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Theoretical Economics Letters, 2019, 9, 1834-1851
http://www.scirp.org/journal/tel
ISSN Online: 2162-2086
ISSN Print: 2162-2078
DOI:
10.4236/tel.2019.96117 Aug. 14, 2019 1834 Theoretical Economics Letters
Examining Intra-Industry Trade between India
& China: Is India on the Right Track?
Rishi Dwesar1, Ankit Kesharwani2*
1Department of Marketing & Strategy, IBS Hyderabad (A Constituent of the ICFAI Foundation of Higher Education),
Hyderabad, India
2Department of Marketing, Indian Institute of Foreign Trade (IIFT), New Delhi, India
Abstract
Massive growth in Industrialization a
nd Gross Domestic Product (GDP) and
a stronger relation between India and China have led to an increase in bila-
teral trade between the two countries. This paper
examines the intensity of
Intra-Industry Trade (IIT) between India and China using A-
Index over a
two-
decade period (1999 to 2018). Further, the study examines trade patterns
of commodities traded between the countries and how have they changed
over the years. The study used data of 99 commodities and conducts a decade
wise comparison. Recent developments and policy changes on the bilateral
trade front between India and China have also been discussed. The research
has important implications for policymakers, economists and business in-
volved internal trade.
Keywords
India-China Bilateral Trade, Intra-Industry Trade, India-China Trade Deficit
1. Introduction
China and India, the world’s most populous country, have seen tremendous
economic growth in recent years. China’s average GDP growth rate has been
more than 9.5 percent from 1989 to 2019, and the country is expected to become
the world’s largest economy by 2030 [1]. On the other hand, India liberalized its
economy in the early 1990s and has witnessed an average growth rate of over 6
percent since then [2]. The Asia-Pacific region has also seen tremendous growth
from the late 1980s as the economies within the heterogeneous region have flou-
rished. This can be attributed to the increased regional capital flow, trade, and
other forms of economic and political interactions. The region has recognized
How to cite this paper:
Dwesar, R. and Ke-
sharwani
, A. (2019) Examining Intra-Industry
Trade between India & China: Is India on
the Right Track?
Theoretical Economics
Letters
,
9
, 1834-1851.
https://doi.org/10.4236/tel.2019.96117
Received:
June 28, 2019
Accepted:
August 11, 2019
Published:
August 14, 2019
Copyright © 201
9 by author(s) and
Scientific
Research Publishing Inc.
This work is licensed under the Creative
Commons Attribution International
License (CC BY
4.0).
http://creativecommons.org/licenses/by/4.0/
Open Access
R. Dwesar, A. Kesharwani
DOI:
10.4236/tel.2019.96117 1835 Theoretical Economics Letters
the important role played by Regional Trading Agreements (RTAs) and Free
Trade Agreements (FTAs) in trade liberalization and overall development of the
countries. The scale of trade has increased after such bilateral trade agreements
and has also influenced the volume of production, export, and import in various
sectors of the economy. This has also lead to some changes in the nature of in-
ternational trade and its structure [3]. If successful, the latest proposed trade
agreement Regional Comprehensive Economic Partnership (RCEP) between the
Association of Southeast Asian Nations (ASEAN) would further enhance bila-
teral trade in the region. This is likely to make India, China, and other RCEP
members to become the world’s largest trade block [4]. India and China, in par-
ticular, have drawn key attention, as not only they have witnessed high GDP
growth rate, but also have a huge economy base, land, and population and play
an import role in the regional trade.
Although India and China have been trade partners since centuries, the bor-
der dispute among them has influenced the geopolitical relation and the flow of
goods. In recent years, trade between the two countries has grown significantly
and is expected to reach $100 billion by the end of 2019 [3]. However, there is a
growing concern for India because the balance of trade is sporadically increasing
in favor of China. Over the last two decades (1999 to 2008 and 2009 to 2018), the
imports from India to China have increased around 6.9 times, however Indian
exports only increased by 3.2 times, leading to increase in the trade deficit of
over 11 times. Moreover, there are growing concerns about China dumping
products in India, which has lead to the closure of businesses and hampering
many industries [5]. It is believed that many imports from China to India are
under invoiced,
i.e.
the actual value of goods imported may be significantly
higher. Thus, the growing trade imbalance between India and China is a concern
for the country, and India is cautious to join any more regional trade agreements
like RCEP. This is because, such trade agreements may further reduce custom
duty and import tariffs on the majority of items, further distorting the trade
balance [5].
Through this paper, we examine the commodities in which the counties trade,
the changes in the pattern of the trade and share of Intra-Industry Trade be-
tween the countries. We do this analysis for two decades
i.e.
from 1999 to 2008
and 2009 to 2018, by making a decade wise comparison. The findings of this
study would help policymakers to understand nature and volume to the trade
between the two countries and understand its impact on the industries and con-
sumers across both the countries. The paper also contributes to academia by
examining the extent to which the trade between the counties is of intra-industry
type and how both the counties are placed when it comes to trade of specific
commodities.
