Saturday, January 26, 2008

India's trade deficit with China hits $10 billion

India is concerned about a free trade agreement further increasing the deficit it is already running with China:
Both countries have talked about a free-trade agreement, though China has appeared more eager than India to get it sealed. India has been concerned that it has more to lose than China from such an agreement. India's economy is protected by high tariff rates, which on average are about 10 percentage points higher than the tax levied on most Chinese goods. India would have to get rid of these tariffs -- and lose the tax revenue its government could otherwise collect -- under a free-trade agreement.
Bilateral trade between the two gargantuans amounted to $39 billion last year, with India receiving $10 billion more in goods and services than it exported to China.

Even though India is poorer (with $3,100 in PPP to China's $5,600), and labor there is cheaper than in China, it is still being outdone, even with protective tariffs that provide some counter to the yuan's 'undervaluation'. Although Chinese labor is not known for its efficiency, India's notoriously poor labor force formed the basis for Gregory Clark's argument in Farewell to Alms that differences in productivity are essential to explaining what propels industrial growth. India's export roster to China consists mostly of low value-adding commodities, while China exports lots of electronics and coal to India.

China is in a unique position. Through currency manipulation (which essentially acts as an across-the-board tariff and can be adjusted to remain as such), restrictions on foreign-direct investment, on foreign control of businesses operating domestically, and on foreign exports allowed into domestic markets, China is 'cheating' its population out of a higher standard of living in the present.

But with rapid annual economic growth rates in the double-digits, this is acceptable to a population that is prospering (especially in the urban areas).

So, your income is increasing 8% a year. You're told it 'should' be rising faster than that, but you've lived most of your life in financial stagnation, so why throw a big fit about it? Anyway, the ears hearing your protests won't be particularly sympathetic. And your government is sitting on top of over $1.5 trillion in currency reserves (enough to buy Wal-Mart, Citigroup, Boeing, Exxon-Mobil, General Electric, General Motors, and Microsoft!). It's now getting involved in sovereign wealth funds (with the aim of making some purchases along the lines of the those theoretical ones), buying up assets in other markets. You're getting wealthier, your country is getting wealthier, and the both of you are still managing to play the role of Aesop's ant. In this time of abundance and accumulation, you are nonetheless living below your means.

Meanwhile, Western nations, growing between 2%-4% annually, cannot place such restrictions on import consumption without a palpable slowing of growth or even an absolute decline in their population's standard of living. Yet by continuing to run trade deficits as the US does, the pain in stomaching such a downturn gets progressively worse. We may just be beginning to deal with that nausea.

Getting back to the East, while India is hesitant to allow its trade deficit to grow still larger, the two nations are hardly at odds on everything:
India and China have found common ground on other environmental issues. Both are fending off international efforts to limit their emissions of global warming gases such as carbon dioxide, which is released from coal-burning power plants and cement factories -- pillars of their economic booms and urbanization drives.

Curbing these gases limits economic growth, they argue, and doesn't account for the damage already done by industrialized nations.

"The rights of our people to a fair chance to improve their lot cannot be abandoned because of environmental damage caused by others who...squandered the earth's resources," Mr. Singh was quoted by the Associated Press as saying.

China, the world's biggest coal producer and consumer, has already surpassed the U.S. as the world's top emitter of greenhouse gas by some estimates. India, which has the world's fourth-biggest coal reserves and has ambitious plans to use even more, isn't far behind.
With nearly 2.5 billion people between them, they represent one-third of the world's population. Even if the Kyoto Protocols were adhered to by all 36 of those who've pledged to fulfill their commitments (and the majority of them have come nowhere near doing so), for every pound of CO2 reduction, India will add a pound, neutralizing the effect. Oh, and then China will add an extra five pounds on top of that.

By not making didactic demands on other countries and by not using its increasingly ostentatious military, China is able to minimize antagonism and trade retaliations directed its way. In contrast to a US presence in 130 countries, China's 'isolation' makes it appear that much more innocuous. It will be interesting to see how the US-China-India relationship unfolds in the coming decades.

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