• 06 Dec 2006
  • Op-Ed

India Needs to Encourage Trade with China

Although India and China have increased bilateral trade over the last five years, the amount is far less than what would be expected. Harvard Business School professor Tarun Khanna says India has primarily itself to blame. From The Economic Times. Key concepts include:
  • China and India recorded $19 billion in bilateral trade in 2005, much less than would be expected of countries similar in size, within geographic proximity, and with shared cultural ties.
  • Indians' fears about Chinese competition and unease over past border wars result in procedural and other roadblocks to increased trade, at India's disadvantage.
  • China benefits from the trade more than India, both by selling more and better products to India and by welcoming Indian investment in China.
by Tarun Khanna

Everyone points out that China-India bilateral trade, at roughly $19 billion in 2005, is a far cry from the $2 billion in 1999. Indeed, the increase is to be celebrated. Chinese President Hu Jintao's current visit to New Delhi cements the diplomatic and economic bridges created by Premier Wen Jiabao last year during a similar visit.

But $19 billion is hardly anything to write home about, even if one were to discount the fact that much of what India exports to China is low-value-added commodities (notably iron ore). I asked myself what a sensible benchmark would be to qualify as a "sufficient" or even "respectable" volume of bilateral trade.

There is a notion in international trade, called the gravity model, which suggests that, ceteris paribus, countries that are larger and more proximate tend to trade more with each other. By the model, China and India should trade extensively with each other. That they don't, at least not yet, is an anomaly.

The U.s.-mexico Example

Consider the U.S.-Mexico bilateral trade as an example, an order of magnitude bigger than China-India bilateral trade. Indeed, Mexico and the U.S. are among the most important trading partners of each other. Of course, there are several ways in which the U.S.-Mexico example is an unfair number to use to benchmark China-India trade. Those countries, even Mexico, are much richer than are China and India, and this means that their trade in dollar terms will be more voluminous.

Notwithstanding some tensions, they also haven't engaged in a multidecade "deep freeze" in relations recently. And there are plenty of Spanish speakers in the U.S. to lubricate the relationship with Mexico, far more than Mandarin speakers in India, or Hindi speakers in China. The Canada-U.S. relationship is similar, as is the relationship between Brazil and Argentina, just to pick a couple of other examples.

Note that China is now among India's most important trading partners, but the importance that India assigns to China has not been reciprocated. India does not yet figure on the ten most important countries to China in terms of trade, recent high profile visits on both sides notwithstanding.

Another benchmark for today's China-India trade is historical. It is well known that the two countries have shared links over the millennia. Indeed, the great-and-good from each country even today start their visits by making the proverbial nods to Buddhism. In 2003, for example, the then prime minister Atal Bihari Vajpayee visited the Baima Si, White Horse Temple, in China's Henan province, one of the monuments that mark the arrival of Buddhism from India to China in the third century.

It is a mistake to dismiss such cultural links as being too far back in history to matter, since they inform historical memories in the two countries. Scholars suggest that Buddhism and trade were mutually reinforcing millennia ago, and reinvigorated cultural links might well lubricate further commerce. But we remain very far from the historical benchmark of mutual relevance.

Advantage China

I would venture to say that China gets a lot more out of India than India does out of China currently, both by selling more and better things to India and by welcoming Indian investment in China, and India has only herself to blame. The primary, perhaps only significant, thing that India has borrowed from China lately is a good, healthy economic scare. Indians, you will recall, were terrified of Chinese goods coming across the border a few years ago. It turned out that this forced several Indian companies to upgrade their game—the well-known salubrious effects of competition operated—and this is no bad thing in itself.

India does not yet figure on the ten most important countries to China in terms of trade.

But it also clarified that Indians had nothing to fear from the Chinese. Indian companies hardly withered away in response to the Chinese threat. Nor have major overseas ventures by the Chinese, in Europe and the West, been unambiguously successful. Shenzhen-based TCL Multimedia, among the world's largest TV makers, for instance, made the high profile acquisition of French company Thomson's TV business, only to oversee considerable value destruction in the years since. That is, the mere fact of aggressive expansion should not strike fear.

The Chinese do not generally reciprocate Indians' attitudes to them. That is, they don't fear Indian competition. In fact, they don't much think about India at all, compared to the time that India spends agonizing over the Chinese threat. To the extent that they do think about India, my research in China suggests that they are focused on movies, software, and Buddhism, in a constructive way, not on cross-border hostilities.

When the Chinese do see things they would like to learn from, most notably in recent years in software, they are quick to send delegation after delegation to Nasscom's doors to figure it out. India doesn't reciprocate with quite the same alacrity, and that is India's (unnecessary) loss.

So, why spend time putting up procedural roadblocks for the likes of Chinese telecom products maker Huawei Technologies, and why not facilitate Chinese entry into India? It will be a worthy complement to continued dialogue regarding the border disputes.

About the Author

Tarun Khanna and Krishna G. Palepu are professors at Harvard Business School. Jayant Sinha (HBS MBA '92) is a partner at McKinsey & Company in New Delhi.