The two Asian giants, The People’s Republic of China (PRC) and India, home to nearly two-fifths of humanity have long been the subject of comparisons. Today, as in the past, the obsession centers on economics. More than sixty years ago when these two countries facing similarly massive problems of economic backwardness, poverty, and illiteracy embarked on diametrically opposed development paths, the merits of socialism and capitalism were passionately contested. In recent decades, as both embraced markets and globalization (China in 1978 and India in 1991), much effort has been devoted to comparing their strategies towards market integration and globalization, whose development path is more sustainable, what lessons each hold for the other, and more recently, whether the late-starter India can “overtake” its giant northern neighbor.¹ However, such comparisons can only take us so far, because China and India are also quite different – not only in their approaches to global economic integration, but also with regard to what each must do to adapt to the vagaries of globalization. This study identifies the sources of each country’s growth trajectories, what each must do to face current and future challenges, the lessons they can learn from each other, and the lessons their experiences offers other countries.

Shalendra Sharma is Professor of Politics at the University of San Francisco. He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Global Integration and Economic Growth

China and India are the fastest growing economies in the world today. With growth rates averaging 10% per year during 1980-2004, and 9% in 2005, and endowed with a GDP of $1.65 trillion, the once poor and inward-looking China is now the fourth largest economy in the world.² While the Communist Party still rules, China’s cities and towns no longer boast billboards that spout doctrinaire socialist phrases. Rather, they advertise consumer products like Internet service, cell phones and credit cards. Although not quite as spectacular as China, India’s post-1991 economic reforms have helped the economy grow at more than 6% on average since 1992 – laying to rest the ghost of the desultory “Hindu rate of growth” of 3.5% -- whose overarching edifice dominated the economic landscape from the early 1950s to the1980s. India’s average annual rate of growth of GDP reached 7.3% in 2003 and over 8% in 2004 and 2005. It is expected to grow between 7.5% and 8% in 2006.³ This growth has translated into significant increases in per capita gross domestic product (GDP) in each country. For India, the 1978 GDP of $1,255 increased to $2,732 in 2003, while for China, it jumped sharply from $1,071 in 1978 to $4,726 in 2003.⁴

However, the engines of their growth are different. China’s is driven by its vast and diverse manufacturing sector, while India’s is fueled by extraordinary growth in services, primarily the IT (information technology) sector.⁵ China has literally become the world’s factory – the growth in the share of its merchandise exports quadrupling during 1983 and 2002. Ten years ago, China’s merchandise trade with the world totaled about $280 billion. In 2004 it was around $1.3 trillion to $1.4 trillion -- a consequence of annual growth rates above 30 percent in some years. However, India’s exports grew only 60% during 1983-2002, placing it in 30th place in world merchandise trade (with a miniscule 0.7% global share) in 2003.⁶ On the other hand, India’s service exports have been surging at about double the rate of its merchandise exports. Between 1995-2000, the Indian IT industry recorded a compound annual growth rate of 42.4%.⁷ In 2002, not only India’s IT exports totaled about $10 billion compared to China’s $1.5 billion, some 40% of China’s IT exports involved Indian IT companies based in China.⁸

Following the manufacturing-led development model used successfully by Japan, South Korea and Taiwan, China’s industrial expansion has been facilitated by its large domestic savings (some 50% of GDP), vast pool of low-cost and relatively skilled labor, and bolder and deeper reforms that placed few restrictions on foreign ownership and provided a liberal investment regime. This, in turn, resulted in a veritable flood of FDI (foreign direct investment), especially in the export industries. According to Lardy, since the reforms began in 1978 to the end of 2003, foreign firms had invested about $500 billion in China and accounted for over one-quarter of China’s output of manufactured goods.⁹ In 2004 China attracted some $60.6 billion of FDI.¹⁰ Only the United States with nearly $96 billion and UK with $78 billion received more.

