Trade should leave China and India both winners

December 14, 2010

Decades of mistrust haven’t stopped China and India’s trade from tripling in the past five years. Now China wants to restart free trade talks when Premier Wen Jiabao visits New Delhi later this week. India has long resisted such an agreement. Yet more open trade should leave both sides winners.

Since the two countries warred over a border dispute in 1962, China and India have had a fractious relationship. But on some issues they agree. India helped China stop an agreement over climate change in Copenhagen that both felt was too soft on rich countries. Chinese and Indian state-owned firms have bid together for oil and gas assets.

While both have benefited from foreign trade, closer union may sound like an unequal bargain. India’s trade deficit with China rose to $16 billion in 2007-2008 from $1 billion in 2001-2002, and freer trade might push it wider. China’s cheap currency gives it an edge, despite Indian tariffs on many goods. But in the longer term, India could be a big beneficiary too. Despite the widening deficit, India’s exports to China have been growing. Indian exports to China surged by 75 percent in the first quarter of 2010, year on year, led by textiles and precious metals. China’s cheaply produced goods pose little threat to India’s thriving services sector, while in categories like pharmaceuticals, India remains significantly ahead.

Moreover, India looks due to take over some of China’s manufacturing lead. Wages in China have been rising rapidly. India’s workforce could step into the gap: the country’s GDP per capita is a quarter of China’s, its median age ten years younger, and its unemployment rate double that of its trade partner. Cheap Chinese power equipment and infrastructure should help India build modern factories, at relatively low cost. Undoing deep mistrust will take time. Indians may worry that China will attempt to keep both low and high end manufacturing, particularly given its reluctance to let the currency appreciate. India may not be prepared to sell more of what China really wants, like iron ore. Free trade between the emerging superpowers is a distant goal, but still one worth pushing for.

Comments

Free trade should be the order of the day more so between India and China. They should set an example of how free trade works. If they can give more credence to free trade, show the world how they make it work and then get the world to follow their steps, that will be really good. Otherwise just trade. No point beating empty tin cans – make plenty of noise, din but zero in substance.

Posted by biztru | Report as abusive
 

Chinese premier Wen once suggested India’s software in combination with China’s hardware shall make up the invincible win-win scenario. We hope one day this vision will come into reality with a free trade pact between the two countries.

Posted by Jocomus | Report as abusive
 

While I agree with the gist of this article, it does include some misconceptions. The yuan has and continues to appreciate, though never enough to satisfy scapegoating critics. The evolution of controlled currencies was to prevent currency runs, and if left to western speculators Asian economies including India would’ve been left in ruin from the 1997 Asian Financial Crisis. It was china that forcefully fought the speculators and brought stability to the region and it continues to be china that helps power the regions’ growth. Regarding the border war 50 years ago, tensions could be reduced dramatically but it is difficult to get a vibrant democracy to negotiate because hawks within the country will always accuse the deal of being soft and the media follow suit (with more impressive headlines to talk of disputes and exaggerated incursions than peace and agreements). It appears as if the chinese have been sincerely negotiating border disputes with many neighbors and realize the folly of military spending versus economic growth. And finally bilateral trade measurements are terrible for assessing true global trade and overall deficits and surpluses and whether such trade is beneficial or not. Example: china has trade deficits with several OPEC and asian countries but the commerce with these countries is nonetheless beneficial to both.

Posted by mgunn | Report as abusive
 

Well that’s the same argument put forward when USA and China signed their free trade agreement.
Today the trade imbalance is ever growing and all traditional GDP calcs are thrown out asking for better ( fudged calc in demand ) to display that decision was not bad.

Its equitable as long there is true free ecomony , not when one side controls the yuan and we have to free it to market forces.
We do not want to be the second case of Thailand and ASEAN counties including south korea which was in the brink of economic disaster not so far off.

A free trade agreement with China is as good as giving up all Indian autonomy in economic affairs and when they have thier own paid goons in the form on Communist party of India in our land and who in late 60′s even vouched China’s chairman is theirs too..

Posted by bokababu | Report as abusive
 

I fail to understand how these two countries do not simply put their conflicts behind in sake of their own personal development. It is obvious that strong ties between these mega-nations will only help them grow stronger.

I have recently written some interesting articles about China and the world in my blog: http://www.laowaiblog.com

I invite everyone to read and to comment,

Thank you

Posted by Liorpari | Report as abusive
 

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