2. Background
Traditionally economists found that countries ventured in international trade
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primary to export goods which were most suited to its own factor endowments
and technology while importing the goods which have high factor endowment
cost and were least suited to the natural characteristics of the country. As this
type of trade involves exports and imports of different type of commodities it is
called Inter-Industry Trade [6].
However, lately, it has been established that with increased industrialization,
industrial economies increasingly involve in within industry trade,
i.e.
similar
goods or goods broadly belonging to the same industry. The primary reason for
this is: reducing sunk costs, enhancing industry specialization, and gets econo-
mies of scale [7]. This type of trade is called Intra-Industry Trade (IIT) and in-
volves trade within the same industry.
2.1. The Theory behind Intra-Industry Trade
Back in 1817, David Ricardo introduced the Standard Trade Theory and that
was when he formulated the popular ‘Theory of Comparative Advantage’. Stan-
dard trade theory assumes trade involving homogeneous products; hence with
perfect competition, there is only Inter-Industry Trade [8]. Ricardo showed that
goods are more mobile across international boundaries than other resources
(land, labor, and capital) and thus countries would reap more gains from pro-
ducing whatever best in can and trading that with other nations. Ricardian mod-
el of trade showed that countries can take advantage of each other due to differ-
ences in the factor of endowments between them,
i.e.
countries are benefited by
better allocation of scarce resources. Thus, according to these theories, countries
should export products which are most suited to its factor endowment like nat-
ural resources, labor, technology, etc., while importing the goods which have
high factor endowment cost and are least suited to the natural characteristics of
a particular region or country. Thus, countries primarily trade between goods
belonging to different industries. This type of trade is known as Inter-Industry
Trade.
However, during the 1970s many international trade researchers found that in
many developed industrial nations, a large volume of simultaneous exports and
imports was being done between similar kinds of commodities. It was Verdoorn
[8] who first observed the formation of custom union among the Benelux Coun-
tries which were formed to enhance two-way cross country trade involving sim-
ilar kind of products. Later, Grubel and Lloyd [9] came out with an index called
GL-Index which, which was specifically meant to measure the amount of IIT. In
later years, other indexes were introduced to measure IIT which did not share
the limitations of GL-Index.
The significance of IIT is not only because of the comparative advantage that
lies within a particular country or region, but it also arises as products are diffe-
rentiated and enormous fixed costs are involved in manufacturing such prod-
ucts. Illustratively, there would be more economic advantage for the industry to
produce only cars and minimize the overall cost of production, rather than to
R. Dwesar, A. Kesharwani
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10.4236/tel.2019.96117 1837 Theoretical Economics Letters
produce all types of vehicles (motorcycles, vans, trucks, etc.). This illustration
can be extended to geographical boundaries also. It other words, it may be of
more economic sense to produce one type of product in one country, and
second in other, although both belonging to the same industry. Nevertheless,
this doesn’t mean elements of comparative advantage are not involved. For ex-
ample, Japan may have a competitive edge in producing electronic items and
Germany for high-quality cars. Thus, IIT increases the benefits of trade by bet-
ter-exploiting economies of scale and bring industry specialization. It focuses on
producing a particular type of products or focusing on particular industries. This
results in the expansion of world output and reduction or savings of fixed costs.
The nature of trade (Intra or Inter-Industry) depends on the degree of simi-
larities the countries are having between the factors of endowment. As countries
become similar, the trade between them will increasingly become intra-industry
in character [10]. To better understand some of the differences between charac-
teristics of Inter-Industry Trade vis-à-vis Intra-Industry Trade, a summary
adapted from Bernatonytė and Normantienė [11] is given in Figure 1.
To measure Intra-Industry Trade, Grubel and Lloyd [12] came out with the
index called the GL-Index. The GL-Index is used widely till date to measure the
intensity of IIT for at a specific point of time (a particular year). However, as
Source: Bernatonytė and Normantienė [11].
Figure 1. Difference between inter and intra-industry trade.
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Hamilton and Kniest and Brulhart, showed GL-Index is a static measure and can
determine IIT only at a specific point in time, but cannot be used to compare
values taken from different time periods [13] [14] [15]. Hamilton and Kniest
[10] explain, in case of GL-Index “an equiproportionate increase in exports of
each country will raise the
amount
of IIT but will not raise the
proportion
of it”.
This is a major drawback of GL-Index, as it cannot be used to compare the pro-
portion of IIT over a period of time.
To overcome the static nature of GL-Index and make index comparable at
different time periods Marginal Inter-Industry Trade (MIIT) index were devel-
oped. Hamilton and Kniest and Greenaway, Milner
et al
. initially proposed an
index to measure marginal intra-industry trade [10] [15]. However, Hamilton
and Kniest’s MIIT index is not defined when exports or imports have decreased
in a particular year [13].