By contrast, India with over half-century of obstinate fixation on an austere Gandhian swadeshi (or self-reliance) and Keynesian import-substitution -- which in practice meant distrust of the market and keeping out foreign investment and imports -- still remains a largely closed economy. India accounts for less than 1% of total global exports, and average trade tariffs still remain as high as 22% -- far above the ASEAN average of around 8%.¹¹ Coupled with modest national savings, still not fully liberalized industrial and manufacturing sector, restrictive labor laws, an ambivalent regulatory attitude to foreign direct investors,¹² and an agonizingly unreliable infrastructure,¹³ has prevented India from attracting the FDI needed to modernize its inefficient and uncompetitive manufacturing industries.¹⁴ In 2004, India attracted a mere $5.33 billion of FDI, a modest increase from $4.26 billion in 2003.¹⁵

But, what explains India’s remarkable economic metamorphosis despite lacking China’s ostentatious advantages? The answer: the audacious “new economy” ushered by globalization. By riding the IT wave, India has been able to overcome the once insurmountable constraints. Specifically, the global expansion of high-speed internet and related telecommunications networks that have rendered geography irrelevant by creating linkages between countries and businesses that simply did not exist a decade and half ago -- has enabled Indian entrepreneurs and the country’s large pool of skilled and inexpensive English-speaking “techies” to cash-in on the IT revolution. In a relatively short space of time India has become the location of choice for all sorts of IT-related activities – best symbolized in “Electronics City,” Bangalore main “tech-hub” and in the prime stretch on Bannerghatta Road in southern Bangalore housing offices of multinationals like Oracle, I.B.M., Accenture, Dell, Hewlett-Packard, PeopleSoft, Honeywell, Intel, Monsanto, American Express, General Motors, and the ubiquitous Microsoft – where everything from advanced software production and programming, data processing, network management and systems integration, multimedia, business outsourcing and call-center processing are performed. Even the solicitous call-center activity has rapidly climbed up the value chain -- moving from just filling sales orders, data entry, payroll processing and real-time customer support for western companies to handling medical data transcription and financial analysis for Wall Street firms. Indian accountants and financial analysts are not only hired to prepare tax returns for Americans, but also to write brokerage reports for Wall Street. Also, in the past few years the world’s leading pharmaceuticals, including Pfizer, AstraZeneca, Bristol-Myers Squibb, GlaxoSmithKline, Novartis, Abbott, Merck and others have established research and manufacturing facilities in India. In fact, anything that can be done digitally (meaning whatever can be done in real-time from any location on the globe) has already moved, or is in the process of moving to Bangalore, Chennai, Mumbai, Delhi and other locations in India because both the low-end and sophisticated IT work can be done at a fraction of the cost there, compared to North America or Western Europe.¹⁶¹⁷ Even more impressive, several of India’s blue chip IT giants such as Infosys and Wipro and newer stalwarts such as Tejas Networks and the Mumbai-based Celetronix (all began just a decade ago as modest start-ups) now build, design and maintain software for nearly 300 companies in the exclusive Fortune 500 club.

Lessons from Others’ Successes

India’s services-led strategy fundamentally challenges some of the basic assumptions of international economic theory – which has long held that technology, capital and labor are immobile and that low-wage countries are better-off concentrating on labor-intensive production, leaving innovation and capital-intensive production to developed economies. India has defied these assumptions because globalization has not only made traditional “non-tradable” jobs in developed countries into tradable ones (and thereby vulnerable to the vagaries of the competitive forces of international trade and investment), but also by racing to the top of the value-technology chain in short order.

The lesson for China is unambiguous: its economy must graduate up the value chain – because, as Paul Krugman has provocatively pointed out: growth that is achieved largely as a result of increased inputs and not increased total factor productivity cannot continue in perpetuity.¹⁸ China economic growth is so driven by capacity expansion (or fixed-asset investments), that such investments now account for more than 50% of the gross domestic product -- more than any other country at any time in the history of economic development. The relentless capacity expansion has led to economy-wide overcapacity and over-competition, to such an extent that the profit margins of the firms are constantly squeezed. Data show that the prices of Chinese exports to the U.S. have fallen by more than a quarter since 1997 whereas the price index for China’s raw materials has risen by about 20%.¹⁹ Undoubtedly, growth that only translates into ever declining profitability for firms and decreasing returns to their shareholders cannot be sustained forever. If China’s economy is to continue growing and its base is to evolve up the value chain in manufacturing and expand into services and knowledge-based industries such as advanced software development and pharmaceuticals, it will need to upgrade its stock of human capital – that is, the skills of its workforce and produce large numbers of world-class university graduates, especially in engineering and the sciences. While China’s has been producing large numbers of college graduates, the vast majority still lack the skills necessary for the global economy.²⁰ Improving quality and educational performance is critical.

