India-China - Trade Relationship

PROJECT OF INTERNATIONAL BUSINESS
REPORT ON TRADE RELATIONS

With Special reference to China
Submitted to: Submitted by:
Prof. Vivek Dabral Group 1
Introduction
The relationship between the two giants of Asia, and the world, has been progressing at a
tremendous pace. Both nations have witnessed their share of ups-and-downs over the years.
India and China today represent Asia’s two largest and most dynamic economies which are
emerging as new trend setters in international relations. The history of bilateral relations
between India and China dates back to the mid 1980s1 . The process of dialogue initiated by
the governments of the two countries at that point of time was quite helpful in identifying the
common trade interests. Efforts were initiated to make the most of their economic strengths so
as to further the economic relations between India and China. In the year 1984, India and China
entered into a Trade Agreement, which provided them with the status of Most Favored Nation
(MFN). It was in 1992 that India and China got involved in a full-fledged bilateral trade relation.
The year 1994 marked the beginning of a new era in the India- China economic relations. In this
year a double Taxation Agreement was signed between India and China. The government of
both countries also took the necessary initiative to turn into dialogue partners in the Association
of Southeast Asian Nations (ASEAN). In 2003, the Bangkok Agreement was signed between
the two countries. Under this agreement both India and China offered some trade preferences
to each other. India provided preferences on tariff for 217 products exported from India. In 2003,
India and China entered into an agreement to initiate open border trade via the Silk Route. The
two countries have also shown interest to take part in a multilateral trade system as per the
WTO commitments. China has already been the top trading partner of India in recent time. The
economic relation between the two countries is considered to be one of the most significant
bilateral relations in the contemporary global economic scenario and this trend is expected to
continue in the years to come. Today, China is India’s largest trading partner; whereas India is
within the top ten of China’s trading partners.
Bilateral Trade: Dynamics and Direction

The bilateral trade between India and China has grown four-fold in the past decade. But the
trade was tilted more in favour of China. India had an unfavorable balance of trade with China.
While China continues to enjoy a huge favourable balance of trade vis-à-vis most other smaller
states of the South Asian region, it is only the India-China trade that has remained to be China’s
most balanced trade in South Asia. However, both these nations are growing very fast and can
propel the future world economy with a pool of the world’s largest skilled workforce.
India’s top ten imports from China comprise 79% of the overall imports from China. The majority
of the share is held by Electrical equipment (HS-85) at 34.5%, followed by Mechanical
appliances (17.7%) and Organic Chemicals (9.2%) among others. Interestingly, the top ten
importable products from China witnessed a positive rise of 4.7% during 2011-16, whereas the
rest of the products witnessed a fall of -6.1% during the same period. Among top imports,
electrical products (HS 85) grew by 9.5% followed by plastic products (HS 39) at 8.7% and
Optical, photographic and other medical devices (HS 90) at 7.3% during the same period.
India’s top ten export items to China comprise 73% of the overall exports to China. The majority
of the share is held by Cotton (HS 52) at 14.2%; followed by Ores, Slag and ash (HS 26) at
13.1% and Organic Chemicals (HS 29) at 8.8% among others. Contrary to the rise in imports of
top ten products from China, growth rate of exports of India’s top ten items to China fell by a
drastic -13.8% during 2011-16. The exportable products that witnessed majority of the fall
include Ores, slag and ash (HS 26) by -23%, followed by Copper (HS 74) by -19.3%, Plastic
products (HS 39) and mineral fuels (HS 27) by 15.4% each and cotton (HS 52) by -14.7%
among other during the same 7 period. Machinery and Mechanical appliances witnessed the
highest positive growth of 4.5% among top ten exportable products to China during the same
period.
CHINESE FOREIGN TRADE

