China: Beyond Good and Evil

In the last two decades, China has established itself as a major trade partner of South Asia. Beyond Pakistan, China has made inroads into South Asia (N8) by becoming Bangladesh’s top trading partner in 2015, and bolstering trade and investment with Nepal, Afghanistan, Maldives and Sri Lanka. China’s economic dominance in the south Asian region is on the rise is clearly seen in the way its export to other countries is increasing.

 This mainly reflects the region’s strategic importance for China’s Belt and Road Initiative (BRI), particularly the smaller South Asian countries. China’s trade with the N8 neighbours is mainly export-driven, making it a top source of goods.

After 2005, China consistently increased its trade with South Asia, barring a slight dip in 2009 because of the global financial crisis. In 2014, China’s trade reached a high of $60.41 billion.  Following the peak in 2014, China saw a decline in trade with South Asia in 2015 and 2016.

Chinas exports have found significant acceleration since 2005 mainly due to the speeding up in economic cooperation between these two economies that led to a bilateral free trade agreement. Same is the case with Sri Lanka, Nepal and Bhutan; China’s exports are growing at a higher rate in several industries.

Apart from steadily improving trade relation with South Asian countries, China also keenly focuses on improving investment and developmental assistance to this region. It mainly invests through government owned enterprises, which also represents it policy stance towards this region. In this respect, it set up China Investment Corporation (CIC) in 2007 for abroad economic and trade relation. So for as Pakistan is concerned, it’s major inflow of foreign investment comes from China, which shows a rising trend after singing free trade agreement (FTA) in 2007. China has interest in trade and energy sectors of Pakistan, like investment on Gwadar port and Cheshma Nuclear Power Plant.

In addition to this, China and Pakistan have designed equal point venture called Pakistan-China Investment Company Limited (PCICL). Chinese firms are also present in oil and gas, science and technology, telecommunication, power generations and infrastructural development. However, China is not investing comparably in Sri Lanka, even though providing finance to certain projects and grant in aid is rising fast. Same is the case for Nepal and Bhutan. By and large, China has firmly established itself in Pakistan and Bangladesh markets and is enhancing its trade relation with Sri Lanka, Bhutan and Nepal.

Reasons for increase in China’s trade intensity with selected south Asian economies fall within the domains of economy, polity and external sector policy as enumerated below:

Four factors make china’s products relatively cheaper to be at advantage on international market including developing countries. 

• The first of these is a technology that on the one hand is relatively superior to its counterparts in the developing world and on the other has a mass spread. While as the former gives china an edge on the technological front the latter makes the technology accessible to its mammoth population as a whole. The level and the spread of technology play an important role in relative better performance of china in the long run. The former helps it to compete with countries with capital intensive technological policy; the latter makes it even capable of outpacing countries using labour intensive technology. It is this great balancing in technological state, that helps china grow with great momentum. This high capital firms in this way are able to progressively develop better technology and the masses are adapted to use new and improved versions with relative comfort and consistency. This not only secures for china a benchmark technology on current international market but even positions it for even better future.

•  Second is cheap labour, China’s strength also lies in its formerly assumed weakness, or at least a central indicator, in development economics, that is, large population. The simple interplay of dynamics of supply and demand of labour in a population rich country obviously result in low wages in its factor market. Both this and relatively better productivity in the backdrop of reasonably superior technology keep the masses busy in the production process. The actual and the prospective firms, both domestic and foreign, are attracted to china’s production process partly because of cheap labour in comparison to wages in countries at the same level of technology and output. The resultant use of labour not only leads to higher production but also helps creating necessary market for this output. As a result, the output produced with the use of cheap labour has an assured cost advantage given the state of technology of the country. Thus here again, like in the former case, china enjoys two pronged advantage over its adversaries on the international market. The more technologically advanced countries’ products are at disadvantage because of cost effective Chinese products because of cheap labour. Thus china’s technological deficit is more than made up for by its cheap labour. On the other hand, countries with wages similar or lower compared to china also themselves at disadvantage because of china’s superior technology. Thus where china has a wage burden its technology brings gains for it.

• Third high level of specialization, over the period of time china has made stupendous progress in not only producing complete products but even where it enjoyed advantage only in part of the product. Since more and more firms are concentrating either on specific products or specific parts of different products, these continue to enjoy improved dexterity and excellence in production. The efficiency of both overall production and labour at each stage of production continues to rise incrementally.

•  The fourth is the advantages of economies of scale also accrue to the firms producing in bulk. These include pecuniary as well as real economies of scale. The economic success it has been able to achieve would simply be impossible in the presence of active political conflicts.  China has been successful in keeping its economic interests and political reservation in balance. 

In the past few decades, China has put up lots of measures to improve its competitiveness in the international market. Complementing this, the diplomatic efforts it has made in South Asian region has led to a surge in its trade in the region. It has successfully managed to prop up different pacts and agreements as well as investments aimed at closer economic ties with its neighbours. As a result merchandise trade between China and SAARC increased manifold in the past decades.

by- Shailja Singh

References/ Further Readings: 

• https://academicjournals.org/journal/JEIF/article-full-text-pdf/12710AC56802

• https://theprint.in/opinion/chinas-trade-with-indias-neighbours-has-grown-stronger-since-2005-delhi-must-catch-up/433327/#:~:text=In%20the%20last%20two%20decades,Afghanistan%2C%20Maldives%20and%20Sri%20Lanka.

• https://www.livemint.com/news/india/mapped-how-china-has-raised-its-clout-in-india-s-neighbourhood-11593498026189.html

• https://www.business-standard.com/article/economy-policy/india-lags-china-in-south-asian-trade-despite-free-trade-agreements-120062800579_1.html

Know more:

This story is part of a four part series on the the Free Trade Agreements in place in Asia and how they factor into the India-China Trade Policy conundrum.

The other parts can be found here, here, and here.

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Have a look at this piece about India's trade connectivity in South Asia, or reach out to us at submissions.scalesandstates@gmail.com for feedback, queries, and sharing your thoughts.