The Growing Dominance of China in South Asia: An Indian Perspective

Abstract

India's economic relations with its neighbors are important for the stable and peaceful development of the South Asian region and for its own security. In a globalized world, economic relations play a major role in deciding political relations and collaboration at multilateral fora. In the context of China's increasing trade and investment relations with India's neighboring countries, the present study examines where and how China has been improving its presence vis-à-vis India in Bangladesh, Pakistan, Sri Lanka, and Nepal. Further, the study also explores the factors of India's loss of market in its neighboring countries and suggests remedial measures.

Keywords:

• China
• India
• South Asia
• trade
• investment

ACKNOWLEDGMENTS

The author thanks the anonymous referee for useful comments and suggestions, and Nisha Taneja for her useful comments and feedback during the study. Surit Das' editing is also most appreciated as is research assistance provided by Sneha Baksi. The author is solely responsible for any errors in the article.

Notes

²China and Sri Lanka provide each other most favored nation (MFN) treatment and signed a Joint Communiqué in 2005.

¹In return, Pakistan gains access to Chinese markets through preferential treatment under the FTA and the possibility of becoming a hub in the region, which may lead to huge future transit revenues.

³For example, India has long since granted MFN status to Pakistan but the latter has not reciprocated.

⁴South Asian countries here refer to only four countries: Bangladesh, Pakistan, Sri Lanka, and Nepal.

⁵Chinese exports have been increasing faster year on year than Indian exports to the region since 2004, resulting in a higher gap between Chinese and Indian exports to South Asia.

⁶For example, India imports more than 60% of world imports from Nepal; China imports only 1.9%.

⁷UNESCAP Interactive Trade Indicators. The values of the index lie between 0–100% and the higher the index the greater is the matching or compatibility between the source country's exports and the destination country's imports.

⁸Herfindahl Hirschman Index = ∑_i(X_i/X)², where X denotes total Exports and Xi denotes Exports of i^th firm. The range of this sum therefore is 0 to 1; if this sum nears 1, it is interpreted as the market being owned by a single firm and, therefore, high concentration in the market. On the contrary, a low sum of squares indicates low concentration in the market.

⁹The Concentration Ratio is the percentage of market share owned by the largest n firms in an industry, where n is a specified number of firms. Four is the most used value for n and, therefore, the ratio is termed CR_4.

¹⁰Positive list is the list of products India is allowed to exports to Pakistan.

¹¹The determinants of export competitiveness include price-related factors such as domestic wages or material costs, availability of labor, exchange rate, foreign direct investment (FDI) and management, and reduced cost of communication and transportation (Adams et al. 2006), as well as qualitative attributes. However, comparative advantage has been criticized because of its weak operational concept (Beaudreau 2011)

¹²However, this expectation assumes that nothing other than comparative advantage affects bilateral trade, which does not hold in practical international trade. We therefore encounter various products/industries in the trade of which other factors supersede the comparative advantage effect. We try explaining the deviations from these expected patterns in the context of the countries involved, with the trade arrangements between them, their trade policies, and with the outputs of our surveys done within India, China, Bangladesh, and Sri Lanka.

¹³Though we have calculated RCA for all the years from 1992–2007, we only report two time points, 2000 and 2007, due to space constraint. Moreover, China has improved its exports to these countries after 2000.

¹⁴In fact, the number of commodities having BRCA has declined in the case of India during the same period (Table 5).

¹⁵China's IRCA in some of these industries shows decline, but it still dominates South Asia markets.

¹⁶Though these concessions are not more than 50% margin of preference concessions, these two industries constitute the majority of exports from China to Bangladesh (31% of total exports), and Chinese exports are likely to benefit from these concessions, which came into effect in 2006.

¹⁷As there is already evidence that outward investment from China in textile industry helps China's exports in this sector (Wu et al. 2012), Chinese investment in these four South Asian countries would have certainly helped textiles exports from China.

¹⁸This is despite the fact that India has almost equal or more comparative advantages in both the products over the reference period.

¹⁹However, India is an important source of cotton yarn, cotton, and cotton threads to Bangladesh. The country sources close to 60% and 30% of world exports of these products to Bangladesh.

²⁰However, China has comparative advantages in products such as raw silk (IRCA = 9.0) and silk yarn (IRCA = 10.1), and Chinese exports of these products are equal to the total world exports of these two items to Bangladesh in recent years.

²¹However, this issue has been addressed very recently by India, and that nation allowed duty-free RMG from Bangladesh up to a specific quota.

²²These are important items of exports of Pakistan, thereby posing serious competition to the domestic industry in Pakistan. Therefore, within the industry, Chinese goods coming into Pakistan are directly in competition with Pakistan's local industries while Indian cotton satisfies local demand.

²³For example, China's exports of transmission apparatus for radio and TV has been impressive, reaching $151.74 million in 2006 from $0.006 million in 1992 (compared to India's exports of $1.569 million in 2006).

²⁴The largest components of world exports in this industry to Pakistan in 2007 were electrical, telephonic, telegraphic, and fax apparatus, transmission apparatus for radio TV, electrical generating sets, and rotary and air or vacuum pumps, compressors, etc. All these important items of demand in Pakistan are supplied by China rather than by India with shares of 46.2%, 28.7%, 13.8%, and 15.3%, respectively, in world exports to Pakistan in 2007.

²⁵The six tariff lines that were brought to zero duty tariffs in 2000 are in the machinery and mechanical appliances category, including lathes and turning centers for removing metal (HS 845811, 845819, 845891, 845899), machinery for sugar manufacture (HS 843830), and machinery for the preparation of fruits, nuts, or vegetables (HS 843860).

²⁶For example, tariff reduction in the machinery for sugar manufacture and for preparation of fruits, etc., in 2003 has not had any significant impact on exports. The same is the case with Indian exports of lathes to Sri Lanka except in other lathes (HS 845899), which have seen random spurts of Indian exports to the country in some years.

²⁷Mineral/chemical fertilizers of phosphorus and nickel as well as synthetic organic coloring matter together make up 39% of Chinese exports in this industry.

²⁸The reason for this large gap is that these products were left out from the Pakistan's positive list (except two or three items in HS 72) until November 2006.

²⁹For FDI policy in South Asia, please see Sahoo (2006) and Nataraj and Sahoo (2008).

³⁰See http://www.financialexpress.com/news/china-bangladesh-sign-pact-to-develop-oil-&-gas/136139/ (accessed January 6, 2012).

³¹This information is taken from the Department of External Resources, Government of Sri Lanka website, www.erd.gov.lk.

³²China has been accused of trade subsidies and under-valuation of currency making its exports more competitive. However, China is supposed to cease input or output subsidies after its accession to the WTO (see Agrawal and Sahoo 2003).