50 | November 30, 2011 visit www.dqindia.com DATAQUEST | A CyberMedia Publication

Indo-China Trade

Two of the fastest growing economies—India and China—together can spearhead market demand, making other economies follow suit

At present India and China share headline space for their war on border norms, but amidst this love-hate relationship, they completed around 27 years of trade partnership, which was established in 1984, after they mutually identified each other as

the Most Favored Nation (MFN). Apart from the fact that both are gifted with a population of more than a billion, together, India and China are among the fastest growing economies (8-9%) and hold a promising future. A World Bank report Impact of Global Growth 2005-20, estimated that South East Asian countries namely, India, China, Malaysia, Vietnam, and Indonesia would be among the most rapidly growing regions with a projected growth rate of 5% per year in the period between 2005 and 2020.

AKANKSHA PRASADakankshap@cybermedia.co.in

Mending the Wall

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Recently, the Associated Cham-bers of Commerce and Industry of India shared that in 4 years the partnership will touch $100 bn and by 2030 India and China would be the world’s largest trading partners.

Another report by the World Bank and International Monetary Fund (IMF) concluded their survey on ‘Ease of Doing Business’ rank which looked at about 183 econo-mies. While India was ranked at 139, China was among the top 100—ranked at 87.

India and China: Competitors or Complimentors?India’s growth is led by software and services exports, China’s merchan-dise and manufactured goods. Both the economies can complement each other if they work in unison. On one hand, India’s textile industries can leverage from China’s proficiency in the field leading to contraction of the textile industries in other countries. While on the other hand, the advan-tages for India help in rapid growth of communication infrastructure, software services in China. Accord-ing to the World Bank report, “The share of services in India’s exports began, at around 20%, over twice as high as China’s. Since 2000, services have accounted for over a quarter of India’s exports, while the share of services in China’s exports has declined to under 10% of total exports—although China’s exports of services has been growing rapidly in absolute terms. In the past few years, the information technology services, in China, expanded from about 25% to more than 50%.”

India’s share of services in total goods and services exports has been much higher than China’s, not just since the rapid expansion of exports of software services around 2000, but for the entire period since 1992.

While every global player looks at India for its software develop-

ment hub, China becomes the hardware manufacturing zone. For many of these transnational firms like IBM and GE, India is the sec-ond largest center outside the US, followed by China. Indian states starting with Karnataka followed by Kerala, Gujarat, Andhra Pradesh, West Bengal, Maharashtra, and Delhi. And, major Indian compa-nies have opened up centers in various cities of China like Beijing, Chengdu, Xinjiang, Shanghai, etc, but the countries are yet to work on a free-trade agreement that will further foster mutual growth.

With this extended trade partnership, developed countries that are also defined as high-in-come countries, will benefit from improved terms-of-trade for their products as India and China would witness increasing dependence on imports for sustenance. Especially the developing economies or the middle/low-income countries such as Thailand, Philippines will face

stiff competition with China and India in terms of trade in price-sensitive regions.

However as mentioned in the report, while the average real incomes in manufacturing indus-tries would have a minimal effect, the larger change would be in the demand scenario. Other countries would reshape their trade com-petency with developed econo-mies. Countries like Indonesia and Vietnam will look to increase production of light manufactures, chemicals, and minerals. All economies would experience struc-tural change, wherein they would switch gears from heavy and high-tech manufactures, while India and China from textiles and light manufacturers. “Exports from many developing economies that compete with China and India decline as a result of the improved efficiency of China’s and India’s heavy indus-tries, and high-tech manufacturing sectors. Most notable is the decline of exports from the Philippines (18%) and Thailand (10%), whose electronics sectors declines by 65% and 53%, respectively. Russia would expect to gain from increases in the demand for oil in China and India, even if that oil is supplied by the Middle East or Africa,” states the report.

Breaking the IceWhile the two countries under-stand the importance of free trade, the talks stop when it comes to who benefits the most out of this partnership. According to reports, the bilateral trade between India and China was driven largely by demand of iron ore and cotton imports from China leading to a trade imbalance of $20 bn. While India imports $40.8 bn, whereas China imports are worth $20.8 bn approximately. Marking the similar concern, Indian counterparts have questioned the trade imbalance. n

Share of Intermediate Goods Exports (In percent of total exports)

1998-2000 China to India 3.30

India to China 1.50

2007-09 China to India 18.6

India to China 4.4

Share of Capital Goods Export (In percent of total exports)

1998-2000 China to India 2.7

India to China 0.4

2007-09 China to India 3.9

India to China 3.2

Share of Consumer Goods Export (In percent of total exports)

1998-2000 China to India 1.3

India to China 0.2

2007-09 China to India 1.6

India to China 0.6