ECONOMY: Will China Overtake US as India’s Trade Partner?

By IPS Correspondents Reprint | | Print |

Paranjoy Guha Thakurta

NEW DELHI, Mar 13 2006 (IPS) - Despite the substantial nuclear cooperation deal, sealed by visiting President George W. Bush, earlier this month, the United States may still lose out to rival China as India’s largest trading partner.

India’s bilateral trade with China in 2005 set a new record at 18.71 billion US dollars, up nearly 38 percent from 2004. India had set a target of 20 billion dollars by 2008, but that could be achieved well in advance. India’s exports to China grew by over 27 percent in 2005, higher than the overall growth in Sino-India bilateral trade to the extent of nearly 38 percent.

”China should emerge as India’s largest trading partner overtaking the U.S. within a year or two, with two-way trade exceeding 30 billion dollars in 2007,” Nagesh Kumar, director general of the Research and Information System for Developing Countries, a government-funded think-tank, told IPS in an interview.

Other analysts disagree, contending that the U.S. would continue to remain India’s largest trading partner in the foreseeable future.

Merchandise trade between India and the U.S. stood at about 25 billion dollars in 2005 and is expected to touch 40 billion dollars by 2009 and Bush took pains to emphasise the importance of trade relations with one of the world’s fastest growing economies.

After he landed in the southern Indian city of Hyderabad, capital of Andhra Pradesh, Bush was gifted a basket of ‘Banganapalli’ mangoes, reputed to be the world’s finest, by state chief minister Y. S. Rajasekhara Reddy. This small gesture was a giant stride in trade terms considering that for 17 years the U.S had kept its doors shut to this luscious native of India. ”The U.S. is looking forward to eating Indian mangoes,” Bush said.

Citing public health concerns, the U.S. has resisted the entry of Indian mangoes. ”The regulatory process for export of irradiated mangoes from India to the U.S. may be initiated and hopefully completed in about a year,” an official statement said.

What this implies is that there could be more export of farm products from India, even as the U.S. is trying to get norms relaxed to push wheat and other products into the Indian market. The U.S. is India’s largest export market, and Bush made mention that the U.S. also looked to India as the largest growing market for its products.

But with China lurking around the corner, the U.S. can no longer dither on gaining a foothold in the rapidly opening up Indian market.

Urgency is visible from the fact that the U.S. has even accepted the assessment system of India’s Agricultural and Processed Food Products Export Development Authority (APEDA) for accreditation of agencies that certify organic produce.

A joint statement during the Bush visit endorsed a work plan to promote bilateral trade in agriculture through agreements that ”lay out a path to open the U.S. market to Indian mangoes, and recognise India as having the authority to certify that shipments of Indian products to the U.S.”. It provides “for discussions on current regulations affecting trade in fresh fruits and vegetables, poultry and dairy, and almonds” that are among U.S. exports to India.

India and the U.S. have also sought to expand cooperation in agriculture by launching the “knowledge initiative on agriculture” with a three-year financial commitment of 100 million dollars. The joint statement said the objective is “to link our universities, technical institutions, and businesses to support agriculture education, joint research, and capacity building projects including in the area of biotechnology”.

”There is new trust and new warmth in India’s economic relations with the U.S.,” says Anil K Agarwal, president of the Associated Chambers of Commerce and Industry in India.

“The Americans have reposed faith in India’s technological capability. Otherwise they wouldn’t even be thinking of a nuclear deal with us. There is, of course, a ‘look East’ policy and India will certainly expand its economic links with China. But the Bush visit has ensured that American investors sitting on the fence would now come to India,” Agarwal told IPS.

Trade between the U.S. and India has been climbing steadily. U.S. exports to India doubled between 2002 and 2005, from four billion dollars to 8 billion dollars a year. However, India’s rank in U.S. trade is 24th in terms of exports and 18th in imports.

India’s main exports to U.S. are precious stones, metals (worked diamonds and gold jewellery), woven and knitted apparel, other textile articles, fish and seafood (mainly frozen shrimp), textile floor coverings, iron and steel products, organic chemicals and machinery (including taps, valves, transmission shafts, gears and pistons).

India imports sophisticated machinery (computers and components, gas turbines and telecommunications equipment), electrical machinery (recording and sound media), medical and surgical equipment, aircraft, spacecraft, precious stones, metals (diamonds, not mounted or set), jewellery, organic chemicals, plastic, cotton and cotton waste and wood pulp, among other items.

Technically, the U.S. is India’s second largest source of foreign direct investment (after Mauritius), accounting for 16 percent of total FDI flows to India between 1991 and mid-2005. While the U.S. had a 17 percent share in FDI inflows into India in this period, Mauritius topped with almost 35 percent . However, a fair amount of U.S. investment is routed through Mauritius because of the island-nation’s reputation as a tax haven.

On the investment front, U.S. investments cover almost every sector in India open to private participants. The American investor is today increasingly involved in several sectors, including the infrastructure, telecom, information technology, pharmaceuticals and biotechnology.

Even here, China has shown keen interest in attracting Indian software support for its manufactures and several major Indian software companies have already set up shop in China.

”The U.S. will continue to remain India’s largest partner despite the rapid increase in trade with China,” Arun Kumar, professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi, told IPS. ”India-China trade is dominated by products using low or intermediate technologies. With the U.S. it is hi-tech trade, which will grow because the U.S. is technologically superior to China,” he added.

Kumar is, however, worried about the agreement on agriculture. “I am perturbed about the implications of the India-U.S. agricultural agreement with regard to the so-called second Green Revolution. The U.S. wants to use on a large scale genetically modified seeds and capital-intensive technology. Many farmers in India are yet to absorb the benefits of the first Green Revolution. These farmers are illiterate, ill trained and their productivity is low.”

The other big sticking point in Indo-U.S. trade ties relates to business process outsourcing (BPO). A section of the U.S. Congress believes that outsourcing is taking away jobs.

During his interaction with young entrepreneurs in Hyderabad, India, Bush said the U.S. will not take protectionist measures. ”I have taken a position. The U.S. will reject protectionism. We won’t fear competition,”Bush asserted, while acknowledging that loss of jobs was an emotive issue.

A recent survey by the Organisation for Economic Cooperation and Development called ‘The share of employment potentially affected by offshoring – an empirical investigation,’ found that only one in five jobs could be hit by continued growth of offshore outsourcing. Even then, the survey said, ”in the long run the positive benefits of services offshoring outweigh the costs”’.

The real stumbling block to U.S.investment may lie in India’s notorious red tape. Releasing the report of the U.S.-India chief executive officers’ forum here on March 6, forum co-chair William Harrison complalined: ”It’s hard to get approvals and permits, the legal system is slow and cumbersome and it takes a long time for the settlement of disputes.”