Scope of South Asian Trade: India vs China
- Scales and States Team
- Jul 21, 2020
- 4 min read
It is no secret that exports and imports over the world have suffered a major blow due to the COVID-19 pandemic. But even before this, the intra-regional trade in South Asia has been well below its potential at 5% of the region’s global trade, making it one of the least economically integrated regions in the world.
Despite geographical proximity and multiple Free Trade Agreements (FTAs), India’s trade with its neighbourhood has ranged between 1.7% and 3.8% of its global trade, from 1988 to 2018. Meanwhile, China has established itself as a major trade partner in the region and has increased its exports to the region by a whopping 546%, from 2005 to 2018, currently valued at USD 52 Billion.
The pandemic has left global supply chains in shambles; it has created a need for stronger local supply chains. Hence, the South Asian region can use this opportunity to overcome existing challenges and work towards better economic integration. As for India, they can use this opportunity to boost their trade within the region.
Challenges
As per the report ‘India’s limited trade connectivity with South Asia’ released by Brookings India, low intra-regional trade can be attributed to protectionist policies, high logistics cost, lack of political will and a broader trust deficit. It also analyses India and China’s share in the global trade of South Asian countries, revealing that only the landlocked countries (Afghanistan, Bhutan, and Nepal) have a higher trade share with India as compared to China.
While exports to China from the region have been minimal, imports from China have been growing since 2012 in Myanmar, and since 2014 in the Maldives, Bangladesh, and Pakistan. In the case of Sri Lanka, there was heavy reliance on imports from India till 2013 owing to the Indo-Sri Lanka Free Trade Agreement (ISFTA) that was signed in 1998 and came into force in 2000. However, post-2013, both India and China export at par to Sri Lanka.
India and China started off at the same level in 1990, but since then, China’s per capita income increased to USD 10,276 in 2019, five times larger than that of India’s. The two countries adopted different trade and industrial growth policies. India did not focus on self-reliance, as it was believed that the Indian consumers would benefit if they could obtain products from the cheapest sources in the world. Thus, barriers to trade were reduced, while domestic capabilities were not built up as fast. China did the opposite and started building industrial capabilities since 1990.
As a result, China’s exports to India were much more than the other way round. In FY 2019-20, India had a trade deficit of USD 48.66 billion. Moreover, while India was exporting more raw materials, China was exporting manufactured goods. The same was pointed out ten years ago, by the Indian Ambassador to China, who observed that while the volume of trade grew, the trade pattern was of that between a colonial power and its colony.
Opportunities and Recommendations
China’s failure to contain the COVID-19 outbreak and delay in informing the rest of the world has led to anti-China sentiments world-wide. India might benefit out of this as firms moving out of China might consider India as a potential destination. Furthermore, since regional markets are easier to connect than global markets, as well as India’s relatively younger population and rising middle class, it is seen as an attractive market by its neighbour, from the point of view of both demand for products and supply of cheap labour.
In order to reduce our dependency on China, we need to overcome domestic challenges by up-scaling technology, infrastructure, etc., and strengthening policies and institutions to confront the strategic Chinese economic and political interventions and policies during and post COVID 19 era. Further, we need to identify areas where we could invest, such as pharmaceuticals and healthcare, because even though we are the global pharmacy of the world, we require ingredients from China.
Using non-tariff measures like Rules of Origin, Sanitary and Phytosanitary Measures, and Technical Barriers to Trade would be instrumental to tackle our trade deficit with China in the short term, but there is also a need to build effective demand and supply capacities by increasing fiscal and monetary measures. This can be done by relocating production to rural areas with focus on training of manpower for ensuring lives and livelihood for all.
Conclusion
It is high time that India and her neighbours start working towards overcoming these trade barriers by refocusing on regional trade agreements, reducing protectionism, improving cross border logistics and infrastructure, and investment in digital infrastructure to reduce human interaction in a post COVID-19 world. Moving forward, policies must focus on reducing barriers and facilitating greater connectivity in all spheres to build trust and counterbalance China’s growing ties with India’s neighbours. India’s dominant presence in South Asia requires it to take steps towards strengthening cooperation, building resilient supply chains, and supporting economic recovery in its neighbouring countries.
Enhancing trade in the South Asian region is not only economically beneficial, it is also strategically important to integrate India with the global economy. By optimising its strategic location in the region, availability of labour and a growing middle class, to generate supply and demand of commodities, India has immense potential to attract investments and become an export-led economy.
by- Diya Srivastva
References/ Further Readings:
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.
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