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IndiaChinaBilateralTradeRelationship

PressRelease

1. Introduction

2. MacroeconomicDevelopmentandtheOutlook

2.1 SustainingHighGrowth

2.2 SourcesofDomesticGrowth

2.3 OutlookforMacroeconomicSituation

2.4 SomeAreasofConcern

3 DevelopmentsinChineseTradePolicy:ItsrelevanceforIndia

3.1 EconomicEnvironment

3.2 TradeandTradePoliciesinKeySectorsofInteresttoIndia

4 IndiaChinaBilateralTradeandEconomicRelations

4.1 TrendsinChineseTradewiththeWorld

4.2 ChangingTrendsofBilateralTradeEngagement

4.3 ChangingCompositionofTrade

4.4 IndiasBilateralTradeImbalancewithChina:SustainabilityIssue

4.5 RegionalDisparityinTradeinChina

4.6 ConstraintstoIndiasExportstoChina

5 ChangingPatternofTariffLiberalisation

5.1 OverallLiberalisationintheTariffRegime

5.2 ImpactofTradeliberalisationonAgriculturalandManufacturingSectorsinIndia:ASimulationAnalysisUsingComputableGeneralEquilibrium 5.3 IndiasExportPotentialinChina

6 SectoralDistributionofIndiasExportPotential

6.1 EstimatesofIndiasTradePotentialinChina

6.2 ExportPotentialofCurrentlyandPotentiallyTradedProducts

7 EngagementofChinaandIndiainGlobalValueChain

7.1 MethodologicalIssues

7.2 TradeDependenceofChinaonGVCSector

7.3 ChinastradelinkageswiththeEuropeanUnionandtheUnitedStates

7.4 IndiasPartsandComponentsTradewithChina

7.5 IndiasSectoralExportpotentialinChinaandCompetitionwithASEANcountries

8 ImplicationofYuanAppreciationonExportProspectsofIndiaintheThirdCountryMarkets

8.1 EmergingIssues

8.2 LiteratureReview

8.3 EmpiricalModel

8.4 EmpiricalResults

9 ApproachtowardsRegionalTradingArrangements

9.1 RegionalInterestofChinaandIndiainEAS:InaCGEFramework

9.2 ASEAN+3,ASEAN+4orEAS:ResultsofRegionalWelfareGains

10 Conclusions

References

ListofAppendix

SKMohanty1

1.Introduction

ChinahasemergedasIndiaslargesttradingpartnerafteritreplacedtheUnitedStatesinMarch2008(GoI,2008).WhenIndiainitiateditscomprehensivereformsintradebetween the two countrieswas insignificant as the trade basketwas restricted to a limited number of products.Howeverwithin a short period,China has become Indias singlemostimportanttradingpartnereventhoughIndiasbilateral tradedeficitwithChinareachedanunsustainable levelofUS$39.1billion in2012(IMF,2013b).PolicymakerswillmanagethishugedeficitgiventhatIndiacanneitheraffordtolimititseconomicengagementwithChinanorcontinuewithsuchahugebilateraltradeasymmetryforalongperiodoftime.

Chinahasbeenonahighgrowthtrajectoryformorethanthreedecades,andevenmaintainedasustainablerateofgrowthatmorethan9percentperannumduringtheof domestic expansion has been robust since its accession to theWTO in 2001. As is evident from statistics, the main drivers of Chinas economic growth have been its export and a

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subsequentexpansionofthedomesticsector,accompaniedby its importsurge.Duringtheabovereferenceperiod,Chinasexportshare in theworldeconomy increasedfrom3.410.4 per cent,while its imports rose from4.4 per cent to 9.1 per cent, respectively. The global economy started recovering from recession in 2010, but with the deepening of the financialsituationinEuropeonceagainenteredthedangerzoneandremainedthereuntilthethirdquarterof2012.Theglobalsituationcontinuedtoremainfragilein2013,anditsadverseimpactwasfeltinmostof theemergingcountries that includedChinaand India.Although itsuffered fromglobaldownturn,Chinahasbeenstrategising to takeadvantage from theexpectedglobaleconomy.

Inthiscontext,itissignificantthatChinasexternalsectorgrowthismostlypropelledbymanufacturingexports.TechnologyisanimportantfactorforbothproductionandexportsastechnologyembodiedFDIandthedomesticinnovationsystemhavecontributedtothegrowthofproductdevelopmentforexports,oftenwiththeimportofrelatedservices(FuandBalasubramayam,2005).Withthechangingindustrialstructureofthecountry,alargeportionofChineseexportsistendingtowardshightechexports.Thistrendcoupledwithmassproductionwillsustainmomentum for long (Mohanty and Chaturvedi, 2006). Further, with the Most Favoured Nation (MFN) and market economy status, China is likely toaggressivepromotionofexports.

However,sustainedeconomicgrowthoveraperiodoftimehasledtoarisein labourproductivityandthedomesticwagerates.Withqualitativeimprovementinthesectorisgraduallyshiftingtowardsmoreknowledgeintensiveindustries.Intheprocess,Chinahasstartedlosingitscostadvantageinseveralsectorsthatspantheprimary,resourceintensiveaswellaslabourintensiveindustries(WTO,2012).TherearepossibilitiesthatsomeoftheseindustriesarelikelytobeshiftedoutofChinaandrelocatedinothercountriesincludingIndiabutitremainstobeseenwhetherIndiaisgearingupforsucharole!TheimplicationsoftheChinesetradestrategyneedstobeexaminedinthecontextofIndiastradeoptions.

AsChinaemergesasthelargesttradingpartnerofIndia,therearemanybilateralissuesthatrequireclosescrutiny.Indiasbilateraltradegapisincreasingtherestoftheworld.ItisimportanttoexaminetowhatextentisthisbilateraltradeimbalancecontributingtotheoveralltradeimbalanceofIndia.Animportantsustainthepresentleveloftradebetweenthetwocountrieswhilenarrowingtheexistingbilateraltradegap.

EquallyimportantisacomparativeanalysisofthetariffpoliciesofbothcountriesbecauseoftheirincreasedengagementwiththeworldeconomythroughtheirTradingAgreements (RTAs) inAsiaand inotherpartsof theworld.Furthermore, reformprocesses in tariff policies inboth countries are again, linked to their external sector performances.Relativeexternalsectorperformanceinbothcountriesrequiresfurtherinvestigationinthelightofongoingtradepolicyreforms.

TheGlobalValueChain(GVC)hasemergedasanimportantvehicleoftradeintheglobaleconomy.Whileduringthe1950sand1960s,theusageofthistradeofdevelopedcountries,,itisanimportantsourceoftradeengagementbetweenNorthSouthandSouthSouthinrecentyears.GlobalvaluechainremainsrelativelyanunexploredpolicyoptionwithIndia.However,ChinaandIndiaarebecomingimportantplayersinsuchactivitiesforbothdevelopedanddevelopingcountriesparticularly intheirengagementwiththeUnitedtheEuropeanUnion.IsitpossibletoleveragethisadvantagevisvisChina?

ThereispresentlyglobaldebateontherevaluationoftheChineserenminbiandthegrowingglobalimbalances.Theimplicationofarevaluationoftherenminbiontheexportcrucialforitstradewiththerestoftheworld.Moreover,IndiastradeisincreasinglybecomingAsiaCentric,whileitsassociationwithvariousRTAshasexpandedduringthelasttwoandhalfdecades.Inthisprocess,tieswithSAARCandASEANhavegainedprominenceforIndiainSouthandEastAsia.StrategiesbyIndianpolicymakerscanlinkthethecountriesthatarepartoftheEastAsiaSummit(EAS)Process.Thesearepressingissuesthatneedspecialconsideration.

Thisstudyexaminessomeoftheseissuesasfollows:Section2presentssomebroadmacroeconomicdevelopmentsbothinIndiaandChinawhileatradepolicyreviewofChinainthecontextofIndiaseconomicinterestisdiscussedinSection3.ThebilateraltraderelationshipbetweenIndiaandChinaisanalysedinSection4Section5examinestariffSection 6 focuses on the trade potential existing in partner countries Section 7 examines patterns of engagement of India and China in the Global Value Chain Section 8 examines theimplicationofarevaluationoftherenminbionIndiasmarketaccessinthirdcountriesSection9examinestheengagementofIndiaandChinaindifferentregionalimplicationsofthisforIndia.Theconclusionsandpolicyrecommendationsarepresentedinthelastsection.

2.MacroeconomicDevelopmentsandtheOutlook

AsIndiaandChinaarethetwofastestgrowingcountriesoftheworld,thepossibilityofaneconomicrapprochementamongthemtoseizethesynergies2ofissue fordiscussion.Both thecountrieshavewitnessed transitions in their economicpoliciesduring the last two to threedecades, and the irreversiblenatureof economic liberalisationhasenabled each nation to integrate with the world economy. While analysing the existing patterns of their trade and the sectoral complementarities for further economic engagement,comparativemacroeconomicperformanceofbotheconomiesmaybeexaminedinrecentyears.Therobustnessoftheseeconomiesmaybeseenfromtheir

2.1SustainingHighGrowth

Chinahasincreasinglyattractedtheattentionoftheglobaleconomiccommunityduringthelastthreedecadesduetoitsexcellenttrackrecordinmaintainingannals of theworld economy3.Since 1980, it has beenmaintaining an averageGDP growth of about 9 per cent per annum and has takenmajor strides in elevatingpopulationabovethepovertyline.Duringtheperiodofglobalbuoyancywhichspannedfom2003to2007,itsGDPgrowthrateacceleratedtomorethan11.6percentperyear,whileitshighestgrowthrateinrecenttimewasrecordedin20074(seeTable2.1).ThereoccurrenceoftheGlobalFinancialCrisisin2008taperedglobaleconomicactivitiessubstantially.However,Chinesehighgrowthprofilewasadverselyaffectedwith thepersistenceofaglobaleconomicdownturn.RealGDPgrowthrateweakenedsharply from9.6percent in2008 to7.7percent in2012,aspersionsaboutthegrowthprospectsofthecountryinfuture.InthePostAsianFinancialCrisisperiod,theexternalsectorhasemergedasthekeysourceofChinasandimportsgrewattherateof28.1percentand25.4percent,respectivelyduring200308anddeclinedsignificantlyduring200910.AccordingtotheMinistryofCommerceofChina(MoCC,2011),tradeinservices,whichgrewatamodestrateearlier,hasregisteredahighgrowthintherecentyears.

5Foreigndirectinvestmentaddedupto$378billioncumulativelywithabout$108

billionin2008.Risingcurrentaccountsurplusescombinedwithstrongcapitalflowsbroughtthenetinternationalreservestoabout$1.55trillionin2007,surpassingthoseofJapaninthepresentdecade.However,externalsectorperformancewasadverselyaffectedduringtheperiodofrecession.

TheresilientChineseeconomydealtwithintermittentoccurrencesofexternalshocksinrecentyears.IthaseffectivelycopedwithshocksforexampleliketheAsianFinancialCrisistheSARsepidemicseveralmajornaturaldisastersincludingfloodsandearthquake,andthecurrentepisodeofglobalrecession,amongothers.

Duringthefinancialcrisisof199798and200812,theChineseauthoritiesevadedadjustingtheexchangerateregimetoreducethepressureofcrisisandinsteadlaunchedamajorKeynesianprogrammeofreflation(estimatedtohaveinjectedstimuluspackagesofabout$1trillionduringAsianCrisisand$0.6billion6duringthepresentcrisistoboostdomesticdemand)tokeepupthegrowth momentum of the economy. Succumbing to international pressure, China has agreed to make appropriate corrections in the exchange rate.7 Theeconomic policies and other factors has led to a resurgence of the growth rate in 2010 butthe growthmomentumwas subdued until 2012. The IMF projection of Chinese growth rate hasexpressedpessimisminthemediumterm.

Amongothers, thedemographicdividendremainsoneof themost important factors,determiningthegrowthprospectsofChina in thenext twodecades.Growthpopulationstructurebecause thedependencyratio,which is representedby relativesizeof the labour force to the totalpopulation, is themajoryardstickof levelofoutput.A risingshareofworkersinthepopulationinChinaindicatesthatparticipationrateisproperlyaccountedforintheproductionprocess.Withdecliningfertilityrate,therewillbereductioninbothpopulationgrowthanddependency rate, leading to rise in theworking age ratio. In case of India andChina, increasingworkingage ratiowould contribute to higher per capita incomedividend.

