Trade: This Illusive Chinese Lantern

Lu Yong is a folk hero in China. He was a patient of leukemia when he began importing generic anti-cancer drugs from India for himself and a thousand other fellow victims of chronic myeloid leukemia (CML) who could not afford the medicine available in the domestic market. Lu Yong’s story is now a blockbuster titled Dying to Survive. The movie has received rave reviews in China, but any assumption of India’s predominance in the Chinese market for pharmaceutical products is entirely misleading.

China imports medicines worth a whopping $25 billion, but from markets other than India. The India-China trade story remains one sided, with imports from China far exceeding Indian exports to China. During the 2017-18 financial year for instance, imports from China were to the tune of $76.22 billion, while Indian exports to China were a paltry $ 13.34 billion (please see chart). The trade balance weighed a mammoth $62.88 billion in China’s favour.

In February this year the Union Ministry of Commerce and Industry bragged of a declining trade deficit with the Chinese dragon. Indian exports to China, driven primarily by marine products, organic chemicals, plastics, petroleum products, grapes and rice, were a rosy $12.7 billion during the first six months of the 2018-19 fiscal (April to December 2018). The reason for the ecstasy was that the half-yearly statistics were almost comparable with the export figures for the whole of the 2017-18 financial year, when India’s exports to China had been worth $13.33 billion.

The Union commerce ministry exulted that the trade imbalance with China had shrunk by a whopping $10 billion in just a year. The truth is that the India-China trade relationship is one-sided, in which India figures as an essentially colonial-style raw-material partner of the Chinese economy. It is no secret that while we were dreaming of Industry 4.0, trading rather than manufacturing dominated economic activity within India.

While low-end to high-end products with Made in China tags sourced through the likes of Alibaba flooded the Indian markets, industrial growth within India slumped to 0.1 per cent in February. In the Index of Industrial Production, the category titled ‘Manufacture of machinery and equipment’ plummeted to (-) 12.8 per cent. India’s trade imbalance was a humungous (-) 142.52 billion with most of its top ten trading partners in 2017-18, with a surplus of a mere $31.69 billion from some partners (please see chart).

Sino-Indian trade ties
At the turn of the millennium in 2000-01 India’s exports to China were worth $831 million, while China’s exports to India were a humungous $1.5 billion. In the ensuing two decades Chinese exports to India have catapulted, to touch $76.21 billion in 2017-18. India’s exports to China have also risen, but modestly to $13 billion. The Chinese have during these 18 years had a competitive advantage in manufactured goods, for which they found a huge demand in the Indian market.

Prime Minister Narendra Modi strove to normalise relations with China post Doklam, but the diplomatic pow-wows have not translated into economic gains for India. India and China have had a series of engagements over the past few months, including Modi’s “informal summit” with Chinese President Xi Jinping at Wuhan in central China on 27 April and 28 April. The bilateral agreements, though, have not quite lifted the scales in India’s favour and the trade imbalance with China persists.



The old Silk Route 
Meanwhile China’s Belt & Road Initiative (BRI) makes inroads into South Asia at an unprecedented scale and could drastically reduce Indian exports to the region. On 26 April, China hosted the second international forum on the Belt and Road Initiative in Beijing.  President Xi Jinping affirmed his “more sustainable” and “progressive” version of the BRI.

Representatives from more than 150 countries participated in the summit. Among those gracing the Great Hall of the People in Beijing were Russian President Vladimir Putin, Prime Minister of Malaysia, Mahathir Bin Mohamad, Vice President and Prime Minister of the UAE, Sheikh Mohammed bin Rashid Al Maktoum and Hungary’s Prime Minister, Viktor Orban. Multilateral agencies also made their presence felt. International Monetary Fund Managing Director Christine Lagarde and United Nations Secretary General Antonio Guterres, attended the conference.

Pakistan and Nepal, two nations that have received funding under the Belt and Road Initiative, were represented by their Heads of State too. China has extended trade in South Asia through the China - Pakistan Economic Corridor (CPEC), the Nepal-China Trans-Himalayan Multi-dimensional Connectivity Network, the Nepal-China Cross-border Railway and the China-Myanmar Economic Corridor.

Some of the leaders at the conference had once viewed the BRI as a Chinese ploy to gobble up markets. Even though the doubts persist, few wish to miss out on the $3 trillion trade pie. According to the China Daily, the total trade between China and countries involved in the BRI exceeded $3 trillion between 2014 and 2016. At the closing ceremony of the summit, President Xi Jinping hailed the $64 billion of deals signed for the Belt and Road Initiative at the forum.

Breaking barriers
The BRI deals are not confined to impoverished nations like Laos in Asia or Djibouti in Africa either. China has made inroads into the Group of Seven (G-7)  – a club of advanced economies comprising Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. In March, Italy became the first member of the wealthy G-7 to join the BRI, followed by other European nations like Luxembourg and Switzerland. China has now managed to bring in Eastern and Central Europe into its orbit by signing major infrastructure deals with the 17+1 group. In April, China and Russia took the first serious steps towards a Polar Silk Road.

China has succeeded in heralding a new era, using the insufficiency in infrastructure in its vicinity to exert its economic prowess in Asia and beyond, towards Europe via Africa. In the second stage it seems to have bolstered the BRI, but all is not well with China either. In 2018 the Chinese economy grew at 6.6 per cent, the slowest since 1990. The primary reason for the deceleration in growth was the escalation in the China-US trade war and its faltering exports to neighbouring countries.

Ajay Sahai, Director General and CEO, Federation of Indian Export Organisations (FIEO) says the Chinese economy has already exited from certain sectors and was pushing its way toward the higher end of the value chain. China now prefers to promote high quality goods and services, based on innovation.

Where is India in this game?
The turn of affairs opens up opportunities galore for India. For example, the Asian Development Bank estimates that between 2016 and 2030 developing countries in the region will need to spend $1.7 trillion per year to build the infrastructure required. These ventures do not necessarily have to be part of  the BRI.

The Quadrilateral Security Dialogue format (Quad) is a viable option in the Asia - Pacific region. The Quad is a grouping of like-minded democratic nations, namely the United States, Japan, India and Australia, but the latter has of late remained a passive member. The Quad was envisaged by the United States as an alliance that would prove mutually beneficial for its members. “Although India has identified countries such as Japan as key partners in formulating a response, there has been little progress on paper,” says Srikanth Kondapalli, Professor in Chinese Studies at the Jawaharlal Nehru University.

Another regional grouping is the Regional Comprehensive Economic Partnership (RCEP), which is a free trade zone of ten Asean nations and Australia, China, India, Japan, South Korea and New Zealand. Once established, it will create a zero-customs duty zone in a region that contributes 34 per cent of the global gross domestic product (GDP) and 40 per cent of world trade. Former commerce Secretary Rajeev Kher says, “Most of the time, India’s approach to trade negotiations has been typified by a defensive stance. Indian industry is wary of the potentially adverse impact of preferential Chinese imports. But this is the only chance of securing a rules-based framework with China.” But should one trust the dragon, or will it breathe fire in a free trade zone too?

Certainly, China’s state-backed super consortium of private companies will leave no stone unturned to dump their products within the trade bloc. The US, which too grapples with a trade imbalance with China, seems to have learnt to live with it. As US Trade Representative Robert Lighthizer, who deals with Chinese affairs says, “Years of passivity and drift among US policymakers have allowed the US - China trade deficit to grow to a point where it is widely recognised as a major threat to our economy.”

The light that shines bright from the Chinese lantern, no doubt casts long shadows around its trade partners. But surely, India should not lose the battle even before it begins?