The 1980s were first marked by the take-off of the Chinese economy under the impetus of a programme of economic reforms which immediately opted for opening up trade as an engine of economic catching up. The proportion of exports from China + Hong Kong (simply called China in the remainder of the paper) thus rose from 2 per cent to 4.3 per cent of world exports, whilst during the same period southern Asia’s share stood at 0.7 per cent.

Next, in the 1990s, trade opening up policies in southern Asia (SA), in India especially, linked with internal liberalisation policies brought about an acceleration of economic growth and a slow but uniform rise in the weight of SA from 0.7 per cent to 1 per cent of world trade in 2000. China nevertheless continued its rapid expansion with a share in world exports that rose from 4.3 per cent to 7 per cent. The relative gap between the two zones thus became wider.

Finally, the beginning of the 2000s was marked by an acceleration in the economic and trade weight of southern Asia. Its share of world exports reached 1.13 per cent in 2003. But with

8.8 per cent for China, the relative gap continues to widen: nearly eightfold in 2003, against more than sixfold in 1990 and already fourfold in 1980. This gap, which is by no means of recent date, will take decades to shrink, if it ever does (at least for goods and not for services). It confirms that GDP growth alone accounts for only a small part of the current gap between the weight of the two zones in world trade.

The comparison between China and India’s opening up process [Chauvin and Lemoine 2003] teaches us two things about the profound difference in the openness between the two countries. Firstly, the Indian trade regime remained notably more restrictive in 1999 and the continuing reduction in the country’s tariff rates over the last few years does not compensate for the persistence of non-tariff barriers, as shown in a recent World Bank report on business conditions in the world [World Bank 2005].

The second major difference concerns the part played in GDP by foreign direct investment and domestic investment, even though, according to most experts [e g, Srivastava 2003], the official data on FDI flows are overestimated for China and underestimated for India. Both differences are the result of fairly deliberate political choices, notably revealing the weight of business lobbies in India. They are opposed to a too rapid exposure to foreign competition, while at microeconomic level they consider themselves able gradually to pick up the dual challenge of the domestic and foreign market. This was not China’s option at the time of its opening in 1980. The result is an openness ratio varying today from 1 to 4 between India and China against a somewhat similar ratio in 1980.

The issue is not one of an improbable race run on the world scene between the two demographic giants. The real short-term issue is rather the estimation of a possible synergy between the two zones, with the recent affirmation of a potential positive sum game between the two partners and the increasing numbers of top-level official meetings taking place to promote a new “Look East” policy.

IIIIIIIIII

Bilateral Trade:Bilateral Trade:Bilateral Trade:Bilateral Trade:Bilateral Trade:

Asymmetry, Spread Effect and ExpansionAsymmetry, Spread Effect and ExpansionAsymmetry, Spread Effect and ExpansionAsymmetry, Spread Effect and ExpansionAsymmetry, Spread Effect and Expansion

From southern Asia’s point of view, China is proving to be an increasingly essential partner since the opening up of trade with SA in the 1990s and progressive political normalisation with India. Its share of southern Asia’s total trade thus rose from 3 per cent to 8.2 per cent between 1990 and 2003 and the rhythm seems to have been accelerating since 2000 with an annual growth rate of 20 per cent for China’s market share in SA.

A noteworthy fact is the parallel between the dynamism of exports and imports, which might at first appear surprising for a region that is not considered very competitive in relation to its Chinese rival. The dynamic of the Chinese opening up seems in fact to have given rise to a spread effect, since the Chinese market constitutes an increasingly important trade outlet for SA, while exports of goods “Made in China” are also finding greater opportunities on the southern Asian market. The SA trade balance with China thus declined from US $ (–)390 million to US $ (–)2.4 billion between 1990 and 2003, but the coverage of imports by exports rose from 65 per cent to almost 75 per cent.

The Chinese spread effect is nevertheless very varied within southern Asia. The major fact is the share of India, which now accounts for more than 70 per cent of the total China-Southern Asia bilateral trade, against 35 per cent in the middle of the 1980s. Inversely, all the other economies of the subcontinent are seeing their relative share decline, especially Pakistan, which was at parity with India in the 1980s. This phenomenon partly reflects the decline of the “politically ordered” trade between the two zones and the growing impact of strictly economic factors. It reflects, in particular, the fairly differentiated growth dynamics within SA during the 1990s, to the benefit of India notably and to the detriment of Pakistan, which experienced a “black decade” during this period. The weight of trade with China in each country’s GDP is thus increasing rapidly for all the countries and not just for India. The progression of the relative weight of India within southern Asia is therefore due to an economy which has been politically and economically standardised and is now growing more rapidly than the subcontinent’s average: 5.9 per cent of annual growth on average for India since 2000, against

5.1 per cent for SA.

At last, China upsets the map of southern Asia’s trading partners. The growing importance of China has brought about a major readjustment to all the trading relationships of the zone with eastern countries, two major phenomena being apparent:

(1) In a few years, China has pulled itself up to first place in the list of the region’s trading partners, to the detriment of all the industrialised countries. If we leave the European Union out of the equation, in 2004 China in the widest sense thus became the leading exporter to India and she appears in the top three everywhere in the region.

