Trade Deficit with China
Context:
Amid a growing trade deficit with China, External Affairs Minister S. Jaishankar has stated that India’s economic relationship with China lacks balance, as Indian goods do not enjoy the same level of market access in China that Chinese products do in India.
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- This comes as Chinese imports to India exceeded $100 billion in FY24 and continue to rise, while India’s exports to China barely surpassed $16 billion in the same period.
- In the first seven months of 2024, Chinese imports have already crossed $60 billion, a 10 percent increase compared to the previous year’s $55 billion.
Reasons for Trade Deficit
A 2022 working paper by the Economic Advisory Council to the Prime Minister (EAC-PM) highlighted the various reasons including:
- Non-tariff barriers: These are faced by Indian exporters in China, particularly affecting agricultural and pharmaceutical products.
- Pharmaceutical exports: The paper noted that China, unlike other countries, does not permit second-chance testing through third-party labs when products are rejected during random sampling for non-compliance.
- With no redressal mechanism in place, the lab’s ruling is final, leading to significant financial costs for Indian companies and affecting bilateral trade.
- Agricultural exports: Like mangoes and grapes, Indian exporters must annually re-submit a list of approved facilities to the General Administration of Customs of China (GACC).
- This process, despite prior verification by Indian authorities, involves additional requirements like video inspections, causing delays and increasing costs.
- High translation costs: The EAC-PM also pointed out that high translation costs are a major hurdle for Indian exporters, as many Chinese trade documents, including those notified at the WTO, are incomplete or only in Chinese.
- The paper suggested that China should adhere to WTO-notified languages—English, French, and Spanish—to ease this burden.
- Unclear specification: Additionally, China often does not clearly specify product categories in its sanitary and phytosanitary (SPS) or technical barriers to trade (TBT) notifications, forcing Indian exporters to spend extra time and money gathering relevant documents from multiple sources.
China Plus One strategy
Over the past five years, global manufacturing has seen a major shift as multinational companies, including Apple, have adopted a ‘China plus one’ strategy to reduce dependence on China. This shift, driven by COVID-19 disruptions, US-China tensions, and rising costs in China, has led companies to diversify their supply chains, moving production to countries like Mexico, Thailand, and Vietnam. India, with its large domestic market, government incentives like the PLI scheme, and rising smartphone demand, has become an attractive destination for companies. Apple, for instance, assembled $14 billion worth of iPhones in India in FY24, contributing 14% to its global production.
India’s electronics exports, especially mobile phones, have grown significantly, transitioning from a trade deficit with the US in FY17 to a surplus of $8.7 billion in FY24. As India integrates into global value chains (GVCs), it is focusing on sectors like renewable energy, AI, and semiconductors through agreements with the West. However, a complete shift away from China is unlikely, as many countries like Vietnam and Mexico have seen an increase in Chinese FDI despite reducing reliance on Chinese exports. For India, attracting Chinese investment may be a more effective strategy to boost exports to the US and Europe than relying solely on trade.
Measures India Can Take to Reduce Trade Deficit with China
- Improve Market Access for Indian Exports: Engage with Chinese authorities to address non-tariff barriers faced by Indian exporters, particularly in sectors like agriculture and pharmaceuticals.
- Diversify Export Basket: Expand the range of products exported to China beyond primary commodities and focus on increasing exports of value-added products and manufactured goods where India has competitive advantage.
- Promote Domestic Manufacturing: Implement schemes like ‘Make in India’, ‘Digital India’, and SEZ schemes to boost domestic manufacturing and encourage import substitution by promoting use of locally produced goods through public procurement policies
- Rationalise Imports: Identify non-essential or luxury imports that can be substituted with domestic alternatives and impose higher tariffs on certain imports like electronic items to discourage imports and boost local production.
- Negotiate Free Trade Agreements: Negotiate and implement FTAs with key trading partners to reduce tariffs and other barriers to Indian exports.
- The India-UAE CEPA aims to boost Indian exports of textiles, pharmaceuticals, and agricultural products.
- Improve Export Infrastructure: Invest in modernising ports, roads, and logistics networks to streamline the export process and reduce costs
- Skill Development: Invest in skill development programs to create a workforce with expertise for modern industries.
- Effective Currency and Debt Management: Manage the rupee’s exchange rate effectively to promote exports without excessive depreciation. Focus on fiscal consolidation to reduce debt burden and create a stable economic environment for industries.