Foreign Policy Watch: India-China

[op-ed snap] Fixing the trade deficit with China won’t be easyop-ed snap

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Mains Paper 2: IR | India and its neighborhood- relations.

Once you are done reading this op-ed, you will be able to attempt the below.

“The deficit is not a result of exchange rate but of the inability to either boost productivity or to plug into international supply chains” Discuss it in the backdrop of increasing trade deficits with China.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: India-china relation, Reasons behind increasing trade-deficits with China



Article talks about India’s increasing trade deficit with China and the reasons for that.

Trade deficit with china

  1. The ongoing military stand-off with China has once again brought the issue of trade imbalances with that country to the fore.
  2. China’s quest for regional military dominance makes trade imbalances with it a strategic concern for a country such as India.

Why India has a nearly $50 billion trade deficit with China.

  1. Indian imports from China are nearly five times the exports to it.
  2. China has used a weak currency to push its products into India.
  3. The Chinese currency has actually appreciated against the Indian currency over the past 15 years
  4. A country can continue to maintain its export competitiveness despite a strong currency if its productivity is growing faster than the productivity of its trading partner.
  5. Inability to either boost productivity or to plug into the international supply chains that span the world.
  6. China uses various mercantilist ploys to keep other countries from freely accessing its growing markets.
  7. Obstacles to market access are one reason for the large trade deficit with China.
  8. Composition of trade between the two countries.

How China trades with countries with which it has a deficit ? 

    1. Chinese imports from countries such as Germany, Japan, South Korea and Taiwan are far higher than the exports it ships to them.
    2. These countries make the more valuable parts of various gizmos which are then sent to China for cheap assembly. The iPhone is a classic example.
    3. It is assembled in China but most of the value created lies in parts of the global supply chain that is outside China.
    4. India exports basic material to China and buys more sophisticated products from it.
    5. The main reason is India’s failure to build a globally competitive manufacturing sector
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