WTO, India and China

IBE Group Project

2/25/2011 LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT

Submitted To:
Prof. Shikha Singh

Prepared By:
GROUP 8 Bhaskaryya Baruah (14) Md. Rejaul Karim (16) Sunil Gupta (46) Nikhil Pandey (56) Rohit Kaushik (81) Prabsahib Chandock (84)

TABLE OF CONTENTS

Particulars
Introduction Objective Methodology Data Analysis and Explanations Conclusion and Recommendation References

Page No
3 5 6 8 20 22

INTRODUCTION Liberalization of foreign trade is a defining moment in the development policy of both India and China. To start with, both these countries adopted inward looking import substitution policies with an emphasis on self-sufficiency. Later in 1978, China adopted the policy of opening up to the outside world and in 1991, India initiated an import liberalization policy. Competitive advantage replaced self-sufficiency as the basic ingredient of trade policy and both the countries are now pursuing market-oriented and outward-looking policies. India has been a member of the WTO since its inception and China joined the WTO in the year 2001. Both the countries are adhering to the WTO rules in conducting their international trade.

China was able to preserve positive trade balance for a long period with the exception of early 1950s and in mid-1980s. Payments from overseas Chinese have made an important contribution to the balance of payments.

In spite of some similarities and dissimilarities, there is a scope for economic cooperation between India and China. Both the countries are growing fast. They are home to the world s largest pools of skilled work force and are expected to be the propellers of global economic growth in the present century. Both the countries are developing closer economic relations with each other and with the rest of the Asian countries through bilateral agreements.

In recent years, bilateral trade and investment between India and China are growing, indicating the existence of a vast potential for economic cooperation. The

complementarities exist between the countries, particularly in imports from China in electrical and electronics, chemicals and silk products. There are limited

complementarities of Indian exports to China. This is confined more or less to primary, resource based products, and low technology manufactured products.

China s entry into the WTO has provided new opportunities and challenges for both the countries to establish cooperation in the areas of negotiations. At the same time, both these nations also pose major threats to each other as the contender for the global outsourcing and trade hub.

China joined the WTO by undertaking many important commitments. These pertain to liberalization of trade and investment. Further, it agreed to provide non-discriminatory treatment to all WTO members, elimination of duel pricing practices, elimination of price controls, elimination of export subsidies on agricultural products and access to its service markets. As per the market access commitment, China has significantly reduced tariff duties on both manufacturing and farm products and removed non-tariff barriers to trade. It has bound all tariffs. The advanced countries are major beneficiaries of China s accession to the WTO, followed by East Asian and South East Asian countries.

The developing countries, particularly South Asian countries, are the minor gainers. China itself is a prime gainer because of increased access to the global market and an improvement in productive efficiency through improvement in technology and management. China s joining of WTO -coincided with the rapid rise in the Indo-China bilateral trade. During the recent years (2000 2004), it grew by 25.5 per cent on an annual basis. Indian exports to China increased by 26.3 per cent and imports from China enhanced by 24 per cent on an average per annum. However, India s share in China s global imports remained just one per cent. China s share in India s global imports reached 5 per cent. In recent years, China is gaining importance as destination for India s exports.

To understand the finer nuances and implications of future trade relations and international profitability, it is, hence very crucial for us to understand their present stand in isolation and with respect to the WTO. With this view in mind, we have decided to ca rry on this project, the details of which we have discussed ahead.

OBJECTIVES

The key objectives of undertaking this project were

 To analyse the Indo-China bilateral trade in the past and the future.  To understand the competitiveness of Indian products in Chinese market and
potential of Indian exports to China.

 To analyse the competitiveness of exports of India and China to third country

markets, especially, in the US, the EU, Japanese markets.

METHODOLOGY

OBJECTIVE 1 We primarily wanted to look at the trade relationship of India and China prior to China becoming a part of the WTO and analyze this data in the backdrop of their trade behaviour post China s joining hands with WTO in 2001. For this purpose we have created two timelines of three years each. The first timeline consists of 1999, 2000 and 2001. This timeline takes into account the immediate 3 years prior to China s joining the WTO. The second timeline consists of the years 2002, 2003 and 2004. These are the immediate 3 years after China joining the WTO. We have then collected trade data of all commodities that were exchanged between the two countries from the UN Commodity Trade Statistics Database (at

http://comtrade.un.org/) in these timelines and compared the data to see if there was any significant change due to China joining WTO. We have also followed the historical tariff rates and their gradual changes from 1990 to 2004 to see if the Government of these countries or the WTO had taken any concrete steps towards facilitating bilateral trade between the two nations.