Bruilhart and Elliott [14] suggested A-Index which is defined in all cases and
also takes into consideration the yearly change while calculating the Marginal
Intra-Industry Trade. Further, A-Index can be aggregated across industries to
reach at an overall level for a particular set of years, which can then be used to
compare the trend the over years. Thus, in this study, we examine MIIT between
India and China using Bruilhart’s A-Index for a period of 20 years. The index
calculation has been discussed in the methodology section.
2.2. Studies on Intra-Industry Trade
Intra-Industry Trade has been widely researched in the past three decades. Sev-
eral contributions were made to the theory of IIT and empirical studies were
done to find the intensity and determinants of IIT and industry specialization. It
was Verdoorn [8] who first observed that the formation of custom union among
the Benelux countries enhanced two-way cross country trade involving similar
products. Krugman [12] showed that Intra-Industry Trade involves less adjust-
ment cost and concluded: “Intra-Industry Trade poses fewer adjustment prob-
lems than inter-industry trade”.
Recent studies on IIT have focused on the role of free trade agreements in
promoting IIT [16], pattern and growth of IIT across countries and regions [17],
the relationship between IIT and demand for child labor [18], determinants of
IIT in automotive and electrical appliances sector [19]. Studies have also ex-
amined the role of domestic innovation and firm heterogeneity on IIT [20], and
the effect of IIT on environment among others [21]. India specific studies on IIT
have focused on country-specific factors which influence IIT [22], how trade
barriers and multinational involvement leads to change in IIT, and the vertical
and horizontal nature of IIT [23].
2.3. Studies on Cross-Country Trade
The geographic proximity and vast shared national boundaries make India and
China much suited for cross-country trade. The countries also have similar re-
R. Dwesar, A. Kesharwani
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10.4236/tel.2019.96117 1839 Theoretical Economics Letters
source pool to some extent, with resources like huge labor pool, iron reserves,
etc. Both the countries have seen tremendous economic development in recent
years. The India-China trade ties have increased the bilateral trade between them
to a significant level. India’s economic relation with China dates back to the
1950s when both countries jointly initiated the famous Five Principles of Peace-
ful Coexistence [24]. Relationship further strengthened in 1988, when Indian
Prime Minister, Rajiv Gandhi’s visited China. Over the years India and China
have broadened bilateral ties in various areas, putting aside the border disputes.
Bilateral agreements have been initiated in the form of science and technology
cooperation, civil aviation by establishing direct air links, and through cultural
exchange programs.
The Chinese economy was decentralized in the 1970s and major economic
reforms and structural changes have already taken place in China. By 1999,
China became the world’s second-largest economy based on GDP at purchasing
power parity [25]. The growth of China’s economy has been partly due to great-
er investment effort, setting up numerous Special Economic Zones (SEZs) and
an increase in the bilateral trade. Strong export growth has helped China’s
economy to grow above 9 percent from 2003 onwards. China is currently the
world’s second-largest recipient for FDI with total FDI inflows crossing the US
$ 136 billion in 2018 [26].
India was a latecomer to economic reforms, embarking on the process only in
1991, in the wake of an exceptionally severe balance of payments crisis. The
country opted for a systemic shift to a more open economy with greater reliance
upon international trade, a larger role for the private sector including foreign
investment, and restructuring of the role of government.
The trade volume between India and China has increased from US$ 1.32 bil-
lion in 1999 to US$ 800 billion in 2008, an increase of more than 60 times in 20
years. India has a significant and growing trade deficit with China, as with other
major economies in the world. With an increase in bilateral trade with China,
the trade deficit has also increased significantly. Moreover, India is always drawn
by a fear of being swamped by Chinese imports, especially in cheap electronic
goods and appliances category. Majority of industry players in India are repul-
sive to this and are of opinion that there is no need to give the Chinese a free
ride into the domestic markets, as this is creating an adverse situation for Indian
exports to China and other courtiers. This is particularly when India and China
have been directly competing across several product categories like clothing,
leather and textile products [27]. Moreover, businesses and policymakers are
concerned with the increased imports of manufactured goods from China.
Cheap exports from China have specifically impacted the products manufac-
tured by medium and small scale Indian Industries, which are expensive but of
better quality.
Influenced from the above characteristics and an enormous increase in trade
over the last two decades, though this paper we analyze the degree to which In-
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dia and China involve in IIT. Moreover, we examine the trend and volume of
major commodities traded between the countries over the past two decades. In
the later section of this paper, we discuss the trade pattern of various commodi-
ties being actively traded between the two countries in recent years, and find the
reason of some of the changes in trade pattern and share. The paper provides
implications for policymakers, export-import consultants and public at large.
3. Methodology
3.1. Data Set
Trade data based on the Harmonized Commodity Description and Coding Sys-
tem (HS) was downloaded from the database maintained by the Indian Ministry
of Commerce. This HS system is an internationally standardized system of
names and numbers to classify traded commodities and came into effect in 1988.