The experience of China and India confirm that the most powerful force for the reduction of poverty and improved living standards is sustained economic growth. The proportion of Indians living in extreme poverty (on $1 a day or less) has fallen from 40% a decade ago to about 25% today, even though the overall population has grown. This means that about 100 million people have been lifted out of this extreme level of poverty over the past 10 years.²¹ In China, the reduction has been more spectacular. Between 1981 and 2001, the proportion of the population living in poverty in China fell from 53% to just 8%. This means that across China, there were over 400 million fewer people living in extreme poverty in 2001 than 20 years previously.²²

What explains China’s phenomenal success in reducing poverty and what can India learn from it? While China’s labor-intensive manufacturing-led development is widely credited with large-scale employment creation (and thereby poverty reduction), what is not always appreciated is the role of the reforms that preceded it: namely, the agricultural reforms that played a significant role in China’s economic growth and poverty reduction. Specifically, the dismantling of the inefficient and corruption-ridden communes which granted peasants a fair degree of control over farm output, labor and land, the decentralization of agricultural production through the “household responsibility system” (which allowed peasants to produce for the market), and the liberalization of pricing and marketing of agricultural goods, unleashed farm production – thereby not only improving consumption but also providing the vital inputs required for industrial expansion. Moreover, rising rural incomes (a direct result of the reforms) gave rise to a dynamic new economic sector – the so-called “township and village enterprises” (TVEs). While subject to market competition and hard-budget constraints, but having the freedom to operate outside state planning, the TVEs astonishing growth allowed it to absorb millions of surplus agricultural workers in its labor-intensive industries. As the share of TVEs in industrial output rose from 9% in 1978 to 58% in 1997, the number of workers employed in TVEs increased from 28 to 135 million over the same period.²³

However, reforms (and prosperity) have generally bypassed India’s agricultural sector – which accounts for about 20% of GDP and provides the livelihood of roughly 70% of the population (or 700 million people). Still dependant on the vagaries of the monsoon, annual growth in the agricultural sector in the previous six years has averaged less than 1%. With annual population growth of about 1.9%, rural incomes have been stagnating. This has slowed down both productivity growth and job-creation in the rural sector.²⁴ Underscoring the symbiotic relationship between agricultural and industrial growth, the incomplete reform in the industrial and manufacturing sector has meant that the Indian economy is still saddled with many uncompetitive firms, and the scope for mobility of low-skilled labor out of the agricultural sector has been limited by the absence of robust and sustained growth in the industrial sector.

Although successive Indian governments have reduced the number of activities reserved for the public sector from six to three and the number of sectors reserved for small-scale industry (units whose investment in plant and machinery cannot exceed $250,000) from 821 to 799, it is still too high. In effect, this “reservation” policy has created protective enclaves within the industrial sector with adverse effect on competitiveness, innovation and job-creation. In particular, small-scale industry reservations’ continues to preempt the adoption of the optimal scale of production. For example, the production of goods such as garments, toys, shoes, leather and textile products continues to be reserved for the small-scale producers, although large firms have potential comparative advantage. Compounding this, India’s labor laws make it very costly to reduce workers in enterprises of more than 100 workers. The result is that formal-sector firms (those that are registered and that pay their taxes) are loath to take on new employment.²⁵ Cumulatively, these have severely restricted export competitiveness and job creation.
Moreover, India’s expansive state-owned companies in the small-scale industrial sector remain a drain on government resources. Until recently, the restructuring and privatization program met with limited success because the government insisted on retaining management control. It seems that the government is more interested in “disinvestment” rather than privatization. Although the government has recently redefined its privatization strategy, committing to privatize all non-strategic companies, including a reduction in its equity to 26% (or lower in some cases) in strategic companies such as those involved in the arms and ammunition, defense and atomic energy, its success in this endeavor is yet materialize. With roughly two-thirds of industrial output of the organized sector in these enterprises, it will be difficult to stimulate industrial growth without privatization.

Since India’s services sector tends to create jobs for the relatively educated urban based populace, they have had limited impact on income distribution and poverty reduction. Nothing underscores this better than the results from India’s most recent national elections (April 2004). Basking in the glow of the country’s economic renaissance, the ruling national coalition led by the Bharatiya Janata party (BJP) settled on the catchy “Shining India” as its campaign theme. While all the pre-polls predicted the coalition return to power with a solid majority, the results mocked the pundits as the coalition was unceremoniously ousted from office. How did this happen? Election post-mortem revealed that the ‘Shining India’ mantra did not play well in the countryside. In fact, the majority of the rural populace not only perceived that the new affluence had bypassed them, but that economic inequalities had sharpened. They particularly resented the fact that the real beneficiaries of the reforms were the educated urban-based middle classes. The vote was a clear remainder that the fruits of the reforms need to be more evenly distributed. It is sobering to think that India will need to generate in excess of 100 million jobs in the next decade simply to keep the unemployment rate from rising. Clearly, high-tech jobs by themselves will not be enough. The stark reality is that India cannot grow into a major economy on services alone. Since the industrial revolution, no country has become a major economy without first becoming an industrial power. India will have to significantly improve the competitiveness of its manufacturing base – in particular, the backbone of its industrial manufacturing and employment: the small and medium-sized enterprises (SMEs), and reform its highly distorted agricultural sector if it is to provide tangible benefits and meet the needs of a growing and expectant population.²⁶

