The Hindu Business Line : It makes economic sense to cosy up to China

CHINA has replaced the US as the main propeller of Japanese trade recovery and has, along with East Asia, become a significant contributor to world economic growth. In this context, should not India look to the East, rather than the West, as its growth engine? The China-East Asia combine make up a $1,000-billion import market, which is as big as the US offers. The former, however, holds greater potential; imports from the West are facing a lull.

In 2002, China and East Asia (Singapore, South Korea, Taiwan, Hong Kong, Thailand, Malaysia, Indonesia and the Philippines) were the biggest importers, surpassing even the US and the EU. They contributed to 35.9 per cent of world imports against 8.3 per cent and 32.4 per cent by the US and the EU, respectively.

China became the saviour of the Japanese economy and emerged as its top trading partner in 2002, leaving behind the US, the traditional engine for Japan's post-War economic recovery. Much of Japan's growth comes from exports and private capital expenditure, which are made primarily to equip factories to produce goods for export.

But the long recession in the US and the EU led Japan to shift to China and East Asia. While Japan's exports to China rose by 28.2 per cent in 2002, they fell by 2.6 per cent and 5.5 per cent respectively to the US and the EU.

Interestingly, the steady growth in Japanese exports to China was because of increased demand for goods made by Japanese affiliates in China by using the cheap labour. In 2002, the share of such exports in Japan's total exports to China was 21.6 per cent against 15.5 per cent in 1996. The growth in such exports was as high as 50 per cent in 2002.

Fuelled by domestic demand and accession to the WTO, a further widening of the Chinese market appears inevitable. And East Asia seems all set to tap the potential.

Analysts say that despite China being a major exporter of garments, its own industry will be squeezed when quotas in the US/EU are lifted in 2005. And countries such as Taiwan and South Korea are likely to benefit from increased demand from China.

According to a World Bank study, China's accession to the WTO is likely to boost its demand for metals and petrochemicals from Korea, electronics from Singapore, and light manufactures, petrochemical, machinery and electronics from Taiwan.

In electronics, China would source components from countries that cut tariff rates to zero in 2005, and India is likely to be one among them. In automobiles, China's plans to restructure the industry will make it a giant assembler of motor vehicles and, obviously, an exporter. This may squeeze automobile production in Japan and other Asian countries.

The World Bank report, however, dispels any fear about China's WTO accession resulting in FDI contraction in newly industrialised countries and India. On the contrary, the Bank presents a rosy picture on FDI, forecasting increased inflows into Asian countries, which would be expanding their capacities to manufacture semi-finished products and then supplying to China where demand is likely to shoot up.

China presents a big market opportunity. Demand from China will be compounded by import demand of developed countries, such as Japan, the US and the EU, and newly-industrialised countries which are flocking to that country for utilising the cheap manufacturing facilities. According to China Economic Quarterly Managing Director, Mr Arthur Kroeber, China can be competitive on the labour costs front for the next 50 years.

Thus, with accession to the WTO, China's output will increase manifold in those areas where there is additional export demand — textiles, apparels and automobiles. And the country will be a powerful investment centre.

What would be the impact of all this on India? China's quick integration into world trade has been seen as a stumbling block and threat to India's trade aspirations, especially because of the complementarities of the two countries.

Cheap Chinese goods, followed by WTO accession and free trade agreement with Asean have made India jittery. Should India continue to counter this by precipitating protective measures such as anti-dumping or should it capitalise on China's growing strength through economic cooperation.

Bilateral trade between the two countries has more than doubled in the past three years. China emerged the biggest importer of iron ore, pushing Japan, the traditional leading importer, to second place. India's export of semi-finished steel to China jumped 10-fold in 2002-03 alone, surpassing the traditionally leading importer, the US.

Exports of processed mineral and chemicals to China doubled in 2002-03. All these show China's ability to be a powerful demand centre for semi-finished goods and raw materials.

Nevertheless, the current two-way trade between the countries constitute less than 1 per cent of each other's global trade. But the road to rapid expansion of trade and investment are wide open, especially with economic cooperation between the countries having just begun.

Five years back who would have thought the Koreans would make such inroads in the Indian market, when two-way investment and trade was insignificant. Today, Japan has lost ground to South Korea in automobiles, consumer electronics and home/electrical appliances.

Japanese brands have met their match in Hyundai, Samsung, LG, and so on. Who knows, Chinese brands Haier and TCL could be the next-generation entrants in the Indian consumer durables market.

China is not only a powerful centre for processing and manufacturing of finished goods, but has also become a consumption epicentre. With the largest population in the world and emerging as the second propeller for global economic growth, which means huge disposal income, China will emerge as a global centre for both agricultural and consumer goods consumption. This is evident from the fact that while exports of Indian marine products to China doubled during the past five years, exports to Japan, traditionally the biggest importer, declined substantially.

China wields greater impact on a resurgent East Asia, coming out of the currency shock in 1997. The Economist has forecast China and East Asia as the second important engine for global economic growth. For many emerging economies, exports to China, rather than to the US, are turning out to be bigger growth boosters.

As regards India, the US and the EU are the biggest importers. Over 60 per cent of India's export goods — textiles and garment — go to these markets. Can India afford to sustain its strong foothold in these markets once quotas are lifted in 2005? What should be India's role to counter the quota backlash?

Cost-wise, India cannot compete with China even a decade later. This is because of vast differences in the scale of production and wages. The only way to survive is to export more cotton yarn and textile material to China — where demand will jump in the post-quota phase — and diversify into the market for finished textile products through the FTA route.

In sum, China's vibrant economic growth, driven primarily by it being the world's largest manufacturing base, will accelerate trade induced productivity gains in Asia. India will have to take a share of the pie. Considering its potential, the Government should give China a re-look and make efforts to strengthen the economic ties.

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