Patterns of International Trade - International Trade between China and India - Case Study Example

Patterns of International Trade: Analyze the International Trade between China and India School: Introduction In terms of population, India and China offer the highest potential market across the world, and the two have been developing into leading economic powers, over the past few decades (Mareli & Signorelli, 2011). In the light of long-term competitiveness, the two countries have taken advantage of market liberalization, which opened their borders to more bilateral trade relations and foreign direct investment (FDI). In the economics of the present time, globalization plays a significant role in charting the economic relations between India and China (Mareli & Signorelli, 2011). This paper will explore the trade relations between India and China, evaluating the development of trade between the two, over the past decade; the key features of their trade; and the cases of their trade patterns. The History of the trade relations between India and China over the past decades These relations between China and India started in 1950, after India became one of the first nations to start relations with Taiwan and China. India and China are the world’s most populated countries and also the world’s fastest growing economic powers (Naidu & Kumar, 2013). The rapid growth of the Indian and the Chinese economies in the economic and the global diplomatic influence has been a major determinant of the increased significance of the bilateral relations of the two. The economic and the cultural relations between India and China can be traced to ancient times, as the Silk Road worked as one of the channels that facilitated the spread of Buddhism from the Indian region to the East Asian region, besides its use as the primary trade route. The relations between India and China during the early years were typified by the border disputes that led to three main military clashes (Garver, 2002). The three clashes included the Sino-Indian war, which took place in 1962; the 1967 Chola incident and the Sino-Indian clash of 1987. However, after the 1980s the two countries were successful in reigniting their economic and diplomatic ties (Lu, 1986; Sidhu & Yuan, 2003). The outcomes of the trade relations include that in 2008, China became the largest trade partner to India (Naidu & Kumar, 2013). Despite the mutual strategic and economic relations existing between the two countries, a number of problems have remained strenuous to the relations between India and China (Frankel & Harding, 2004). The first issue is that India remains subject to a heavy trade imbalance in favor of China (Sen, 2003); the two countries have not resolved their border disputes successful (Chellaney, 2012) and Indian media continues to report the military excursions of Chinese forces (Naidu & Kumar, 2013). Following the growing bilateral trade relations between China and India, over the past years, Indian companies have began to establish operation centers in China. According to India’s embassy to China, about 100 Chinese Companies have started operations in India. This number includes the many large-scale state-owned Chinese corporations working in the fields of infrastructure and machinery construction, which have secured contracts in India. The openness of India in allowing these companies to launch their operations in their country can be justified, partly; using the national competitive advantage theory of international trade. The theory maintains that countries invest in a given industry, based on whether they consider themselves capable of innovating and upgrading in the given industry (Wild & Wild, 2013). Similarly, a lot of Chinese hardware manufacturing, IT and electronic companies have launched operation centers in India. Some of these companies include ZTE, Huawei Technologies, Haler and TCL among others. Many of the Chinese companies with operational centers in India are doing the business in the power sector, especially in the service of EPC projects. The fact that many of the Chinese companies with operation centers India have invested in the power sector can be explained using the absolute advantage theory of international trade (Wild & Wild, 2013). The theory maintains that different countries specialize in the production of different products, based on their ability to produce the products more effectively than others, using less or the same amounts of resources (Wild & Wild, 2013). In the case of China, specializing in the power sector allows it to take advantage of its higher competitiveness in the area. The grand Chinese automobile company “Beijing Automotive Industry Corporation” (BAIC) made the announcement of its plans to invest USD 250 million in constructing an auto plant in Pune (Naidu & Kumar, 2013). The Key features of the trade relations between India and China India has, in the recent past, been named as the top trade partner to China. The bilateral relation between India and China has been and are still considered one of the highly impactful bilateral trade relations in the current global trade scenario (Frankel & Harding, 2004). China is the number one international trade partner of India. The major products imported by India, from China include coal, electronics, briquettes, Coke, Machinery, organic chemicals, pharmaceutical and medical products. The wide array of the products offered by China, including value added products like electronics and non-value added ones like coal can be explained using the factor proportions theory; the theory holds that countries supply the goods that are in abundant supply (Wild & Wild, 2013). The products exported by China to India, demonstrate its relatively higher competitiveness in offering products like machinery, pharmaceutical products, electronics. The choice of China’s export offering can be explained using the national competitiveness advantage theory (Wild & Wild, 2013). The theory maintains that the competitiveness of national economies in a given industry is dependent on the ability to upgrade and innovate in the given industry (Wild & Wild, 2013). The imports of India from China accounted for about 0.82 percent of the total amount during the financial year 1990-91. The share taken from the total Indian imports from China had increased to 4.66 percent during 2000-01 (Naidu & Kumar, 2013). The Indian import share taken by Chinese products had increased significantly over the years, and it stood at 13.94 percent for the financial year 2011-12. The unbounded increment of the trade exchange between China and India can be explained using the absolute advantage theory, which maintains that trade should not be limited by tariffs, but allowed to flow freely, depending on the demand levels of the partners in business (Wild & Wild, 2013). When translated into the terms of the value of the imports of India from China, the products were valued at USD 196.6 million during the financial year 1990-91; the value of the Chinese products imported into India increased considerably, to the value of USD 68248.6 million during the financial year 2011-2012. Over the two decades of bilateral trade, the value of Chinese exports into the Indian market was