The system was developed and maintained by the World Customs Organization
(WCO) and is followed by more than 200 member countries [28]. Export and
Import data for India and China for all the 99 commodities based on HS was
downloaded from the website of Indian Department of Commerce and aggre-
gated in a spreadsheet for a period of 20 years (1999 to 2018). The values were
recorded in US$ million, with dollar value adjusted to the average annual ex-
change rate prevailing for the particular year.
3.2. Calculation of Index
The intensity of MIIT was measured using Weighted A-Index (Brulhart, 1997)
for the 20 year period. Following formulas were used to calculate A-Index &
Weighted A-Index:
Calculation of A-Index:
i i ii
i
ii
X M XM
A
XM
∆ + ∆ − ∆ −∆
=∆ +∆
where,
Xi
and
Mi
refer to exports and imports respectively for the year
t and t
−
1, for the commodity
i
. Whereas,
,1i it i t
XXX
−
∆= −
and
,1i it i t
MMM
−
∆= −
.
The value of A-Index varies between 0 and 1, where, values close to unity in-
dicate trade is of Intra Industry type and values close to 0 indicate trade is of In-
ter-Industry type.
A-Index can be aggregated across commodities to arrive at Weighted A-Index,
by obtaining weighted average across commodities. The weights correspond to
the proportion change in the trade of a particular commodity to the proportion
of change in the total trade for a given set of years. Thus, weighted A-Index pro-
vides aggregated values A-Index across commodities for a given year and pro-
vides values of MIIT which can be compared across years, unlike GL-Index.
Calculation of Weighted A-Index
1
,
N
ii
i
Aw w A
=
=
∑
R. Dwesar, A. Kesharwani
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10.4236/tel.2019.96117 1841 Theoretical Economics Letters
where
( )
1
ii
iN
ii
i
XM
w
XM
=
∆ +∆
=
∆ +∆
∑
4. Analysis and Findings
Values for trade volume and MIIT were calculated and analyzed for the
two-decade period. The first decade comprised trade between the countries from
1999 to 2008, and the second decade from 2008 to 2018. The decade wise com-
parison provided a realistic way to analyze and compare structural trade
changes. Also, the year 2008-2009 was chosen to divide the two decades, as the
year witnessed the global recession which impacted the export-imports between
the counties [29].
As it was not cognizant to analyze all the 99 commodities, top 20 ex-
port-import commodities between India and China were identified and used for
analysis. This resulted in a total of 30 commodities, which represented at least 85
percent of the total trade between the two countries for a particular year. Decade
wise comparison was done to examine the changes in trade patterns over a long
period of time.
4.1. Decade 1 (1999 to 2008)
The weighted A-Index between Indian and China from 1998 to 2018 ranged
from 0.05 to 0.27 (5 percent to 27 percent), reveling trade between the two
countries is predominantly of inter-industry type. This is not alarming, as pre-
vious studies have found that IIT in developing and newly-industrialized coun-
tries (NICs) is generally less than 10 percent of their total trade [30]. Second, it
can be observed that the A-Index doesn’t follow a particular trend, reflecting
that trade between India and China is relatively inconsistent. For the first dec-
ade, 2004 has the highest level of MIIT (weighted A-Index = 0.24).The value was
specifically high when compared to 1999 (weighted A-Index = 0.07), 2002
(weighted A-Index = 0.11) and 2003 (weighed A-Index = 0.13). Refer to Figure
2 and Figure 3.
To understand the factors which affected the level of IIT, commodity-specific
changes in the trade volume (weights) and A-Index ratio was analyzed. Mineral
fuels (HS 27) which had no IIT in 1999 had an A-Index of 0.83 in 2004. Similar-
ly, Ores (HS 26) represented 3.37 percent of the total trade with an A-Index of
0.06 in 1996, while in 2004 it represented 17.5 percent of the total trade and in-
creased A-Index of 0.14 (Refer, Table 1). Other products for which the IIT in-
creased and had a high share of trade included organic chemicals (HS 29), inor-
ganic chemicals (HS 28) and cotton (HS 2). Also, the total trade increased from
US$ 1322.44 Million in 1999 to US$ 6243.46 Million in 2004.
During the decade, the commodities which had the highest share of exports
included Ores, Slag & Ash (HS 26), Cotton (HS 52), Copper (HS 74), etc. While
the top three commodities which were imported were Electrical Machinery and
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Figure 2. Weighted a-index and exports-imports for all commodities.
Figure 3. Weighted a-index and exports-imports for top 20 commodities.
Equipment (HS 85) Nuclear Reactors, Boilers, etc. (HS 84) and Organic Chemi-
cals (HS 29). Refer to Figure 4 and Figure 5.
