The ongoing trade dynamics between India and China continue to startle the world. On the one hand, there has been a lot of chest thumping about banning Chinese products and reducing reliance on China as a supply chain hub. On the other hand, China resurfaced as India’s leading trading partner in the first half of 2020-21. The bilateral trade volume between the two countries stands at USD 38 billion, a decline of 15% as per the report. With the Galwan Valley incident in June’20 and the countermeasures taken against the same, this emerging trade relation is addling. Moreover, the ongoing pandemic has left India’s trade condition in bits and pieces, but China suffered the least as a trade partner.
This article focuses on the perplexing chain of events, the outcomes of which will affect the trade relationship between these countries going forward. Read on to understand India’s confusing trade relationship with China. In this article, we will discuss:
The conflict across the Sino-Indian border left a sour taste and spoiled diplomatic relations between India and China. Responding to public sentiment, and rising media pressure, the Indian government decided to implement short term policy decisions that went into effect immediately. Some of these decisions are briefly covered below:
All these retaliatory measures became a starting point to the way the trade relationship developed over the last few months. But before getting to the current state of the relationship, it is important to understand how we got here.
Bilateral trade relations between India and China have been a bit all over the place for the last 5 years. Exports from the Indian side have fluctuated and been inconsistent. While imports have steadily risen since 2015. Of course the COVID pandemic changed the macro situation last year. One of the results of this change was China occupying the position of India’s largest trading partner in 2020-21. This isn’t particularly surprising. When cities went to work post lockdown, it was China’s economy that showed a V-shaped recovery curve, at a time when American & European economies were reeling under the effects on the pandemic. Not only did China deal with the pandemic better, it also went back to work sooner and accelerated its economic recovery.
Here’s how trade has looked between the 2 countries over the last 5 years:
The statistics prove that the countries have, over the last 5 years, maintained a fairly healthy trading relationship. It might seem like India is the more reliant partner, and that may be true too. While bilateral trade between India and China suffered a 15% decline, India’s trade with other nations registered a 32.5% decline in 2020. I would personally take this stat with a grain of salt. India might have China as its largest trading partner, but that’s also because of the decline in trade with other countries affected by the covid pandemic.
And while the Atmanirbhar Bharat initiative has its heart in the right place, there’s still some time to go before India reverse its trade balance with the Chinese.
China exports large quantities of raw materials that act as input for India’s manufacturing and pharmaceuticals industries. There has been some indication that India plans to source these raw materials from other countries, but so far there has been very little action. India has however raised its voice against China investing or trading in Indian companies via third parties. Let us understand where things go from here.
India imposed anti-dumping duties on 90 Chinese products in February 2020, as announced by Piyush Goyal, Minister of Commerce and Industry. The government also put 24 products under investigation to check for loopholes created by China through third parties. The key highlights go as follow:
Traders were then expected to do their bit and try to respond to these government initiatives and policies to decrease imports from China. The rules weren’t just aimed at traders though. They also appealed to populist general sentiment prevailing in the country at the time.
After China’s infiltration into the Galwan Valley area belonging to India, the Indian Prime Minister made a decisive move by revising the FDI policy. The decision also took into account reports that China was circumventing trading bans by working with entities based out of Hong Kong and Singapore.
Consolidated Foreign Direct Investment Policy: The revised policy incorporates restrictions on FDI investments from individuals and firms from neighboring countries. The notice also clarifies the direct application of this rule on the countries sharing borders with India, including China. The government intends to repel any opportunistic takeover of Indian lands or properties by countries haring borders with India.
26% Investment Cap On FDI/Equity Covering Digital News: The government has imposed an investment cap of 26% on FDI or equity investments in the digital news segments, says the officially documented statement. The concerned parties must also seek government approval before proceeding with the investments.
Obligations on the E-Commerce Industry: The latest revision also demands the e-commerce associations with foreign investments to obtain a statutory audit report every year by 30 September. The government or automatic route is mandatory in the case of 100% FDI.
Withdrawal From RCEP Free Trade Deal: India pulled out of the free trade deal of the RCEP (Regional Comprehensive Economic Partnership) to protect the vulnerable and critical sections of the economy. The idea was to persuade China and make it grant reciprocal market access without any rift. With the market flooded by Chinese goods, this free trade deal would have made the situation worse.
Apart from the initiatives taken on the foreign policy front, there were quite a few initiatives launched within India too. Some of them are mentioned below:
All these measures were taken from the pov of reducing dependence on Chinese imports. It’s difficult to ascertain how these changes might play out in the long run, but it is obvious that India doesn’t foresee the strongest of trade relations with China going forward.
“One step forward and two steps backward”. As is the case with short term policy decisions driven by populist appeasement, the policy changes did not bring about the desired change. On the contrary, many small businesses reliant on Chinese imports suffered enormously.
The import ban caused a Rs.40,000 crores loss to the country. There’s some investigation required into why these losses, and what can be done to assuage them in the future.
The political and trade tensions between China and India led to some other, second order effects. Trying to reduce its dependence on Chinese imports, Australia may now consider India as a stronger trade partner. The offer is to:
What’s more, The US, Australia and Japan now consider themselves part of the Quad – a political and military partnership meant to establish a stronghold in the Indian Ocean and South China Sea areas, as a counter to the threat posed by China in the region.
These are positive signs.
If you like what we write about, don’t forget to subscribe
An overview of the current industry consolidation and how this trend will affect container shipping
Get full details about what a supply chain is, and how is it important. Know how covid-19 has impacted supply chain and what can you do to manage and adapt.
What is Brexit, no-deal Brexit and the impact of Brexit on trade? How Brexit will impact the logistics sector and India. Know how to be Brexit ready.
Know about the best 35 digital resources needed to do an import/export business successfully. Know where to look for buyers and the trade finance needed for it.
China is one of India's biggest trading partners. Read to know more about the bilateral trade between the two Asian giants.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.
The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.
A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!
Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.