Variousstudies have indicated thatChina has passed through a phase of demographic restructuring, and demographic dividend has amajor contribution to the recentcountry. The demographic dividendwill continue for some timebefore it turns out to be adverse in the formof demographic tax.Chinesepeak populationwill be 1.5 billion in 2032 beforedeclining(Wolf,etal,2011).TheempiricalanalysisofCaiandWang(2005)concluded thatdemographicdividendofChinawouldcease toexistby2015.ADB(2011)projected thatChinaexpectedtoreceivebenefitofdemographicdividenduntil2020,andwillincurdemographictaxinthe2020s.ThepredictionabouterosionofChinesedemographicdividendinthenextdecade,particularlybefore reaching thestatusofadevelopedcountry,couldbedue toseveral reasons includingrapidlyagingpopulation, risingdependency ratios, risinghealthcosts for thesharpgenderimbalances,etc(Wolf,etal,2011).Onthecontrary,Indiaislikelytogainfromthedemographicdividend.AccordingtoAiyarandMody(2011),Indiastarteddividendsince1980s,anditwouldcontributeatabout2percentagepointsperannumtoIndiaspercapitaGDPgrowthoverthenexttwodecades.ItwouldnotonlyaddresstheissueofincomeconvergenceamongIndianstatesbutalsofocusonbalancedgrowthof theregions.Theworkingagepopulation inChina isexpectedtodecline in thenextIndia.Withtheexistingdemographiccharacter,IndiasgrowthprofilecouldoutpaceChinasforaconsiderabletime(Economist,2010).ThelevelofdemographicdividendsinIndiaandChinaaredependentuponthesuccessfulimplementationofarangeofpolicychoicesduringtheperiodoftransformation(GolleyandTyers,2012).

GrowthmomentumoftheIndianeconomy8hasbeensusceptivetotheglobalbusinesscycles(seeTable2.1).Duringtheperiods200102and200812,Indiasgrowthperformancewaslimpingascomparedtotheyearsofbuoyancyintheglobaleconomy.AverageGDPgrowthdeclinedto6.5percentduring200812from9.5percentduring200507.slowincomparisontoChina,thoughbothcountriesrevivedfromtheglobalrecessionin2010.Withareboundingoftheeconomy,IndiacouldpostarobustGDPallowingpercapitaincometorisefrom$1159in2009to$1432in2010.Thepercapitaincome,however,hasstagnatedat$1501in2012.Duringthelastdecade,IndiasshareinWorldGrossProducthasincreasedfrom4.0percentin2003to5.7percentin2011,butremainedstagnantin2012.Simultaneously,performancesofexportsandimportsareyettopickupin

However,thesurgeintheexternalsectorperformanceofIndiaisconsiderablebelowitspotential.StronginflationarypressuregrappledtheIndianeconomyduring200812,leadingtoasurfacingofnumerousmacroeconomicimbalances inthedomesticeconomy.Until2005, Indiasrateof inflationwasunderthepermissiblemacroeconomicceilingof5percent.Withtheonslaughtrecessionin2008,thecurrentaccountimbalanceasapercentageofGDPwentupto4.8percentin2012from1.0percentin2006.Invalueterms,currentimbalancegrewfrom$15.7billionin2007 to$88.2billion2012, registeringanunsustainable riseofCADduring theperiod200712.Therefore, Indias recovery in2010was transitory innatureenoughtowithstandthesecondepisodeoftheglobaldoublediprecession.



Table2.1:SelectedEconomicandSocialIndicatorsMacroeconomicIndicators 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

China

GrowthRate,GDP(%) 10.0 10.1 11.3 12.7 14.2 9.6 9.2 10.4 9.3 7.7

GDPpercapitaPPP,(International$) 3217 3614 4102 4740 5526 6145 6730 7487 8305 9055

GDP,currentprices(US$Billion) 1641 1932 2257 2713 3494 4520 4991 5930 7322 8221

GDPpercapita,currentprices(US$) 1270 1486 1726 2064 2645 3404 3740 4423 5434 6071

Population(Mill) 1292 1300 1308 1314 1321 1328 1335 1341 1347 1354

GDP,Worldshare,PPP(%) 8.4 8.8 9.3 10.0 10.8 11.6 12.7 13.4 14.1 14.7

Inflation 1.2 3.9 1.8 1.5 4.8 5.9 0.7 3.3 5.4 2.7

Volume,Exportofgoods(%Change) 20.0 18.5 24.5 24.2 19.3 8.2 10.7 28.4 9.4 5.7

Volume,Importofgoods(%Change) 24.4 20.0 13.6 16.0 12.9 3.4 2.5 22.3 9.8 5.1

Currentaccountbalance(%GDP) 2.6 3.6 5.9 8.5 10.1 9.3 4.9 4.0 1.9 2.3

Currentaccountbalance(US$Billion) 43.1 68.9 132.4 231.8 353.2 420.6 243.3 237.8 136.1 193.1

GDPbasedonPPP(BillInternational$) 4158 4698 5364 6230 7301 8161 8982 10040 11189 12261

GDP,ConstantPrices(LCBillion) 6784 7468 8313 9367 10693 11723 12804 14141 15456 16647

India

GrowthRate,GDP(%) 8.4 7.9 9.3 9.3 9.8 3.9 8.5 10.5 6.3 3.2

GDPpercapitaPPP,(International$) 1848 2042 2260 2509 2789 2914 3141 3466 3707 3843

GDP,currentprices(US$Billion) 618 722 834 949 1238 1223 1365 1711 1873 1842

GDPpercapita,currentprices(US$) 572 658 749 840 1081 1053 1159 1432 1547 1501

Population(Mill) 1081 1097 1114 1130 1146 1162 1178 1195 1211 1227

GDP,Worldshare,PPP(%) 4.0 4.2 4.4 4.5 4.7 4.8 5.2 5.5 5.7 5.7

Inflation 3.9 3.8 4.4 6.7 6.2 9.1 12.4 10.4 8.4 10.4

Volume,Exportofgoods(%Change) 12.9 15.5 11.5 10.6 18.3 1.2 3.9 19.5 12.3 2.1

Volume,Importofgoods(%Change) 11.4 29.1 14.2 6.5 21.7 10.4 4.5 7.3 15.1 1.9

Currentaccountbalance(%GDP) 2.3 0.3 1.2 1.0 1.3 2.3 2.8 2.7 4.2 4.8

Currentaccountbalance(US$Billion) 14.1 2.5 9.9 9.6 15.7 27.9 38.2 45.9 78.2 88.2

GDPbasedonPPP(BillInternational$) 1997 2241 2518 2836 3196 3385 3701 4141 4489 4716

GDP,ConstantPrices(LCBillion) 30058 32422 35432 38715 42509 44164 47908 52961 56314 58137

Source:RISbasedonWorldEconomicOutlook,October2013,WorldBank.Note:IMFProjectedfiguresindarkshadedcolumns.

2.2SourcesofDomesticGrowth

Theglobaldebateon thechoiceofanappropriatedevelopmentstrategyhasbeenchangingradicallyduring the last fewdecades. In themidseventies, therewasapolicyexportledgrowth(ELG)strategyinseveralcountriesincludinginAsia.ConstraintsrelatingtotheELGstrategysurfacedpredominantlyduringtheAsiancrisis,andtherewasstrongmotivationto move to a Domestic DemandLed Growth (DDLG) strategy in order to maintain high growth while keeping the economy resilient to the intermittent occurrences of external shocksConsidering the advantages and disadvantages of both the approaches, India and China have been pursuing these strategies simultaneously to optimise theirconstantlychangingglobalanddomesticsituations.Withglobalbuoyancy,theELGstrategyreceivespriority,whiletheDDLGstrategydominatesinthedomesticpolicyduringglobalrecession.

TheELGstrategyisfocusedonreorientingthestructureofdomesticproductiontopromoteexports.Basedontheneoclassicalprinciplesofefficientallocationisenvisagedthatexportswouldactastheengineofgrowth.Inthechangedpolicyenvironment,withexportsfirmly inthesaddle,domesticdemandwasstimulated,andthisprocess, inturn,encouraged savings and capital formation to expand with exports and economic growth. In the framework of the ELG strategy which is consistent with the principles ofConsensus,exportsgraduallyemergedasthegrowthsimulatorfor theeconomy.Thegrowingdemandfromtheexportsector,pavedthewayfor introducingnewandefficient technologies inexportingfirmstomeettherequiredqualityandstandardsofvariousproducts.ThespillovereffectsoftechnologicalupgradationinselectexportsectorswerefeltintherestofWithastrongundercurrentofexportsinthedomesticeconomyandcontinuousinvestmentintheexportingsectors,thesupplypotentialoftheeconomyinthetradablesectorsincreasedovertime.This,inturn,strengthenedtheimportcapabilitiesofthecountriestosupporttheirincreasedneedoftheexportsector.

Duringthepostwarperiod,withinthedevelopingworldsomeofthecurrentlymoreadvancedcountriesknownastheAsianTigerwerealmostatasimilarlevelofTherapidgrowthoftheseeconomiesoveraperiodofmorethantwodecadesbroughtanotherdimensiontotheELGstrategyasadevelopmentparadigm.Asiawitnessedagrowthmiracle inthesecountriesduring theperiod from1970 tomid1990s.However, thedevelopmentgapbetween theseand the rest of thedeveloping countrieswidened.A key factor for thegrowth of these fast growing economies has been the export boom following adoption of theExport LedGrowth strategy,which has effectively integrated these economies into the globaleconomy.Thisstrategyalloweddevelopment to transmit through theexternalsectorchannel,andexport took the lead inshaping thegrowthprocess througha restructuringof thedomesticproductionstructure.ExperiencingthepositiveeffectsoftheELG,manycountriesfromLatinAmericahavealsoadoptedasimilarstrategy(Herzer,2006).

However,asanaftermathoftheAsianFinancialCrisis,theHighGrowthProfileoftheELGregimeasacrediblestrategyforenhancinggrowthandeconomicwelfareand its efficacy came under the scanner. Inconsistent performances of some of the sectors during the period of crisis raised doubts about the relevance of exportled growth as a growthstimulatingstrategyforthedevelopingcountries(Felipe,2003).Thiscalledforanewdevelopmentparadigm,whichwouldinsulatedevelopingcountriesfromthepossibilityofbecauseofexternalshocks.Inthepostcrisisperiod,agradualswitchingofpoliciestowardsDomesticDemandLedGrowthstrategyyieldedpositiveresultsandplacedthedevelopingeconomybackonthepathofsustainedhighgrowth10.

UndertheDomesticDemandDrivenGrowthhypothesis,expansion in thecomponentsofdomesticdemandwould lead toan increase ineconomicgrowth.Someof thedomesticdemandareprivateinvestment,governmentexpenditure,consumption,etc.ThishypothesisemphasisesthatGDPgrowthcanbemadesustainablewithdeepTherefore,growthinoutputcanbetriggeredbygrowthofaggregatedemand.Thecentralfocusoftheapproachwouldbetoenhancetheproductioncapacitytocomplywith

Therearemerits inbothapproaches to steeringaneconomy tomaintain steadygrowthover a longperiod. It is oftendiscussed in the literature that thesecompetitiveinnature.Inmanycases,theyarerathercomplementary,eventhoughtheyappeartobecompetitive.It isfrequentlyseeninthe literaturethatempiricalevidencesdonotsupportthe dominance of any of these approaches in a country/region because they contribute differently in diverse situations. It is the prerogative of a country to chooseparadigmtoguideitsgrowthprocess,particularly,onethatwilltakeittoahighgrowthtrajectory.

The current literature provides sufficient evidence to show that the exportled growth strategy is not likely to sustain growth (Palley, 2011) because of theprotectionismintheglobaltradingarenahasreturnedwithavengeanceandthespaceofexportactivitieshassomewhatnarrowed.Thesituationwillbemorecomplexforthosecountries,whicharemiddleincomecountries,aspiringtoahighincomecountrylevelstatus.Foraccommodatingthenationalpriorityofsustainedgrowthwithintheframeworkoftoclimatechange,globalstandards,globalgovernance,etc.),thenewdevelopmentparadigmsuggestsmaximisingdomesticeffectivedemandwithDomesticDemandLedGrowth.