Not only the value of IIT is low, but the industries (commodities) in which
both the countries actively trade are very primary in nature. Specifically, India
has no commodity in which there is high IIT corresponding to the high share of
exports. For example, India’s highest share of export aggregated from 1999-2008
is for Ores and Slag (HS 26) which contributed to 49.6 percent of total trade but
its weighted A-index is only 0.08 (Refer, Figure 4). Similarly, Iron & Steel (HS
72) and Cotton (HS 52), which contributed 8 percent and 7.7 percent of exports
to China from 1999 to 2008 had a moderately high A-Index of 0.23 and 0.26 re-
spectively. Further, India lost its net exporter position to 2007 onwards for Iron
and Steel (HS 72). Considering manufacturing goods which require significant
specialization, India only imported such commodities from China, with minimal
exports. For example, Electrical Machinery and Equipment (85) and Nuclear
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Table 1. India and China export-import data and a-index 1999-2018 (top 20 export-import commodities).
HS
Code
Commodity
Rank
(Export,
Import)
Exports (India to China)
Imports (China to India)
Weighted A Index
1999 to
2018
1999 to
2008
2009 to
2018
%
Change
1999 to
2018
1999 to
2008
2009 to
2018
%
Change
1999 to
2008
2009 to
2018
%
Change
26
Ores, Slag & Ash. 1, 46 45,537.3 18,358.1 27,179.2 48.1 833.2 465.2 368.0 −20.9 0.08 0.00 −96.9
52
Cotton. 2, 31 23,962.9 283 7.7 21,125.2 644.5 2219.2 656.4 1562.8 138.1 0.26 0.04 −86.3
74
Copper & Articles Thereof. 3, 34 14,382.0 1194.5 13,187.5 1004.0 2025.9 280.2 174 5.7 523.0 0.17 0.11 −35.4
29
Organic Chemicals. 4, 3 12,006.1 2678.8 9327.3 248.2 57,928.1 8412.5 49,515.5 488.6 0.38 0.45 17.3
27
Mineral Fuels, Oils, Products of
Distillation.
5, 9 8188.7 395.0 7793.7 1873.0 12,733.5 5389.4 7344.1 36.3 0.26 0.41 58.3
72
Iron & Steel. 6, 6 6501.3 2948.0 3553.3 20.5 19,546.1 2653.9 16,892.2 536.5 0.23 0.27 15.8
39
Plastic & Articles Thereof. 7, 8 613 1.5 1959.9 4171.6 112.8 14,447.4 1436.0 13,011.4 806.1 0.35 0.33 −3.6
25
Salt; Sulphur; Cement & Sto ne, etc. 8, 38 6105.8 1019.7 5086.1 398.8 1469.0 512.8 956.3 86.5 0.31 0.20 −34.8
84
Nuclear Reactors, Boilers etc.
9, 2
5128.2
765.8
4362.4
469.7
107,096.1
12747.1
94,349.0
640.2
0.16
0.08
−52.6
85
Electrical Equipment, Television,
Sound Recorders etc.
10, 1 3242.8 330.6 2912.3 780.9 180,034.7 18965.7 161,069.0 749.3 0.09 0.11 27.4
15
Animal Or Vegetable Fats & Oils.
11, 79
3125.5
291.3
2834.2
873.1
94.0
7.0
87.0
1135.4
0.08
0.08
3.5
28
Inorganic, Organic Compounds,
Precious Metals etc.
12, 14 2708.6 1287.6 1421.0 10.4 7714.6 1457.8 6256.8 329.2 0.51 0.54 5.5
3
Fish & Crustaceans, Molluscs &
Aquatic Invertebrates.
13, 95 2648.9 989.2 1659.8 67.8 3.3 1.2 2.1 70.8 0.00 0.00 7.3
71
Pearls, Precious or Semiprecious
Stones etc.
14, 13 2321.5 97.5 2224.0 2182.2 7755.5 1075.3 6680.2 521.3 0.15 0.26 70.2
67
Prepared Feathers & Articl es Made
Of Feathers etc.
15, 78 1821.7 417.1 1404.6 236.8 110.4 18.0 92.5 414.8 0.10 0.04 −59.7
90
Optical, Photographic, Precision,
Medical Instruments.
16, 10 1420.4 216.1 1204.4 457.5 11148.9 988.7 10,160.2 927.6 0.29 0.24 −16.9
38
Miscellaneous Chemical Products. 17, 15 1278.9 214.0 106 4.9 397.7 7298.2 597.8 6700.5 1020.9 0.39 0.09 −76.0
13
Lac; Gums, Resins etc.
18, 71
1264.1
179.8
1084.4
503.2
159.4
9.6
149.9
1467.7
0.24
0.06
−73.5
41
Raw Hides, Skins & Leather.
19, 62
1186.8
227.7
959.2
321.3
316.7
73.1
243.7
233.5
0.49
0.36
−25.7
32
Tanning & Dyeing Extracts etc.
20, 22
1185.3
245.0
940.3
283.8
3727.2
513.3
3213.9
526.1
0.45
0.32
−28.9
87
Vehicles other than Railway.
24, 12
853.3
84.8
768.5
806.5
10,092.0
659.6
9432.5
1330.1
0.11
0.35
213.5
73
Articles of Iron or Steel.
26, 7
661.9
71.7
590.3
723.5
15,162.8
2562.5
12,600.3
391.7
0.06
0.15
143.2
76
Aluminum & Articles.