(2) Contrary to the assertion that India’s trade would readjust itself towards the whole of Asia, a strong decline in the market shares of Japan, Korea and even Taiwan2 in southern Asia can be noted. For example, Korea’s market share in India decreased from a peak of 8.6 per cent in 1993 to 2.7 per cent in 2002, despite an amazing revival in 2003 widely linked to the breakthrough of the car manufacturer Hyundai (equipment and components for the priming phase). One interesting phenomenon is that the market share of the Asian industrialised countries has in the same time period increased for China as well as for Korea (7.5 per cent in 2003). It is even more marked for Japan, whose market share in India is still declining, from 23 per cent in 1984 to less than 4 per cent in 2003.

In fact this redistribution of business in southern Asia seems

Table 1: World Export Share (Per Cent) of Southern Asia-ChinaTable 1: World Export Share (Per Cent) of Southern Asia-ChinaTable 1: World Export Share (Per Cent) of Southern Asia-ChinaTable 1: World Export Share (Per Cent) of Southern Asia-ChinaTable 1: World Export Share (Per Cent) of Southern Asia-China

since 1980since 1980since 1980since 1980since 1980

1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003

China+

HK 2.1 3.1 4.3 6.4 6.3 6.7 6.6 6.5 7.1 7.4 8.2 8.8 Southern

Asia 0.7 0.7 0.8 0.9 0.9 0.9 0.9 1.0 1.0 1.1 1.1 1.1

Source: DoTS, author’s calculations.

Table 2: Openness Ratio (Per Cent) of China and Southern AsiaTable 2: Openness Ratio (Per Cent) of China and Southern AsiaTable 2: Openness Ratio (Per Cent) of China and Southern AsiaTable 2: Openness Ratio (Per Cent) of China and Southern AsiaTable 2: Openness Ratio (Per Cent) of China and Southern Asia

Since 1980Since 1980Since 1980Since 1980Since 1980

1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003

China+

HK 243861776967 61 62 71 67 72 83 Southern

Asia 17 14 17 22 22 22 22 23 24 25 26 25

Source: DoTS, authors’ calculations

to reflect the growing role of China as a “world factory”, in particular for the multinationals. Products stamped “Made in China” are actually for the most part the exports of multinational companies which have set up in China (Nokia, Motorola, LG, etc). According to F Lemoine (2003), they accounted for nearly 60 per cent of both China’s imports and exports in 2004.

From China’s point of view, the asymmetry in the trade dynamism of the two zones is nevertheless reflected by the fact that southern Asia still remains a fringe partner for China, even if its relative weight stopped decreasing after the 1980s and has increased slowly since the low of 1990. In spite of the fact that the southern Asian market comparatively doubled in the 1990s, it accounts for only 1.4 per cent of Chinese exports and its market share in China is only 1 per cent, 0.9 per cent of which is for India alone. In addition to the existence of a structural surplus in trade balance with SA, there is an apparent asymmetry between the very different weights in the various partners’ trade balances, since China is now a major trading partner of southern Asia with about 9 per cent of its total trade. It is advisable, however, to go beyond this simple observation and verify whether the spread effect is purely Chinese and whether, in spite of everything, the two zones are moving closer in trade.

Beyond this asymmetry between the relative market shares, the major fact to emerge since the 1990s is the weight of each partner’s trade in its neighbour’s GDP, with an additional gap of 1 to 2 for China only. It is because the Chinese GDP is much more open to trade (60 per cent against 25 per cent for south Asia in 2003) that the relative progression of southern Asia in China’s imports appears so weak and conversely why the weight of Chinese trade in SA appears much greater.

It is important to note that the share of both southern Asia’s and India’s trade in the Chinese GDP has almost doubled over the last five years. The acceleration of India’s growth and opening up, together with, according to most experts, a great potential to catch up over the next few decades, could make this country a special trade target in a context within which China needs to diversify towards buoyant markets which are less sensitive than those of the developed countries, and, in short, complementary to its strong sectoral specialisations. One indication is the increasing number of operations carried out in the subcontinent by wholly Chinese companies, as well as the increasing number of triangular establishments by large global companies in a number of sectors such as the pharmaceutical industry or IT.

Whether closer trade ties do or do not exist between two countries may be measured by means of a trade intensity indicator (TII). It measures the ratio between the bilateral trade flows of two partners and their respective weights in world trade. From this point of view, the two zones seem to have moved rapidly closer in trade during the 1990s. After a period of quasi-stagnation in the 1980s, the SA-China relative trade intensity in exports took off from 0.7 in 1990 to 0.9 in 1995 and 1 in 1999. This progression is especially marked for India, which rose from 0.8 to 1.34 at the end of the period.

The new discourse of opening up of the two Asian giants can be understood in this context, with an official target of US $20 billion for their bilateral trade by 2008.3 This target seems within reach. Owing to the geographic proximity of the two partners, the trade intensity indicator could easily converge towards two or three, as within eastern Asia where we may speak of true regional integration. India itself is more and more active in the Asian community project. The level of India-China bilateral trade could therefore double at least over the next few years.

