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Economic ties between China and India will play a large role in one of the most important bilateral relationships in the world by Bilateral. For a long time, the imbalanced trade between China and India has been a stubborn obstacleholding backour economic and trade relations. NEW DELHIL: Amid increasing strain in Sino- India ties, China has Secondly, restart negotiation of China-India Free Trade Agreement.
Deeper integration ahead, but distrust lingers Two developments could lead to even greater momentum for Sino-Indian economic integration. Larger companies in both countries are increasingly acquiring third-country companies that already have a presence in China and India. For example, Tata Steel Ltd.
As more third-country acquisitions materialize, investment linkages between India and China will deepen. A second possibility is that Chinese capital could help India accelerate its infrastructure revolution. China has an abundance of capital looking for attractive investment opportunities. Not all is smooth sailing, however. The recent global economic crisis, which has slowed economic growth in China and India, appears to have exacerbated the severity of these concerns.
Over the last 24 months, India has issued several antidumping measures against products such as yarns and fabrics, nylon tire cords, and aluminum products from China. Both governments appear keen to resolve these issues through mutual discussions rather than taking them to the WTO, however. A major obstacle to bilateral investment that needs to be bridged is one of lingering distrust stemming from the brief war of and unresolved border disputes.
In an example of this distrust, in Julythe Indian government prevented companies from China and two other countries from investing in port infrastructure projects in the country for security reasons. It is important to note, however, that well-established mechanisms exist that enable parties that do not fully trust each other to do business. In the coming decade, it may be possible for tens of billions of dollars from China to find their way into India.
After all, if China and Japan, which have far greater emotional tensions attached to their relationship, can forge strong economic ties, why not China and India, which have led a far more harmonious relationship for over 2, years?
Companies must decide how best to leverage the growing power and economic integration of these two economies. China's private investment in India has grown steadily in recent years. With the transfer of some labor-intensive industries, more jobs have been created in India. The two countries have supported each other to ensure global trade remains multilateral while pushing for stronger regional economic integration.
INDIA CHINA TRADE
Together, India and China have made important contributions in the establishment of a new international economic order while safeguarding the interests of developing countries. According to official figures from the Chinese Ministry of Commerce, China's trade with India reached a record high of China remains India's largest trading partner.
China has a rapidly growing aggregate bilateral trade surplus with the US, even according to Chinese data, and even when the miscounting of re-exports through Hong Kong are taken into account Table 3.
Nor can this growing Chinese surplus be explained away as a function of the relocation of production from Hong Kong and Taiwan to China as was conceivable a few years ago Table 4.
These imports are almost wholly labor-intensive manufactures, and economic theory suggests that this exerts downward pressure on the wages of import-competing domestic low-skilled labor, if production in such activities is actually carried out domestically. With respect to exports, as shown in the top panel, the industrial sector with the greatest dependence on exports to China was agricultural pesticides which exported 40 percent of domestic production to China.
It was followed in turn by phosphatic fertilizers 33 percentstructural metal parts 16 percentwelding apparatus 14 percentnoncellulosic man-made fibers 12 percentand vitreous plumbing fixtures 10 percent.
US-China Economic Relations | PIIE
The sectors listed in the upper panel of Table 4 might be described as mostly chemicals and capital goods. The import figures in the bottom panel of Table 6 are both larger, and in a sense, more systematic.
Sectors in which imports from China account for more than half of domestic consumption include dolls 75 percentrubber and plastic footwear 66 percentnarrowly defined miscellaneous manufactures which includes a laundry list of items such as cigarette lighters, umbrellas, and wigs percentleather wearing apparel 53 percentand leather gloves 51 percentall of which are simple light manufactures. The Department of Commerce's survey of foreign direct investment provides a considerable amount of detail on US investment in China.
Most of this activity was in the petroleum sector, wholesale trade, machinery and chemicals sectors. Unfortunately most of the data on intra-firm trade and the destination of sales is not reported to avoid disclosure of data for individual firms.