OBJECTIVE 2 After getting a grip over the overall trade scenario between India and China, we focussed on three handpicked commodities from a wide basket of commodities that India exports to China. The basic idea here is to analyze the competitiveness of Indian products in the Chinese market and trace its development in the last three years. The three commodities that we picked are

 Iron and Steel  Cotton  Organic chemicals

The timeline for this study is again three years, 2007, 2008 and 2009. The statistics of 2010 have not been computed yet and hence are not available on the database. We found out the trade volume of the export of these products to the Chinese market and then analyzed their competitiveness by determining the percentage of these products against China s total imports of the same products from the rest of the world.

Also, we tried to identify the competition India faces in the Chinese market from other countries, the competitiveness of these products as compared to the Indian products and finally we have tried to comment on the sustainability of these products in the future Chinese market.

OBJECTIVE 3: To determine the competitiveness of Indian and Chinese Exports in third countries like US, EU and Japan, the methodology used can be divided under the following heads y y Collecting data of exports of China and India to the countries in concern. Year on Year growth rate in the exports of China and India to the countries in concern. y y Balance of Payments of the countries in concern with India and China. The major commodities that are traded between the countries in concern with India and China. y Position of India and China in the Import and Export Partner s list for the countries in concern. y Comparison of the exports of China and India with respect to the countries in concern. Finally, we provided with the ranking of the exports of India and China with regards to the level of technology they contain.

ANALYSIS
OBJECTIVE 1:

Here s a look at the bilateral trade statistics of India and China in two different time lines. The first timeline is from 1999 to 2001, three years before China became a part of WTO. The second timeline is from 2002 to 2004, three years after China became a part of the WTO YEARS INDIA S EXPORTS INDIA S
TO C HINA

TRADE BALANCE

TOTAL TRADE

IMPORTS FROM CHINA

1999 2000 2001

825.74 1353.44 1699.06

1287.18 1527.51 2057.85

-461.44 -174.07 -358.79

2112.92 2880.95 3756.91

2002 2003 2004

2273.82 4251.32 7677.98

2779.14 4004.50 5994.59

-505.32 246.82 1733.39

5052.96 8255.82 13622.57

Source: UN Commodity Trade Stats.

Impact of China joining WTO

(Note: India s exports to China in 2003 and 2004 were phenomenally high due to a surge in exports of steel. This can be attributed to a record growth in the iron and steel sector in India during this year.)

The following is the data for the Indian share in Chinese imports & exports and the China s share in Indian imports and exports in the same timelines we initially considered. Years India s share in Chinese import (in %) China s share in Indian import (in %) Share of China s export to India in total Chinese export (in %) Share of India s export to China in total Indian export (in %)

1999 2000 2001

0.50 0.60 0.69

2.59 2.97 3.96

0.41 0.39 0.52

2.16 3.08 3.84

2002 2003 2004

0.77 1.03 1.31

11.6% 33.8%

4.54 5.19 6.03

0.61 0.69 0.84

4.84 7.03 9.22

Source: UN Commodity Trade Stats. If we analyze the above data, we can observe that bilateral trade between India and China saw a sharp rise in the years 2002, 2003 and 2004 after China s entry into the WTO. However, these figures are still abysmally low for two countries that together amount to 1/3 rd of the world population. But things look better now as trade co-operation between the two countries has seen a big boost. In the coming years, we can expect these figures to be considerably higher and substantial.

I P

This gr

sudden surge of Commodit Exchanges between the two nations, this shows the impact of China joining the WTO.

India and China are both gradually opening up to the world. Let us see the Tariff reduction by both the countries in the course of time.