33, 17
493.8
104.2
389.6
274.1
5585.3
555.9
5029.4
804.7
0.27
0.20
−26.1
50
Silk. 48, 19 135.6 30.0 105.5 251.5 4902.0 2223.3 2678.7 20.5 0.05 0.05 5.7
94
Furniture; Bedding, Mattresses etc. 49, 16 129.1 4.3 124.8 2815.4 7058.2 656.0 6402.2 875.9 0.02 0.16 633.8
59
Impregnated, Coated or Laminated
Textile Fabrics.
50, 18 121.9 7.1 114.8 1516.2 5237.8 949.2 4288.6 351.8 0.02 0.12 665.8
89
Ships, Boats & Floating Structures. 57, 11 82.1 45.9 36.2 −21.3 10,602.8 648.0 9954.9 1436.3 0.15 0.00 −100.0
98
Project Goods; Some Special Uses. 58, 4 74.1 28.9 45.2 56.5 22,379.7 1148.5 21,231.2 1748.7 0.05 0.01 −84.0
69
Ceramic Products. 67, 20 53.2 11.7 41.6 256.5 4808.6 712.2 4096.4 475.2 0.08 0.07 −4.0
31
Fertilizers. 83, 5 6.5 2.3 4.2 79.0 20,455.6 1356.8 19,098.8 1307.6 0.05 0.00 −96.3
Total
152,759.6
37,043.8
115,715.7
212.4
542,946.2
67,732.7
475,213.5
601.6
0.14
0.15
6.2
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Figure 4. Yearly export pattern from 1999 to 2018 for top 10 commodities.
Figure 5. Yearly import pattern from 1999 to 2018 for top 10 commodities.
Reactors and Boilers (84) contributed 28 percent and 18.8 percent respectively of
total imports from China from 1999 to 2008. While on the export side, the share
of these two commodities was less than 2 percent during the same period. Refer
to Table 1.
From 2005 to 2008, the trade deficit between the countries increased signifi-
cantly (Refer, Figure 2). In 2005, India’s export (import) stood at US $5615.8
(US $7098.0) million and increased to US$ 10,384 (US $27,116.0) million by
2008, though exports increased by 1.92 times, imports increased by 3.8 times,
exponentially increasing the trade deficit by around 11 times. In value terms, the
trade deficit increased from US$ 1482 million to US $16281 million during the
decade. Although, India was a net importer from China during these years, such
increase in trade imbalance puts India in an unfavorable situation. Next, we
examine the trade patterns for specific commodities during this decade.
Fertilizers (HS 31) had a marginal share of imports in 2005 and increased by
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10.4236/tel.2019.96117 1845 Theoretical Economics Letters
65 times in the year 2008. The reason for this exponential increase is due to gov-
ernment policies and intervention. India is primarily an agrarian economy, in-
puts like fertilizers, irrigation water and electricity has significant demand. Also,
to cater to the growing need of staples and to keep inflation under control, food
grains production is the nation’s top priority. Since not all farmers can afford
fertilizers at all times, government subsidies the fertilizers to ensure they are
available at lower costs. The share of fertilizer subsidy increased significantly in
the post-reforms period from Rs. 43 billion crores in 1990-1991 (approximately
US $1 billion) to Rs. 75,849 crore (approximately US $19 billion) in 2008-2009.
As a percentage of GDP, this represents an increase from 0.85 percent in
1990-1991 to 1.52 percent in 2008-2009 [31]. Further, fertilizer subsidy has at-
tracted a lot of attention of policymakers, researchers, and politicians in the re-
cent past [32]. China being the world’s largest producer of potash—one of the
key fertilizer used in India—fertilizers are one of the key commodity imported
from China.
The second commodity for which India’s import has increased is Iron and
Steel (HS 72). Iron and steel were one of the most traded commodities between
the two countries. India was a net exporter of Iron and Steel to China till 2006
and its exports increased massively till 2005. However, 2005 onwards India’s
share in exports have decreased (Refer, Figure 4). From 2005 to 2008 Iron and
Steel imports have increased by 450 percent, whereas the exports have fallen by
35 percent. Primarily policy changes have been responsible for this. To protect
its domestic market, the Indian government imposed 5 percent duty on iron and
steel. India had also received a lot of criticism from the international community
and WTO for imposing this 5% duty on iron and steel imports but this has been
deemed necessary to protect the local industry from the influx of cheap steel va-
rieties from China. This import duty has made iron and steel exports from India
to China less attractive, but imports have been growing due to increasing do-
mestic demand.
Imports in other commodities like articles of Iron and Steel (HS 73), Project
goods and goods of special uses (HS 98), vehicles other than railway rolling stock
(HS 87), paper and paper pulp have also increased significantly due to increased
domestic demand and china having competitive edge in production of their
goods. On the export side, India’s export of mineral fuel and mineral oils (HS
27) and copper and other articles of copper (HS 74) have increased significantly.
