB: How would you describe the growth of the China-India bilateral relationship so far?

Dr. Liu Zongyi (LZ): I think the India-China bilateral relationship improved significantly only after former Indian Prime Minister Atal Bihari Vajpayee visited China in 2003. Keeping up with the growth prospect, during his visit to India in 2010, Chinese Premier Wen Jiabao accompanied by then Indian Prime Minister Manmohan Singh, promised to work towards increasing the bilateral trade to $100 billion by 2015. However, in 2015, the trade between the two countries went into stagnation mainly because of the global economic crisis and the Indian government’s political and economic barriers to the flow of Chinese investments to India. Even at a later stage, Chinese President Xi Jinping while visiting India promised to invest $20 billion in India. Both India and China agreed that Chinese companies will set up a few industrial parks in Gujarat and Maharashtra. But, the industrial parks didn’t come up as promised. The Indian government rejected a lot of the proposals. Only a handful of Chinese private investments were green signalled by India citing various reasons.

TDB: What kind of opportunities can India explore to reduce its trade deficit with China?

LZ: The trade deficit is huge from India’s point of view. But, there is a huge potential for investment and exports in the agriculture, IT and pharmaceutical sector in China. The quality of the Indian agricultural products however is not up-to-the-mark in comparison to similar products from other Asian countries. So, India needs to improve the quality of the agricultural as well as pharmaceutical products to gain access to the Chinese market. In fact, both China and India can collaborate to remove these quality-related issues. In addition, the manufacturing sector in China is now moving towards valued-added product manufacturing. So, there is an opportunity emerging for India to attract labour-intensive manufacturing from China.   

TDB: What kind of impact have Chinese initiatives like String of Pearls, CPEC and OBOR had on the bilateral trade?

LZ: China is very active in South Asia presently, but the activities are mainly economic in nature and these activities do not emanate from explicit geopolitical ambitions. China also carries out maritime activities in the Indian Ocean, but the main objective of those activities is to safeguard China’s own investments, imports and exports. China has built ports in Sri Lanka but these ports will not only benefit China but also help South Asian Countries, including India. At the Colombo Port, 80% of the goods handled are from India.

   

 

“A Dysfunctional Bilateral Trade will slow down both Economies”

Yifan Zhang, Faculty, Department of Economics, Chinese University of Hong Kong

 

TDB: India’s trade deficit with China has grown to more than $50 billion in 2016. What are the reasons for that?

Yifan Zhang (YZ): The main issue is the structure of trade. From China, India imports finished products such as electronics and machinery. This is not surprising, as China has emerged as the “factory of the world”. Meanwhile, India majorly exports raw materials to China. Another reason is that India has not been able to fully integrate itself into the Asian supply chains. As a result, China imports parts and components from Japan, South Korea and Southeast Asia, but not India, through the global supply chain of multinational companies.

TDB: How will barriers and restrictions in bilateral trade impact the economies of China and India?

YZ: Barriers in the bilateral trade or a complete ban on the Indo-China trade will prove detrimental, as both the countries will lose opportunities to learn from each other. For instance, China can learn from India how to improve output from its information technology and services sectors. Similarly, India could gain insights on infrastructure and skill development from China.
 
I think the end-consumers will end up paying more if bilateral trade is severely restricted. Under a less competitive environment, companies in both countries will not feel fully motivated to innovate. That scenario will negatively influence their production efficiency. A dysfunctional bilateral trade will slow down the economic development in both countries.

TDB: How will FDI inflows from China benefit India?

YZ: In recent years, thanks to its Go Global Strategy aimed at promoting Chinese investment abroad, China has emerged as one of the largest investors around the world. Chinese companies are investing in various developing countries. This is an opportunity for India to attract FDI from China to augment domestic capital, technology, innovation, skills and improve infrastructure. All these factors should contribute to accelerating the pace of India’s economic growth.

TDB: Is there any significant change in the Chinese economic growth model?

YZ: China has entered the so-called ‘New Normal’ phase of economic growth. The pace of growth has now shifted from high to medium-high trajectory coupled with structural optimisation. The change happened because the previous investment-driven growth model proved unsustainable. Hence, the Chinese government is trying to move from input-driven growth to innovation-driven growth. The change is significant and will impact bilateral trade.

   

 

“There is no guarantee a similar situation amy not arise in future"



DR. SRIKANTH KONDAPALLI, Professor in chinese studies, JAWAHARLAL NEHRU UNIVERSITY

 

TDB: With the end of the Doklam standoff and the subsequent BRICS Summit in China, is the worst over for Indo-China bilateral trade relationship?

Dr. Srikanth Kondapalli (SK): The standoff at Doklam can be termed as “one of the worsts” in the bilateral relationship between India and China. But there is no guarantee that a similar situation may not arise in the future. The fundamental problem in the India-China bilateral relationship is that both have not agreed on the definition of the Line of Actual Control, let alone the entire territorial issue. Any misperception on the border could once again trigger such incidents.