/ P AP
h sh ws I i s Ex rts t and i rts fr China. Fr 2002, w can s th
10

Impact of WTO on the Tariffs of both the nations

All Products Year Weighted mean tariff

CHINA

1992 1997 2000 2004 6

32.1 20.9 14.7

INDIA

1990 1997 1999 2004

56.1 27.7 28.5 28

(Source: World Development Indicators) China was gradually reducing its Tariff from all the products, even though they did not join the WTO, in order to facilitate trade. The import substitution policy was abolished and labour intensive exports policy was adopted, so we saw a tariff reduction from a high 32.1% in 1992 to 14.7% in 2000. After joining the WTO, China reduced its tariff further to 6% by 2004. India opened its economy in 1991, subsequently the tariffs were reduced. Before opening up, India s tariffs were as high 56% in 1990, but after liberalization there had been reduction in tariffs, but the tariffs have stagnated for a long period of time, from 1997 to 2004 we can see the tariffs hovered around 28%. After 2004, both the countries reduced their tariffs, as China has already slashed down their tariffs drastically, so there was not much avenue for reduction. But in case of India, there was drastic reduction in the tariffs later on. Weighted Mean average Tariff for the nations in 2008 China: 3.92% India: 5.86% (Source: tradingeconomics.com)

11

l zi

Comp i iv

of Indi n Produc

To analyze the competiti eness of Indian commodities in China, we have handpicked three commodities from a wide basket of commodities that India exports to China. These commodities are  Iron and steel  Cotton  Organic chemicals The following is a snapshot of value of India s exports to China in these three commodities in the years 2007, 2008 and 2009. (Note: Data for 2010 has not been computed yet.) Commodity 2007 2008 2009

Iron & steel Cotton Organic Chemicals

340299670 935689470 611300119

205599854 779630423 456051495

420598744 618342139 456615449

(Figures are in $)

         
D B IVE:

in Chinese market

12

From this graph we can see that the export of all three commodities had decreased from 2007 to 2008. This was probably due to the effect of the global recession in 2008 that hit the overall world economy. But as the economy started reviving in 2009, so did the export of these commodities. An exception to this, as we can see, is cotton. China s imports of cotton saw a further decline in the year 2009. It took some investigation on our part to probe into the underlying cause of this reduction when China s overall import of cotton had actually increased considerably. We later realized that India had intentionally decreased their export of cotton to provide an impetus to its domestic textile industry as the spot price of cotton had substantially increased. However, we cannot comment on the competitiveness of any product considered in isolation. Hence we have next compared the import volume of India from China against China s total imports of that product.

13

(Note: These figures are only approximate as the Microsoft pie chart doesn t consider decimal values and round them off to the next integer value)

Looking at these figures we can see that Indian exports constitute a very small portion of the Chinese imports. The major exporters to China are USA and EU -27. Let us consider each commodity in individual now to analyze their competitiveness.

Iron & Steel: India is a large exporter of iron ore concentrates, iron pellets, iron ore in the form of lumps, finished steel, different steel coils, flat steel products etc . The main competitors are Brazil, Australia, Canada, and South Africa. Indian ores are better in quality and higher in prices as
14

compared to its competitors. They sell it to manufacturers and trading companies. Demand for steel in China is huge. Chinese buyers have tied up long-term contracts with major suppliers. But the Chinese government is encouraging formation of large steel mills with the amalgamation of small mills. Now, the emphasis is on quality. More thrust is on use of domestic iron ore and imports are discouraged to an extent by the government. Thus, trade may not be sustainable over a long period though it s doing considerably well presently.

Cotton: India exports cotton yard, knitted fabric and raw cotton to China in huge volumes every year. But the Indian export of Cotton has seen a downfall in the last few years due to two major reasons

 An impetus provide by our Government to the domestic textile industry keeping

in mind the increased spot prices of cotton.

 A relatively poorer quality and stiff competition from other countries.

The major competition comes from Indonesia, Bangladesh, Pakistan, USA, Egypt and Thailand, besides local companies. Largely, the competitor s quality is better and prices of Pakistan and Bangladesh are lower. They sell their products to manufacturers and trading companies. The Indian companies still feel that trade is sustainable due to large scale production of garments in China.

Organic Chemicals India is a major exporter of organic chemicals to China. The major competition they face comes from countries like Singapore, Indonesia, Russia, Saudi Arabia, USA, South Korea, Taiwan, Poland and Ukraine. Prices and quality that India provides are more or less at par with its competitors. However, Saudi Arabian products are marginally cheaper while technology is more advanced in Russia. These are major threats to the Indian market share and may eat into India s market if these supplying companies form joint ventures with Chinese companies as few are planning to do. However, Indian exporters are optimistic about the sustainability of their trade and expect good growth in the coming years.

