Indo-China trade: Is the balance tilting?

• India’s trade deficit with China declined by 12.1% during April-December, 2018 to reach US$ 41.3 billion.
• Primary & intermediate products dominate India’s exports to China, while imports are led by electrical & electronic equipment and pharmaceuticals.
• The Department of Commerce is actively exploring possible export opportunities to reduce the trade deficit, particularly in the aftermath of the US-China trade war. These measures are beginning to show their intended impact.
• It is critical for India to push for further market access and enhance domestic manufacturing capacities, both to shrink the trade deficit and reduce dependence on China for critical imports.

India’s huge trade deficit with China has been a persistent area of concern over the years. In 2017-18, the trade deficit had reached a record high of US$ 63 billion.

However, the tables seem to have turned quite significantly this year, with India’s exports to China posting a strong yoy growth of 34% during April-December, 2018-19 to reach US$ 12.7 billion. In comparison, exports to China for the entire fiscal year 2017-18 stood at US$ 13.33 billion On the other hand, imports from China have witnessed a decline by 4.5%. This is quite a favourable equation, considering that India’s overall exports have increased by less than 10% during the period while imports have increased by 14% yoy.

 

As a result, India’s trade deficit with China declined by 12.1% during April-December, 2018-19 to reach US$ 41.3 billion. India is expected to register the sharpest ever decline in its trade deficit with China this year.

India-China trade analysis

The trade deficit between India and China has widened alarmingly over the years. It stood at just US$ 671 million in 2000-01. Imports from China increased sharply from US$ 1.5 billion in 2000-01 to US$ 76 billion in 2017-18, accounting for 16.4% of India’s exports.

India’s exports to China, on the other hand, have not increased at the same pace. Exports were at US$ 3 billion in 2003-04 and reached their peak of US$ 18 billion in 2012-13. However, in 2017-18, they stood at just US$ 13 billion.

Two commodity groups form a major share of India’s imports from China – electrical and electronic equipment and pharmaceuticals. China accounted for over 60% of India’s electric and electronic equipment imports and 75% of imports of active pharmaceutical ingredients.

India’s exports largely comprise intermediate products and raw materials including cathodes, petroleum oils and iron ore & concentrates. There is a need to enhance manufacturing capacity within India to enhance the exports of value added products as well as to reduce dependence on China for critical product lines.

In the present fiscal, petroleum products have contributed the most to growth in India’s exports to China, growing by over 2.5 times yoy during 2017-18. Other products that have led growth include marine products, organic chemicals, plastics, petroleum products and rice.

Potential export opportunities

Last year, India had proposed to conduct bilateral trade in local currencies (rupee/renminbi) with China to reduce the trade deficit. China had refused to accept this proposal.

However, after sustained discussions between the two countries, China has agreed to reduce barriers for India’s exports in some commodities to reduce the trade deficit. It has removed import restrictions for non-basmati rice, sugar and some pharmaceutical products from India. High quality farm products are high on the agenda, as China also plans to remove restrictions for rapeseed, bananas, soya, buffalo meat, oil meal and groundnut.

The ongoing US-China trade war also promises enhanced export opportunities for Indian exporters, as the two countries have imposed retaliatory tariffs on each other’s products. A study by the Department of Commerce identified at least 100 products wherein India can benefit from declining US exports to China. The most prominent product groups in this list are cotton, corn, almonds, wheat and sorghum. India has market access for some of these products including fresh grapes, cotton linters, steel boiler tubes and flue cured tobacco. However, there are certain product groups where India does not have market access to China currently, like fresh/dried oranges, corn, durum wheat and grain sorghum.

While US exports to China in these products face tariffs of 15-25%, exports from other countries face tariff rates of 5-10%. India can also avail of additional duty concessions of 6-35% on the MFN under the Asia Pacific Trade Agreement. A report by UNCTAD estimates that India could gain as much as US$ 2.65 billion owing to China’s tariffs on US imports. The sector expected to benefit the most is chemicals and plastics, with a potential upside of US$ 1 billion.

The Department of Commerce had proactively identified potential growth opportunities in collaboration with Indian exporters and other stakeholders in the aftermath of the US-China trade war. The Department signed three protocols to open access to Indian exporters from China for Indian rice (to include non-basmati rice, June 2018), fishmeal/fishoil (November 2018) and tobacco (January 2019). Protocols for soybean meals, cakes and pomegranates could be finalised soon. India has also asked China to announce its import quotas for sugar and rice in advance, so that Indian exporters can be better prepared.

As efforts by the government for enhanced market access to China bear fruit, Indian exporters need to ensure that they leverage the benefits of these opportunities in the coming years.