Acritical examination of the development strategies of India and China indicates that these consist of a combination of both ELG and DDLG in recent years,FinancialCrisis(MohantyandChaturvedi,2006LiandZhang,2008MohantyandArockiasamy,2010).Duringtheperiodofglobalrecession,developmentpoliciesaremore inclinedtowardsDDLGtomaintainhighGDPgrowthrate.Duringthephaseofglobalrecovery,exportispushedasamajordriverofgrowthwithanemphasisonGloballyDynamicProducts(Mohanty,2009).

ReviewofLiterature



TheExportLedgrowthhypothesishasbeendominatingthedevelopmentliteratureforthelastfourdecades.Severalstudiesexaminedtherelationshipbetweenexportsandand1980s.Manyofthesestudies(seeforexample,Michaely,1977Heller&Porter,1978Tyler,1981Feder,1983Kavoussi,1984Ram,1987,MohantyandChaturvedi,2006Wah,2004Wong,2007and2008)havesupportedtheassertionthatexportgrowthhasastrongassociationwithgrowthofrealoutput.Moreover,causationbetweenthetwovariablesisnotcertaintyamongdifferentcrosssectionofcountriesandatdifferentpointsoftime.Duringthelastseveraldecades,suchrelationshipswereexaminedintheframeworkoftimeseriesandinacrosssectionofcountries.

Severalstudieshave(seeforexample,JungandMarshall,1985Hsiao,1987BahmaniOskooee,etal.,1991Dodaro,1993andLove,1994LoveandChandra2005)useddifferenttimeseriesapproaches to lendsupport to theexportledhypothesis.Their resultsarenotconclusive insupporting thehypothesis,but rathermixed innature.Takinga largesetof87countries,(1993)examined thecausalitybetweenexportgrowthandcausality.Resultsof thestudy foundweaksupport for thehypothesis thatexportgrowthpromotesGDPgrowth.Using thecausality,JungandMarshall(1985)foundthattheexportledgrowthhypothesis issupportedby10percentof thesample inthecrosscountryanalysis.Theresultsof thestudybyBahmaniOskooee et al. (1991), combining Granger causality with Akaikes Final Prediction Error (FPE) were to some agreement with the exportledgrowth hypothesis, although the evidence isinconclusive.Usingasimilarmethodology,withJohansensmultivariateapproach to cointegration,LoveandChandra (2005)examined thehypothesisof anBangladesh.The findingssuggest that thedirectionofboth longandshorttermcausality is from income toexportand thereforecountry inward tradestrategyofdevelopmentdiscriminatedagainstexport.

Inseveral countries, bothELGandDDLGarepursuedsimultaneously inorder to insulate thedomesticeconomy from theadverse impactsof global businesscycles.observedthatempirical findingsdonotstronglysupport theexportledgrowthstanceandthis isbecauseof themissing impactofDDLGmisspecification in themodel. Inmanyothercases,bothdevelopmentparadigmsareempiricallyfoundtobeimportantincontributingtogrowth,meaningtherebyasimultaneouspursuitofthesetwostrategiestooptimisenationalLi(2002)examinedcontributionof theexternalsector toGDPgrowth toexamineefficacyofexportledgrowth inChina.Theyproposedanewmethodology toestimate thedirectand indirectcontributionofexportstoGDPgrowth.Theirresultsindicatethata10percentincreaseinexportgrowthwouldleadto1percentgrowthinGDPinthe1990s.

Inarecentpaper,Mohanty(2012a)examinedthepossibilityofmaintainingasustainedhighgrowthperformance in IndiawhilesimultaneouslypursuingbothELGandIndia falls in the LowMiddle IncomeCountryGroup, it has a large number of productswith export competitiveness globally. TimeSeries analysis with the VECMmodel reveals that bothstrategieshaveasignificant longtermrelationshipwith income.If Indiasmediumtermgrowthperformanceweresustainable, Indias trade integrationwithASEANeitherELGor by a combinationof both strategies. Indias interest could be to pursueboth strategies alternatively tomaintain sustained high growth until its export competitiveness is fullyrealised.

In thecaseofChina,astudybyTangandSelvanathan (2008)suggested thatFDIhadnotonlycompensatedashortageofcapitalbutalso inducedhigheconomicinvestment.Therefore,FDIencouragedtherelevanceoftheDDLGstrategyinChina.

Wah(2004) tried toexamine the specific paradigmof development that contributed to thehighgrowthphaseof theMalaysianeconomyduring theperiod19612000.period,exportremainedanimportantfactor intheeconomictransformationoftheeconomy.However,variousstudiesexaminingtheexportledhypothesis inMalaysia foundweaksupport forthishypothesis inthelongrun,andthiscouldbebecauseofexclusionofvariousfactorsrelatingtodomesticdemand in themodels.Resultssupport thedomesticdemandhypothesislongrun,but theexportledhypothesiswasnotsupportedbytheempirical findings. Inanotherstudy,Wong(2008)examinedtherelevanceofdevelopmentstanceofsomeof theSouthEastAsiancountries,particularlyASEAN5,duringandafter the AsianEconomicCrisis.Theregionaloverview indicated that therewasbilateralGrangercausalitybetweenexportsandeconomicgrowth,andprivateconsumptionandeconomicgrowth.Theempiricalfindingscouldnotsuggestthatthecrisisintheregionwasduetoexportledgrowth.Thebroadthat sustainedeconomicgrowth requires steadygrowth in the exports anddomestic demand.A similar hypothesiswasexaminedbyWong (2007) for someMiddleEast countries includingBahrain,Iran,Oman,Qatar,SaudiArabia,SyriaandJordan,andfoundthatsustainabilityofeconomicgrowthwenthandinhandwithgrowthofbothexportsanddomesticdemand.resultswerelessconclusivetosupportanydevelopmentstrategyresponsibleforsustainedeconomicgrowthintheMiddleEastregion.

Anoverviewofthecurrentliteraturehighlightstheroleofbothexportsanddomesticdemandtoputeconomicgrowthonahighgrowthtrajectoryinasustainablemanner.Theexactsequencingofpoliciesandtheirimpactonthegrowthprospectsofacountryareempiricalissues,whichcanbeexaminedincaseofIndiaandChina.

GrowthAccountingApproach

FromtheabovediscussionitisrelevantthatbothIndiaandChinaaremaintaininghighgrowthoveralongperioddespiteturbulencesatthelevelofboththedomesticandresilienceoftheseeconomieshasbeentheoutcomeofthepolicyprioritiesassociatedwithalternativedevelopmentstrategies,whichvaryfromtimetotimeinordertocatchupwithdifferenteconomicsituations.Anexerciseistoexaminethecontributionofdomesticdemandandtheexternalsectortoaggregategrowthinbothcountriesfollows.Itmaybeinterestingtorelativecontributionofboththecomponents(i.e.,domesticdemandandexternalsector)varywiththechangingglobalsituations.ThecomputationsofgrowthdecompositionarebasedontheproceduresdevelopedbyFelipeandLim(2005).

GDPgrowthintheyeartisexplainedbythefollowingmacroeconomicidentity:

Thesameformulaappliestoothercomponentsofdemand.

It is hypothesised that contribution of domestic demand, such as consumption, investment and government expenditure is expected to be significant duringexternalsectorcontributionshouldberobustduring theperiodofglobalbuoyancy.As theglobaleconomypassed throughdifferentphasesof thebusinesscycle,bothcountriescontinued tomaintainhighgrowthperformancesduringthelasttwodecadesduetoasuitableinterplayofbothELGandDDLGstrategies.

AnalysisforGrowthDecomposition:ChinaandIndia

Chinahassimultaneouslypursuedexportledanddomesticdemandledgrowthpoliciestoplacetheeconomyonahighgrowthtrajectoryinasustainablemanner.Theinvestmentleddomesticdemandandtheexportsectorhavebeen thedriversofgrowth for theChineseeconomy.Theexperiencesofdevelopingcountriessuggest thatbothexportledgrowthanddomesticdrivengrowthhavepositiveaswellasnegativeeffectsoneconomicgrowthandneitheroftheseappearstobeappropriatetobepursuedinisolation.InrecentthestrategiestooverallGDPgrowthinChinafollowthebehaviourpatternoftheglobalbusinesscycle,thus,itinsulatedthehighgrowthmomentuminthesecountriesfromtheadverseeffectsofexogenousshocks.Simultaneouspursuanceofboththesestrategiesofdomesticdemandandexportledgrowthcanensureconsistentlyhighgrowthirrespectiveof thenatureof theglobal



businesscycle.

During the last fewyears,exportshavebeenexpanding rapidly in real termsand the impactofexportsonemploymenthasbeenprofound (Mohantyandtowardsthealleviationofpoverty.Exportshavegeneratedsubstantialemploymentopportunitiesduetosustaineddemandforindustrialproductsintheglobalmarket.

The impact of the global business cycle on domestic economic growth has been different for various elements in the income identity during differentdecompositionanalysisfortheChineseeconomyindicatesthatcontributionsofdomesticdemandandexportstooverallgrowthhavebeendifferentacrossvariousphasesoftheglobalbusinesscycle,buttheircombinedcontributiontogrowthhasbeensignificantandconsistentduringthelastdecade.Duringtheperiod200103,theglobaleconomygrewatduringtheeconomicdownturnandincreasedto4.9percentonanaverageannuallyduringtheglobalbuoyancyof200407.TheworldeconomywasstruckbyrecessioninamajorwaytwicerecentlyintheformofAsianEconomicCrisisduring199798andthensince2008,withamarginalimprovementin2010beforerelapsingintocrisis.

ThegrowthperformanceoftheChineseeconomywasadverselyaffectedduringthesetwophasesoftheglobalbusinesscycle,andthecontributionofdomesticdemandandtheexportsectortoGDPgrowth followedadefinitepatternduring these twophases.Thecontributionofdomesticdemand togrowthwassignificantlyhighduring recessionanddeclinedperiodofeconomicboom.Areversedtrendisapparentfortheexportsectorinitscontributiontogrowth.Declineinthecontributionofagrowthfactoriscompensatedbyanothergrowthinducingfactorinoneepisodeofthebusinesscycle,leadingtorestorationoftheoverallgrowthrateofChineseeconomymaintainedatahighlevel.

GrowthdecompositionforChinaisestimatedfortheperiod19912011usingequation(1)and(2).Forexaminingthecontributionofdifferentsectors togrowth indifferentphasesof theglobalbusiness cycle, we have referred to fdifferent time periods in the analysis as presented in Table 2.2. The empirical results indicate that during the phase of recession (i.e., 199699), thecontributionoftheexternalsectortooverallGDPgrowthwas3.7percentperannumonanaverageandwentupto21.9percentperannumtotheGDPgrowthduringisobserved that thecontributionofexports toGDPgrowthduring recessiondeclined from24.6per cent in2007 to 82.0per cent in2009, and the lossof external demandwasadequatelycompensatedbydomesticdemand,mostlybyconsumptionandinvestment.