As a consequence it is impossible to tell how much of affiliate output is exported back to the US, or conversely what share of US exports to China are from parents to Chinese affiliates. What the data that is reported indicates is that for majority owned affiliates, 20 percent of output is sold to related parties, which is slightly lower than the average for US majority owned affiliates worldwide 75 percent.
In other words, intra-firm trade is probably somewhat less important in the case of US trade with China than with other countries. Production by majority owned affiliates is exported to third countries at a noticeably lower rate 16 percent than the worldwide average 23 percent. The overall picture that emerges is for a pattern of investment which is probably a bit more geared to serving the needs of the host market, China, than is the case with other US direct investments around the world.
A corollary is that intra-firm trade is probably not a big contributor to the bilateral trade imbalance. US Policy Toward China The outside world has limited abilities to affect the development of the Chinese economy-the outcomes of the major economic policy issues that China faces will largely be determined internally.
To give but one example: If the political leadership in China began to fear that centrifugal forces were pulling the country apart, there might well be a retrenchment of economic reform, and the Chinese government would become less responsive to the interests of foreigners and to fulfilling international obligations. In such circumstances there would probably not be a whole lot that foreigners could do to reverse such a tendency. Contrary to recent calls to "contain" China, the overarching goals of US economic policy toward China are to promote political and economic liberalization within China which the Clinton Administration explicitly views as linkedintegrate China into global institutions, and pursue US commercial interests which the Administration largely identifies as exporters' interests.
The US also has strategic and political goals which may at times conflict with economic interests though there appears to be a lack of consensus in the domestic foreign policy establishment about prioritizing among these possibly conflicting goals as well as the effectiveness of alternative strategies and tactics to achieve them in the post-Cold War world. Policy is also influenced by the demands of a variety of domestic special interests import competing sectors, exporters, human rights activists etc.
As a consequence, US policy toward China is probably best regarded as a manifestation of competing interests in which no single goal predominates, and special interest groups may hold sway on particular issues. This sometimes gives the impression of an inconsistent policy, but to a certain extent this is probably inherent in the structure of the US political system and the lack of domestic consensus over goals, strategies and tactics in the post-Cold War world.
In the economic sphere, relations with China are played out in bilateral, regional, and global fora, and involve both trade and financial issues.
- US-China Economic Relations
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- Spotlight: China-India trade ties set to deepen
There is obviously interrelationships between these different modalities, but for expository reasons, it is probably simplest to consider them separately in turn. The first is proactively through US policies to encourage economic reform in China, and China's responsible integration into the international economy.
The Administration regards technical assistance as the primary channel through which it can influence economic reform in China and by extension encourage political liberalization.
Among the avenues of technical assistance which have recently been created or revitalized has been the US-China Joint Economic Committee led by the Treasury Department, with working groups on financial reform and the foreign exchange system.
The Securities and Exchange Commission has a group that works on securities regulation, and the Treasury and the Federal Reserve Board have a group to provide assistance on banking regulation and the implementation of monetary policy. Private nongovernmental organizations such as the American Bar Association also engage in institution building. The primary channel of economic cooperation is private business trade and investment, though.
Similarly, bilateral intergovernmental relations are dominated by a second track of reactive trade conflict, largely a function of China's rapid growth, partially reformed economic system, and the complainant driven US trade policy making system.
However, the potential for Sino-American economic conflict is likely to worsen. Table 7 reports the shares of US trade accounted for by different trade partners, and projections of how these shares might change obtained by plugging the Table 1 figures, estimates of per capita income, measures of distance and other factors into a gravity model of bilateral trade.
Most Favored Nation Status Under the Jackson-Vanik Amendment to the Trade Act ofmost favored nation MFN status can be extended to nonmarket economies only if the President grants a waiver certifying that the country does not impede emigration.
The law was originally passed to encourage the Soviet Union to permit the emigration of Soviet Jews. President Clinton exacerbated this tendency, first by criticizing then-President Bush during the campaign, and then in by tying renewal of MFN explicitly to immediate improvements in human rights in China.
