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Tuesday, Feb 05, 2002

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Can India score in trade ping-pong with China?

S. Majumder

THE Chinese Prime Minister, Mr Zhu Rongji's visit to India, amid tension on the Indo-Pak border reveals a dichotomy. One section views his visit as a ping-pong policy to maintain power in South Asia. Another group sees it as an effort to counter a foreseeable threat to China's role in global trade.

At present, the bilateral trade between India and China is at a low ebb. China accounts for a mere 2 per cent of India's export and a little above 3 per cent of the imports, while India accounts for less than 1 per cent of China's global export and import. Therefore, both have enough scope to broaden the trade between them; but the question is: Who gains more in two-way trade? The Chinese foray has already threatened India in labour-intensive domestic industries such as toys, shoes, household and electronic appliances including tape-recorders, VCD, batteries, energy-saving bulbs, and so on. Anti-dumping duties have had little impact on the Chinese goods entering India. China has a big edge over India, in its potential in the global market. A `global leader in workshop', it was the world's largest producer of crude steel and synthetic textiles in 2000. The removal of quantitative restrictions has added to India's woes.

For instance, the Indian toy industry is in shambles. Within a year, over 45 per cent of the toy market has been captured by Chinese products. On the brighter side, China's accession to WTO will open up its markets. Its imports are forecast to grow faster than exports in the foreseeable future; the tariff levels will slump from 22 per cent to 17 per cent, and the barrier on local content requirement will be removed.

In the post-WTO period, Beijing, Shanghai and Shenzen — that have benefited most from the flood of foreign investment — will help China emerge the world's largest middle-class market. Whether India can benefit from such wider import market prospects is debatable. Growing foreign investments have provided advanced technology and upgraded China's industrial structure. Indian products are three times more expensive than Chinese goods, and India lacks the edge to win over China in terms of hi-tech products.

Therefore, except in information technology where India has already proved its global leadership and where China is lagging, broadening two-way trade between the two countries cannot yield much result. The only recourse left to India is to establish a production base in China either through joint ventures or contract base manufacturing and make use of the emerging Chinese market.

India can learn from Japan, which too faced a similar onslaught of Chinese goods, severely impacting its domestic industry. The Japanese textile industry, which was facing severe competition from Chinese exports, shifted its manufacturing base to China, produced at low costs and brought back the products at competitive prices. This led the other Japanese manufacturers to shift their production bases to China, to sustain their competitiveness both in domestic and export market. For instance, Toshiba Corp. shifted its production facilities for television sets from Japan to China. Sony Corp., the Japanese giant that concentrated on Singapore as the manufacturing base for Asian market, started paying more attention to investing in China.

Today, Japanese companies believe that success in China is a prerequisite for penetrating the global market. American and European firms — such as Royal Dutch/Shell Group of Cos, Seimens AG and Motorola Inc — are also increasing their investment in China.

Therefore, broadening trade ties between China and India will not yield any result. Instead, it may make the road thorny for domestic industries. What is required is increased investment in the liberalised post-WTO China, that will let India access not only the emerging Chinese middle-class market but also open other Asian countries. Besides these, the other areas of cooperation between the two countries would be service industries such as low-cost healthcare services, construction activity and entertainment industry.

(The author is senior researcher in a New Delhi-based Japanese MNC.)

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