Table2.2:ContributionofDemandComponentstoGDPinChina(in%)

YearDomesticDemand ExternalDemand

TotalC I G Total X M Total

1991 54.5 20.0 26.2 100.8 13.9 14.6 0.8 100

1992 64.1 30.5 18.2 112.9 11.2 24.1 12.9 100

1993 43.3 57.4 13.2 114.0 9.6 23.6 14.0 100

1994 29.9 42.7 8.8 81.4 30.4 11.9 18.6 100

1995 49.9 61.2 5.3 105.8 14.6 20.4 5.8 100

1996 57.5 32.6 12.4 102.4 19.2 21.6 2.4 100

1997 41.5 20.8 14.5 76.8 45.3 22.1 23.2 100

1998 57.4 27.4 18.9 103.7 17.0 20.7 3.7 100

1999 62.0 20.3 19.8 102.2 26.9 29.1 2.2 100

2000 50.4 17.4 17.4 85.1 56.2 41.3 14.9 100

2001 44.2 43.1 16.0 103.3 24.7 28.0 3.3 100

2002 31.5 34.7 8.1 74.3 52.4 26.7 25.7 100

2003 32.4 56.7 6.6 95.6 69.2 64.8 4.4 100

2004 36.5 50.2 7.8 94.6 80.6 75.2 5.4 100

2005 29.0 29.0 11.7 69.8 59.6 29.5 30.2 100

2006 30.4 32.7 9.6 72.6 59.0 31.6 27.4 100

2007 32.0 34.2 9.2 75.4 51.8 27.2 24.6 100

2008 33.2 35.6 9.4 78.2 32.0 10.2 21.8 100

2009 60.2 106.8 15.0 182.0 64.4 17.6 82.0 100

2010 28.1 34.2 9.3 71.5 66.9 38.4 28.5 100

2011 35.5 36.9 10.0 82.3 29.7 12.1 17.7 100

PeriodAverage

199295 46.8 47.9 8.7 103.5 16.5 20.0 3.5 100

199699 54.6 25.3 16.4 96.3 27.1 23.4 3.7 100

200003 39.6 38.0 12.0 89.6 50.6 40.2 10.4 100

200407 32.0 36.5 9.6 78.1 62.7 40.8 21.9 100

200811 39.2 53.4 10.9 103.5 16.1 19.6 3.5 100

Source:ComputationbasedondatafromWorldDevelopmentIndicatorsOnline[AccessedonOctober25,2013)

Amongthedriversofdomesticdemand,themostimportantsourceofgrowthwasinvestmentwhichgrewatadoubledigitrateduringthepresentdecade.Thedecompositionresultsshowthat36.5per centofGDPgrowthcame from investmentasagainst21.9per cent fromnetexportsduring200407.Buoyancy returned to theworldeconomypickedup.Withthechangingphaseoftheglobalbusinesscycle,exportsofChinasurgedandsoalsoitscontributiontogrowth.TheshareofexportstoGDPcentperannumandcontributionof investment reduced to36.5percentonanaverageduring200407.Onaccountofstrongcomplementaritiesbetween theexportledgrowthanddomesticdemandledgrowth,mostlyledbytheinvestmentfactor,Chineseoverallgrowthperformancewasunhinderedsubstantiallyduringthedecade.TheChineseeconomygrewatan9.4percentduringtheglobaldownturnandmaintainedanaveragegrowthrateof12.1percentduringtheglobalboom(200407).

Thehighinvestmentrateinthecountrywasmorethanfullysupportedbyanincreaseindomesticsavings,whichincreasedfrom35.5percentofGDPin2001to53percentin2007andledtoasubstantialcurrentaccountsurplus.SuchhighratesofdomesticsavingsobtainfromanumberofpeculiarcharacteristicsoftheChineseeconomyandalsofromenterpriseswhicharenotrequiredtopaydividendstothegovernment.Whileforeigndirectinvestmenthasassistedgrowth,morethan50percentof investmentconsistedofselffinancingbyenterprises includingthatmadebystateownedenterprises.Foreigndirect investmentwasnonethe lesssubstantialandthebulkof itwasdirected tomanufacturingasaplatformforexport:foreigninvestedenterprises(FIEs)basedinChinaconductedasubstantialpartofChinasforeigntrade,undertakingmorethanhalfofmanufacturedexports.FDIservedasaplatform,Chinatomanufactureproductsthatmetworldmarketspecificationswithregardstoquality,design,andtechnologicalcontent.

It is important tonotethat thegrowthprospectsof theChineseeconomyis likely toremainrobust in themediumtermduetoasimultaneouspursuancegrowthbytheChinesegovernment.Asdomesticgrowthislikelytoremainstrongirrespectiveoftheglobalbusinesscycle,thedomesticdemandforimportswillbestrong,takingintoaccounttheimportprofileof theeconomy in thepresentdecade.Thepredictabilityof theChinese importbehaviour in themediumterm isanopportunity for India todevelopastrategy toChinesemarket.Whileopeningupof theeconomy to tradeandFDIhave resulted in theemergenceofasignificantprivatesector,publicownership remainsa key featureof theeconomy,especially forservices.Themajorenterprises, forexample thebankingsector,aremostly in thepublicsectorandgovernmentcontinues toexertastrong influenceon tradeand(Girardin,1997).GovernmenttogovernmentrelationsthusremaincrucialforChinastradingpartnersincludingIndia.

Chinaisdependentontheexternalsector,butthecontributionofthistoGDPhasstarteddeclining.ThisisevidentfromthefallingshareofdomesticdemandinofnetexportstoGDPhasgoneupsubstantiallyduring200204,theChineseeconomyislargelycharacterisedbythedominanceofdomesticeconomicactivities.SimilartrendsexistforIndia.

TheexternalsectorinChinaconstitutedmorethan20percentofitsGDPgrowthduringglobalbuoyancy(200407).During200208,exportcontributionremainedandothercomponentsofdemand.However,contributionofexportsremainednegative(64.4percentin2009),leadingtonetnegativecontributiontogrowthduringglobalcrisis(200809).ThisshowsadecliningrelevanceofELGincaseofChina.



China is passing through a phase of rapid structural change, leading to growing imbalances in its current account position.As reported by the IMF (2012c),increasedfrom$615billionin2004to$3.2trillionattheendof2012.SurgingofChineseinternationalreservesoveraperiodhasbeenconstruedasthekeyreasonfor thecontinuationof therecentepisodeofglobal imbalance.Chinahasbeenexperiencingcurrentaccountsurplus (CAS)since theearly1990s,evenduring theperiodof Asian financialnatureof current account surplushasundergone radical changeover the years.As a percentage ofGDP,CAS reached its peak of 10% in 2007, and started declining (Cline,following years. Various reasons are provided in the literature to explain secular failing ofChineseCAS ratio including robust import demand against declining terms of trade (IMF, 2012c),wideningresourcegap(EAF,2012),andrealappreciationofexchangerate(Cline,2012ClineandWilliam,2011),etcamongothers.

WhileChineseconsumptionasashareofGDPhasbeengrowingsteadily,savingsratiographismovingtowardsaphaseofplateauandthenfallingoffsignificantlyfromitspresentlevelof50percentofGDP.Therearesome tendencies towardssurge in theconsumptionbehaviour in thecountry.Chinasprivateconsumptionhasbeengrowingwithin the rangeof89percentperannumduringthelasttwodecades,andthishasbeenfuelledbygrowingdemandforconsumerdurables.Fallingsavingsratio,risingconsumptionandpressureoneffectonwideningofdomesticresourcegap,whichwillputpressureonChinascurrentaccountbalance(EAF,2012).Chinaislikelytowitnessrobustimportgrowthbecauseofsurgingprivateconsumptionand investment demand in themedium term. Indications of secularworsening of the countrys terms of tradewould have a lasting impact on its adverse exportDivergencebetweenimportsandexportsmayhavelongtermimplicationsforitscurrentaccountbalance(IMF,2012c).Recentempiricalstudies11(Cline,2012Clineandthatakeyreasonfordecline in theshareofCASinGDPissubstantial realappreciationof theexchangerate.Other factorscontributing to thisprocess includeworldoilprices,slowerworldgrowthandanerosioninthecapitalservicesaccountsbutthesearesecondaryfactorsascomparedtoappreciationofYuan.

ThepresenttrendindicatesthattherewillbealastingdeclineintheChinesecurrentaccountsurplusinthemediumterm.IMF(2012a)projectsthatCASasa2012and2.5percentin2013.Cline(2012)observesthatCASratiowouldbeintherangeof24percentofGDPovernextsixyears.ThereareseveralcounterfactualresultsshowingexpectedCASratioin2017.ResultsofClineandWilliam(2011)suggestthatitwouldbe5.4percentwhereasIMF(2012a)predictedat4.3%in2017.Cline(2012)haspredictedCASratioinarangeofpercentofGDPin2007,dependinguponexchangeratepolicyofthegovernment.However,throughvariouschannels,thecurrentaccountsurplusisgoingtodipinthemediumterm.

Both IndiaandChinahaveshowndivergentgrowthpaths though therearemanycommonalitiesbetween them.Duringglobalbuoyancyor recession,priorities indevelopmentstrategies (i.e.,ELGandDDLG)havebeensimilar,butthecountriesdifferintermsoftheirdriversofgrowth.ItisinterestingtonotethatwhileinChinatheELGstrategyisfacingitisstillbeingconsideredasrelevantasacredibledevelopmentstrategy.Duringtheglobalboom,growthperformancesweresignificantinboththecountries.WhileIndiawasgrowingatarateof9.0percentinaverageduring200407,Chinapostedanaveragegrowthrateof12.1percentperannum.Duringtherecentepisodeofglobalrecession,Indiasaveragesloweddownto6.5percentwhereasitdeclinedto9.4percentinaverageforChinaduring200809.Itisimportanttoexaminethegrowthdriversinbothcountriesduringdifferentphasesoftheglobalbusinesscycle.

Table2.3:ContributionofDemandComponentstoGDPinIndia(%)

YearDomesticDemand ExternalDemand

TotalC I G Total X M Total

1992 46.8 71.2 9.1 127.1 7.8 34.8 27.1 100

1993 179.0 80.2 35.4 134.2 50.4 84.6 34.2 100

1994 57.5 60.5 2.9 120.9 17.7 38.6 20.9 100

1995 51.3 45.4 9.5 106.3 28.0 34.3 6.3 100

1996 115.6 47.5 11.2 79.4 13.6 7.0 20.6 100

1997 48.8 60.7 19.4 128.9 3.6 25.3 28.9 100

1998 81.9 18.6 21.4 121.9 19.5 41.4 21.9 100

1999 41.3 41.2 11.5 94.1 14.2 8.3 5.9 100

2000 117.6 93.9 9.1 32.8 102.6 35.4 67.2 100

2001 56.3 38.1 4.2 98.6 7.7 6.4 1.4 100

2002 52.9 22.2 0.7 74.4 79.4 53.8 25.6 100

2003 61.5 46.3 5.1 112.9 21.6 34.5 12.9 100

2004 28.2 66.2 3.5 97.9 31.8 29.7 2.1 100

2005 57.2 49.8 9.1 116.1 43.0 59.2 16.1 100

2006 53.0 51.9 4.0 108.9 40.5 49.4 8.9 100

2007 52.1 50.6 8.0 110.8 10.7 21.4 10.8 100

2008 181.5 22.1 36.9 196.4 108.3 204.7 96.4 100

2009 51.0 39.9 13.0 103.9 9.5 5.6 3.9 100

2010 46.7 50.1 5.5 102.4 33.3 35.7 2.4 100

2011 129.4 13.6 21.9 164.9 80.1 145.0 64.9 100

2012 75.9 53.9 12.0 141.7 19.8 61.5 41.7 100

PeriodAverage

199295 83.7 24.3 14.2 122.1 26.0 48.1 22.1 100

199699 71.9 18.3 15.9 106.1 10.9 17.0 6.1 100

200003 72.1 3.2 4.4 79.7 52.8 32.5 20.3 100

200407 47.6 54.6 6.2 108.4 31.5 39.9 8.4 100

200812 96.9 27.1 17.9 141.9 46.4 88.3 41.9 100

Source:ComputationbasedondatafromWorldDevelopmentIndicatorsOnlineaccessedonOctober25,2013.Note:Wedropped1991,becauseithappenedtobeanabnormalyearforIndia

IndiasgrowthrecordsduringitstwodecadesofreformsarepresentedinTable2.3.DomesticdemandduringtheAsianFinancialCrisiswassignificant.IncomparisonwithChina,consumptionandgovernmentexpenditure remainedmajordriverofdomesticdemandduring theglobal recession (199699).Duringglobalbuoyancy (200407),GDPgrowth in Indiawas fuelledequallybyconsumptionandinvestment.ThecontributionofconsumptiontooverallgrowthinIndiawasmuchstrongerthanitwasforChinaduringthesameperiod.Investmentasaninstrumenttosupportthe growthmomentum in India has been fragile during the period of global boom.Over the years, in India, export sector contribution to growth has been improving starting with the AsianEconomic Crisis. During the recent episode of global recession, domestic demandled growth had been the major policy to maintain high growth, andcontributor togrowthduring200809(181.5percent).Governmentexpenditurealsoplayedan important roleduring recession tomaintainanoverallgrowthperformance.However, theexportsectorhasbeenconsolidatingitscontributiontogrowthdespiteenlargementofthecurrentaccountdeficitinrecentyears.

Despitebroadsimilarities in theoveralleconomicstructure, thereexiststarkdifferences in thecompositionofdomesticdemand in the twoeconomies.WhileGDPremainedconsumptionledinthe1990s,theroleofinvestmentindomesticdemandimprovedforChinain200009.Ontheotherhand,Indiacontinuedtomaintainahighlevelofdependenceonprivateconsumptionmarkinga7.4percentrisefrom54.8percentin19912000to62.2percentin200009.