Finally, at the centre of China’s successful export strategy have been the “Special Economic Zones” or SEZs which were created in 1980 along the coastline in Guangdong, Fujian and Hainan. The SEZs assured favorable export conditions for both foreign investors and domestic enterprises. In the SEZs foreign investors were allowed 100% ownership, all exporters were allowed to import intermediate products and capital goods duty free, all were given generous tax holidays, and assured access to reliable physical infrastructure, often through the provision of land, power, physical security, and transport to the ports, within specially created industrial parks. With such incentives, the SEZs became overnight successes -- witnessing a massive influx of foreign investment in factories and industries. In short order, this created large-scale employment opportunities. Moreover, the SEZs did not remain as enclaves for very long. Rather, they served as a first step to a much wider and deeper opening. In 1984, the Economic and Technological Zones (ETDZs) were set up, followed soon after by the creation of Free Trade Zones (FTZs) established in fourteen coastal cities. This was followed by several more FTZs in the inland areas, including Dalian, Guangzhou, Zhangjigang, Tianjin, Shenzhen, and Pudong New Area in Shanghai.

While India has also created a number of export processing zones (EPZs), they have failed to live up to expectations. This is largely because both foreign and domestic investors do not enjoy the kind of incentives offered in China’s SEZs. Coupled with the limited scale and over-crowding of the EPZs in small enclaves, inflexible labor laws, poor infrastructure, especially poor links to ports and airports, cumbersome incentive packages regarding inward investment, and product reservation for small scale industry have served to undermine the EPZs potential as dynamic export zones.²⁷

Big Dreams and Big Challenges

President Hu Jintao is fond of saying that China’s aim is to lift the size of its economy to $4 trillion by 2020 -- effectively quadrupling its gross domestic product of five years ago.²⁸ His Indian counterpart, Prime Minister Manmohan Singh has an equally lofty goal – to more than double India’s GDP from $0.56 trillion in 2003 to $1.75 trillion by 2020. If these ambitious goals are to be achieved (and they are achievable), both countries will have to expeditiously deal with the number of core challenges they face. Without doubt, the most important is to maintain, (and for India) to accelerate, the pace of economic growth over the next decade. This is essential if both countries are to further reduce poverty, improve living standards and provide employment, especially to a large group of young people who will be soon entering the labor market. Undoubtedly, the key to sustaining economic momentum is to continue to strengthen the structural and institutional underpinnings of their economies by continuing the reforms – which remain unfinished in both countries. In the case of India, the burgeoning fiscal deficit is a major cause for concern. The combined fiscal deficit of the central and state governments have remained at around 10% of GDP since the early 1990s. This has negatively impacted national savings, crowded out private investment, circumscribed the government’s ability to deliver much needed public spending, and put macroeconomic stability at risk. Accelerating the pace of divestment and privatization of public sector enterprises will help reduce the public sector deficit by raising revenues, increasing the efficiency of resource use, and helping to realign government policy in a way that contributes to faster economic growth. Divestment proceeds could also assist in retiring domestic debt, thereby alleviating debt-service payments. Furthermore, the barriers to trade and investment are still high (both internal and external). India currently ranks second in terms of high tariff zones in the world. As noted earlier, FDI, although increasing, is still far lower than that of other emerging market economies due to India’s restrictive policies limiting foreign equity ownership and its poor infrastructure. India needs to attract large amounts of foreign investment to help shore up its infrastructure, particularly power supply, roads, ports and airports. Reliable electricity supply is unquestionably the most pressing concern. In nearly every metropolitan city and provincial towns power outages occur fairly regularly. The lack of an adequate power grid is one reason that no foreign company has built a semiconductor fabrication facility in the country. Eliminating the “infrastructure deficit” is essential if India is going to be a competitor in manufacturing exports. However, even by its own estimates, the government will need to raise at least $150 billion over the next ten years to address the country’s crumbling infrastructure. Clearly, there is no way to meet this resource need through public sector alone. Resources will have to come from the private sector – both internal and foreign.
Both countries must strengthen their financial sector. One of the major lessons from the Asian financial crises of 1997 was that a strong and well-regulated financial sector can serve as a protective bulwark against global market turmoil. This not only means having in place prudential and supervisory systems to ensure financial stability, but also authorities must take swift corrective actions to deal with weak or insolvent institutions.²⁹ While the probability of an exchange rate crisis like the one experienced in Asia in 1997 is very low since neither the renminbi nor the rupee is convertible on capital account, and capital controls are in place in both countries, procrastination will have severe ramifications for economic growth.

