India China Trade deficit triggers uneasiness

Context:

• The ongoing military stand-off with China in the Himalayan mountain range has once again brought the issue of trade imbalances with that country to the fore.

Introduction:

• A bilateral trade deficit should not be a worry in normal circumstances. What really matters is the overall trade balance rather than its individual components. China is quite another matter. Its quest for regional military dominance makes trade imbalances with it a strategic concern for a country such as India.
• India has a nearly $50 billion trade deficit with China. Indian imports from China are nearly five times the exports to it.

Statics about India China Trade:

• Trade deficit with China continues to balloon, which is currently over $51.09 billion
• India exports basic material to China and buys relatively more sophisticated products from it.
• India only sells raw materials to China and buys finished consumer goods in return.
• India sells basic stuff such as iron ore, cotton, copper and inorganic chemicals to China. It buys mobile phones, telecom equipment, power generators and engineering goods from China. The trade pattern suggest the position of the two countries in global value chains that dominates modern manufacturing.
• China can continue to maintain its export competitiveness despite a strong currency if its productivity is growing faster than the productivity of its trading partner.
• According to the statics, the Chinese currency has actually appreciated against the Indian currency over the past 15 years. One Chinese yuan could be bought for Rs5.88 in August 2002. The exchange rate was Rs8.76 per yuan a decade later. It is Rs9.53 per yuan now.
• Chinese imports from countries such as Germany, Japan, South Korea and Taiwan are far higher than the exports it ships to them. These countries make the more valuable parts of various gizmos which are then sent to China for cheap assembly.
• Thus, India’strade deficit with China is thus not a result of exchange rate but of the inability to either boost productivity or to plug into the international supply chains that span the world.

Salient features of India’s Trade with China

• The Five-year Program for economic and trade cooperation is a joint medium term roadmap for promoting trade and investments, signed between the nations back in September 2014.
• The agreement also asks for easing of restrictions by the Chinese government against high potential export items such as bovine meat, fruits & vegetables and basmati rice, among others. Of these, only basmati rice has seen a breakthrough with 14 firms allowed rice to be exported to China last year.
• Growing allegations of military incursions from both sides have restricted that space further. The armies of both the nations are currently in the midst of a standoff at the disputed Doklam plateau of Bhutan. In this regard, the Commerce Department officials said the chances of further conclusive talks on trade issues remain slim in the near future.
• The agreement is ‘non-binding’, therefore the scope of deliberations with regard to reducing trade deficit depends significantly on the presence of a free environment for discussion.
• An agreement signed with the Chinese government in September 2014 correctly identifies the trade deficit with China as “a matter of high concern for India”. It added that the two countries will try to gradually achieve bilateral trade balance over the next five years.
• India’s export mainly raw materials like cotton, iron ore and copper. The government and exporters try to shift export priorities towards value-added products in a bid to cap growing trade deficit.
• In the last FY, India’s highest export earners were iron ore, cotton and organic chemicals worth $1.43 billion, $1.34 billion and $886.96 million, respectively.
• Other raw materials like copper, constituted for more than 70 per cent of India’s exportsto China.
• Currently, the top five export categories to China are all input products. These are used by China to manufacture costlier goods, which it ships abroad — often back to India.
• More than 95% of Indian imports of everyday use items also come from China.

Way Forward:

• The Union Minister for Commerce and Industry has identified key sectors such as hardware, electronics, pharmaceuticals, textiles, auto components, to realign and boost export from India.
• India is also focusing on trade in the areas of hardware, electronics and renewable energy has the potential to expand greatly.
• The revised export basket to China has the potential to boost export earnings from China and bridge the trade deficit.