However, India has not been able to achieve a competitive advantage in the
global export market and this makes Indian goods exports less attractive. Fur-
ther, India primarily exports raw materials and primary goods to China, which
are labor-intensive and have minimal value-added revenues. On the other hand,
India imports goods which are more technology-oriented and specialized in na-
ture. Not only this, relative to India, China is much more integrated with the
world economy and its share of global exports is nearly six times that of India.
Share of China’s export to industrial countries, as a percentage of total exports,
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have increased from 35 percent in 1990 to 52 percent in 2006, on the other side
India has experienced an opposite trend where its share has declined from 55
percent in 1990 to 44 percent in 2006 [27]. This shift from industrial nations to
developing nations reflects the declining competitiveness and shift towards pri-
mary goods and inputs of Indian exports. Further, the competitiveness of Indian
exports as compared to China, as well as the world is relatively much lower. For
example, China ranks number one for four categories of goods, whereas India’s
minimum rank is five and seven in clothing and textile respectively. Also, the
share of India’s exports to the world as compared to China is relatively much
lower (Refer, Table 1). Moreover, the Indian trade basket (exports) with China
is highly concentrated. Our findings support the findings of Nag and Chatterjee
[33], that only the top 11 commodities constitute more than 70 percent of the
trade. However, India’s imports from China are much widespread across differ-
ent commodities and more than top 40 commodities on an average aggregate
together contribute to 70 percent of trade. Thus, India is much more dependent
on Chinese imports in various sectors.
4.2. Decade 2 (2009 to 2018)
Though the trade significantly increased in the year 2009 to 2018, the proportion
of IIT was almost similar to the previous decade. The A-Index for the year 2009
to 2018 ranges from 0.06 to 0.22 (6 to 22 percent). The IIT values do not follow a
particular pattern, reflecting that the trade between the two countries is not con-
sistent. Further, we analyzed for which commodities the IIT changed over the
decade. Examining these changes would reveal if the trade between the two
countries is becoming more industrialized or is still primary in nature. To un-
derstand the change in IIT trade patterns, we specifically analyze the change in
IIT for all the top 20 export-import commodities. It is interesting to note that for
many commodities the proportion of IIT has increased or decreased significant-
ly. The highest increase in IIT was for Textile Fabrics (HS 59) [IIT increase =
665%] and Furniture, Bedding, etc. (HS 94) [IIT increase = 633%), however, this
product had very low trade volume. Other commodities where IIT increased
were Vehicles (HS 87) [IIT increase = 213%] and Articles of Iron and Steel (HS
73) [IIT increase = 143%]. However, all these four commodities represented less
than 5 percent of the total trade volume. Commodities which represented signif-
icant trade volume and for which IIT also increased include Electrical Machinery
& Equipment (HS 85) [IIT increase = 27.4%) and Organic Chemicals (HS 29)
[IIT increase = 17.3%]. The Electrical Machinery & Equipment share was
around 28% of the total trade, whereas the share of Organic Chemicals was 10%.
The highest A-Index was recorded for the year 2018 (A-Index = 0.22), which was
much higher than in 2017 (A-Index = 0.22). While analyzing the reason for this
change we found that Organic Chemicals (HS 29), Plastic Articles (HS 39) and
Mineral Fuels led to this change.
While comparing the increase in trade volume for the decade, the imports
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from China to India grew by a whopping 7 times. On the contrary, the export
from India to China grew only three times, increasing the trade deficit by 11.7
times. The commodities for which exports to China increased manifold includes
Furniture, Bedding, etc. (HS 94), Natural or Cultured Pearls (HS 71), Mineral
Fuels and Mineral Oils (HS 27), Copper and Copper Articles (HS 74), Cotton
(HS 52), etc. On the other side, apart from Ships, Boats & Floating Structures
(HS 29), for no other commodity, there was a decrease in exports. On the import
side, commodities for which the inflow increased maximum where Project
Goods (HS 98), Fertilizers (HS 31), Ships, Boats & Floating Structures (HS 29),
Lac, Gums and Resign (HS 13), Animal and Vegetable Fats (HS 15), Miscella-
neous Chemical Products (HS 38). However, trade data for the year 2018-19
(beyond the time period of this study) reveals that for the first time in history,
India decreased its trade deficit with China. The primary reason for the same
was an increase in the export of Cotton and a decrease in imports of electronic
items.
4.3. Key Difference in Decade 1 (1998 to 2008) and Decade 2
(2009 to 2018)
Decade wise comparison reveals that Indian exports to China became slightly
broad in nature and were not focused on three primary commodities. For exam-
ple Ores, Slag and Ash (HS 26) contributed more than 46 percent of the total
trade in first decade, but its share decreased to 21 percent in the second decade.
