China’s Accession to WTO: Implications for India By Pami Dua Delhi School of Economics, India Project LINK Spring Meeting April 14-16, 2004 United Nations Headquarters New York
Contents ! Background information " " " "
GDP First Ten Years of Reforms Foreign Trade FDI
! China’s accession to WTO " Impact on India’s Exports to ROW " Impact on India’s Exports to China
" Impact on India’s Imports " Impact on India’s FDI
! Business Processing Outsourcing ! Way Forward " China vs. India: Next 50 Years
Background Information
China vs. India ! China and India are the world’s future major powers. !Can India overtake China? !Or, will China stay ahead?
India vs China: GDP ! In 1965, India’s GDP stood at 125% of China’s. By 1978, India’s lead had slipped to only 106% of China’s. By 2000, the value of India’s total production had fallen to just 45% of China’s. ! Real GDP rose by 2.5 times in China between 1980 and 1990 while in India the corresponding figure was only 1.8 times. ! China's average growth rate was 10.7 % per year during 1990-99 while India's growth rate was 6.0% per year for the same period.
GDP: Sectoral Decomposition ! In China the share of value added originating in agriculture fell from 68% in 1949 to 18% in 1999. In India the share of agriculture in GDP fell from 52% in 1950-51 to 25% in 1999-2000. ! In both countries the capital intensive nature of investment in industry meant that the share of agriculture in total employment remained high, as much as 60% in China, and nearly two-thirds in India in 2000. ! In 1965 the value of industry in GDP in China was 35% compared to 20% in India. By 1980, China’s share of industry had increased to 48% and then to 50% by 2000, compared to 24% in 1980 and 27 % in 2000 for India. ! By 2000 India’s share of services was 48% compared to only 33% in China.
First Ten Years of Reforms: India and China ! China : 1978-87; India: 1991-2000 ! Comparing the first ten years of reform in each country, India opened to the world economy faster than China (1991-2000 vs. 1978-87). ! In terms of exports and imports as a percent of GDP, and total accumulated foreign direct investment, India (1991-2000) surpassed China (1978-87). ! Growth rates of GDP and GDP per capita in the first ten years of reforms were faster in China. ! China started at half the GDP per capita when reforms began as compared with India, which may have made higher rates of growth easier to attain.
First Ten Years of Reforms: Geographic Location ! Geographical location may have contributed towards explaining China’s relative success vis-à-vis India. " The east coast of China is situated in a highly dynamic and rich neighborhood. Neighbors like Japan, South Korea, Taiwan, Hong Kong, Thailand, and Singapore provided capital for investment, markets for Chinese exports, more advanced technology, and expertise.
" The neighborhood of India was, in comparison, less dynamic: Pakistan, Myanmar, Sri Lanka, Bangladesh, and Nepal. Very few such transfers took place between India and its neighbors to India’s advantage.
Foreign Trade: Last 2 Decades ! The opening up policy led to a marked acceleration of foreign trade in China, whose share in world trade quadrupled in twenty years (from 0.9% to 4.3%), whereas it was less pronounced in the case of India (from 0.4% to 0.8%). Share in World Trade (in % of exports and imports)
Foreign Trade
(cont’d..…)
India and China: Exports
Exports of Goods & Services (constant 1995 $US, billion)
1980
1985
1990
1995
2000
India
11.46
13.22
20.39
39.66
56.48
China
27.75
41.00
84.88
167.96
158.95
41.3
32.2
24.0
23.6
31.9
India
6.1
5.6
7.3
11.2
14.0
China
7.6
10.0
17.5
24.0
25.9
80.8
55.9
41.5
46.8
53.9
India as a % of China Exports of Goods & Services (% of GDP) India as a % of China
Foreign Direct Investment ! China's territory has been more attractive for foreign investors than India.
Foreign Direct Investment, 2001 (%) FDI stock / GDP
FDI flows / GFCF
China
33.2
10.5
India
4.6
3.2
Foreign Direct Investment: Last 2 decades ! For the eighteen years between 1981 and 2000, China’s total net inflow of FDI was $336 billion compared with $18.3 billion in India (18 times that of India). ! Although FDI in India increased in the late 1990s as a result of reform policies, by 2000 China’s annual net FDI inflow was still 15 times that of India.