Compared to China, the share of investment in GDPwas lower for India during the period 200003. In subsequent years, the share of investment of both the countries wasmore orcomparablevaryingaround35percent.Forinstance,theaveragecontributionofinvestmenttoGDPwasfoundtobe48percentduring200207whereasithoveredaround40per

Therelativeshareofgovernmentconsumptiondeclinedinboththecountriesduringthelastdecade.Itdroppedfrom13percentto12percentinChinaandfrom11percentto10percentinIndiaovertheperiodoftwodecadesbetween19912000and200012.

Tosumup,itcanbeconcludedthatthepresentlevelofexternalexposureforIndiaandChinaisquiteconsistentwiththemediumtermgrowthpotentialofthetwoeconomies.Alternatively, itsuggeststhatthedownsideriskofdoublediprecessionwasstrongforIndiawhereasitcouldbelesserforChinaduetostrongeconomicfundamentals.Inviewofweakexternal



thecountrieshavesomeleewayinpursuingdomesticdemandbasedeconomicpoliciesduringthecrisisperiod.

2.3OutlookforMacroeconomicSituation

AccordingtotheIMF(2012a),recoveryinChinahasbeenstrongerthanitwaspredictedearlieronaccountofthepickingupofbusinessactivitiesandfinancialmarketin2010.Resumptionoftheeconomywithahighgrowthratewasexpectedasanoutcomeofthemacroeconomicpoliciesalongwithhighcapitalinflows.GDPgrowthrateincreasedtoadoubledigitfigurein2010anddeclinedsignificantlyto7.7percentin2012.Itisprojectedtodeclinefurtherto7.3in2014.OtherreportsincludingtheADB(2012)andESCAP(2012)havepredictedgrowthrate12inthemediumterm.TheChineseMinistryofCommerce(2011)hasreportedrobustdomesticgrowthin2010onaccountofthecascadingeffectsofpolicystimulusHowevertherecentforecastsindicateaboutmarginalweakeninginthegrowthprospectsofChinabetween2013and2017(IMF,2013a).

Asexpected,theChineseexternalsectorpickedupfastin2010and2011accordingtotheADB(2012).Withthemodestrecoveryoftheworldeconomy,percentandimportsby13.5percentin2010duetoarobustdomesticdemand,higherglobalpricesforoilandrisingpricesofprimarycommodities.Thoughworldoutputgrowthdeclinedfrom5.1percent in2010 to3.8percent in2011 (IMF,2012b).Chineseexportsand importsgrowth rateswere robustduring thecorrespondingperiod.TheChineseMinistryofCommerce (2011)forecastedarobustgrowthoftheChineseexternalsectoronaccountofanexpectedboominthedomesticeconomyaswellasduetorecoveryof thedevelopingcountries. In2010,exportsgrewattherateof31.4percentandimportsby39.1percentamidstpersistenceofmultipleinternationalproblemsincludingcontinuationoftheglobalfinancialcrisisrisksinsomecountriespersistenceofprotectionistmeasuresanddomesticconcernslikerisinginflationarypressure,occurrencesofintermittentnaturaldisasters,fastrisingofhousingpricesinurbancities,latentrisksinfiscalandfinancialsectors,etc.AlthoughthepaceofChineseoverallexportsandimportsgrowthratessloweddownin2012inthe levelsofgrowth rateswere robust.TheChinesegovernment tookastrongcommitment that themacropolicieswereeffectivelymanaged to enhancequality andefficiencyof economicgrowth,strengtheningandtargetingflexibilityofmacroeconomicpoliciesandstriveforasteadyandfastereconomicdevelopment.Thereisnowagrowingconsensusthelargesteconomyintheworld,pushingtheUSeconomytothesecondpositionby202013.

2.4SomeAreasofConcern

While the performance of China has been exceptional, for bilateral trade there are, of course, many areas of concern, some of which have special significance for India. First, China isexperiencing largeand increasing inequalitieswithin theeconomy.Several regionsclose to India (especially inSouthWestChina)areamong the laggards indevelopment.Thereareseveralgovernmentinitiatedspecialprogrammestohelptheunderdevelopedregions,whichincludepublicinvestmentaswellaspreferentialtreatmentforFDIintheseareasIndia,sotheymaybeofspecialinteresttoIndiaintermsoftradeaswellasinvestmentpolicy.

Second, as noted above, growth in investment has been very high, perhaps excessive from a prudential point of view. There aremajor risks pertaining toinvestments.Therearevariousgovernmenteffortstoreinininvestmentandtostimulateconsumption.Sofarsuccessintheseeffortshasbeenmodest.Incaseinvestmentslowsdown,itmayhaveimplicationsforIndiasexportsofironoreandotherrawmaterials.

ThethirdissueisthatraisedbytheexchangeratepolicyofChina.ThecountryhasfollowedapolicyofpeggingtherenminbioryuantotheUSdollarformorethanadecade.Between2000and2005,therenminbiwasallowedtotradeagainstthedollarwithinanarrowrangeof8.2768.280andhasnotbeenallowedtoappreciateinsynchronisationwiththegradualaccumulationofexchangereservesandagrowingtradesurplus.TheChinesetradesurplustotheworldincreasedsignificantly.ThetradesurpluswiththeUShasbeenevenlarger.AstheUSdollarhastendedtodepreciateintherecentyearswithrespecttotheworldsmajorcurrencies,apeggedexchangeratehasledtodepreciationoftheChinesecurrency.Anartificiallydepreciatedexchangeratecanprovidebroadbasedprotectionfromimportsandcanbeofspecialhelptoexports.WiththelargeandcontinuingtradesurplusofChinawiththeUS,therearepressuresfromthe latteronChinatoappreciateitsexchangeratetoactuallevel.Chinaaccordingly,relaxedtheexchangerateregimeinAugust2005whengovernmentsuspendedthepolicyofgradualappreciationinlate2008throughearly2009,therenewedtieoftherenminbitothedollarresultedinappreciationofrealeffectiveexchangerate.However,Chineseauthoritiesremovedfixedtietodollarinmid2010andallowedtoappreciategradually.15

Duringthelastfewyears,IndiascompetitivenesshassufferedfromasharpappreciationofIndianrupeevisvisthedollar.SofarChinahasbeenresistingamajorappreciationoftherenminbiorthefloatingofthecurrency.However,ifChinadoesrevaluetherenminbiinrelationtotheUS$inamajorwayoragreestofloatthecurrencyleadingtosignificantappreciationshouldresult inarelativestrengtheningofcompetitivenessofIndiasgoodsvisvisChina.TheexpectationisthatChinawillallowtherenminbi toappreciate inaverygradualmannerratherthanrevaluingitsuddenly.

Fourth,thereareconcernsrelatingtoaweakfinancialsectorinChinawhichisreelingundertheheavyburdenofnonperformingassets(NPA)estimatedtobeupto50percent.Thegovernmentkeepsbailingoutthebanksandfinancialsector(Wang,2007Lu,FengandYao,2009).NPAshaveaccumulatedover theyears in the formofsubsidisedcreditsextendedstateownedenterprises (SOEs) that form thebackboneof theeconomy.TheSOEsarealsonot required topaydividend to thegovernment. It isbecauseofsuchpoliciesanddue tootherformsofsubsidisationoflabourcostsofenterprisesbylocalgovernmentsandmunicipalitiesthatmanycountriesarenotwillingtoofferamarketeconomystatustoChina.China,asofthelargestnumberofantidumpingcases,seeksmarketeconomystatusinbilateralnegotiationswithdifferentcountriesandisslowlymovingtowardsfinancialsectorreformsandprudentialregulationofcapitalmarketsdue togrowing internationalpressure.Thegrantofmarketeconomystatus toChinaby Indiacouldbeconsideredonce the transparentandprudentialnormscapitalmarketshavebeenestablishedandfinancialsectorreformshavebeencompleted.

Finally,an interestingdevelopment is the increasingoutwardorientationofChinese investmentespecially in resourcerichareas likeAfrica.The increasingoutwardorientation is the resultofhuge reserves accumulated over the years from its trade surpluses since themid1990s. This trend is set to rise further in the coming years as Chinasmega investment plans in Africamaterialise. Further, China is pursuing its going global strategy effectively as can be seen from the formalising of regulations to help investors to investAdministration of Foreign Exchange abolished quotas on the purchase of foreign exchange for overseas investment. However,most of these investments abroad are resourceseeking inorientation.SomeChinesecompaniesarenowactivelyconsideringplanstosetupanintegratedsteelplantinIndia.In2007,ChinadecidedtosetupanagencytomanagemoreconsiderableportionofitsforeignexchangereservesforoffshoreinvestmentsfollowingtheSingaporemodel.

There are many other challenges in Chinas growth story, for example the massive and growing demand for energy, minerals and other natural resourcesenvironmentaldegradationandclimatechangeresultingfromrapidgrowth,wideninginequalitiesbetweenregionsandemergingsocialtensions,governanceanddemocracy,etc.whichmayhavesomeimplicationsforIndiasdevelopmentbutarebeyondthescopeofthepresentstudy.

3.DevelopmentsinChineseTradePolicy:ItsrelevanceforIndia

3.1EconomicEnvironment

ThemacroeconomicreformsundertakenbyChina,includingitstradereforms,industrialpolicychanges,investmentliberalisation,andothermacroeconomicpositiveoverallperformanceofitseconomy.Someoftheseinitiativesarediscussedinthissection.

3.1.1WTOAccessionandTradePolicyChanges

After15yearsofnegotiationsforentryintotheWTO,Chinasaccessiontothesamein2001wasamajordevelopmentinitstradepolicy16.ManyanalystsinChinaandtermsofagreementwerequitetoughonChinainmanyareas17,suchasthefinancialsectorwhereChinaagreedtoliberalisemorethanwhatitobtainedfrompostWTOaccessiontariff ratesare bound,meaning thatChinacannot raise themabove theboundrateswithout compensatingWTOtradingpartners.All thesereduceddrasticallyChinaspolicyspaceforactivedevelopmentpolicy.Despitetheseconcessions,Chinawasnotgiventhestatusofamarketeconomyuntil2016,whichmeansthatuntil thatdatewouldbringinantidumpingactionswithouthavingtoprovethattheexportpriceswerelowerthanthedomesticmarketpricesinexportingcountries.Insteadcostsinathirdcountrycanbeusedtomeasure thesocalled normal value for antidumpingaction.Theprocess is thusopen to somewhat arbitrary actionand it is nowonder thatChinahasbecome the targetnumberofantidumpingcasesforseveralyearsinarow.ObtainingmarketeconomystatusfeaturesprominentlyinChinasbilateraltradeagreements.AperceptionofanunfairagreementunderWTOaccessionprevailsinmanytradepolicyquartersinChina.

Chinahasalsoreluctantlyacceptedsomediscriminatoryprovisionsinitsaccessionprotocolwhichcanbeusedtolimitaccessof itsexportstooverseasmarkets.Thefirst is thetransitionalproductspecificsafeguardmechanismwhichtargetsChineseproducts.ItcanbeinvokedifthereismarketdisruptionorthethreatofmarketdisruptioncausedbyChineseimports,morestringentinjurytestundertheWTOAgreementonSafeguards.Thissafeguardmechanismwilllastfor12yearsafterChinasaccessiontotheWTO.Thesecondisthespecialsafeguardmechanismthatwasapplicable toChinas textileandclothingexportsuntil theendof2008. Itprovides fora6.07.5percentannual increase in thegrowthofChineseexportsand itcanbeinvokedimmediatelyuponrequestbytheimportingcountryforconsultationwithChina.AnimplicationofthelatteristhatChinahasbeenrestrainedfromtakingfulladvantageoftheMFAoutundertheAgreementonTextilesandClothinguntiltheendof2008.

Itisalsoworthnotingthattradeliberalisationcameafternearlytwodecadesofrapidgrowthandproductivityincreaseinthemanufacturingsector.AccordingtostudiesconductedbytheWorldBankandothersbythemid1990s, therewasa lotof water in thetariffs inChina: formanyof theproducts, thedomesticpricewas lowerthanthe internationalprice.Theprincipleof infantindustryprotectionwasfullyusedbyChinaandseriousliberalisationstartedonlyaftermostoftheprotectedindustrieshadhealthygrowth.TheChinesepoliciesontradeandinpracticemindfuloftheneedsofindustrialcapacitydevelopmentinkeysectors.