On the other hand, proportion of trade of Mineral Fuels (HS 27), Nuclear Reac-
tor (HS 84), Machinery Equipment (HS 85) increased significantly. Whereas,
proportion of imports from China drastically reduced for Mineral Fuels (HS 27),
Silk (HS 50), Fabric (HS 59), etc. On the intra-industry trade side, the trade in-
creased for Ships, Boats (HS 89), Miscellaneous products (HS 38), Copper (HS
74) and decreased for Pearls (HS 71), Plastic (HS 39), etc. The exports increased
by 215 percent whereas the imports increased by 587 percent from decade 1 to
decade 2, increasing the trade deficit sporadically.
5. Discussion
Contribution of China and India in global and Asian trade has been increasing
in recent years. In this paper, we examined the nature and volume of bilateral
trade between India and China. Motivated by IIT theory, the objective of this
paper was to understand if India and China have started trade in specialized
products, best leveraging the factors of endowment. As India and China are in-
creasing becoming industrialized, it was expected that the intra-industry trade
would have increased over the years.
Nevertheless, we find that India and China are still predominantly trading in
different commodities and are majorly involved in Inter-Industry Trade. Fur-
ther, the majority of exports from India to China are primary in nature, which
includes predominantly includes raw-materials and some semi-finished goods.
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The commodities majorly exported by India to China included Ores, Slag, Ash,
Organic Chemicals, Iron and Steel, Cotton etc. China’s exports to India included
primary products like Organic Chemicals, Iron and Steel, Silk; but also second-
ary and manufactured goods like Electrical Machinery, Nuclear Reactors, and
Boilers, etc. Moreover, the proportion of intra-industry trade over the two dec-
ades was inconsistent. Studies have shown that as countries develop and become
more industrialized the volume and proportion of IIT increases. However, in the
context of India and China, though the intra-industry trade increased along with
an increase in overall trade, the proportion has not increased. Moreover, the
proportion of Intra Industry Trade was inconsistent, where some year had more
than 20 percent of the trade as inter-industry years, while other years had less
than 10 percent.
Another area of concern is the growing trade deficit between India and China.
The trade deficit has specifically increased from 2014, as the exports from India
to China decreased while the exports have increased. For the four year period
from 2014 to 2018, the trade deficit increased by 1.7 times. The growing trade
balance is a cause of concern for policymakers and is much debated at an inter-
national level. For example, though India was keen to join RECP initially, lately
there is resistance as this will lead to further reduction of import tariffs making
the situation even worst [34]. However, economists feel not joining RECP would
limit India’s trade with its South Asian countries and increase the role of China.
Further, realizing that India needs to increase its share of exports to China, more
ways in which trade between the two counties can be increased are being sought.
The recent US-China trade war has made exports of more than 150 items more
favorable due to increased tariff China has imposed on the US [35]. Interesting-
ly, the trade deficit between India and China decreased for the first time in the
year 2018-2019 [36]. Given that trade data for this year not public yet, we could
not include this year in our analysis. The key reason for the decrease in the defi-
cit was a lesser import of electronic items. Although there is global pressure on
China to stabilize its trade imbalance with its neighbors like India, experts opine
that the decrease in deficit maybe just an eye-wash. This is so because; during
the same year, the export of similar times increased significantly from Hong
Kong, suggesting that China may have routed its exports through Hong Kong.
However, this reveals the desperateness on both the sides to sell its products in
exchange of dollars.
The paper also focused on the nature of commodities which are treaded be-
tween the countries, and the extent to which import and export of these have
changed. This was important to understand the nature of trade and IIT between
the two countries. The analysis found that in recent years India’s export of Fur-
niture, Bedding, Mattress, Pearls and Semiprecious Stones, Mineral Fuels, and
Copper have increased sporadically. However, the items which contribute the
majority of share to export include Ores, Slag, Ash, Cotton, and Copper. How-
ever, India still does import finished goods from China the majority of being
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Electrical Equipment, Nuclear Reactors, etc. Although India understands the
need to build internal competence to reduce reliance on exports for manufac-
tured goods and the incumbent government has introduced initiates like “Made
in India”, India is still an import lead when it comes to manufactured products.
The trade deficit between India and China reduced by more than US $10 billion
in the year 2019, as India got access to export Sugar, Rice, Pharma, Grapes, Fish
Meal, Fish Oil, rapeseed meal, and tobacco to China [36]. Nevertheless, India
needs to build its competitiveness in industrial products.
In years to come, the pattern of Indo-China trade will depend on several
factors. These include economic growth trajectories of the two countries, gov-
ernment policies, negotiations with WTO, external economic outlook, the
competitiveness of exports of the two countries in each other’s markets and
the “effectiveness” of tariff and non-tariff barriers in curbing the exports.
Moreover, the specialization between industries and the commodities traded
between the two countries should increase. Given that India and China are set
to become the world’s largest economies in next few years, enhancing trade
relationship which enables both the countries at a global level would help the
countries in the long run. Moreover, the global trade environment would also
play a major role in the relationship and the bilateral trade relationship be-
tween the two countries.
Conflicts of Interest
The authors declare no conflicts of interest regarding the publication of this pa-
per.
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