15

OVERVIEW OF OTHER EXPORTS

India has a considerable market share in China in products like sesame seeds, granite, chromium ores, menthol, paper, worked human hair, wool or animal hair, diamonds, iron ore, shrimps, prawns, aluminium oxide, leather etc. In these products India has either the highest or the second highest market share in China. India is a major exporter of resource based or low technology based products but China s major imports constitute mainly of medium and high technology products which creates a trade mismatch between India and China. But as India is progressing very fast and advancing its technology rapidly, its overall market share in China is seeing a gradual improvement in recent years. If this trade continues, in the coming decade India may move up to be one of the biggest exporters from China and grab a substantial portion of its overall market share for international goods. The three underlying reasons because of which we anticipate a higher competitiveness of Indian products in China are

 Increase in Chinese demand;  Improvement in the competitiveness of the Indian exports; and  Increase in the number of products, which India has started exporting to China.
(Product Diversification)

16

THIRD OBJECTIVE

Competiti eness of exports of India and China in US

Trade with the United States ($ billions) Source: US International Trade Commission 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CHINA TRADE STATISTICS China Exports % change US Balance 100.0 102.3 22.3 2.2 125.2 22.4 152.4 21.7 196.7 243.5 29.1 23.8 287.8 18.2 321.5 11.7 337.8 5.1 296.4 -12.3

-83.7 -83.0

INDIA TRADE STATISTICS India Exports % change US Balance 10.6 17.7 -7 9.7 -9.2 -6 11.8 21.6 -7.7 13 10.1 -8 15.6 20 -9.4 18.8 20.5 -10.9 21.8 15.9 -12.1 24 10.1 -9.1 25.7 7.1 -8 21.2 -17.5 -4.7

Top US imports from China has been Electrical Machinery and Equipments, power generation equipments, apparels, toys and furniture. The US has always been a net importer. China ranks first in the US import partner, whereas India ranks 12 th. China ranks 3rd in the US export partner while India ranks 13 th. India s top export to the US has been in IT Services, crude petroleum products and gems. Though in both the cases of China and India, the US is a net importer, still China has a much bigger market than India, the numbers prove that. The percentage growth of India s Export has been much volatile, while that of China has been steady at above 15% most of the times. In case of the US, both India and China are into knowledge/technology or semi technology based exports. This is good news for India, as because in most other regions, they are into resource based or low technology based exports.

-103.1 -124.0 -162

-201.6 -232.5

-256.3 -266.3 -226.8

17

Competiti eness of exports of India and China in EU

TRADE WITH THE EU (in billion Euro) Source: European Commission Trade 2007 CHINA TRADE STATISTICS China Exports EU Balance China Exports as a % of Total Imports INDIA TRADE STATISTICS India Exports EU Balance India Exports as a % of Total Imports 26.6 2.9 1.9 29.5 2.1 1.9 25.3 2.3 2.1 232.7 -160.7 16.2 247.9 -169.5 15.8 214.1 -131.7 17.8 2008 2009

Top EU imports from China include Machinery and Transport Equipment, Textiles and Clothing, Chemicals and other product. EU has a trade deficit with respect to China. China is a large exporter to the EU with a share of 17.8% of the imports for the EU. Top EU imports from India include Textile and Clothing, Machinery and Transport Equipment but it is a net importer in this sector, and Chemicals but it is also a net importer in Chemicals. India is a net importer from the EU nations and we can see that India is not a major import nation for the EU, though the value holds much significance for India, India is still far away from China, to even be considered as a rival. China ranks first in the EU s import partner, whereas India ranks 10 th. China ranks 3rd in the EU s export partner while India ranks 8 th.

"

18

Competiti eness of exports of India and China in Japan

TRADE WITH THE Japan (in billion Yen) Source: Ministry of Internal Affairs and communications, Japan 2007 CHINA TRADE STATISTICS China Exports Japan Balance INDIA TRADE STATISTICS India Exports Japan Balance 4056 214 3968 256 3535 231 15035 -2196 14830 -1880 11436 -1200 2008 2009

Due to absence of adequate data, we are unable to comment on the kind of commodities being imported or exported.

Ran ing of China and India in the categories of Export worldwide

Technology Category Resource Based Low technology Medium technology High technology China 11 1 11 9 India 22 15 Does not figure in top 25 Does not figure in top 25

Source: UNIDO industrial Report, 2007 From the table shown above, we can see that India scores only in Resource based exports and Low technology based exports, while China is number one when it comes to Low technology and it occupies a significant position in High Technology exports. India predominantly relies on cotton, textiles, gems and jewellery for major chunk of exports. It also exports some low technology machineries, crude petroleum exports, but need to develop high/medium technology based machineries to become a decent competitor to China in the global markets.