ThereareseveralWTOpanelsinvestigatingChinasviolationsofWTOagreements.From1January1995to31December2008,677antidumpingcaseshavebeeninitiatedagainstChinaandin479cases,measuresweretakenagainst.Intheyear2008alone,73antidumpingcaseswereinitiatedagainstChinabutmeasuresweretakenin52ofthesecases.IndiaantidumpingagainstChinaandtakenmeasuresin90ofthesecasesduringtheperiod19952008.Morethan23percentofthetotalcasesinwhichIndiahastakenantidumpingmeasuresare



againstChina.ItmaybenotedthatIndiahassofartakenupthemaximumnumberofantidumpingmeasuresandantidumpinginitiativesagainstChinaascomparedtootherWTOmembers.

ThetariffliberalisationinitiatedinChinaduringthelastfewyearsissummarisedinTable3.1.Theaverageboundratewasunchangedduring200711.In2011,percent,14.6percentforagricultureand9.1percentforindustrialproducts.Chinahasmadesignificantreductionsintariffsonarangeofsectorsincludingmotorparts,officemachinery,largeappliances,furnitureandchemicals.Inoneofitsmoresignificanttariff initiatives,in1January2005,tariffsonInformationTechnologyAgreement(ITA)productsdroppedtozerofromapreWTOaccessionaverageof13.3percent.However,Chinastillmaintainshighdutiesonsomeproductsthatcompetewithsensitivedomestic

Asapartof itsWTOaccessioncommitments,ChinawastoestablishlargeandincreasingTariffRateQuotas(TRQs)for importsofwheat,corn, rice,cotton,wool,sugar,vegetableoils,andfertiliserwith most inquota duties ranging from 1 to 9 per cent. By 2004, TRQ commitment was largely implemented, although transparency continues to be problematic forcommoditiessubjecttoTRQs.Thenumberofproduct linesunderTRQswasseentobedecliningduringthepastdecade.Thenumberof linesasaproportionof total tariff linesat8digitHSdeclinedfrom0.9percentin2001to0.6percentin2009.

Significantprogresshasbeenachieved instandardising theproceduresbut therearesome tendencies tousestandardsandregulationsasameansofprotectingdomestic industryrates fall. Redundant testing requirements continue to trouble exporters, particularly in cosmetics, new chemicals, pharmaceuticals19, medical equipment, cellulartelecommunication products, consumer electronic products and automobiles. Exporters also cite problems caused by lack of transparency in the certification process, lack of coordinationamongstandardsettingbodies,burdensomerequirementsandthelongprocessingtimetakenforlicenses.WTO(2010)reportedthatquantitativerestrictionswereeliminatedon1January

Table3.1:StructureofMFNTariffinChina,200111(Percent)

2001 2002 2003 2004 2005 2007 2009 2011*BOUNDTARIFF

1.Boundtarifflines(percentofalllines) .. 100 100 100 100 100 100 100

2.Simpleaverageboundrate .. 12.4 11.3 10.4 10 9.9 9.9 9.9

Agriculturalproducts(HS0124) .. 17.9 16.4 15 14.7 14.6 14.6 14.6

Industrialproducts(HS2597) .. 11.4 10.4 9.6 9.1 9.1 9.1 9.1

WTOagriculturalproducts .. 18.2 16.9 15.6 15.3 15.3 15.3 15.3

WTOnonagriculturalproducts .. 11.5 10.4 9.6 9.1 9 9 9

Textilesandclothing .. 17.6 15.1 14.9 11.5 11.5 11.5 11.6

3.Tariffquotas(percentoflines) .. 0.8 0.7 0.7 0.7 0.6 0.6 0.6

4.Dutyfreetarifflines(percentoflines) .. 4.3 5.9 6.4 7.7 7.7 7.6 7.5

5.Nonadvaloremtariffs(percentoflines) .. 0 0 0 0 0 0 0

6.NonadvaloremtariffswithnoAVEs(percentoflines) .. 0 0 0 0 0 .. ..

7.Nuisanceboundrates(percentoflines) .. 2 2.3 2.4 2.6 2.6 2.6 2.6

APPLIEDTARIFF

8.Simpleaverageappliedrate 15.6 12.2 11.1 10.2 9.7 9.7 9.5 9.5

Agriculturalproducts(HS0124) 23.2 17.9 16.3 15 14.6 14.5 14.5 14.5

Industrialproducts(HS2597) 14.3 11.1 10.1 9.3 8.9 8.9 8.6 8.6

WTOagriculturalproducts 23.1 18.2 16.8 15.5 15.3 15.2 15.2 15.1

WTOnonagriculturalproducts 14.4 11.2 10.1 9.3 8.8 8.8 8.6 8.6

Textilesandclothing 21.1 17.5 15.1 12.9 11.5 11.5 11.5 11.5

9.Domestictariff'peaks'(percentofalllines) 1.7 1.8 1.9 1.9 2.6 2.4 2.1 2.2

10.Internationaltariff'peaks'(percentofalllines) 40.1 29 25 18.2 15.6 15.6 14.9 14.8

11.Overallstandarddeviation 12.2 9.1 8.4 7.8 7.6 7.5 7.5 7.5

12.Coefficientofvariation 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8

13.Tariffquotas(percentoflines) 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.6

14.Dutyfreetarifflines(percentoflines) 3 4.9 6.7 7.2 8.6 8.7 9.4 9.4

15.Nonadvaloremtariffs(percentoflines) 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7

16.NonadvaloremtariffswithnoAVEs(percentoflines) 0.7 0.7 0.7 0.7 0.7 0.7 0.7 ..

17.Nuisanceappliedrates(percentoflines) 1.5 2 2.1 2 2.6 2.7 2.7 2.7

Source:TradePolicyReview,PRC2007,2010and2012,WTO,Geneva.Note:*Figuresaretakenfromtradepolicyreview(WTOSecretariat)2012,pp.2829.

China agreed to eliminate all subsidiesprohibited under Article 3 ofWTO Agreement on Subsidies and Countervailing measures, including all forms of export subsidies on industrials andagriculturalgoodsuponitsaccessiontotheWTOinDecember2001.However,thelackoftransparencymakesitdifficulttoidentifyandquantifythepossibleexportsubsidiesprovidedbyChinesegovernment.Chinassubsidyprogrammesarea resultof internaladministrativemeasuresandarenotoftenpublicised.Sometimes these take the formof income tax reductions,orexemptions that arede facto contingent on export performance. Chinas subsidy programmes can also take a variety of other forms, includingmechanisms such asinterest loans,debt forgivenessand reductionof freightcharges. Importingcountrieshaveexpressedconcernsabout the involvementof localgovernments in theuseof subsidy topromoteexporters.

Chinahasmadesubstantialefforts tooverhaul thedomestic legal regime toensure theprotectionof intellectualproperty rights inaccordancewith itscommitment to theWTOAgreementofTradeRelatedAspectsofIntellectualPropertyRights(TRIPSAgreement).Theseeffortshavefallenshort insomerespects,particularlywithregardtothecriminal liabilityofandtrademarkcounterfeiting. Inotherareas,Chinahasdonearelativelygood jobof revising legal regimes.However,Chinahasbeen lesssuccessful inenforcing its lawsandregulations inensuringeffectiveIPRenforcement.AccordingtotheUnitedStatesTradeRepresentative(USTR),counterfeitingandpiracyinChinaremainatepidemiclevels.In2007,theUScomplainedtoWTOaboutpiracyandblockedaccesstoUSfilms,amongothers.

AregistrationsystemwasputinplaceforimplementingChinasWTOcommitmentsonliberalisationoftradingrights,bothforChineseenterprisesandforChineseforeignjointventures,whollyforeignowned enterprises and foreign individuals, including sole proprietorships. Consistent with the terms of ChinasWTOAccession Agreement, the importation of some goods, such aspetroleumandsugar, isstillreservedforstatetradingenterprises.Inaddition,forgoodsstillsubjecttotariffratequotassuchasgrains,cotton,vegetableoilsandfertilisers,Chinareservesaportionoftheinquotaimportsforstatetradingenterprises,whileitiscommittedtomaketheremainingportionavailableforimportationthroughnonstatetraders.Amongtheareaswheretradingrightcommitmentshavenotbeen implementedare importationofbooks,newspapersandmagazinesandpharmaceuticalswhereChinastill requiresforeignpharmaceuticalChineseimporterstobringtheirfinishedproductsintothecountry.ThishasbeenamajorNonTariffBarrier(NTB)forIndianpharmaceuticalexports.

InaccordancewiththetermsofitsWTOaccessionagreement,Chinaagreedtoconductitsgovernmentprocurement inatransparentmannerandtoprovideall foreignsupplierswithanequalopportunitytoparticipateinprocurementopenedtoforeignsuppliers.ThecountryappliedfortheGovernmentProcurementAgreement(GPA)andimplementeditsfirstGovernmentProcurementLawin2003.UndertheWTOaccessionagreement,thegovernmentwouldnotinfluencethecommercialdecisionsofstateownedenterprises,althoughinpracticethishasnotconsistentlybeenthecase.However,thelawalsodirectscentralandsubcentralgovernmententitiestogiveprioritytolocalgoodsandserviceswith limitedexceptions.Oneareaofspecialconcernisthatofgovernmentsoftwareprocurement20whereinitialindicationsarethatdraftguidelinesmandatecentralandlocalgovernmentstopurchaseonlysoftwaredevelopedinChinatotheextentpossible.AttheinterventionoftheUS,thesedraftguidelineshavebeensuspendedindefinitely.

3.1.2IndustrialPolicyforStrengtheningIndustrialBase



Chinese industrial policy was effectively used to promote and protect certain favoured industrial sectors. China has not fully embraced the key WTO principles of market access,discrimination,andnational treatment,norhasChinafully institutionalisedmarketmechanismsandmade its traderegimepredictableand transparent.Someof the industrialpolicies thatareillustrative of this include, for example, the issuance of regulations on automotive parts tariffs that discourage the use of imported parts the telecommunications regulatorscommercialnegotiationsoverroyaltypaymentstointellectualpropertyrightsholdersintheareaof3Gstandardsthepursuitofuniquenationalstandardsinmanyareasofhightechnologycould lead to theextractionof technologyor intellectualproperty from foreign rightsholdersdraftgovernmentprocurement regulationsmandatingpurchasesofChineseproducedsoftwareanewsteel industrialpolicythatcalls for thestatemanagementofnearlyeverymajoraspectofChinassteel industryandexcessivegovernmentsubsidisationbenefitinga rangeofdomesticindustriesinChina.ThereisstrictcontroloverforeignownershipofsteelcompaniesimplyingthatnonChinesecompaniescannotacquirecontrollingstakesinthecompany.

ChinaemulatedJapanandSouthKoreainpursuinganindustrialpolicysimilartowhatwasearlierpursuedbythetwonationsduring1970sand1980stocreatelocalmultinationalcorporations(MNCs)ornationalchampionsinselectareasbasedontheircorecompetence.Varioussupportivestatepolicieswerepursuedincludingconsolidationoffragmentedcapacities,subsidisationfinancialresources22,encouragementofR&Dactivityandstatepatronageintheiroutwardoperations.Thegovernmentplanstobuild3050ofitsfirmsintolocalmultinationalsbytheturnofthepresentdecade.Thesecompanieswouldenjoytaxbreaks,cheaplandandvirtuallyfreefundingviastateownedbanksandgovernmenthelpinsecuringcontractsorexplorationrightsabroad.Haierinhomeappliancesisonesuchhighlysuccessfulcompanyhavingbuiltupacommandingshareinthedomesticmarketofupto70percentinmostappliances,andnowoperatesinover100countries.A fewautoproducerssuchasGeelyarealsoquicklyemergingas largeexporters,especially todevelopingcountries,ofcheapcars.Someposition through acquisitions such as Lenovo with a US$ 2 billion takeover of IBMs PC division. Some of the most successful companies are engaged in thetelecommunicationnetworkequipment,forexample:HuaweiandZTE.Thesecompanieshaveemergedasmajorplayersintheirareaofbusiness,commandingnearlyonefifthofglobalexportsof telecomequipments. Inthissector, IndiahadastrongermanufacturingandR&Dbase intheformofpublicsectorenterprisesandR&Dlaboratories,namelyCDot.However, theymakeatransitionwiththemobile/cellulartechnology.