However, since the beginning of the 2000s, TII has shown a surprising downward trend in spite of growth rates which are still rapid. It is explained mechanically by bilateral trade which is less dynamic than the total trade of the two zones, especially for India (India’s exports have taken off since 2002). What is therefore the potential reality of “Look East”?

IIIIIIIIIIIIIII

Interpreting India-China Bilateral TradeInterpreting India-China Bilateral TradeInterpreting India-China Bilateral TradeInterpreting India-China Bilateral TradeInterpreting India-China Bilateral Trade

Within the framework of gravity models, the simple pursuit of the economic growth of India and China involves the mechanical or structural growth of their bilateral trade. This part attempts to estimate the impact of this growth effect between 1990 and 2000, using a simple gravity model similar to the Newton model:

Xij = α ——————

Xij is bilateral trade between country i and j and GDP is measured at current exchange rates.

Table 3: Share of Trade with China (Per Cent) in Southern Asia’s Trade since 1980Table 3: Share of Trade with China (Per Cent) in Southern Asia’s Trade since 1980Table 3: Share of Trade with China (Per Cent) in Southern Asia’s Trade since 1980Table 3: Share of Trade with China (Per Cent) in Southern Asia’s Trade since 1980Table 3: Share of Trade with China (Per Cent) in Southern Asia’s Trade since 1980

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Exports 2.8 3.0 3.0 4.7 4.5 5.2 5.3 5.8 5.4 6.0 6.1 6.5 6.8 7.5 Imports 3.0 3.6 4.2 5.0 5.6 5.7 5.6 6.0 5.8 5.9 6.6 7.2 8.1 8.7 Total Trade 2.9 3.3 3.7 4.9 5.1 5.5 5.5 5.9 5.6 6.0 6.4 6.9 7.5 8.2

Source: DoTS, authors’ calculations.
Table 4: Southern Asia-China and India-China Relative Trade Intensity in Exports since 1990Table 4: Southern Asia-China and India-China Relative Trade Intensity in Exports since 1990Table 4: Southern Asia-China and India-China Relative Trade Intensity in Exports since 1990Table 4: Southern Asia-China and India-China Relative Trade Intensity in Exports since 1990Table 4: Southern Asia-China and India-China Relative Trade Intensity in Exports since 1990 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 India-China TII 0.82 0.82 0.80 1.07 1.01 1.09 1.14 1.20 1.21 1.34 1.19 1.15 SA-China TII 0.72 0.66 0.57 0.74 0.70 0.82 0.84 0.93 0.92 1.01 0.92 0.93 Source: DoTS, authors’ calculations	2002 1.13 0.90	2003 1.15 0.91
Economic and Political Weekly	June 30, 2006	2895

Taking logarithms of the gravity model equation, we get the linear form of the model: Log (Xij) = α+ β1 Log (GDPi GDPj) – β2 Log (Distanceij) By differentiating this equation, it comes to:

For this simple model, Batra (2004) estimates the β1 coefficient at 0.87. Using this estimation, we find in the period 1990-2000 a mechanical increase of US $ 3.1 billion for the India-China bilateral trade induced by both India’s and China’s GDP growth. In comparison, the current increase in bilateral flow is US $ 4.9 billion. This means that more than 60 per cent of the actual growth of bilateral trade between these two zones would be due to an economic growth effect. This effect cannot however fully explain why India and China came closer in trade in the 1990s.

Within the framework of gravity models, several other factors are added to predict the optimum level of trade: geographic proximity, shared border, regional trading agreement, trade liberalisation policy or per capita income. Two studies are analysed here (see Box 1).

Box 1: TheBox 1: TheBox 1: TheBox 1: TheBox 1: The

Gravity ModelsGravity ModelsGravity ModelsGravity ModelsGravity Models

The gravity models were developed by Tinberger (1962) and Pöyhönen (1963) and enable the bilateral trade potential between two countries to be estimated. They explain the current trade level according to economic size and geographic or cultural proximity. Different authors then showed the theoretical consistency of these models with trade theories based upon models of imperfect competition and with the Hecksher-Ohlin model. The ICRIER [Batra 2005] uses an augmented gravity model to estimate the bilateral trade potential between India and China. Some explanatory variables are added to the basic Tinberger and Pöyhönen model to take into account historic, cultural or geographic factors. The specification of the ICRIER model is quite classical:

⎛Yi Yj ⎞

log T αβ YYj ⎜

()ij =+ 1 log()i +β2 log ⎟

pop pop

⎝ ij ⎠

+γ1 log( )+ 2 log Comcol)γlog Col

+β3 log(Dij )+β4 log(Borderij )+β5 log(Langij )

Regl γ( + 3 ( )+

+γ4 log(landlocked )+γ5 log(Island )+uij

Where Tij represents bilateral trade between two countries i and j; Y the national GNP and Y/pop the per capita GNP, often interpreted as the true level of development of a country; D is the distance between the two countries; Border is a dummy variable that is unity if country i and j share a common border; Lang is a dummy variable that is equal to 1 if the two countries share a common language (official or commercial);Comcol is a dummy variable that is unity if after 1945 i and j were colonised by the same country; Landlocked is the number of countries sharing a border with these two countries; Regl is a dummy variable that is equal to 1 when both countries belong to the same regional group. The CRISIL uses the Latin-American model that takes as independent explanatory variables: GDP, the differences in per capita income (Linder hypothesis: two countries with the same level of development have similar preferences but differentiated products and therefore tend to trade with each other), the geographic distance and dummies for cultural similarity, trade agreements and trade liberalisation. Other models add trade preferences between countries or sectoral allocations as explanatory variables.