Despite India’s recent achievements in strengthening prudential and supervisory systems, considerable weaknesses remain. At the core of the problem is that a few government-owned banks (particularly the State Bank of India – the country’s largest commercial bank) still account for roughly 80% of the banking sector. The vast majority of these banks are chronically undercapitalized and burdened with nonperforming loans. While public ownership of banks has created an aura of invulnerability to shocks, it is urgent that the authorities move expeditiously to reduce the high level of nonperforming loans, restructure the weak and close insolvent public-sector banks. Although various governments have repeated their commitments to reduce government ownership to 33 percent, political pressure from the powerful public sector unions has forced them to back off.³⁰ Clearly, private investors will not be willing to enter the banking and financial sector as long as the sector is characterized by weak balanced sheets and pervasive government control and presence. Also, further improvements in the regulatory and supervisory system and in corporate governance (underscored by the recent stock market scandal which involved accusations of insider trading and payment defaults by some brokers), are urgently needed in India’s banking and financial sectors.

Similarly, the stability and health of China’s banking sector is a big concern. A destabilized banking sector will most likely involve a deep recession with severe ramifications for China’s trading partners. China’s state-owned banking system has historically made loans under government direction to unprofitable state-owned industries, with little regard for repayment or risk. For example, interest rates are completely controlled by the People’s Bank of China (the Central Bank), and the country’s big four banks (all of them possibly insolvent by international accounting standards) which control over 95% of banking assets have no credit scoring or credit risk based pricing mechanisms in place.³¹ The result is a substantial portfolio of nonperforming loans estimated at 30% to 40% of GDP³² (compared to 3.5% of GDP for India). By using its large stock of foreign reserves and the country’s extraordinarily high savings rate, Chinese authorities have managed to maintain liquidity in the banking system in spite of the large volume of nonperforming loans. However, at some point a continued escalation of non-performing loans will restrict further expansion of bank credit, thereby constraining growth, especially in the small and medium-sized sector – which play a big role in creating jobs.

Unlike China, India has a rather vibrant domestic credit market -- with an active corporate and government bond market, including interest rate and credit derivative markets. Indian interest rates are market determined, and the banking system prices credit based on market signals. However, China’s asset markets are very similar to that of Japan. They are very heavily leveraged and are primarily fueled by property speculation. The Chinese property market coupled with its leveraged and insolvent banking system is an accident waiting to happen. It is widely assumed that many Chinese banks are ill-equipped to face the increased foreign competition in 2007 – when under WTO (World Trade Organization) accession commitments, the financial sector is opened up to foreign banks. Despite public funded capital infusions and the government’s active courting of foreign banks and financial institutions (which currently make up only 2% of the Chinese market), to partner with domestic banks to provide financial support and sorely needed technical expertise, these strategies may not be enough.³³ The fact that competition on lending rates are still circumscribed, foreign bank participation heavily curtailed, and foreign ownership of any domestic bank still limited to a total of not more than 25%, acts as a major brake to full foreign participation. It remains to be seen whether China’s banking sector’s profit margins are sufficiently wide and balance sheets healthy enough to withstand the impending increased competition from more profitable foreign banks.

Clearly, privatization and opening the banking sector to international competition is a short-term solution to the problem of nonperforming loans. Over the long-term, China’s banking sector problems cannot be resolved by simply readdressing the balance sheet. Meaningful reforms must involve systemic change. That is, reforms must include building more effective legal, supervisory and regulatory frameworks to make the financial sector more resilient to internal and external shocks. It must require banks to adopt good corporate governance rules, meet international best practices and promote a culture of professionalism where senior positions and salaries are determined by performance, and lending decisions are made on the basis of the credit worthiness of the borrower and risk analysis, and not on one’s political connections. A strong banking system is necessary for China to sustain growth because it will ensure more efficient allocation and use of scarce resources, and enable the economy to grow on the basis of improved productivity, as opposed to increased input.