Ontheotherhand,theChinesestrategyofbuildinglargemanufacturingcompaniesthatcansustainlargeR&Dbudgetshasenabledthemtonotonlycompeteonthebasisofjustcheaplabourorcostsbutalsoonthebasisoftechnologicalinnovation.TheseeffortsenabledChinatoemergeasaproductionhuboftheglobaleconomy.Intheprocess,Chinahasofmassproductionofmanufacturingproducts,whichhastheadvantageofloweringtheprice.Globalexperiencesindicatethatleadfirmsincertaincountries,areengagedinvariousvalueaddedservices includingR&Danddesignactivities,whichcouldbring thembrandvalues in theglobaleconomy.Large firms incountries likeJapanandKoreagained fromproducts.But,similarexperienceswerenotreplicatedformanyincludingfastindustrialisingcountriesincludingemergingcountriesinrecentyears(Birnik,BirnikandSheth,2010).

Chinesecompanieshavenotdevelopedabrandnamefortheirproductsglobally.Ratherothercountrieshavedevelopedbrandnamesusingproductsoriginatedfromafewvaluablebrandsthatareknownglobally.Amongthetop100brandsintheInterbrands2012valuationoftheworld,afewAsianbrandswerelistedfromJapanandKoreabutnonefromtheAsianmanufacturinggiantslikeChinaandIndia(Interbrand,2012).

TheproductionbaseofChinahasnothelped thecountry indeveloping itsbrandname.TheChinesepolicyofcreating LocalChampionsor localMNCshasnotproductiongiantswithcovetedbrandnamesliketheJapaneseorKoreans.ThoughChinafollowedthemodelsofKoreaandJapanincreatingMNCs, thecountryachievedvery little fromthisinitiativeascomparedtoJapanandKorea.

Interestingly,firms inothercountriesareusing theproductionbaseofChinaforcreating theirownbrandname in thedomesticor internationalmarkets.Forexample, theevolvedabrandnameinIndia inthe lowendof theproduct,butsourcing theproducts fromChina. It is interesting tonote that marginofbusiness fromproductionmaybehigh inacountryhavinganefficientproductionbasebutthemarginofbusinessfromtradecouldbelargerwiththebrandingofaproduct.Forexample,aBarbiedollissoldatthepriceofwiththeimportpriceof$2.OutofwhichaChinesemanufacturerreceivesaremunerationof$0.35andtherest($1.65)goestoactivitiessuchasmaterialcost,packaging,etc.(Barboza,2006Chen,2005).IntheUSmarket,aHugoBossshirtissoldatthepriceof$120.WhiletheChinesemanufactureshares10percentofthecost,60percentofitgoesto2005).Forthisreason,thetopglobalmanufacturersarenotglobaltopbrandownersandthelattersetofcompaniesmostlyoutsourcetheirmanufacturingtoAsia(Fan,2006).Whenacountryisabletocombineitsefficientproductionbasewithbranding,itcanoptimiseitsmarginofbusiness.

However,ChinahasdoubledtheR&Dexpenditurefrom0.6percentofGDPin1995toover1.2percentin2004.ItwasprojectedtohaveemergedasthesecondlargestinvestorinR&DaftertheU.S. in 2006 (OECD, 2007).Correspondingly, the number of researchers employed increased by 77 per cent between 1995 and 2004, possibly next to theUS.BothdomesticprivatefirmscompeteintermsoftheirexpendituresinR&DactivitiesasshowninTable3.2.WhileR&Dintensityismuchhigherinstateownedfirmsthaninpharmaceuticalandmedicalequipments,itismoreinsectorsliketelecommunications24andofficeequipmentsforthedomesticprivateenterprises.InChina,R&Dintensityisstronginsectorssuchaselectricequipments,computerhardwareandmedicalequipments.Interestingly,R&Dintensityhappenstobemorestrongforsmallfirmsthanforothers(see

Table3.2:R&DIntensitybyownershipandsizeinselectedsectors(percentofsales,2004)

StateownedDomesticprivate JVHTM

JVForeign Foreign

Pharmaceuticals 2.0 1.3 1.9 1.3 0.8

Electronics&Telecom 3.2 3.7 0.6 1.0 0.4

ComputerandOfficeequipment 2.0 4.7 0.7 0.9 0.3

Medicalequip.andinstruments 4.1 3.0 1.0 2.2 0.1

Smallfirms 1.2 1.6 1.0 1.7 1.5

Allfirms 1.3 0.9 0.4 0.6 0.3

Note:Smallfirms=14percentoftotalbusinessR&D(OECD=17percent).Source:OECD(2007).

_______________________________________________________________________________________________________________________________________________________________Box3.1.R&DandInnovationinChina

InthePostCulturalRevolutionperiod,thescaleofR&Dactivitiesofferedverylowsupporttothemammothtaskofproductionactivitiesinthedomesticeconomy.Duringthisperiod,productionactivitiesweremostlypropelledbyimportedtechnology.Theneedforarenewedemphasisonadomesticinnovationorientedapproachwasfeltduringtheeconomicthelastfewyears.TheS&TStrategicPlan20062020hassetoutthekeyobjectivesandprioritiesinscienceandtechnologyandenvisagestheneedtodevelophomegrown innovation. Institutional reform of the S&T system was launched in 1985 with reformmeasures focused on public R&D funding, transformation of R&D institutions in appliedresearchintobusinessentitiesand/ortechnicalserviceorganisations,andtheincorporationoflargeR&Dinstitutionsintolargeenterprises,creationofmarketsfortechnology,andreformofthehumanresourcemanagementinpublicresearchinstitutions.R&DactivitiesweremostlylocatedinS&Tindustrialparks,universityscienceparksandtechnologybusinessincubatorsTorchprogrammeandspinoffsfrompublicresearchorganisationsstartedtofillthegap.Bytheturnofthecentury,acombinationofexperimentalnationalpoliciesinspecialzones,bottomupinitiativessupportedby regionaland localauthorities,and topdownsystemic reformshadgivenbirth to theNational InnovationSystem (NIS).Chinanowpursuesagrowthpath that is lessdependent on lowskill, resourceintensivemanufacturing.Human capital formation and the encouragement of capabilities in science, technology and innovation play a key role as potentialenginesoffuturegrowth.InJune2007,fourindustryresearchstrategicalliances,concerningsteel,coal,chemistryandagriculturalequipment,weresetupwithaddresslongstandingproblemsrelatedtothelowlevelanddispersalofinnovationcapabilities,theinadequatesupplyofgenerictechnologiesandthelackofcoretechnologicalcompetenciesinthesesectors.

ChinahasexcelledinmobilizingresourcesforscienceandtechnologyonanunprecedentedscaleandemergedasamajorR&Dplayer.R&Dspendinghasincreasedatanannualrateof19centsince1995andreachedUS$30billionin2005.Similarly,theR&D/GDPratioimprovedfrom0.6percentin1995to1.34percentin2005.Asfarasallocationoffundsisconcerned,morethan70percentofthegrossdomesticexpenditurehasbeenforexperimentaldevelopment,leavingonly6percenttobasicresearch.ThebusinesssectoristhedominantR&Dactorperformingover twothirdsof totalR&D,up from less than40percentat thebeginningof1990.Thenumberof firms in technologybusiness incubators (TBIs)hasmore thanquadrupledsince2000 toalmost40,000in2005.Inaddition,ChinahasrankedsecondintheworldaftertheUnitedStatesandaheadofJapaninnumberofresearchersengagedintheseactivitiessince2000.

Despitesignificantprogress,thecurrentstateofinnovationactivitiesisfarbelowtheglobalstandards.ChinasNISisnotfullydevelopedandimperfectlyintegratedwithlinkagesbetweenactorsand subsystems. Technology transfer toChina through operations of the foreigninvested enterprises and related spillovers to the domestic economy have notmeteffective IPRprotectionanddeficiencies in frameworkmanifest inconditionssuchasapassive learningbasededucationsystem, inadequateproductmarketcompetition,corporate governance and financing difficulties affects the R&D activity in the country. Current regional patterns of R&D and innovation activities are not optimal from the perspective ofefficiencybycreatingaphysicalseparationbetweenknowledgeproducersandpotentialusers.Thedemandsforscientificinputstoinnovationareverylimitedasthevastfirmshavenotputinnovationatthecoreoftheirbusinessstrategy.Theconceptofprecompetitiveresearch,asopposedtonearmarketappliedresearchormeretechnologicaldevelopment,aswellasthatofpublicprivatepartnership,arenotyetwellunderstoodbymanyactorsintheinnovationsystem.Inordertobuildamodern,highperformancenationalhavetomaintainahighlevelofinvestmentinR&D,innovationandeducationtoovercometheremaininginstitutionalandstructuralweaknessesofitscurrentinnovationsystem.

Source:OECD(2007)



________________________________________________________________________________________________________________________________________________________________

InanefforttobuildlocalMNCs,theChinesegovernmentissupportingcompaniesbyconsolidatingfragmenteddomesticindustriesandthenexpandingtheseinternationally.Baosteel(insteel),Chalco (inaluminium)andYanzhou (incoal) areamongcompanies thathavebeencreated through thisprocess.Asimilar strategy is nowbeingpursued tobuild cement championsby theNationalDevelopmentandReformCommission(NDRC).

3.1.3.ExploitingthePotentialofFDIforExportorientedProduction

OneofthekeyfeaturesofChinasForeignDirectInvestment(FDI)regimehasbeenthebetterthannationaltreatmentinitstaxationpolicesforforeigninvestedenterprises(FIEs).Thestandardenterpriseincometaxis33percent.However,anenterpriseincometaxrateof15percentappliestoFIEslocatedinspecialeconomiczones(SEZs),ortoFIEsinvolvedinmanufacturingtheeconomicandtechnologicaldevelopmentzones(ETDZs)andarateof24percentapplies toFIEs involved inmanufacturingand located in thecoastalurbandistrictsofcitieswhereSEZorETDZsarelocated.HitechFIEslocatedinhitechindustrialzonesenjoyatwoyearincometaxexemptionthoseinvolvedinmanufacturingalsoenjoythe50percentincometaxreductioninthefollowingthreeyears.ExportorientedFIEsenjoythesametwoyearexemptionandthe50percentreductionaslongastheatmorethan70percentofthegeneralsalesoftheenterprise.Inaddition,FIEsoperatingindesignatedmanufacturingindustriesinthewesternandcentralregionsofChinaenjoyacompletetaxholidayduringthefirsttwoyearsaftermakingprofitsanda50percentincometaxreductionduringthefollowingsixyears.

Such preferential treatment of FDI supported by a well developed infrastructure and a large domestic market has helped China to become the largest recipient of FDI among developingcountries25.TherehasbeenadebateontheabilityofChinatomobilisesuchamassiveinflowofFDIincontrasttoIndiasabilitytoattractonlyUS$56billionofbeenarguedthatmorethanthemagnitude,theChineseachievementhasbeenintermsofmakingFDIworkforitsdevelopment.Chinahassuccessfully leveragedaccessto its largemarketwith foreignMNCs in return for building export capabilities. Foreign invested enterprises undertook 57 per cent ofChinasmerchandise exports and over 80 per cent of herexportsin2004(OECD,2007).

HavingaccumulatedsuchamassivestockofFDI26,Chinainearly2007movedtowardsscrappingthepreferentialtaxregimeforFIEs.Thesearenolongerexemptfrompayinglandusetax.InMarch2007,itmovedtounifytheincometaxratespaidbyforeignanddomesticfirmsat25percentandunveiledaseriesoftaxbreakstopromotehightechnology,environmentalprotectionorientedandenergysaving ventures.China has revised its laws and regulations for foreigninvested enterprises in an attempt to eliminateWTOinconsistentperformance,localcontentandforeignexchangebalancingaswellastechnologytransfer.ChinaalsorevisedthebuyChinapoliciesthatregulatedprocurementofrawmaterialsandfuels,andremoved its requirements of joint ventures and whollyowned enterprises to submit production/operation plans to Chinese authorities. However, some measurestechnology transfer,without formally requiring it.Moreover, someChinesegovernmentofficials still consider factors suchasexport performanceand local contentwhendecidingwhether toapproveofaninvestmentortorecommendapprovalofaloanfromaChinesebank.TheautoindustrypolicyofMay2004continuestoincludeprovisionsthatdiscourageimportsandhasdrawncriticismfromforeigncompanies.Ithasalsoincludedarequirementofasizeableminimuminvestment(US$200million).

