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Trade imbalance to cast shadow on China-India talks

The Economic Times, India

Trade imbalance to cast shadow on China-India talks

10 December 2010

BEIJING/NEW DELHI: Chinese Premier Wen Jiabao faces a tough task when he arrives in India next week to allay New Delhi’s fears over China’s rise as a global power , and to smooth tensions in an often fractious relationship.

Despite a boom in bilateral commerce in the past decade and cooperation on global issues such as climate change, India and China remain suspicious of each other’s growing international clout and influence.

"The relationship is a mixture of third-world solidarity and strategic rivalry. Those two elements are here to stay," said Jean Pierre Cabestan, an international relations professor at Hong Kong Baptist University.

"But India will need to balance China’s growing power even more tomorrow than today."

Wen plans to spend Dec. 15-16 in New Delhi , after which he will travel to Pakistan, India’s closest rival, for another two nights.

The growing economic interdependence between China and India is likely to head Wen’s agenda for the trip.

Analysts say he could announce more Chinese investments in India or lower trade barriers to assuage the worries of Indian politicians, peeved that the Sino-Indian trade balance is heavily in China’s favour.

India’s deficit with China could reach $24-25 billion this year, said Srikanth Kondapalli, head of East Asian studies at Jahawarlal Nehru University.

The deficit rose to $16 billion in 2007-08, from $1 billion in 2001-02, according to Indian customs data.

Prime Minister Manmohan Singh is likely to press Wen for reassurances that China will open its market wider, especially in value-added sectors such as financial services and information technology.

China is India’s biggest trading partner, with bilateral trade expected to pass $60 billion this year.

But even with greater market access, it is likely to be a long time before India can close the trade gap.

"I don’t see the deficit narrowing rapidly," said Dibyesh Anand, an international relations professor at London’s University of Westminster. "Even if tariffs are lowered on manufactured products, India can’t compete with China on manufactured products."


India has sought to diversify its trade basket, but raw materials and other low-end commodities such as iron ore still make up about 60 percent of its exports to China.

In contrast, manufactured goods — from trinkets to turbines — form the bulk of Chinese exports.

In an illustration of India’s dependence on Chinese manufacturing, Shanghai Electric Group Co agreed in October to sell power equipment and related services worth $8.3 billion to India’s Reliance Power .

Even if India and China are the world’s two largest emerging economies, the development gap between them remains large, due in part to a decade’s head start for Chinese economic reforms. "India’s at a phase of capital expenditure that is 15 years behind China. That’s just the way it is," said Chetan Ahya, a Morgan Stanley economist in Singapore.

"China also was importing a lot of capital goods in the initial period of growth takeoff in the 1980s with periods of trade deficit."

India and China said in October that they would pursue a free trade agreement, but talks could be protracted because trade relations are overlaid with political and strategic rifts.

"When it comes to economic ties, because there’s a general suspicion of Chinese motives in India, that would play into the hands of those sceptical of China and probably filter down into the Commerce Ministry," said Westminster University’s Anand .

"The trade deficit does not have a long-term effect on relations," he added. "But they want a scapegoat. China is an easy one to blame because it is seen as a political and military rival."


India and China have clashed repeatedly over a raft of issues including their long-disputed border, China’s increasingly close relationship with Pakistan, and fears of Chinese spying.

No other country has initiated more anti-dumping investigations against China at the World Trade Organisation than has India.

In May, India barred its mobile phone operators from placing orders with China’s Huawei Technologies and ZTE Corp because of national security concerns.

Still, both sides have something to gain from the relationship.

"The visit comes at a time when the Chinese are really keen that the Indians do not become a fully fledged member of the U.S. camp," said Manoj Joshi, the opinion editor of India’s Mail Today newspaper.

India needs Chinese backing for a permanent seat on the U.N. Security Council and both countries have stood together to resist Western demands in world trade and climate change talks.

Singh is not expected to talk tough on China, but this softer strategy could backfire at home. Indian military officials have turned increasingly hawkish toward China and are suspicious of China’s intentions in the Indian Ocean.

Nearly half a century after war broke out between them, mistrust persists, especially over the 90,000 sq km (35,000 sq. miles) of land in Arunachal Pradesh state claimed by Beijing.

China was incensed when the Dalai Lama visited the state last year and saw it as proof of the exiled Tibetan spiritual leader’s separatist machinations.

"I think the border dispute is still a festering sore, which would continue to create disputes for the relationship," said Pradeep Taneja, a lecturer in Asian politics at the University of Melbourne. "As long as the nationalists on both sides continue to stir the pot, then any settlement would not be easy."