The ICRIER Model

The ICRIER estimations give a bilateral trade potential for India and China (without Hong Kong) of US $ 7.6 billion in 2000, compared to the actual level of US $ 2.9 billion. This means a trade potential which is 2.5 times higher than the actual trade. This trade potential is explained by the level of GDP but also by geographic distance, the presence of a common border and trade liberalisation policies implemented in both countries (estimated coefficients all positive and statistically significant). Inversely, the per capita income coefficient is insignificant.

The ICRIER study has nevertheless a major defect in that it does not take into account trade with Hong Kong, which is very largely with continental China and practically at the same level as India’s official trade with China. A re-estimation of the ICRIER equation with Hong Kong gives a trade potential of about US $ 8.6 billion in 2000 compared to actual trade flows of US $ 5.7 billion, in other words, a gap which is now of only 30 to 35 per cent. The difference is significant. It does not refute the existence of an important catching up effect in the 1990s but puts greatly into perspective the official discourse in both countries. On the one hand, the rapid growth of official trade with continental China is largely due to a “statistical slippage” with more and more direct trade between the two countries. On the other hand, it provides a possible explanation for the reversal of trade intensity observed from 2000 onwards, since both countries would come nearer to their trade potential.

CRISIL Estimations

The CRISIL (2003) uses a gravity model which in its structural logic is relatively comparable to the ICRIER model (see box 1). Nevertheless, while ICRIER makes its own estimations for all the world’s countries, in the case of Latin America, CRISIL uses coefficients previously estimated by other authors. Its results give a potential volume of exports from India to China and imports from China to India of US $ 7 and 9 billion respectively. This means a bilateral trade potential of US $ 16 billion in 2001 compared to the current level of US $ 4.2 billion (as per Indian customs) and therefore a potential of about 4 times the actual bilateral trade.

The CRISIL study is, however, not really convincing. On the one hand, taking into account Hong Kong reduces the gap by half. On the other hand, the calculated trade potential appears overestimated because of the direct use of a Latin American model in an Indo-Chinese context. The cultural (Spanish as common language), geographic and commercial proximity (regional agreements such as MERCOSUR) differ considerably between the two continents, even though official discussions with a view to reaching a possible free trade agreement between China and India would slightly reduce the gap with the Latin American model. This possibility seems, however, remote.

The CRISIL shows a sectoral complementarity that proves a strong trade potential. Its analysis first studies the structure of trade between India and China (without Hong Kong). At the end of the 1990s, India’s exports to China were mainly composed of mineral ores and raw materials (45 per cent of its total exports to China), chemicals and pharmaceuticals (16.5 per cent). China’s exports to India concentrated strongly on electronic (25 per cent) and electrical goods (10 per cent), and organic chemicals (17 per cent).

According to CRISIL, this trade structure shows strong sectoral complementarities between the two countries. CRISIL calculates the revealed comparative advantages of India’s and China’s exports of goods. It gives the country’s market share for a given product in relation to its world trade market share. If it is more than unity, the country has a comparative advantage in the given product. India has major RCA in agricultural products (grains and cereals, fats and vegetable oils …), metals (iron, steel) and pharmaceuticals. On the opposite side, China specialises more and more in manufactured goods such as watches, electrical appliances, transport equipment and plastic products. Another recent study shows similar complementarities at a more aggregated level and estimates that India and China compete in only 25 per cent of their products exported to world markets [Cerra et al 2005].

From a dynamic point of view, CRISIL’s observation is similar. Products with strong export growth coincide with products with the widest gap between the comparative advantages. For India, these are, for example, semi-finished iron and steel (growth of +3820 per cent in 2003-04), gems and jewellery (+238 per cent) and non-ferrous metals (+613 per cent). Thus, these strong sectoral complementarities would account for the fact that India and China quickly grew closer in trade during the 1990s.

Moreover, the CRISIL study brings out some untapped complementarities regarding the sharp differences between the RCA of each country. For India, the seven products in which it enjoys the strongest comparative advantage at world level (agricultural products, jewellery, pharmaceuticals) are still underrepresented in its sales to China (2.3 per cent of its total exports), either due to the Chinese demand being too weak or more especially due to insufficient exploration of the Chinese market by Indian firms. For China, the observation is similar, with the notable exception of household electrical appliances and wooden products, already well represented in its sales to India. These untapped complementarities would reinforce the preceding CRISIL observation of a strong bilateral trade potential for India and China at a more aggregated level.

