China restricts Indian companies from entering many sectors, shows an institutionalized preference for its state-owned enterprises, and provides subsidies to its companies that some claim contravene international trade law. Even so, India’s preoccupation with its trade deficit with China is misguided.
India has blocked Chinese investments in sectors such as telecom, ports, and shipping due to security concerns, made it difficult for Chinese employees to obtain visas to work in India, and complained loudly and frequently about its trade deficit with China. Chinese imports to India were $48.44 billion in 2013, while Indian exports to China were only $17.03 billion.
Here are the reasons that Indians should not be fixated on Chinese trade.
1. The structure of India’s trade with China is not so exceptional. India buys more from the rest of the world than it sells; it runs trade deficits with 16 of its top 25 trade partners. One reason for India’s trade deficit is its weak manufacturing sector, which in turn stems fromrestrictive 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 demand of its billion-plus consumers.
2. India’s trade with China is actually more balanced than some of its other trading relationships. According to a recent piece in The Indian Express, India’s 2013-2014 trade deficit with China represented roughly 55% of total China-India trade, while its trade deficits with Iraq, Switzerland, and Australia were 90%, 83%, and 62% of total bilateral trade, respectively. In other words, India is sending a relatively large amount of goods back to China.
3. That said, economists agree that bilateral trade figures are pretty much irrelevant. The presence of global supply chains and regional hubs of production means that always-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 made in Korea, Japan, Taiwan, and elsewhere 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 – only $6.50 of a $187 iPhone in 2010, for example.
The countries that buy these iPhones and other goods assembled in China run large bilateral trade deficits with China 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 in the East Asian supply chain.
4. Looking at the numbers, it’s clear that the main culprit for India’s trade deficit is not China, but energy. Roughly 70% of India’s trade deficit is due to net imports of oil and coal; gold imports further elevate the figure. This has nothing to do with China, but rather with ill-designed policies that prevent the efficient excavation and use of India’s substantial coal and natural gas deposits.
5. 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 their innovation.
What’s more, one of China’s main exports to India are capital goods, which are used to accelerate the building of Indian infrastructure and thus positive for India’s economic growth, says Anil Gupta, a professor at The University of Maryland at College Park. Since Chinese capital goods are cheap and often come with low-cost financing, the Indian companies that buy these goods receive big savings they can invest elsewhere.
Trade between China and India has exploded from $2 billion in 2000 to almost $70 billion today. But that figure still seems small compared with to the $569 billion in goods and services that the US and China exchanged in 2013. In November 2011, India and China set a target for raising bilateral trade to $100 billion by 2015. It’s unlikely that will be met.
There is a huge opportunity to expand these figures. Instead of limiting imports, India should concentrate on unraveling onerous regulations to increase its manufacturing capacity and thus its exports. Chinese business practices leave plenty to complain about, to be sure. However, India could benefit far more from putting its own house in order.