Investors in China continue to confront a lack of transparency, inconsistently enforced laws and regulations, weak IPR protection, corruption and an unreliable legal system incapable ofprotectingthesanctityofcontracts.Yet,foreignanddomesticcompanieshavecontinuedtoreporthighprofitabilityin2010,indicatingthatthechallengestodoinglargelysurmountable(WorldBank,2010).

3.1.4ApproachtowardsWTOsDohaRoundofNegotiations

ChinahasbeenanactiveparticipantintheWTOsDohaRoundnegotiationsandworkscloselywithIndiaandotherdevelopingcountries.Onanumberofimportantissues,itspositioniscloseto thatof India.For instance,China isamemberofG20andG33onagriculturealongwith Indiaandshares theperception thatdistortions indevelopedcountries inreducedwhiledevelopingcountriesshouldretainflexibilitiesforfoodsecurityandlivelihoodconcernsthroughSPandSSM.EventhoughChinaisnotamemberofNAMA11, ithassupportedIndiapositionandofNAMA11countriesthattariffpeaksandtariffescalationindevelopedcountriesonproductsofexportinteresttodevelopingcountriesshouldcomeonIPRsespeciallyontherelationshipbetweenTRIPsandtheConventiononBiodiversity(CBD),inparticularontheneedforevolvingasystemofpriorinformedconsentandsharingfortheexploitationofindigenousknowledgeandbiodiversityofdevelopingcountries,issimilartothatofIndias.IntheearlyyearsofDohanegotiations,ChinasupportedIndiaspositiononSingaporeIssues.TheChinaIndiaJointMinisterialStatementonWTOissuedduringthevisitofIndiasCommerceandIndustryMinistertoBeijingin2007wasandirectionofgrowingcoordinationbetweenthetwocountriesinmultilateraltradenegotiations.

3.2TradeandTradePoliciesinKeySectorsofInteresttoIndia

ThesectoralcompositionofChinasexportshassomeinterestingcharacteristics.WhileChinaisusuallyseenasspecialisinginexportsoflabourintensiveproducts,itsexportbasketisrapidlymoving towards high technology products. The cutting edge of Chinas exports is now provided by relatively high technology products involving machinery and transportationparticularlyofficemachinesandtelecommunicationequipmentandparts.Exportsoftheseproductshaveincreasedmorethanfivefoldinthelast7yearsandtheynowaccountfornearlyhalfofthemanufacturedproducts.One importantgap inChinasexportdrive isevident in theservicesector. In theoldsocialistparadigm,serviceswerenot included inGDPsocialisteconomies.Thenationalincomestatisticsincludeservicessincetheinitiationofmarketorientedreforms,butthesectorisstillrelativelyunderdeveloped.Withrespecttoexternaltradetoo,Chinawaslagginginexportsinthissector.In2012,Chinaisexpectedtohaveasignificanttradedeficitintheservicesector.27Indiaontheotherhandhasalargeservicesectoranditsexportsofservicesareincreasingrapidly.Asdiscussedbelow,thismaywellbeanicheareaforIndiasexportstoChina.

ForassessingsectorsinwhichIndiamayhaveopportunitiesforexpandingitsexportstoChina,itisusefultoreviewChinastradepolicyinsomekeysectors.

3.2.1Agriculture

ThetariffliberalisationpolicyinagriculturehasbeenstrikinginChinasinceitsaccessiontoWTO.Appliedtariffsonagriculturalproductsdeclinedfrom23.2percentin2001to14.5percentin2011.Therehasbeenaconsiderablereductionintheaveragerateofappliedtariffinsectorslikedairyproducts,grainandoilseeds.TariffsonsugarandtobaccoremainedhighLowertariffsapplytosubsectorswhereChinaapparentlyhasacomparativeadvantagesuchaslabourintensivehorticulturalandanimalproducts.Theagriculturalaverageboundtariffratewas17.9percentin2002anddeclinedto14.6percentin2011.28Despiteasharpreductionintheaverageboundrate,thedividebetweenagricultureandindustrialsectorremainedsignificantlyhighduringthelastdecade.

Theproportionofproductlinesundertariffquotainthetotalnumberoftarifflinesdeclinedfrom0.9percentin2001to0.6percentin2009.Asinothercountries,thesystemservestorestrictthequantityof importsand isnecessary toavoid largequantitiesof importsaffecting farmers incomesandsocial stability.Despite liberalisation, thegovernment retains someimportsandexportsthroughStateTradingEnterpriseswhichincludegrain(includingmaize,rice,andwheat),vegetableoil,sugar,tobacco,andcottonaswellaschemicalfertilisers.Exportsofagriculturalproductsaresubsidisedby localand thecentralgovernments.TheTradePolicyReview (TPR)of theWTOfinds thatconcernsaremostlydue tosubsidyrelatedprogrammes forexports by local governments. Besides officially supported export credits are also source of concern for the WTO members. WTO (2010),29 has outlined the need for submitting freshnotificationsregardingitssubsidies.

Governmentinterventioninagriculture,thoughdecliningisstillsignificant.Forachievingthebroadobjectiveoffoodsecuritytopromoteindustrialisation,alongwithraisingruralincomesthroughpricesupport,aheavyfinancialburdenfallsonthegovernmentonaccountofprovidingsubsidies,managingconsumerprices,andothermeasures.AccordingtoUSTR,agricultural tradewithChina remains among the least transparent and predictable of theworldsmajormarkets. Capricious practices byChinese customs and quarantine officials can delay or haltagricultural products in China, while sanitary and phytosanitary (SPS) standards with questionable scientific bases and a generally opaque regulatory regime frequently bedevil traders inagriculturalcommodities.TherestrictiononIndianfruitsandvegetableuntilrecentlyisacaseinpoint.IndiahasbeenstrugglingtogainmarketaccessinChinainnumberoffruitandproductswhereithasglobalcompetitivenessforexportsincludinginChina.

3.2.2Manufacturing

TariffliberalisationhasbeenverydramaticintheChinesemanufacturingsectorduringthepastdecade.Averageappliedtariffsonindustrialgoodshavecomedownfrom14.3percentin2001to8.6percentin2011.However,anarrayofnontariffmeasuresarestillusedinsomeinstancestorestrictimportsandexports.

China is the largest textilesandclothingproducer in theworld.Of thesectors total output,more than twothirds is consumeddomesticallyand the rest is exported.Since1995,Chinahasemergedastheworldslargesttextilesandclothingexporter.Itstradepolicyregardingthetextilesandclothingindustryconsistsmainlyofreducingtariffsandnontariffandrelaxingcontrolsonsomeexports.Inaddition,inagreementwithcertaintradingpartners,Chinaimposedrestrictionsonsomeexports.ChinahassignedanMOUwiththeEU,theUSAandBraziltolimitthegrowthratesof itsexportstothesecountriesuntil2008atannualrateswithintherangeof1018percent.Chinaalsoencouragesinvestmentabroadbycompanies,inparticularindevelopingandleastdevelopedcountries,byprovidingpreferentialloans,simplifyingadministrativeprocedures,andenhancinginformationsupport.

ItishighlylikelythatasChinamovesintomoreadvancedtechnologyorientedproducts,theproductionbasefortextilesandclothingwillslowlyshifttoothercountries.Indiashouldbereadyforbenefitsfromsucharestructuringandget intopartnershipswith foreignfirmsnowestablishingproduction facilities inChinaasalsowith theChinesefirmstoshiftoccurs. Inparticular, Indianeeds togear itselfup formassproducedgarmentsanactivity inwhichChinahasaclearadvantagewithmassiveproductionbases thatcanhandleverylargeorderstobeabletotakeadvantageoftheopportunitiesarisingfromtheChineseindustryphasingitselfoutofthegarmenttrade.However,westernimportersmaybewillingtobuymorefromIndiainpreferencetoChina,providedwecansupplyvolumes,asapartoftheirstrategies.

Chinahasbeentheworldsfourthlargestautomobilemanufacturersince2003,aftertheUnitedStates,JapanandGermany.In2004,Chinabecamethethirdlargestmarketintheworld,aftertheUnitedStatesandJapan.AccordingtoforecastmadebyGoldmanSachsreportedinTheEconomist,16September2006,thecarownershipinChinamayexceedthatoftheUSby2025



maybecometwiceashigh(over400millionvehicles)asthelevelofUSownershipby2040.ChinahasbecometheworldssecondlargestcarmarketintermsofsalesasmillionsofChinesearebuyingcars for thefirst time. Indiacannotafford to ignore thismarket. Indiashouldstartpreparingforpenetrating thismarket.JustasJapanandKoreasucceeded incompetingwithgiantcarmanufacturersoftheUS,IndiacansucceedincompetingwiththemanufacturersinChina,whicharegenerallyjointventuresbetweenstateownedfew home grown companies like Geely and Cherry have come up rapidly as producers of cheap cars. However, quality and reliability concerns have affected their plans tomove into thedevelopedcountrymarketsuntil2008.ForeigninvestmentplaysanimportantroleinChinasautomotivessectorandFIEsaccountedforaroundthreefourthof

Chinaselectronicandcommunicationsequipmentindustryisthethirdlargestintheworldintermsofoutput,aftertheUnitedStatesandJapan.ElectronicandcommunicationsequipmentalsoaccountforthelargestshareofChinasexports.TheexportrevenueofthesectorconstitutesnearlyonethirdofChinastotalexportvalue.Inthetotalexportproceeds,thefirmshasbeeninsignificant.Thecentralgovernmenthasadoptedseveralmeasurestoassistthedevelopmentoftheelectronicandcommunicationsequipmentindustry,inparticulartoimprovethetechnologicalcapabilitiesofdomesticenterprises.Underthispolicy,thegovernmentallocatesfundstosoftwareandICindustriesfortheestablishmentofsoftwarealia,universitiesandresearchinstitutes.PreferentialpoliciesincludeVATrebates,tariffexemptionsforimportedequipmentforownuse,exportloansprovidedbyEXIMBankandexportcreditinsuranceprovidedbySINOCUEatfavourableterms,governmentprocurementpreferences,andaspecialfundtopromotedomesticenterprisesR&Dabilityinthesemiconductorindustry.Thegovernmentisalsoencouragingdomestic industriesto investabroadinanattempttoupgradetechnologyandtoestablishacommercialpresenceintheinternationalmarket.ChinajoinedtheWTOInformationTechnologyAgreement(ITA)in2003and258tarifflinesattheHSeightdigitlevelweresubjectedtozerotariffsaccordingtothenewagreement.Import licensesandquotasoncertainelectronicandcommunicationsequipmentproductshavebeenremoved.

Inthepharmaceuticalsector,ChinaisverypoorlyplacedincomparisonwithIndiaduetoadifferentiatedpolicyregimeandmanagementskills.ThereisnoChineseproductlineorproduct that has been certified byFDA (Food andDrugAdministration of theU.S.). China ismostly a rawmaterials supplier and is lacking in production of generic branded products. TheChinesemarketcouldbepotentiallyahighexportmarketforIndianpharmaceuticalproducts.However,therearereportsthatinseveralbulkdrugs,producersarecomplainingaboutimportsofcheap drugs from China. The competition is very severe for firms producing bulk drugs like azithromycin, clarithromycin, ciprofloxacin, norfloxacin, roxycomycin, cephalosporins and antiquinolines.

3.2.3Services

TheservicessectorinChinahasbeenunderdevelopedduringtheplanningeraandnowpresentsasignificantpotentialinviewoftherapidgrowthoftheeconomy.IntheChinesegovernmenthas identified thedevelopmentofservicessectorasaprioritysector in the11thand12thFiveyearPlans forNationalEconomicandSocialDevelopment.With thespectacularperformanceofexportsandimportsoverthepastfewyears,thecontributionofservicestoGDPintermsofvalueaddedhassurgedfrom39.7percentin2005to40.1percentin2008. Some of the most important export sectors in services have been transport and other business services during the last decade. Potentially other important exportcommunication,construction,computerandinformation,insurance,finance&royaltiesandlicensefees,whichareexpandingfastinrecentyears.

Both as amatter of policy and as a result of itsWTO co

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countrieswas insignificant