The CEPII [Chauvin and Lemoine 2003] presents an interesting analysis of the classification of exports by factor content. It shows in particular two very different specialisation methods that appear less buoyant.

In India, the presence of strong traditional industries led the country to focus mainly on labour and resource-intensive manufacturing, which today still makes up about 43 per cent of its total exports, against 53 per cent in 1980. At the same time, India began to focus on a few niche technologies (chemicals, pharmaceuticals and biotechnology) in which it now has a comparative advantage.

On the other hand, from the beginning of the 1980s, China gave priority to an export-driven growth, strongly integrated into the global chain of production. Starting from an upstream position in the global chain of production, thanks to active trade protection policies, China then moved progressively up to products with higher added value, benefiting in particular from the establishment of multinational companies in its export zones. This would account for the large quantity of exports of goods which are not only labour-intensive (43 per cent of total China’s exports in 2001) but also capital-intensive and more technologically advanced.

This breakdown of exports according to factor content might, for the most part, account for the type of sectoral specialisation in the two countries. Thus, 75 per cent of India’s exports to China are resource-intensive and China’s demand still seems insatiable, even though considerable investment programmes in upstream sectors like steel or petrochemicals are pushing the demand back more and more towards raw materials in the strict sense, of which

Table 5: Trade Potential between India and ChinaTable 5: Trade Potential between India and ChinaTable 5: Trade Potential between India and ChinaTable 5: Trade Potential between India and ChinaTable 5: Trade Potential between India and China

(in US $ billions)

2000 2001 Continental China China + HK Continental China

Actual trade 2.9 5.7 4.2 Trade potential 7.6 8.6 16 Gap 4.5 2.9 11.8 Gap (per cent of trade

potential) 59 34 26

Sources: ICRIER for the potential trade estimate in 2000 with continental China; Author’s calculations for the potential trade estimate in 2000 with China + HK; CRISIL for the estimate in 2001.

Table 6: Indian Goods with High RCA*Table 6: Indian Goods with High RCA*Table 6: Indian Goods with High RCA*Table 6: Indian Goods with High RCA*Table 6: Indian Goods with High RCA*

but Low Export Weightagebut Low Export Weightagebut Low Export Weightagebut Low Export Weightagebut Low Export Weightage

Commodities Indian Difference in Share in RCA Indian and Total Exports Chinese RCA (Per Cent)

Gem and jewellery 22.05 20.66 0.029 Grain mill products 19.93 18.49 0.18 Manufacture of carpets and rugs 13.98 12.47 0.003 Spinning weaving and finishing textiles 5.36 2.81 0.019 Vegetable and animal oils and fats 3.34 3.19 0.12 Tanneries and leather finishing 3.02 2.4 0.05 Manufacture of drugs and medicine 1.84 1.41 1.94

Note: * The RCA index of country i for product j is measured by the products share in the country’s export in relation to its share in world trade: Thus RCAi j = (Xij / Xrj) / (Xit/Xrt), where Xij is country i’s export of jth commodity, Xrj is world export of jth commodity, Xit is country i’s total exports and Xrt is total world exports.

Source: CRISIL (2003).

Table 7: Chinese Goods with High RCA*Table 7: Chinese Goods with High RCA*Table 7: Chinese Goods with High RCA*Table 7: Chinese Goods with High RCA*Table 7: Chinese Goods with High RCA*

but Low Import Weightagebut Low Import Weightagebut Low Import Weightagebut Low Import Weightagebut Low Import Weightage

Commodities Chinese Difference in Share in RCA Chinese and Indian Total Imports RCA (Per Cent)

Transport equipment not
elsewhere classified	7.74	7.72	0.17
China Pottery and earthenware	3.85	3.5	0.73
Manufacture of watches and clocks	3.24	2.93	0.42
Manufacture of plastic products
not elsewhere classified	3.21	2.91	1.02
Manufacture of musical iiiii nstruments	2.41	2.03	0.025
Wood and cork products	3.56	3.44	0.08
Note: As in Table 6.
Source: CRISIL (2003).

India is not really a big producer. These investment programmes therefore explain the sharp reversal in 2004-2005 of India’s exports of steel to China, itself experiencing such a glut on the world market as to cause a drop in prices on the domestic Indian market.

On the other hand, India is proving more and more dependent on mass produced goods from China, either low end market products manufactured by state companies or up-market goods made by multinational companies (e g, mobile telephones) that now account for more than 70 per cent of India’s imports from China.

This sectoral differentiation however seems less buoyant than it might appear, as shown by the Brazilian example recently quoted by The Economist.4 Brazil has a sectoral specialisation which is somewhat similar to India’s (strong traditional industries and importance of agricultural products). Last November, the Brazilian government recognised China as a market economy and a strategic partner. In return, China promised to invest US $10 billion in the infrastructure sector. Ten months later, with the exception of China’s exports which are invading the country, contrary to expectations, the bilateral trade between the two countries has still not yet taken off. The Brazilian economic leaders are today blaming China for buying only low added value raw materials while the promised investments are still awaited. This is also partly noticeable in the case of India, whose specialised products are still having difficulty entering the Chinese market.