registered as having grown by 28.5 percent per year. On the other hand, Indian exports to the Chinese market forms a vital part of the bilateral relations between the two countries. The main classes of products imported by China from India include slag and ash, ores, plastics, iron and steel, cotton and organic chemicals. When translated into the terms of the value of the exports of India to China, the value stood at USD 614.7 million during the financial year 1990 – 1991. This amount increased considerably, to USD 30980.3 million during the year 2011-2012. During the years covered by the period between 1991 and 2011, the imports of China from India registered a growth of 17.8 percent per year. The exports made to China by India were estimated to account for 3.39 percent of the total imports made by China; as of 2011-2012, the percentage taken by Indian exports increased to 10.17 of the total amount (Naidu & Kumar, 2013). Key features of the India-China bilateral trade The India-China trade relations form the very vital aspect of the bilateral relations between the two countries. Following a transitory reduction in the inflow of Chinese products into India, the imbalance of trade seems to have changed in favor of India, which was traditionally disadvantaged. India is benefiting from the positive trade balance with China. According to the Mercantilism theory of international trade, India was successful in meeting the need of accumulating wealth through increasing its exports to China, while at the same time reducing the levels of imports, which improved its trade balance (Wild & Wild, 2013). The India-China relations in trade are regulated by India-China JBC; the regulating agency seeks to ensure that a free exchange of the services and the goods of the two countries prevail. The two countries entered into a contractual trade agreement in 1984, and later, another one in 1994, which was aimed at eliminating double taxation. The bilateral trade saw the exchange of USD 13.6 billion during 2004, which marked an increase from the 2002 figure of USD 4.8 billion. The value has been increasing constantly, and registered the highs of USD 18.7 billion in 2005. The relations have been improved by the launch of border trade relations in 2006, which had been closed more than 40 years ago. Under the India-China trade relations, the major Chinese imports from India include iron and steel, ores, slag and ash, organic chemicals, plastics and cotton. Some of the potential products that could be exported to China include oil seeds, marine products, inorganic chemicals, salt, rubber, plastic, medical and optical equipment and dairy products. Other areas that India could advantage from, by exporting to China include the products and the services under the areas of IT, biotechnology, health, ITES, tourism, education and financial services (Mareli & Signorelli, 2011). The choice of India to supply these products, for example cotton and ores, can be justified using the factor proportions theory of international trade. This is the case, because it has focused on the exportation of the products that are abundant in India but limited in supply, in China (Wild & Wild, 2013). On the other hand, the major products exported by China to India include electrical equipment and machinery, organic chemicals, cement, nuclear reactors, machinery, boilers, silk, oils and mineral fuels. It is important to note the bigger portion of Chinese imports to India comes from value added products like electrical machinery, which fall under the classification of low and medium technology manufactured products (Mareli & Signorelli, 2011). China’s focus on the production of value added products can be justified using the absolute advantage theory of international trade. The case is true for China because focusing on the production of the items that it produces more efficiently is more favorable to its dominance of the trade relations (Wild & Wild, 2013). The causes of the features of the India-China trade relations The factors behind the India-China trade relations explored before include the trade agreements made by the two countries. One of these agreements is that targeting the realization of USD 1000 billion target in bilateral trade, which the two plan to realize by 2015, up from the USD 66 billion registered during 2012 (Naidu & Kumar, 2013). The second factor behind the features of trade explored before is the border trade agreements and movements initiated by the two governments, after it remained barred for over 40 years (Naidu & Kumar, 2013). The third factor behind the trade features explored is the demographic size of the two countries, noting that they house more than a third of the world’s population (BBC, 2013). The huge population and market allows them the potential to become a major economic block. The fourth factor underlying the trade ties identified is that the worsening of the relations between the two could drive India towards the side of America, which would be unfavorable to China (BBC, 2013). Conclusion In demographic terms, China and India are the superpowers of the world. Further, the two economies are rapidly growing into economic hubs, and the growth has favored the bilateral trade relations of the two. The trade relations of China and India started in 1950, despite the fact that the relationship has been strained by the issues in the way of the relations. Due to the favorable trade relations between the two countries, Chinese and Indian companies have invested in the counterpart’s territory. The key features of the trade relations include that India has grown into the top trade partner for China, the trade between the two countries has been increasing over the past two decades, and the two countries have become economically dependent. The factors behind these traits include the trade agreements made, the reopening of border trade, the demographic size of the two, and the need to keep India from engaging with America. References BBC. (2013). Why China Seeks better relations with India. BBC News India. Retrieved from: http://www.bbc.com/news/world-asia-india-22430301 Chellaney, B. (2012). Rising Powers, Rising Tensions: The Troubled China-India Relationship. SAIS Review, 32(2), 99–108. Frankel, F.R., & Harding, H. (2004). The India-China Relationship: What the United States Needs to Know. New York: Columbia University Press. Garver, J. W. (2002). Protracted Contest: Sino-Indian Rivalry in the Twentieth Century. Seattle: University of Washington Press. Lu, C. H. (1986). The Sino-Indian Border Dispute: A Legal Study. Westport, CT: Greenwood Press. Mareli, E., & Signorelli, M. (2011). China and India: Openness, Trade and Effects on Economic growth. EJCE, 8(1), 129-154. Naidu, V.B., & Kumar, S. (2013). An analysis of trade relations between India-China. Global Research Analysis, 2(4), 40-41. Sen, T. (2003). Buddhism, Diplomacy, and Trade: The Realignment of Sino-Indian Relations, 600-1400. Honolulu: University of Hawaii Press. Sidhu, W., & Yuan, J.D. (2003). China and India: Cooperation or Conflict? Boulder, CO: Lynne Rienner Publishers. Wild, J., & Wild, K. (2013). International business: the challenges of globalization (7th Ed). Upper Saddle River, NJ: Prentice Hall. Read More