19

CONCLUSION AND RECOMMENDATION

India and China together constitute 1/3 rd of the total world population and 1/4 th of world s skilled labour force. They are both regarded as two future economies to reckon with. As countries of such vast magnitude, their requirements for goods and services from the world and their ability to provide first rate goods and services to the world cannot be ignored. It s also predicted that by 2025, the combined GDP of India and China would exceed that of G7 minus USA. In such a situation, it is clear that India and China cannot afford to ignore each other any longer. For a sustainable trade relationship between the two nations facilitated by their interaction with WTO, it s imperative that they move from competition to cooperation. Some of our main recommendations based on our study and our own opinions are:

 Reduction in shipping costs: The Government should try to provide an impetus

to entrepreneurs by providing subsidized shipping/ freight costs while exporting or importing goods from either of these countries.

 Mutual Recognition Agreements (MRA) on standards: For a meaningful trade

relationship between the two countries to flourish, all non-tariff barriers need to be done away with.

 Reduction in Tariffs: The markets in both these countries should be made freely
or almost freely accessible to each other with a constant waive in tariff rates. This would not only encourage bilateral trade but also add to the competitiveness of the products by making them available at a cheaper price.

 Emphasis on quality: Quality at an affordable price always creates a value

proposition that s difficult to challenge. So India should try to increase their competitiveness in the Chinese market by trying to provide an unparalleled value proposition.
20

 Increasing complementarities: There is a very clear mismatch between China s

requirements and India s offerings. India should try to focus not only on resource based and low technology products but also move to medium and high technology products. With cheap and skilled labour, India w ould be able to take on all major economies if it can bring itself at par with their technologies.

 Penetrate deeper: Penetrate deeper into their markets and develop regional
marketing strategies.

 Product Di ersification: Feed into each other s supply chain. Increase the variety
of products that are exchanged between the two countries.

 Unique comparati e ad antages: Both India and China have comparative

advantages in similar sectors such as chemicals, metals, alloys, textile etc. This makes them highly competitive in third country markets. Try not to intrude too much into each other s markets by splitting the booty!

 Foreign Direct In estments: Make themselves more attractive FDI destinations

by means of further liberalization.

 A politically diplomatic stance: The political scenario between two countries

would always play a major role in their trade interactions. Hence a politically diplomatic stance is very necessary even if they have opposing views on tertiary issues such as their individual relation with USA, UNO etc. Also it may be crucial to resolve the long ongoing controversy regarding each of their claims on Arunachal Pradesh.

 Joint Ventures: To take trade cooperation to the next level and build a cemented
relationship, it may be a great idea to create joint ventures in certain areas that could lead to mutual benefit. After all, it s one common motive that both these countries are working towards; an inclusive growth and reduction in poverty while emerging as global economic superpowers by next decade.

&

&

'

21

REFERENCES
1. Bhatt, T.P.: India and China in WTO, 2006,Planning Commission Govt. of India,

Institute for Studies in Industrial Development, New Delhi- 110070

2. Rao, P.S (2008). International Business: Text and cases . 3rd ed. New Delhi: Himalaya Publication. p340 -520. 3. Goldhar, B. (2005). Impact on India of tariff and quantitative. ICRIER. 172 (1), p10 -12. 4. Anonymous. (2011). Tariff Rates: all products, China. Available: http://tradingeconomics.com/china/tariff-rate-applied-weighted-mean-all-productspercent-wb-data.html. Last accessed 24th Feb 2011. 5. Anonymous. (2011). Tariff Rates: all products, India. Available: http://tradingeconomics.com/china/tariff-rate-applied-weighted-mean-all-productspercent-wb-data.html. Last accessed 24th Feb 2011. 6. European commission trade. (2011). Economic Indicators, China. Available: http://trade.ec.europa.eu/doclib/docs /2006/september/tradoc_113366.pdf. Last accessed 24th Feb 2011. 7. Min. of internal affairs, Japan. (2010). International Balance of Payment. Available: http://www.stat.go.jp/english/data/handbook/c11cont.htm. Last accessed 24th Feb 2011. 8. UN Commodity Trade. (2010). Database Statistics. Available: www.comtrade.un.org. Last accessed 24th Feb 2011. 9. PRC General Administration. (2010). US-China Trade Statistis. Available:
http://www.uschina.org/statistics/tradetable.html. Last accessed 24th

22