The Brazilian example shows that the presence of strong sectoral complementarities alone is not sufficient to predict a rapid expansion of bilateral trade between India and China.

IVIVIVIVIV

Projection for 2015: ‘Chindia’ orProjection for 2015: ‘Chindia’ orProjection for 2015: ‘Chindia’ orProjection for 2015: ‘Chindia’ orProjection for 2015: ‘Chindia’ or

‘China and India’‘China and India’‘China and India’‘China and India’‘China and India’

Table 8: China and India Exports by Factor ContentTable 8: China and India Exports by Factor ContentTable 8: China and India Exports by Factor ContentTable 8: China and India Exports by Factor ContentTable 8: China and India Exports by Factor Content

(Manufactured Products)(Manufactured Products)(Manufactured Products)(Manufactured Products)(Manufactured Products)

1980 1985 1990 1995 2001

the logic of the recent political discourses on a synergy between the two countries that would make them a new global centre of gravity [Ramesh 2005].

There are, however, serious arguments that also plead that the two economies have more complementarities with the world economy than with each other, what we call here the “India and China” scenario. This could explain the slowdown in the growth of relative trade intensity at the beginning of the 2000s.

We shall first put forward the arguments in favour of the second scenario, before giving a quantitative assessment of the two scenarios for bilateral and world trade in 2015.

Sustainability of India’s Trade Deficit

Whilst the authorities in both countries openly congratulate themselves on India’s official trade surplus with China over 200304 and 2004-05, they are also aware that including Hong Kong and informal or indirect trade would really alter the picture. The southern Asia trade balance with greater China thus declined from US$ (–)390 million to US$ (–)2.4 billion between 1990 and 2003 despite China’s desperate efforts to mitigate it and even facilitate the market entry of SA products. There is now no medium-sized town in India without its “Chinese bazaar”, usually located on the high street. Indeed, for a considerable section of India’s political and economic actors, China is seen as a threat to India’s security as well as to its economy.8 China is moreover the first victim of the anti-dumping measures taken by India over the last few years (400 measures implemented in 2005, of which about 20 per cent were against China).

India’s service exports will nevertheless remain an unknown factor for the next few years. Indian service exports experienced an annual growth rate of 17 per cent during the 1990s, and nearly 30 per cent currently, and today generate about US $ 20 billion. An additional US$8 billion come from the repatriated income of experts working abroad. Altogether, each year almost US $ 30 billion supply the Indian balance of payments. The pursuit of this trend might enable India to shore up the inevitable deterioration in its trade balance. A noteworthy fact is the keen interest shown by Indian IT firms in China, in which in the space of two years they are reported to have set up more than thirty dual-purpose facilities: a world offshore unit (after India, the second in the world for Infosys for example) and one of the most promising IT domestic markets in the world already earning US $ 25 billion per year and achieving an annual growth rate of 30 per cent.

But linguistic and even administrative barriers, as well China’s intention to focus more and more actively on the service sector, could limit trade in services between the two countries and even make them competitors in world markets. Estimates made by the Gartner consultancy show that Chinese exports of offshore services could rise from US$2 billion in 2004 (US$17 billion for India) to 27 billion in 2007, while the official target in India is US$50 billion in 2008. China’s political will to move into this sector is symbolised by its implementation of a vast English language teaching programme that could challenge one of India’s decisive advantages. But one of the features of outsourcing in China is the dominance of Asian companies (from Japan and Korea) while western groups are more present in India, doubtless due to cultural and geographic proximity.

Indications in Favour of the “India and China” Scenario

The specialisation and industrial transformation methods described earlier plead first in favour of the emergence of two zones trading with the developed countries in different segments. These specialisation methods could at the same time lead to a more and more asymmetric trade relationship between an India still clamouring for cheap Chinese goods, whilst its own specialised products have difficulty entering the Chinese market. In this scenario, India would continue to focus on specialised ranges for the developed countries with an upgrading in the added value of these products. This is indeed what India is already doing in some sectors: the development of small commercial vehicles, exports of which have doubled between 2004 and 2005, car accessories, electrical switchgear, power equipment and industrial consumables (electrodes), biotechnology… China would continue to mass produce, but with the inclusion of a greater technological content.

The consequences of dismantling the multifibre agreement in 2005 are quite interesting to study from this point of view. Both India’s and China’s exports benefited from this measure, progressing quickly, both in the European Union and in the United States markets. Despite the predominant weight of the Chinese giant, a closer analysis shows that exports from both countries are in fact concentrated on very different segments: mass production in China and specialised textiles in India, especially for furnishing.

A second indication in favour of this scenario concerns the evolution of FDI, with a growing interest in India, even though this country still has difficulty convincing investors of the quality of its business environment. Two factors seem important. Firstly the attractiveness of a more and more solvent market with promising demographic perspectives encourages direct investment in mass production sectors and/or in sectors with high transport costs (Dunning effect). A diversification of the Chinese risk, especially on the part of multinational corporations that have already set up facilities in China in order to re-export (auto components…), can then be observed.