TDB: What are the key concerns of India on OBOR?

SK: One Belt One Road (OBOR) is an initiative by China to overcome its “new normal” relative decline in growth rates by exporting its excess capacities to the regions included in OBOR. India is, in a way, a participant in OBOR to the extent of being the second-largest contributor to the Asian Infrastructure Investment Bank. India has endorsed the Bangladesh-China-India-Myanmar (BCIM) economic corridor of OBOR, although progress on BCIM is slow due to India’s security concerns. The main concern of India on OBOR is related to the violation of sovereignty in Kashmir by China with the China Pakistan Economic Corridor (CPEC) projects, which are not entirely infrastructure-based. These projects have provisions for deploying troops in the Kashmir region. If China is concerned on its sovereignty related to Taiwan and Tibet, India wonders why Beijing is adopting double standards while addressing sovereignty concerns of India.

TDB: While exports from China to India are dominated by value-added products, India’s exports to China, on the contrary, are primarily raw materials. What reasons do you attribute to this qualitative imbalance?

SK: India’s manufacturing sector is growing at present but its share still stands at less than 20% of the GDP, compared to manufacturing sector comprising over 40% of the GDP of China. So, China has an edge when it comes to exporting consumer durables and low-end finished products to India. In such a scenario, India ends up exporting raw materials like iron ore to China. As a matter of fact, exports of iron ore to China constitute nearly 60% of the total volume of iron ore exports from India. China, in return, exports finished goods to India. So, India needs to focus on expanding its manufacturing base.

TDB: What are your expectations from RCEP?

SK: Although India is a part of the Regional Comprehensive Economic Partnership (RCEP) negotiations, it has some concerns which I believe must be addressed before real progress is made in finalising the RCEP deal. As the Trans-Pacific Partnership (TPP) has been blocked by the Trump Administration, RCEP offers better prospects for its member nations including India. As the stand-off between India and China is over, we can soon expect some progress in this direction.

 

 

“Trade should be ring-fenced from political and boundary issues"


Sourabh Gupta, Resident Senior Fellow, Institute for China-America Studies (ICAS),
Georgetown University

 

 

TDB: What impact will China’s geopolitical ambitions and initiatives like CPEC and OBOR have on India-China bilateral trade relationship?

Sourabh Gupta (SG): They will not have any impact on India-China bilateral trade per se. India will not be punishing specific Chinese companies that conduct business in other South Asia countries under the aegis of CPEC or OBOR. In fact, some of the Chinese state-owned enterprises (SOEs), which operate in the infrastructure space and may participate in CPEC and OBOR, are also likely to have independent operations in Indian industrial parks. In fact, a number of MoUs between Indian state government agencies and Chinese companies have already been signed. On the other hand, to what extent CPEC and OBOR will have an impact on improving the economic environment and potential of other South Asia countries – and thereby impacting India – will depend on the rollout and implementation of the projects in these countries. The impact may not be immediate and we will have to wait and observe.

TDB: China's economy is rebalancing itself to become more consumer-led. What effect will this have on bilateral trade?

SG: China’s turn towards a more consumer-driven economy will necessarily impact India, given that India’s export basket vis-à-vis China is biased towards resources and raw materials. Rather than restrategise regarding its resource exports, India should focus on products where it could enjoy latent comparative advantages, especially in the area of light manufacturing as China loses its cost advantage and graduates to a higher-wage, consumption-driven economic model. Vietnam and Bangladesh are already going down this path.

TDB: The trade deficit with China is a cause of concern for India, which stood at $51 billion in FY2017. What can India do to make its trade relationship with China more balanced?

SG: Rather than reducing dependence on Chinese imports, the emphasis on India’s part should be to boost its capacity to export more into the Chinese market. There are three important avenues to do so.

Firstly, certain areas of Indian export specialisation such as pharmaceutical exports and IT-enabled service exports are hobbled by cumbersome tax and regulatory processes in China. These hindrances should be reduced as best as possible within the framework of the India-China Strategic Economic Dialogue. Secondly, as China ages and becomes a more high-cost producer economy, cost-conscious manufacturing sectors will seek to migrate to new localisation opportunities within Asia. Vietnam and Bangladesh have already benefitted from such opportunities. India too must take advantage of this.

Finally, India must make itself a welcoming destination for Chinese investment, especially in sectors such as power, telecom equipment, automotive and electronic components, textiles and clothing, etc., where China is looking to transfer some of its productive capacity abroad. Industrial parks in India where such Chinese capital is invested could thereafter become a base for exports to China.

TDB: What role has the BRICS Summit played in defusing the tension between the two countries?

