Friday, 15 May 2015

What is behind the widening India-China trade gap?

In World Economy News 15/05/2015

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One of the items on Prime Minister Narendra Modi’s agenda, as part of his three-day visit to China, is the easing of non-tariff barriers for Indian exports, especially in pharmaceuticals and textiles. Such barriers are in the nature of restrictions on trade other than tariffs. The push is part of India’s objective to reduce the trade gap with its largest trade partner. The gap had narrowed in the first five years of this century but has since been widening.
In 2000-01, what China shipped to India was 1.8 times what India sent to China. By 2004-05, India had narrowed this multiple to 1.3 times. But then, the commodity boom set in, China went on an export-driven growth spree and created a massive trade gap with India. In 2014-15, this multiple stood at 5.1 times—a sizeable increase over 2013-14. During this burst, China also became India’s number one trade partner.
China has been better at capitalizing on its strengths—low-cost manufacturing, supported by hidden subsidies, cheap credit and marketing support—to ship a variety of goods to India in these 15 years. Of the 99 broad categories under which the countries classify trade items, 42 categories of Chinese goods bound for India were in the $100 million club, against 20 for Indian ones bound for China. China also had 12 billion-dollar categories against India’s three.
India has been largely sending primary goods to China, as highlighted in the list of top-10 items of the respective trade baskets of the two countries. Since these are on the lower rungs of the production chain, their realizable value is lower than, say, the finished goods made from them, and also leaves India open to the risk of Chinese economic cycles. In comparison, the goods that China sends to India are dominated by intermediate and finished goods.

A Reserve Bank of India study, published a year ago, broke sharply with the conventional wisdom that the Chinese have made major inroads into the Indian market because their products are cheaper. The study says India has actually “been importing a large amount of uncompetitive products that can easily be supplied by other competitors of China at cheaper prices to India… reasons should be explored at the product level which is beyond the scope of this study”.

Source: LiveMint