The inflows of FDI in India henceforth stand at US$6-8 billion per year against US$100 million at the beginning of the 1990s and the corrected data of Srivastava9 [2003] show a ratio to GDP of 1.7 per cent for India against 2 per cent for China. The official target of US$150 billion for FDI inflows by 2010 no longer appears completely illusory. Since the beginning of the year,

Table 9: Trade Flows (in US$ billion)Table 9: Trade Flows (in US$ billion)Table 9: Trade Flows (in US$ billion)Table 9: Trade Flows (in US$ billion)Table 9: Trade Flows (in US$ billion)

in 2015in 2015in 2015in 2015in 2015

Of which: GDP Total Trade India-China Trade to the Bilateral Trade Rest of the World 2003 2015 2003 2015 2003 2015 2003 2015

Sc 1 Sc 2 Sc 1 Sc 2

India 580 1411 131 617 6 39 116 124 578 501 China 1412 4754 851 3079 6 39 116 845 3040 2963 India +

China 1992 6165 982 3695 969 3617 3464

Note: Scenario 1: “India and China”. Scenario 2: “Chindia” Source: DoTS IMF, authors’ calculations.

Table 10: Changes in World Trade in 2015Table 10: Changes in World Trade in 2015Table 10: Changes in World Trade in 2015Table 10: Changes in World Trade in 2015Table 10: Changes in World Trade in 2015

(Per cent)

Share of India-China Bilateral Trade Share in World Trade in Each Country’s Trade (Per Cent) (Apart India-Chinabilateral Trade) (Per Cent) 2003 2015 2003 2015

India 4.9 6.3 18.7 India 0.8 2.4 2.1 China 0.8 1.3 3.8 China 5.5 12.8 12.4 India + China India + China 6.3 15.2 14.5

Note: Scenario 1: “India and China”. Scenario 2: “Chindia”

advertisements by multinational companies wishing to set up or acquire businesses in India are steadily increasing (Wal Mart, Nokia, Motorola…) with operations which promise to be significant, like that of the Korean company POSCO (US$12 billion). These projects target both the internal market and reexports of specialised products to the developed countries. This is the case with Nokia, which in 2005 set up a production and R&D unit in India. Chinese firms are themselves beginning to invest in India. TCL (electronics), Huawei (computer software) and Zhongxing Telecom have launched operations in India worth a total of US$ 210 million for the first two companies. Their objective is clearly to circumvent the risk posed by the barriers to entry but also to gain direct access to a mass market.

The “India and China” scenario finds a somewhat solid support in the recent study by Valerie Cerra et al [2005]. She attempts to evaluate the impact of China’s entry into the WTO on India’s trade by 2010, using a computable general-equilibrium trade model.

On the bilateral scale, Cerra shows that the entry of China into the WTO should not induce a strong expansion of India-China bilateral trade, by reason, notably, of a decrease in China’s imports in important sectors (agricultural products).

Quantitative Assessment of the Two ScenariosQuantitative Assessment of the Two ScenariosQuantitative Assessment of the Two ScenariosQuantitative Assessment of the Two ScenariosQuantitative Assessment of the Two Scenarios

by 2015by 2015by 2015by 2015by 2015

This sub-section presents quantitative results for the two scenarios by 2015 with a separation between the India-China bilateral trade and trade with the rest of the world.

Assumptions and Hypothesis

For India-China-World trade, we assume:

(a) The trade elasticity of GDP remains constant for India and China.

(b) The growth projections of GDP at current exchange rates come from Goldman Sachs (2003).

(c) World trade pursues the linear trend of the last five years. The two scenarios are projected to unfold as follows:

(a) The “Chindia” scenario assumes that the two countries will continue to move closer in trade at the current rhythm. The growth rate of bilateral trade is thus assumed constant by 2015 and equal to the current average rate (+30 per cent per year).10

(b) The “India and China” scenario assumes that these countries should not move closer in trade in a significant way by 2015. Bilateral trade growth is therefore only a function of their respective GDP growth (see the gravity model equation in Section III).

Estimation Results

Regarding bilateral trade, the two scenarios are as follows:

(a) Scenario 1 “India and China” gives an India-China bilateral trade worth US $38 billion in 2015, or 6.3 per cent of India’s trade

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and 1.3 per cent for China (see Tables 9 and 10).

(b) In Scenario 2 “Chindia”, India-China bilateral trade could reach US $115 billion in 2015, or 18.7 per cent of India’s trade and

3.8 per cent of China’s trade.

Regarding trade flows from India and China towards the rest of the world, the projections are as follows:

(a) On a global scale, the asymmetry between India and China increases in both scenarios: China would represent about 13 per cent of world trade in 2015 against 2.5 per cent for India. The relative gap would thus stabilise but the absolute one would become considerable.

(b) The joint weight of India and China trade, excluding bilateral trade, would differ slightly: 15.2 per cent of world trade in the “India and China” scenario against 14.5 per cent in the “Chindia” scenario.

The advantage of having tested the two scenarios is that even the favourable “Chindia” hypothesis, which means a reinforced cooperation between the two Asian giants, would see their joint pressure on the rest of the world decline really very little. Moreover, in this scenario, Chinese pressure on the Indian market appears unsustainable from India’s point of view and reinforces scepticism with regard to such a scenario.