The Executive Order signed by President Clinton in to extend MFN untilincluded a laundry list of human rights objectives as conditions for future renewal. Relations between the two countries continued to be rocky in Despite this, economists and business leaders successfully argued that revoking China's MFN and the ensuing retaliation would only hurt American exports while doing little or nothing for human rights. The Chinese, for their part, made a number of superficial concessions on human rights while cultivating the support US business.
Despite an outcry from many Congressmen, human rights activists and the press, the Administration decided to announce that China had met the minimum requirements necessary for renewal. The Administration's adopted the new line that encouraging China's economic liberalization and integration into the world economy would be the best way to pursue US foreign policy objectives of democratization, development and economic reforms in China Economic Report of the President, Although the renewal of MFN in was correct substantively, the apparent climbdown from the earlier statements of explicit conditionality made the President appear unsteady.
Soon after the MFN renewal, the US designated China as a priority foreign country under the Special intellectual property rights protection provision. Several reports were released criticizing China's human rights policy; the American public was particularly outraged when China imprisoned but later released human rights activist Harry Wu, a US citizen.
China also conducted large-scale military exercises off the coast of Taiwan in an effort to intimidate voters before the island's first democratic elections in which Lee Teng-hui scored a resounding victory.
Evidence was uncovered that Chinese firms had sold Pakistan magnetic rings that could be used to enrich nuclear fuel which could be then used in the production of nuclear weapons, and were involved in smuggling illegal weaponry into the US. And just as the intellectual property rights IPR dispute was reemerging as a hot political issue, it was time to renew China's MFN status for another year.
MFN renewal in passed with little fanfare, but as tension on the trade, human rights, IPR and proliferation fronts increased, the debate over renewal in has become yet another forum for addressing American concerns.
As could be expected, the President announced that he would certify China's MFN status for another year, and the Administration has strenuously resisted Congressional efforts to link the MFN debate with human rights, the IPR issue, and proliferation concerns. Even South Carolina Senator Ernest Hollings, a long-time opponent of China's MFN status, announced that he would switch his vote and support MFN extension on the grounds that the yearly Washington debate serves only to increase tension and harm US-China relations without accomplishing anything positive.
Indeed, what is truly striking about the trade politics in the US is how MFN policy has been driven by exporters and investors, not import-competing interests. Historically, the focal point of trade tensions has been protectionist demands by US light manufacturers.
China and India: Greater Economic Integration - China Business Review
To cite one example, China's share of the US bicycle market increased from China circumvents its bilateral textile and apparel quotas, mainly by transshipping products through third countries which are also covered by bilateral quotas. In other words, the Chinese substitute their products for the unfulfilled quotas of third countries. The main transshipment points are the high wage locations of Hong Kong, Taiwan, Macau, and Singapore. In other words, the Treasury figure implies that nearly 25 percent were transshipped.
A bilateral agreement on this issue was signed in January Government sources indicate that the problem appears to be getting worse, however. Even allowing for high re-export markups, these discrepancies are huge.
The US Customs Service found that half of the 36 fastest growing apparel suppliers to the US market had no significant domestic production for export, but report a significant increase in imports from China. Kenya, for example has recently experienced a percent growth rate in apparel imports from China, and a percent growth in exports to the US.
Other countries, including Belize, the Czech Republic, Ecuador, and Qatar, exhibit similar triple-digit growth rates. Transshipping is currently subject to criminal prosecution, and Customs and the Justice Department have launched a major campaign to prosecute transshippers. There was recently a major conviction involving a Chinese state-owned firm.
In May the US cut China's cotton underwear quota by 35 percent and also reduced some other quotas because firms were illegally transhipping textiles though Hong Kong, mislabeling them as video rewinders and metal furniture. To investigate this question a constant market share CMS analysis was undertaken.
The CMS approach is based on the idea that a particular country's share of world production is a function of its "competitiveness" where s denotes share, q production quantity, and c "competitiveness"; lower case letters indicate reporting country values, upper case world values.
Thus, in Equation 2changes in the reporter country's production are decomposed into two terms-the first indicating what the country's production would have been if it simply maintained its share of world production, and a second indicating gains or losses due to changes in share competitiveness.
Production, in turn, is also a function of the pattern of domestic consumption, exports, and imports, and changes in production will be affected by the commodity and geographical market partner composition of trade.