SG: The end of the Doklam standoff and the successful BRICS Summit have somewhat restored the tenor of ties, particularly bilateral economic ties which the Chinese too have every interest in safeguarding. Going forward, both sides should commit to their consensus that economic engagement be ring-fenced from China-India political and boundary-related tensions. China and India have working groups on infrastructure, energy, high-technology and resource conservation, as part of their Strategic Economic Dialogue. The activities within these working groups need to be deepened, and the existing MoUs that have been signed between Indian state government agencies and Chinese investors should also be hastened to their shovel-ready rollout stage.       

TDB: How can two nations strengthen trade cooperation?

SG: China and India must engage each other on trans-boundary connectivity initiatives – in South Asia and beyond. While India will never participate in CPEC, India must raise its game and be much more forthcoming in cooperating with China on the Bangladesh-China-India-Myanmar (BCIM) sub-regional connectivity initiative. Down the line, coordination can also be envisaged in infrastructure projects in Nepal and Bangladesh. Moreover, India and China must ensure that the Asia Infrastructure Investment Bank (AIIB) and the New Development Bank (also known as BRICS Bank) operate on ‘lean, clean, and green’ principles and meet high standards of loan disbursal and development outcomes. Finally, India must be far more forthcoming in making deeper trade liberalisation offers, both at-the-border and beyond-the-border, to China and other trading partners in the context of the RCEP negotiations.

   

 

“Indian garment industry has limited direct exposure to China”


Ashok G. Rajani, Chairman, Apparel Export Promotion Council (AEPC)

 

 

TDB: Did exports to China from your sector suffer due to the recent Doklam standoff?

Ashok G. Rajani (AGR): Available data shows some decline in our exports and a marginal increase in imports. However, we feel that these trends are more of a demand-supply position and cannot be correlated to the political situation.

TDB: With bilateral trade skewed in favour of China, would a total ban on imports from China for your sector be more of India’s loss than that of China’s?

AGR: For the apparel industry, imports from China are nominal. The same holds true for exports as China doesn’t figure in the top 10 export destinations for India as far as the apparel industry is concerned. In June 2017, India's apparel exports to China stood at $19.4 million, while imports of apparel from China stood at $5.5 million. So, under present circumstances, we don’t see any major impact on exports to China.

TDB: What are India’s sourcing options beyond China?

AGR: The exposure of Indian garment industry to China is limited which is evident from the nominal, export and imports to and from China. As an industry, we constantly explore the opportunities available outside India and based on an assessment of all the investment-related factors of that country, investment decisions are made. It is an ongoing process and any decision regarding leveraging the manufacturing capabilities of manufacturing hubs based elsewhere is done after weighing in all the factors necessary before making an investment.

TDB: The India-China border standoff should not threaten RCEP deal is the widely held view. What’s your take on this?

AGR: RCEP is a mega trade deal that aims to cover goods, services, investments, economic, technical co-operation and intellectual property rights. We welcome the RCEP deal. We recognise it as one of the most important deals for India. India already has implemented an FTA with the ASEAN, Japan and South Korea and negotiations for similar pacts with Australia and New Zealand are underway. So, a mega trade deal like RCEP will only benefit India and since the border standoff has been resolved we don’t foresee any impact on RCEP.

   

 

“State and local leaders can help strengthen bilateral trade”


William J. Antholis, Director and CEO, Miller Center, University of Virginia and Former managing director of the Brookings Institution

 

 

TDB: Despite growing political differences, China continues to be one of the largest trade partners of India. How can the two benefit from each other's experience?

William J. Antholis (WJA): On a broader perspective, India and China complement each another’s strengths and weaknesses. India’s service sector can be of a great value to China whose main focus has always been on manufacturing. China can teach India about export-oriented manufacturing.
 
TDB: What can India do to improve its exports from the manufacturing sector?

WJA: Globally, manufacturing has become so diversified that supply chains are spread across a range of countries. The manufacturing sector in India needs to develop a better understanding on how its industries can fit into various supply chains. The stakeholders of the manufacturing sector in India need to discover their prospective partners in the supply chain.

TDB: Do you think any fallout in the relationship between India and China will have an adverse impact on the global trade and economy?

WJA: Both nations are now in an elite circle of nations in trade negotiations. Their interests diverge – both in terms of their negotiating priorities and in terms of their view of international organisations. This already makes it difficult for them to coordinate policy. So, a further fallout of relations between the two countries would only make a difficult situation worse.
 
TDB: How do you see the India and China relationship developing in the future?

WJA: Many important initiatives within India and China  have come from state and local leaders. On one hand, diversity makes it harder for each of the nation’s capitals to manage bilateral relations. On the other hand, local leaders can forge relations with one another and take advantage of complementary strengths. We’ve seen that with western China's tech centres partnering with south India in the service sector. I expect those local-to-local ties to continue.

   

TDB at a glance

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