The China Strategy: Tackling the Growing Trade Deficit with our Industrious Neighbours

Posted on November 8, 2011 in Business and Economy

By Pradyut Hande:

It was not more than a decade ago that industry experts, policy formulators and other extraneous potential stakeholders attempted to convince the Government to embrace a more proactive strategy with regards to engaging the Chinese in greater trade. Over time, both the Asian behemoths have embarked on their individual trajectories of socio-economic progression. We may have our fair share of differences — political, ideological, economic, and military — but undeniable is the fact that a stable strategic relationship with the Chinese is integral to our future growth prospects as a rapidly emerging economy. Set in this backdrop, trade between the two nations has blossomed and China has gradually become India’s biggest trading partner. A measure of this can be gauged from the fact that trade with China has boomeranged almost 160% to amount to USD 24 Billion since 2006-07.

However, a cursory glance at the figures is not liable to paint one a complete picture. While holistic trade over multiple sectors has certainly improved and increased by appreciable levels, India’s trade deficit with China too has also escalated. The trade deficit is the difference between a nation’s exports and imports with a corresponding trade partner nation. While imports of Chinese goods has risen from USD 17.6 Billion in 2006-07 to USD 43.5 Billion in 2010-11, Indian export to China pales in comparison, up from USD 8.3 Billion to USD 19.6 Billion over the same five year period. China accounts for more than a fifth of India’s trade deficit. This escalating trade imbalance has not gone unnoticed and has emerged as a domain of alarm for the incumbent Government. In its endeavour to tackle this growing deficit, the Government is exploring myriad measures.

Amongst the many options the Centre is presently mulling over, imposing higher tariffs on a majority of imported Chinese goods appears to be a viable option. It proposes a blanket ban on specific products such as power and telecom equipment; sectors that are increasingly becoming dependent on Chinese imports at the expense of other domestically or internationally procured equipment and infrastructure. It also postulates that it should be made mandatory for Chinese companies to enter into Joint Ventures (JVs) with their contracted Indian firms prior to the import of heavy equipment and machinery from China; consequently marginally diluting their position of strength that they seemingly enjoy in the present scenario. There is also an increasing likelihood of gradually substituting Chinese goods with those from Japan, Taiwan and South Korea as a direct consequence of having to deal with lower tariff barriers.

One must note that the Commerce Ministry hasn’t just drafted a modified “China Trade Strategy” overnight. The ever increasing trade deficit has been rightly taken cognizance of and brought to the notice of the concerned authorities as well. Indian officials say that China has openly acknowledged the trade deficit issue but has continued to pursue its seemingly self-serving uni-dimensional ways and consequently, has done precious little to address the pressing situation at hand. In fact, China has shown scant regard for India’s repeated requests and proposals that could have significantly reduced the widening trade gap. Some of the requests include the reduction in import duties on Indian pharmaceuticals, agro produce, IT products, heavy equipment and machinery. China may have promised to look into the matter but as is often their wont, apart from furthering their interests by adopting a carefully calibrated market penetration and consolidation strategy (primarily through the effective albeit frowned upon use of Predatory Pricing), they have failed to take into consideration Indian concerns. Hence, the plainly evident lack of favourable response from China has compelled the Commerce Ministry to draft the fresh proposal in order to counter the increasing trade inequity.

On the face of it, the aforementioned proposals do hold promise. However, a policy remains steeped in inefficacy if it fails to come to fruition. The intricacies of the revised policy ought to take into consideration the inputs from the concerned industries it is most likely to impact — Power and Telecom amongst others — in the long run. Drafting a more comprehensive policy with strategic revisions and obtaining implementation clearance isn’t the only obstacle in the Commerce Ministry’s path though. Experts believe that the increasing dependence on Chinese goods will only make restrictions on their import that much harder. Opposition to the imminent policy change is liable to stem from the Indian industry itself. Additionally, also at a time when the clarion call espousing the multifarious benefits of an open market devoid of amplified Governmental intervention is at its loudest and nations are increasingly entering into Free Trade Agreements (FTAs), India’s interventionary stance to reduce its trade deficit with China maybe perceived as retrogressive by international quarters. So the Government sure has its work cut out on multiple levels, as far as tackling the trade deficit with China is concerned. Proactive policy formulation continues to remain the need of the hour. The question though that needs to be answered is: “Is the Government willing to take tough decisions that may cause a veritable degree of consternation amongst Chinese ranks in the larger scheme of things?”

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