http://www.forbes.com/sites/anaswanson/2014/09/28/five-reasons-india-shouldnt-worry-about-its-trade-deficit-with-china/
Two steps forward and one back: That was the general theme for Sino-Indian economic ties after Chinese leader Xi Jinping’s recent visit to India.
According to statements made by Xi and Indian Prime Minister Narendra Modi, China promised to help update India’s railway system, establish industrial parks in the Indian states of Gujarat and Maharashtra, and open its markets to Indian products like pharmaceuticals and agricultural goods. A spokesperson for the Chinese foreign ministry said Xi’s trip removed “some suspicions” between China and India.
At least in India, however, the comment seemed premature. As Xi’s visit approached, Indian media were reporting that Chinese troops were constructing a temporary road into Chinese territory, leading to a standoff in the Himalayas. Agitated Indian media reports cited Xias urging his troops to be ready for war.
Due partly to the lingering legacy of the 1962 Sino-Indian border war, Indians remain deeply suspicious of China. Chinese have a slightly more sanguine attitude: A 2012 Pew poll showed that some 39% of Chinese surveyed say the China-India relationship is cooperative, while only 23% of Indians agree.
Unfortunately, this suspicion extends to the economic relationship. 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.
China is hardly blame-free – it 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.
The danger in imbalanced trade
First, a little background: Like some Americans, many Indians complain that China is flooding the market with cheap products and driving local manufacturers out of business, resulting in a growing trade deficit. But unlike for the US, a too-large trade deficit poses an imminent risk for India.
The dollar’s position as the world’s reserve currency gives the US the “exorbitant privilege” of always being able to print more money to finance its trade deficit. Printing more money could lead to inflation in the short term; as debt piles up, it could also convince creditors that the US isn’t financially sound, cause interest rates to spike, and eventually end the dollar’s reign as the world’s biggest reserve currency. Until that point, however, the US can always meet its foreign debts by printing dollars.
India clearly does not share the same privilege. Its central bank needs to amass a large supply of dollars or other foreign currency to have ready to exchange with its citizens for rupees – currently around $300 billion. When Indians import a lot of stuff, they pay for it using this foreign currency obtained from the central bank. If the central bank starts running out of foreign currency to give to these would-be importers – or if investors sense that this point is approaching, and conduct a speculative attack on the central bank – it is quickly game over. The government may have to default and revalue its currency, probably at great loss to creditors.
India had a balance of payments crisis in living memory, which forced the country to take on liberalizing measures in 1990s. So when Indians worry about an excess of imports over exports, there is a cause for concern.
To insulate against this threat, India has put up extensive barriers to limit imports and stave off another balance of payments crisis. Yet these barriers also shut out cheaper imports that could benefit Indian consumers and might spur faster development among Indian companies.
Ladies and gents, the listicle
So how much does all this have to do with China? Not much at all. Here are five 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 from restrictive 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 Chinaset 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.
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