Thanks to its enormous trade surplus over the past few years, China has become the world's
largest exporter and ranks second among the world’s largest importers. Despite its strict
policies, the country is fairly open to foreign trade, which represented 35.7% of its GDP in 2019
(World Bank, 2020). China's main exports include transmission apparatus for radio-telephony
(9%), automatic data processing machines and units (5.9%), electronic integrated circuits and
microassemblies (4.1%) and petroleum oils (1.5%). On the other hand, the country mainly
imports electronic integrated circuits and microassemblies (14.8%), petroleum oils (11.5%), iron
ores (4.8%), petroleum gas (2.5%) and motor vehicles (2.3%). The International Monetary Fund
(IMF) is forecasting a rebound of 7.8% in the volume of exports of goods and services of this
country in 2021, after a nil increase (0%) in 2020, and a jump of 10% of its imports, after a fall of
2.7% in 2020.
The country's main partners include the United States, Japan, South Korea, Vietnam, Australia
and Germany. Increasing tensions in the U.S. - China's economic relationship has heightened
business uncertainties in 2020, given that the US is the country's main trade partner (China's
2019 trade surplus with the U.S. was USD 295.8 billion after an all-time record of 323.3 billion in
2018). Similar tensions were at play with Australia although with less consequences for China.
However, the Chinese government has been adopting looser economic policies to mitigate
mounting risks to future growth. On the 15th of November 2020 China signed the Regional
Comprehensive Economic Partnership (RCEP) with 14 other Indo-Pacific countries. This free
trade agreement is the largest trade deal in history, covering 30 percent of the global economy.
It includes the Association of Southeast Asian Nations (ASEAN : Brunei, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and ASEAN’s free
trade agreement partners (Australia, China, India, Japan, New Zealand and Republic of Korea).
The RCEP covers goods, services, investment, economic and technical cooperation. It also
creates new rules for electronic commerce, intellectual property, government procurement,
competition, and small and medium sized enterprises.
Trade has become an increasingly important part of China’s overall economy, and it has been a
significant tool used for economic modernisation. As reported by WTO in 2020, exports of goods
in 2019 were USD 2,499.4 billion and imports USD 2,078.4 billion, while exports and imports of
services in 2019 reached USD 281.6 billion and USD 497 billion respectively. China reported an
overall 19.5% increase in exports and 18.7% rise in imports for 2019. According to the World
Bank data of 2019, China's trade surplus for goods stood at USD 425.2 billion, an increase from
USD 395.1 billion in 2018. The overall trade balance (including services) was USD 164.1 billion
in 2019, from 103 billion the previous year.
TRADE AGREEMENTS: CHINA
China has bilateral investment agreements with over 100 countries and economies, including
Austria, the Belgium-Luxembourg Economic Union, Canada, France, Germany, Italy, Japan,
South Korea, Spain, Thailand, and the United Kingdom. China’s bilateral investment
agreements cover expropriation, arbitration, most-favored-nation treatment, and repatriation of
investment proceeds. They are generally regarded as weaker than the investment treaties the
United States seeks to negotiate.
China maintains 17 Free Trade Agreements (FTAs) with its trade and investment partners and
is negotiating or implementing an additional eight FTAs. China’s FTA partners are ASEAN,
Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Maldives,
Mauritius, Georgia, Korea, Australia, Cambodia, Hong Kong, and Macao. In addition, in
November 2020, China and 14 other countries signed the Regional Comprehensive Economic
Partnership. China announced the ratification of the agreement in early 2021.
FDI FROM CHINA
Amid apprehensions of a fall in Chinese investment in India, overall flows added up to just $163
million in 2019-20 and no proposal has been filed since the government decided last April to
scan all foreign direct investments (FDIs) from countries with which India shares a border.
"We have ourselves decided to keep close tabs on Chinese investment, which was meant to
discourage them, especially because of the takeover threat for our companies. Without our
permission, they cannot invest a single yuan in India," a government source said.
India-China LAC stand-off: Complete coverage
Officials said some investors may be keen to avoid scrutiny and may be waiting for the detailed
clarifications to emerge, which will specify things like the definition of "significant beneficial
ownership". The new rules on FDI for neighbouring countries, put in place with an eye on
Beijing, were meant to ensure that Chinese investors do not enter India via a third country.
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PROJECT OF INTERNATIONAL BUSINESS

REPORT ON TRADE RELATIONS

Submitted to: Submitted by:

Prof. Vivek Dabral Group 1

Bilateral Trade: Dynamics and Direction

CHINESE FOREIGN TRADE

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