The recently-held informal summit between the Chinese President Xi Jinping and Indian Prime Minister Narendra Modi included an announcement about the setting up of a high-level economic and trade dialogue mechanism to discuss issues related to trade imbalances, investment, and services.
The high-level trade-centric mechanism comes as no surprise given the galloping trade deficit between the two countries and the pending status of the Regional Comprehensive Economic Partnership Agreement (RCEP) negotiations since 2012.
For the past few years, New Delhi has been highly vocal about its rising trade deficit and the high tariff barriers that the Indian companies face in certain Chinese data-x-items and sectors. For example, in its submission to the World Trade organisation (WTO) last year, India complained that the trade deficit with China was becoming “unsustainable” and that the Indian products such as farm produce and meat face entry restrictions from Chinese regulatory policies despite the protocols in place. Besides the market access issues, New Delhi has flagged the concerns over the stringent Chinese visa regime preventing the Indian professionals to travel and work in China for longer durations.
The India concerns, particularly, assume prominence in the light of the ongoing U.S.-China tariff dispute. For the past three years, the Sino-American trade dispute driven largely by the massive trade imbalance, has shaken the markets world over and induced new uncertainties. Although economists attribute macroeconomic factors to explain the trade deficit that the United States suffers vis-à-vis China and other countries, American policymakers, however, point to Beijing’s state-guided policies — such as currency manipulation, low wages, and unfair export subsidies — as the reasons for the trade imbalance.
India, which has so far refrained from taking sides in the U.S.-China trade dispute, nevertheless bemoans similar issues in its trade relations with China. Despite the benefits that the RCEP deal promises to bring to New Delhi, Indian industry is, particularly, wary about the Chinese presence in the RCEP. The fear of compounding trade deficit on account of Chinese goods flooding the Indian markets is thus strongly deterring the Indian negotiators from concluding the agreement.
In this backdrop, President Xi’s statement indicating Beijing’s strong desire to address the trade deficit issue with New Delhi has raised some hopes among the Indian establishment. The Indian government faced a strong backlash from the domestic manufacturing lobby with respect to its bid to join RCEP. Professor Amitendu Palit of the National University of Singapore argues that the fate of India’s membership to RCEP largely depends on the concessions that China is willing to make in terms of greater market access, duty cuts and work visas.
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Also the idea of the high level trade dialogue is not new. At the 11th joint economic group (JEG) meeting in March last year, such mechanisms were talked about as a means to tackle the trade imbalance. The trade deficit between the two countries touched an all time high of $63 billion in 2017-18. But the question which begs attention is “Can a high level trade dialogue between India and China work in reducing trade deficit?”
No joint statement was issued after the 11th JEG in 2018, despite various action points being flagged between the two sides.
The trade deficit is both an economic and a political problem. On the economic side, India’s increasing trade deficit with China can be attributed primarily to the different composition of trade baskets between the two countries. With regard to the data-x-items exported to China, the basket mainly consists of intermediate goods and raw materials accounting for 56 percent and 20 percent of total exports in 2017. Such data-x-items include petroleum oils, seafood, vegetable fats, animal feed, iron ore residue, and so on, which China has sourced from India and other Asian countries to process its exports of finished or assembled goods.
On the other hand, India’s imports from China are dominated by manufactured items, particularly electronics, telecom products, electrical equipment, and pharmaceuticals. Most of India’s electrical and electronic requirements, including smart phones and computer hardware, are met by China. China also supplies most of India’s pharmaceutical ingredients and drug intermediaries which stood at almost $2.4 billion in 2018-19. Thus, India’s import basket implies a high demand for Chinese goods in key sectors, pointing to the mismatch between the bilateral exports and imports.
In any discussion of Sino-Indian economic relations, the trade deficit with China often acquires political undertones. The primary reason is the strategic distrust that the two countries share owing to the long standing border dispute, New Delhi’s sheltering of Dalai Lama, and the Sino-Pakistan nexus. As a result, any irritant, even economic in nature, tends to become politically sensitive, demanding some kind of diplomatic intervention. The other factors relate to China’s unfair trading practices evident in the largest number of anti-dumping cases that India has slapped on Chinese goods till date.
Thus, the expectation that the high-level trade dialogue can push the envelope of negotiations between the two sides remains shrouded in doubt. In fact, a trade dialogue similar to high level border talks would only prolong the process of negotiations between the two sides and may as well delay the prospects to reach an agreement anytime soon. Although it can be argued that the talks would generate new momentum in bilateral relations, there is little hope that they would engender mutually agreed steps to minimize the existing trade imbalances and enhance India’s export potential for the Chinese market.
