comparison of trade performance between china and

COMPARINGTRADEPERFORMANCEOFCHINAANDINDIASarahY.TONGEAIBackgroundBriefNo.398DateofPublication:20August2008iExecutiveSummary1.ThetwoAsiangiantsandtheworldmostpopulatednations,ChinaandIndia,haveregisteredoutstandinggrowthperformancesinrecentyears.Moreimportantly,theircontinuedeconomicexpansionhasbeenmuchanticipatedtohelpsustainworldeconomicgrowthaseconomicprospectintheindustrialworlddarkens.2.Forthreedecades,China’seconomyhasgrownbynearly10%ayeartobecometheworld’ssecondlargestmeasuredinpurchasingpowerparityterms.Between2000and2006,Chinacontributed15%ofthetotalincreaseinworldGDP.Likewise,India’seconomyhasalsogrownrapidlyinrecentyears,bymorethan8%ayearsince2003.3.Tradehasincreasedatafasterpacethantheeconomy.Between1978and2006,tradegrewby18%ayearinChinaanditsshareinworldexportjumpedfrom1.4%to7.6%.India’stradehasalsoincreasedrapidly,by11%ayearsince1978.Thoughitsexportsharealsowentupfrom0.4%to1.2%,itisstillaratherminorplayerintheworldeconomy.4.OnewouldexpectIndiatocontinueitsgrowthintradeandeconomy,renderingthecountryamoresignificantroleintheworld,especiallyasChina’sfutureexpansionmaybeconstrainedbyrisingcosts.5.China’straderestructuringhasbeenmoreextensive,comparedtoIndia’s.ManufacturedgoodsdominateChina’stradewhileservicetradeisrelativelymoreimportantforIndia.SubstantialchangeshavealsotakenplaceinChina’smanufacturedtrade,fromlow-skilledlabor-intensivegoodstomorecapital-andtechnology-intensivegoods.6.Suchdisparityisduelargelytotheimportantroleofforeigndirectinvestment(FDI)inChina,enablingChinatoparticipateintheescalatingregionalproductionnetworkandbecloselyintegratedwithneighboringeconomies.ii7.Consequently,Chinaisincurringincreasingtradesurplus,especiallywiththeUnitedStatesandEuropeanUnion,mostlybyforeigninvestedenterprises.Ontheotherhand,ChinaimportsheavilyfromitsneighborsandhasaccumulatedlargetradedeficitwitheconomiesinEastandSoutheastAsia.8.TheoutlookforIndia’sfuturetradeexpansionremainsuncertain.India’stradehasexperiencedlimitedrestructuring,whileaccumulatinghugedeficits.Itcontinuestodependconsiderablyontheexportofprimarygoodsandlow-skilledlabor-intensivegoods.Itsserviceexports,suchassoftware,arestillquantitativelysmall.9.Moreover,Indiareliesonimportsofenergyandresourcegoods,leavingitvulnerabletopricehikesintheworldmarket.AsFDIplaysonlyaminorrole,IndiahaslimitedparticipationinAsia’seconomicintegrationandproductionsharing.Indiaingeneralstillhasalongwaytogointermsofindustrialization.1COMPARINGTRADEPERFORMANCEOFCHINAANDINDIASarahY.TONG∗ExportsinRisingChinaandEmergingIndia1.1ThetwoAsiangiants,ChinaandIndia,aretheworld’smostpopulouscountriesandjointlymadeupnearlytwo-fifthsoftheworldpopulation(37%)in20061.Bothhaveregisteredextraordinarygrowthperformanceinrecentdecades,Chinasincethelate1970sandIndiainthelastdecade,andconsequentlyattractinggrowingglobalattention.Indeed,continuedgrowthinthetwonationsismuchanticipatedtosustainworldeconomicdevelopmentastheeconomicprospectintheindustrialworlddarkens.1.2Theyear2008marksthe30thanniversaryofChina’seconomicreformandopeningup.Overthepastthreedecades,China’srapidgrowthcontributedconsiderablytotheworldeconomy.Between1978and2007,Chinahadsustainedalmostunprecedentedeconomicgrowthofnearly10%ayear,albeitfromaverylowbase.ValuedatPurchasingPowerParity(PPP)terms,Chinahasbeentheworld’ssecondlargesteconomysince20002.Evenwhenmeasuredatmarketexchangerate,China’sGDPamountedtoUS$3.3trillionin2007andwastheworld’sfourthlargestbehindtheUS,Japan,andGermany.Between2000and2006,Chinacontributedaround15%ofthetotalincreaseinworldGDP.∗SarahY.TongisAssistantProfessoroftheEconomicsDepartmentandResearchFellowattheEastAsianInstitute,NationalUniversityofSingapore.ShewouldliketothankProfessorsJohnWongandDaliYangfortheirhelpfulcommentsandsuggestions.SheacknowledgesthecontributionbyTengSiowSongforsomediscussions.ZENGTingprovidedexcellentresearchassistanceforthepaper.1CalculatedbasedondataobtainedfromWorldDevelopmentIndicators,theWorldBank.2Source:WorldDevelopmentIndicators,theWorldBank.21.3Indiaalsoentereditsthirddecadeofeconomictransformationandtheeconomyhasmovedprogressivelytowardsamoremarket-basedsystemafteritstartedsuccessivereformsinthemid-1980s.Economicperformancehasimprovedconsiderably,especiallysincemoredramaticliberalizationmeasureswereimplementedinthe1990s.In2007,India’sGDP,valuedatUS$1098billion,amountedtoaboutonethirdofChina’sGDP(AppendixTableA).WhenPPPisused,Indiaistheworld’sfifthlargesteconomy.1.4Perhapsmoreimportantthaneconomicgrowth,ChinaandIndiaaffecttheworldeconomythroughtheirrapidtradeexpansion.Between1978and2006,China’sshareinworldexportsofgoodsandservicesjumpedbymorethan5times,from1.4%to7.6%.Duringthesameperiod,India’sshareinworldexportsofgoodsandservicesgrewfrom0.4%to1.2%,anequallyimpressivethree-foldincrease.1.5Nonetheless,Indiaisstillaminorplayerinworldtrade,comparedtoChina.ThisisalsotrueforcountriesinSoutheastAsia.Forexample,in2006,exporttoIndiabythefiveoriginalmembersofASEAN(ASEAN-5)accountedforonly2.5%(Table1)ofthegroup’stotalexport.TheshareofexporttoChinainthesameyearwas8.8%,upfro