The growing China threat

China has become a top exporter, accounting for roughly 10 per cent of global merchandise exports. This manufacturing giant presents both an opportunity as well as a challenge. It is a cheap and critical source for procuring inputs such as power equipment, auto-components, electronics & computer hardware, pharmaceutical ingredients and coking coal, besides being an important export market for India.

It is also a challenge, as Indian businesses feel threatened by cheap import of manufactured goods from China.

It is, therefore feared that sectoral negotiation in WTO, which aims at deeper tariff reductions in 14 sectors (including chemicals and allied sectors, electrical/electronics, industrial machineries, textiles & clothing) will further open up India's domestic market for imports from China. Besides, a free trade pact with China is also being considered.

INDIA'S RANKING

Thus, an understanding of Chinese competitive advantage in trade will help Indian businesses in incorporating the China factor in their trade and procurement strategy more effectively.

The World Bank's ranking of nations on the basis of their trade friendliness would be a good starting point. It has placed India at 100, compared with China at 50. India's poor ranking as reflected in the number of documents required, time taken and cost involved in export/imports badly compares with China.

In addition to Chinese cost advantage in export-import formalities, other factors which favour Chinese exporters are: (i) Low real wages and absence of industrial disputes and lockouts (ii) Cross-subsidisation of corporate sector by households through Government-controlled financial institutions (in a low domestic consumption, high savings ratio, plus high inflation, low real interest rates, cheap capital policy environment); (iii) Undervalued exchange rate (iv) Export restriction on raw materials with limited global supply such as coke, fluorspar, silicon, yellow phosphorus and zinc (v) Aggressive policy of acquiring commodities (iron ores, copper, coal, oil and gas) assets in Africa and Latin America ; and (vi) Availability of government-acquired land, cheap power and more lenient environmental standards.

China will have to depend on exports to maintain its growth momentum and threat of cheap Chinese imports will continue to haunt Indian businesses. But when it comes to its own market, China uses several non-tariff trade barriers to restrict access to its domestic market.

ECONOMY STATUS

China is an important export destination, a supplier of cheap inputs and a serious competitor in domestic as well as export markets. However, Indian businesses are deprived of a level playing field due to the impact of high trade transaction costs in India, and the domestic availability of cheaper inputs and an undervalued currency in China.

At present, China is regarded as an “economy in transition” or non-market economy, which gives its trading partners enough flexibility for liberal application of trade defence measures. This flexibility will cease to exist once India accords China “Market Economy” status, which is likely by 2015.

To comply with India's commitment at WTO, export incentives in India will have to be phased out once it achieves the GNP per capita of $1000 at 1990 prices, a likely scenario by 2012. This will further make the lives of Indian businesses, especially SMEs, difficult.

India, in contrast to China, has been a laggard in securing steady supply of key commodities either through long-term supply contract or through acquisitions of mining assets. This limits the effectiveness of measures adopted for inflation management, especially during sharp fluctuations in global commodity prices.

EXPORT MARKET

Thus, in the years to come, Indian businesses will have to compete with overtly or covertly subsidised Chinese products ranging from processed food to textiles, and chemicals to engineering, in both domestic as well as export markets.

These realities should be factored into by Indian businesses while formulating their post-2015 commercial strategies.

With slower economic recovery in developed markets, Indian businesses must look at ways and means to tap fast-growing China, as an export market and/or a supplier of cheap inputs to improve their cost competitiveness.

We must resist WTO-incompatible Chinese trade measures such as export duties on key inputs, or discrimination between domestic and imported products — bilaterally, or multilaterally — through the WTO dispute settlement mechanism.

This situation calls for diversification of India's export markets into fast-growing African and Latin American markets, with relatively comparable per capita income and consumer preferences. These resource-rich regions can also be relied upon for securing steady supply of key raw materials, cereal, edible oils and pulses.

And, the role of Indian government has to be remodelled from that of an ‘incentive-provider' to a ‘trade-facilitator', and here it has a great responsibility in making concerted efforts to improve India's trade infrastructure.

There is also an urgent need for effective cooperation between India's trade negotiators and Indian businesses, so that their trade objectives are taken into account in bilateral and multilateral trade talks.

(The author is a subject matter expert (International Trade) for Aditya Birla Group. >blfeedback@thehindu.co.in )

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