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New chapter in trade

The US-imposed trade war is opening new doors for Indo-China engagement in economic development

New chapter in trade

Trade war is not a short-term tussle; it will linger. Nobody knows when it will reach its end game. It is an indirect sanction against export-based economies, given that the US is the biggest buyer in the world. Amidst this turbulence, a new pattern of economic partnership emerges. Even politically adverse countries are tending to reunite to withstand USA's protectionism. In this perspective, a relook at economic cooperation between China and India unleashes a new pattern of economic engagement.

There are two fronts of India-China economic relation: one, trade and the other, investment. Interestingly, both are opposite to each other in terms of benefits accrued to India. In trade, benefits are accrued more to China as it is the biggest trade partner of India. The exponential growth in trade between the two countries has led India to be swamped by a huge trade deficit. Today, China accounts for more than a third of India's global trade deficit. A large trade deficit implies pressure on the balance of payment.

In investment, however, the benefits accrued are more to India. China has become the driving force behind the upsurge of start-ups in India. It has also been a pioneer in placing the country in the electronic manufacturing industry's high growth trajectory. It is considered the future linchpin for foreign investment in India.

One of the important reasons for China emerging as an important investor in India is the government's reversal of the security concern threat. Laying a lid on the political adversarial role, Modi government's FDI policy attributes more to the economic and financial power of China as a potential investor in India. Nevertheless, whenever political disputes arose, China continued to play hardball against India. The situation aggravated after India refused to join Chinese BRI (Belt and Road Initiative). Amidst the antagonistic situation, the trade war provided a boon to Indo-China economic relations. It led to a turnaround in the vilified Chinese attitude towards India. It evoked an intent to have a good neighbour for economic partnership. It was further accelerated by Prime Minister Modi's informal summit with Xi Jinping in April 2018.

The trust deficit began to ease off and the bonhomie between the two leaders unleashed a new turf for economic engagement. The unilateral attempt by the USA to invoke protectionism stood as the sole reason for China's volte-face to India. China started extolling India's economic power with its large domestic market and IT prowess. The Chinese media advocated an India-China joint partnership to counter USA protectionism. Global Times, the Chinese official media on international issues, said, "A new day has dawned for the two countries, which were once at odds." Focusing on joint partnership, it said, "Given the situation, closer Sino-Indian cooperation may be the right solution for some Indian economic problems." These remarks have nuances.

China is planning to import more from India and other countries. It decided to reduce the import tariff on 8,500 items from India and other Asian countries. The goods include chemicals, agricultural produce, medical products, soybean, clothing, steel and aluminium products. To fill the gap of soybean, China considered zero duty import from India, against 3 per cent at present.

While China was struggling against the US-initiated trade war, India was dragged into the war, however, on a different plea. India was blamed for export subsidies as they were non-WTO compliant after India crossed the threshold limit of per capita income of $1000. To retaliate, India decided to raise tariffs on 29 items from USA. The attempt was praised by China. Responding to this as a right retaliation, China advocated for joint action against Trump's protectionism. It alleged that USA would undermine the global free trade system. China argued that at a time when global value chain (GVC) plays a pivotal role in manufacturing, protectionism would harm global manufacturing.

In fact, despite the political difference, economic ties between India and China have been steadily rising. Seemingly, there is a shared belief that both countries can reset their trust deficit by reaping benefits from their inherent economic advantages. Gao Feng, the spokesman of the Ministry of Commerce, China, said, "As two large developing countries and major emerging market economies, China and India both have a huge domestic market". He said further, "The economies of both countries are highly complementary to each other, creating enormous potential for cooperation."

A new opportunity stems from the ongoing trade war to export more to China and court Chinese investment in infrastructure. A huge market opens for the export of soybean meal to China after China decided to impose a 25 per cent tariff on US soybean. China is the biggest importer of soybean in the world. The annual import is around US $ 34 billion. USA accounts for the biggest share of China's soybean import market. With the imposition of high tariff on US soybean, which makes space for new entrants, India stands a bigger chance to cut a big pie of the Chinese soybean market, with the tariff reduced to zero. At present, India's global export of soybean is about US $0.7 billion. Of these, China accounts for an insignificant share – less than 1 per cent.

Similarly, China can play a significant role in infrastructure investment in India. Last year, China's Sany Heavy Industry planned an investment of US $9.8 billion in India, while Pacific Construction, China Fortune Land Development and Dalian Wanda announced investments of more than US $ 5 billion each

Cross-border e-commerce would be an eye-catching fief for joint cooperation between the two countries. India has become the fastest market in e-commerce, with about 100 million internet connections adding every year. According to a report by Tracxn, a start-up research company in India, a whopping US $5.2 billion was invested by Chinese internet companies such as Alibaba, Fosun, Baidu and Tencent in 2017. This showed a five-fold jump from US $930 million investment in India in 2016.

(The views expressed are strictly personal)

Subrata Majumder

Subrata Majumder

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