The “India and China” scenario appears more probable. The share of bilateral trade in each partner’s trade could become stabilised quite quickly (in China’s favour) after what could be seen as rapid catching up during the 1990s. On the other hand, the joint pressure of the two countries on world markets should increase but in quite different segments, with the weight of China’s trade clearly remaining predominant.

Whatever the scenario, the developed countries must make a greater effort to adapt, but it does not rule them out altogether. To create the basis for a positive sum game, it presupposes, among other things, a more consistent targeting of these two countries’ domestic demand, which should grow rapidly over the next few years. The only difference between the “India and China” scenario and the “Chindia” scenario is a more or less fine targeting of the high added value demand of these two countries. Within this framework, the India-China-Developed Countries triangular strategies are a sensible way of taking advantage of the strong complementarities between India and China, rather than simply putting up with them.

mr:

Email: jjboillot@yahoo.fr

[The views expressed in this paper are those of the authors and do not necessarily represent those of the French Embassy.]

1 Throughout this paper we have used the DoTS database (Direction of Trade Statistics, IMF). This has the advantage of providing consolidated data that are considered more reliable than those from national sources alone. For statistical reasons, the location of the big trade masses will be between China and Hong Kong on the one hand and southern Asia (composed of India, Pakistan, Bangladesh, Nepal, Sri Lanka and the Maldives) on the other hand. The division into regions tends to respond to two issues: First, there is an extensive informal/illegal trade in southern Asia. For reasons of selective protectionism but also to avoid customs duties, some countries are used as platforms for the re-export of China’s products to India.

2 We are also beginning to observe this in the case of Hong Kong, whose role as an export platform for southern China is progressively disappearing, to the benefit of new ports built in Mainland China.

3 Announced jointly during the visit of the Chinese prime minister Wen

Jiabao in New Delhi in April 2005. 4 ‘Brazil’s Fading Love Affair with China’, The Economist, August 4, 2005. 5 Between 1995 and 2005, the number of students in India increased from

6 The story dates back to the beginning of the 1980s with the creation of the current giants Infosys and Wipro by engineers who had spent several years in the United States. Their return to India benefited from political support thanks to NASSCOM and the various technical ministries concerned, which created Software Technology Parks around the Indian Institutes of Technology and the public research centres, benefiting from numerous tax advantages such as duty free imports of the most modern equipment. Attracted by this first dynamic base, companies from all over the world have begun investing directly in India or subcontracting their software activities to it, and progressively other services such as distance accounting or customer service centres (call centres) but also research centres. Altogether, India receives nearly 40 per cent of all IT projects located in the developing countries, far ahead of China (19 per cent) and Singapore (11 per cent) where the Indian presence is significant. Thus, India’s computer service exports increased from US $0.5 billion to almost 18 billion between 1999 and 2004.

7 In 2004, FDI outflows were US $2.2 billion for India against 1.8 billion for continental China. (UNCTAD, World Investment Report, New York, September 2005).

8 See the paper by D Nalapat, ‘China Misses Its Chance with India’, Business Standard, May 2, 2005.

9 The author corrects the problems of the Indian definition of FDI (no inclusion of reinvested earnings and equity investments above 10 per cent) and the Chinese overestimations, which include flows transiting via Hong Kong.

10 A high hypothesis that assumes that India’s trade will account for 3.5 per cent of world trade in 2015 (official target) and a low hypothesis based on the linear trend of the last five years were also tested, but they give results that appear unrealistic.

Batra, A (2004): ‘India’s Global Trade Potential: The Gravity Model Approach’, ICRIER WP 151, ICRIER, December.

Cerra, V, S A Rivera and S C Saxena (2005): ‘Crouching Tiger, Hidden Dragon: What Are the Consequences of China’s WTO Entry for India’s Trade’, IMF Working Paper WP/05/10, IMF, May.

Chauvin, S and F Lemoine (2003): ‘India in the World Economy: Traditional Specialisations and Technology Niches’, CEPII Document de Travail n° 2003-09, CEPII, August.

CRISIL (2003): ‘Indo-China Bilateral Trade’, CRISIL Ecoview, CRISIL, July.

Debroy, B, P D Kaushik (eds) (2005): ‘Reforming the Labour Market’, Academic Foundation in collaboration with the Friedrich Neumann Stiftung and the Rajiv Gandhi Institute for Contemporary Studies, New Delhi.

Goldman, Sachs (2003): ‘Dreaming with BRICs: The Path to 2050’, Global Economics Paper n°99, Goldman Sachs, October.

OECD (2005): ‘2005 Economic Review – China’, Economic and Development Review Committee, OECD, Economic Department, May.

Ramesh, J (2005): Making Sense of Chindia, India Research Press, New Delhi.

Srivastava, S (2003): ‘What Is the True Level of FDI Flows in India?’, Economic and Political Weekly, February 15.

World Bank (2005): ‘Doing Business in 2006’, the World Bank, Washington DC.