India and China: Cumulative Net Inflows of Foreign Direct Investment (Current $US, millions)
India C hina C hina Vs India
1970-80 455 0 --
1981-85 295 3,983 13.5X
1986-90 835 14,263 17.1X
1991-95 4018 112,673 28.0X
1996-00 13,122 205,320 15.6X
1981-00 18,270 336,239 18.4X
China’s Accession to WTO Implications for India’s Exports, Imports and FDI
China’s Entry Into WTO: Impact on India’s Exports to ROW ! Both India and China have comparative advantage in the exports of labor-intensive manufactured goods due to low costs of labor. ! India competes with China in the export of many such goods, such as textiles, garments, leather and leather products, and light machinery. ! Since the composition and direction of trade of China and India are similar, increase in Chinese exports as a result of its accession to WTO is likely to have a negative impact on India’s exports. ! Chinese competition may also hurt India’s software exports. Software has long been one of India’s most successful exports. ! In early 2002, the Chinese government designated expansion of China’s software industry as a key target. During the 10th Five Year Plan (2000-2005), the Ministry of Science and Technology was to spend about US$ 100 million for research and development of critical software technologies. The objective was “catching up with India in two years.”
China’s Entry Into WTO: Impact on India’s Exports to China ! Increase in China’s imports can have a positive impact on India’s
exports.
! Most of the commodities imported by China like machinery,
minerals and mineral products, iron and steel, organic chemicals, medical and surgical equipment, and agricultural products, are principal commodities in the Indian export basket.
! Given that China has to lower tariffs on many of its imports and
phase out many subsidies, there can be some gain in India’s export to China.
! Bilateral trade between India and China is quite limited since
India’s exports to China is about 2% of its total exports. Therefore, the overall impact of China’s entry into WTO on India’s exports to China is likely to be negligible.
China’s Entry Into WTO: Impact on India’s Imports ! Impact on India’s imports from third countries is
likely to be negligible since imports from third countries are unlikely to be affected by the Chinese accession to WTO.
! Thus the main effect will come via the impact on
Indo-Chinese trade.
! India’s imports from China is about 3% of total
imports (2000-01) and therefore the impact on India’s imports is expected to be negligible.
China’s Entry Into WTO: Impact on India’s FDI ! The impact on India is likely to be minor: " Domestically oriented FDI is often country specific and
increased inflows into China are unlikely to affect the availability of FDI for India. " Inflows of FDI for domestic markets would be primarily determined by the pace of macroeconomic reforms in India. " India is not yet competitive in attracting export-oriented FDI.
! Issues facing India are much more broad-based such as
improvement in infrastructural facilities, effective administration, labor reforms etc. New initiatives are required to enable India to face the challenges posed by China’s accession to WTO.
China vs. India: Other Issues
Business Processing Outsourcing ! In the BPO field, China is perhaps the biggest challenge in the
future and the largest threat to India.
! Despite the emergence of China as competitor in BPO, India
is well placed in terms of parameters like cost savings, competency, technical infrastructure, language and skill pool.
! Main disadvantages of China:
" Lack of good quality record in software, whereas India has a better image as quality supplier. " Low percentage of Chinese population speaking English and a less mature and relatively new BPO industry. India has an advantage in both areas.
China vs. India: Other Issues
Business Processing Outsourcing ! However, China is catching up. It has:
" Low manpower costs " Low real estate costs and power costs " Chinese government has invested $ 5.4 billion in nine universities in China to promote English language and other skill sets. " It can leverage its manufacturing image. " Since it is close to Japan, its BPO market is also likely to grow through the Japanese outsourcing route. As India currently offers almost no BPO services in Japan, China can capitalize on its proximity to it.
Way Forward
China vs. India: Next 50 Years ! A recent Goldman Sachs study concludes
the following:
" India has the potential for fastest growth over the next 30-50years. Growth could be higher than 5% over the next 30 years and close to 5% thereafter. " China’s GDP growth is expected to fall to 5% in 2020 from its current levels of over 8% growth rate. By the mid2040s, growth is expected to slow to 3.5%. Nevertheless, China is expected to become the world’s largest economy (in terms of US $ GDP) by 2041. " India’s economy is expected to be in third place, after China and U.S.
