BLAME- IT- ON- CHINA SYNDROME
Although India and China granted each other the Most Favoured Nation status in trade relations in 1984, bilateral trade between the two countries rose to a modest $ 2.9 billion 16 years later in 2000. But as growth in India accelerated to the 8- 9 per cent range and industrial tariffs were slashed, the bilateral trade expanded at astronomical pace, reaching $ 74 billion by 2011.
One would think that this change would be equally welcome in both Beijing and New Delhi. But it is not. The dominant view in the official circles and press in India is that there is something deeply unfair about this relationship. China exports to India two to three times of what India exports to it. There is widespread belief that China engages in dumping its manufactured goods in the rapidly growing Indian market to the detriment of India. That view has found expression in a gigantic 154 anti- dumping cases initiated by India against China since 1995, by far the largest number of such cases by any member of the World Trade Organization against another member.
But is this view grounded in proper analysis? Not by a long shot. For starters, the United States merchandise imports from China are more than five times those of India and its bilateral trade deficit more than 10 times that of the latter. Yet, at 112 cases since 1995, it plays a distant second to India in initiating anti- dumping cases against China.
Good economics tells you that you should worry about the overall balance in the current account, which includes trade in goods and services and remittances and not any bilateral merchandise trade deficit. From a macroeconomic standpoint, there is nothing special about exporting goods over services or paying for imports from remittances. Even more importantly, macroeconomic stability requires longrun balancing of the overall current account and not that with every specific trade partner. If India gets the best prices for its goods and services in the United States and Europe, those are the markets to which it should export. Symmetrically, if it can buy the goods and services it needs the cheapest from China, it should buy them from the latter. This is no different than what we do in our household decision- making: Sell our services to the employer who pays the highest salary and buy goods from stores that sell them the cheapest. Indeed, restricting imports from China will do little to solve the problem of overall current account deficit.
A different popular complaint is that India’s trade with China exhibits a colonial pattern: It imports manufactured goods from China but exports raw materials to it. This is surely an important concern in terms of India failing to exploit its comparative advantage but not one for which we can hold China responsible. This is a wholly homegrown problem. Whereas China faces severe labour shortages and rising wages, India has a vast pool of labour in the informal sector that it can draw into the organised sector without significant wage increases and produce quality products that can outcompete the Chinese goods not only in our home market but third- country markets such as the United States and European Union as well.
But because of our draconian labour laws, we have simply scuttled organised sector manufacturing of products that China exports in vast volumes. The most dramatic example is apparel. Today, China exports more than 10 times the apparel India exports. Indeed, over time, the share of apparel in the total merchandise exports of India has dramatically shrunken from 12 per cent in 1993- 94 to 5 per cent in 2011- 12.
Highly constraining labour laws have meant that medium and large firms, which drive productivity, innovation and product quality and also account for the bulk of the exports, have shied away from entering the apparel industry in India. In an important recent paper, Rana Hasan and Karl Jandoc show that whereas tiny firms with seven or less workers employ just 0.6 per cent of apparel workers in China, they account for a gigantic 85 per cent of apparel employment in India. At the other extreme, large firms with 201 or more workers employ 57 per cent of the Chinese apparel employees while medium size firms with 51 to 200 workers employed another 31 per cent of them. The corresponding percentages in India are just five and two. Two decades after the reforms were launched, there still remains something horribly wrong with Indian policy framework.
A final Indian complaint is that China has obstructed Indian exports of pharmaceutical and software products. This is a wholly legitimate complaint and one behind which the Indian leadership should put its weight to seek better access to the Chinese market. Arvind Panagariya is a professor at
Columbia University