So for example, countries specializing in exports to rapidly growing product markets or partner countries would experience faster export growth than competitors concentrated in slowly growing markets for a given level of relative competitiveness.
Their shares in those markets, however, would be constant as long as the underlying competitiveness factors remained unchanged. Thus a more sophisticated model can be constructed by decomposing production into consumption, exports, and imports, and redefining the relationships in Equations 1 and 2 in terms of commodity- and geographic-specific markets 3 4 where i and j indicate product and partner respectively.
The first term on the rhs of Equation 4 is the CMS rate of consumption growth-the rate of production growth which would have occurred if the country simply maintained its market share in domestic consumption in each commodity market. The second term gives the change in production for domestic consumption due to changes in share-that is, changes in competitiveness.
The remainder of the terms in Equation 4 can be defined analogously. At the sectoral level the data were disaggregated to product categories at the 4 digit SIC level and three geographical markets-the US, China, and the rest of the world-were distinguished.
Applying the Department of Commerce figure for average labor productivity across the industrial sector, this would amount to a loss of less than one thousand jobs. This is not the end of the story, however. Export jobs pay on average 13 percent more than non-export jobs. Applying the export-related wage premium to the jobs figures one finds that the higher pay of the export jobs more than compensated for the slight reduction in total employment, and total compensation in the industrial sector was higher than expected, even with the Chinese competitiveness gains.
Whatever the Chinese gains in competitiveness, these gains have come almost exclusively at the expense of third country exporters, and the direct impact on the US economy has been minor. Export Controls US policy discourages exports to China. This discouragement takes the form of both generic export disincentives such as unfavorable tax treatment, and specific disincentives such as restrictions on the export of militarily sensitive products or the refusal of the Exim Bank to support participation of US firms in the Three Gorges Dam project.
Richardson uses a gravity model similar to the one used to generate the bilateral trade volume estimates of Table 7 to estimate the impact of export disincentives. In other words, US exports to China for would have been something like twice their actual volume had it not been for export disincentives. These estimates are subject to considerable uncertainty, the US export control regime has loosened with respect to China since Richardson's sample period, and the Chinese economy has grown by approximately one-half.
Nonetheless, even if they are remotely accurate, they suggest that self-inflicted US export disincentives dwarf the impact of Chinese policies on US trade. Intellectual Property Rights Bilateral trade disputes between the US and China have not only involved merchandise trade. An important, possibly preeminent, source of conflict has been over the lack of intellectual property rights IPR protection in China.
Early in its reforms, China proclaimed its commitment to protecting copyrights, patents, and trade secrets by signing the US-China Bilateral Trade Agreement of Throughout the s, the two countries used the Joint Commission on Commerce and Trade as a forum to discuss issues of compliance, and China even joined the Paris Convention for the Protection of Intellectual Property.
It pledged to treat computer software as literary works: It also promised to expand the definition of and increase the protection for pharmaceutical patents, an issue that had proved to be a major sticking point in the negotiations. Later that year China joined the Berne Copyright Convention and the Universal Copyright Convention, and in it took on additional responsibilities under the Geneva Phonogram Convention. In Februaryafter a flurry of consultations, negotiators reached an agreement on the day before the tariffs were to be imposed.
China agreed on specific enforcement measures to crack down on IPR infringement, to conduct frequent bilateral consultations, and to establish task forces to raid illegal manufacturers and improve border control.
China also promised to increase market access for US products by banning quotas on several goods and allowing US companies to set up new joint ventures. This last move was seen as important to counteract the implicit trade barrier to US goods caused by China's domestic sales of pirated goods. China's efforts focused on curbing sales of pirated goods at the retail level. Yet production, distribution, and exports have continued.
Not only does domestic sales of pirated goods act as a barrier to US goods, China exports them to third country markets mainly Hong Kong, but also Southeast Asia, Eastern Europe and Latin America inflicting losses on American exporters to those markets as well. For its part, Beijing has pointed out that in the last year it closed 7 CD plants that violated copyright laws and confiscated hundreds of thousands of bootleg CDs.