Similarly, China’s unwieldy and inefficient state-owned enterprises (SOEs), consume much capital given their links to the state banks, but they produce little or no return on their capital. Many are poorly managed and protected from competition. Private enterprises are more efficient, but have difficulty raising capital. While closing or merging weak SOEs with stronger enterprises is necessary for creating enterprises that respond to market signals and for shifting the much-needed resources to the private sector, the process is going to be painful as the future of some 370-400 million Chinese workers and over 50% of the country’s industrial assets are tied to these institutions. While analysts often lament that the drive to reform SOEs has lost momentum (even though much work still needs to be done), what is essential is that deepening SOE reforms will require public support and must be carried out in a transparent manner. Thousands of SOEs have been bought at re-sale prices by politically connected persons who, in collusion with corrupt officials, have often stripped the enterprises of assets and employees without any accountability – further saddling the banking system with bad debt.³⁴ If SOE restructuring is continued in the crudely instrumental manner by abdicating responsibilities to workers (SOEs offered all-life benefits for workers), the government will see an escalation of popular protest. At a minimum, SOE sales should be executed through open auctions or stock markets, because this generally brings in a fairer price than the usual clandestine “behind-the-door privatization.” Moreover, once the sale is made, proceeds must first be used to pay overdue salaries and fair unemployment benefits to laid-off workers. As SOE reforms will mean large scale layoffs, an efficient social safety net is going to be very important to cushion the transitional effects. But beyond this, an even more costly responsibility lies ahead for the government: paying for the unfunded obligations of the pension and social security system, as well as rising expenditures that are going to be driven by the unfavorable demographics with a rapidly aging population.

The Future is Here

Currently, India and China’s economic structure is mostly complementary rather than competitive. Bilateral trade has increased more than tenfold over the past decade with both countries agreeing to raise their annual trade volume to $20 billion by 2007.³⁵ However, talk about the two countries soon establishing the world’s largest free trade area (a desire expressed by the Chinese), seems premature. Complementarity may not last long: wage rates in many of China’s export-oriented labor-intensive industries are now well above Indian wage rates. This is already diverting manufacturing outsourcing of East Asia (ASEAN) to India. Similarly, China, which has long enjoyed a huge advantage in computer hardware, is losing its edge. India has not only caught-up, it is now a real competitor. Moreover, with China’s entry into the WTO (which requires China to substantially reduce tariffs on agricultural and industrial goods in return for permanent most-favored nation status with the US³⁶), India is likely to make gains in food grains and light manufacturing and modest growth in other sectors, but is likely to lose export shares to China, especially in textiles and apparel. In fact, with the expiration of the 30-year old Multifiber Arrangement (MFA), which set export quotas for textile-producing countries, has meant that China, already the world’s biggest exporter of textiles has further enlarged its market share.³⁷

Given their voracious appetite for energy and commodities to feed their growing economies, both countries will continue to put pressure on a variety of global markets. The sharp increase in net oil imports by China, India (and the United States) since 2000 has been a major factor behind the sharp increase in oil prices. China’s National Offshore Oil Corporation (CNOOC) aggressive efforts to secure reliable supplies of oil and natural gas around the world reflect just how strong China’s thirst for fossil fuels has become.³⁸ However, on the positive side, with their growing ranks of the affluent, both countries are fast becoming consumers of imported goods. China’s imports of goods are roughly one-quarter of GDP, well above the share for the United States and Japan (for which the comparable ratio is around 10%). China’s demand for foreign manufactured goods and raw materials has been dramatic -- with imports of both manufactured goods and raw materials doubling over the past seven years. This increased demand has boosted exports and growth in many economies – not only China’s neighbors, but leading commodity exporters such as Brazil and Chile. However, this has caused China to run trade deficits with many countries, with the exception of the United States. The massive trade surplus that China has with the United States (which hit $200 billion in December 2005³⁹) and concerns about job losses in import-sensitive sectors such as textiles and clothing has already eroded much of the bipartisan support in the U.S. Congress for free trade with China.⁴⁰ Moreover, China’s undervalued currency (despite the recent revaluation) which both the U.S. and the European Union regard as giving China’s exporters an unfair competitive advantage, will undoubtedly add to the friction between the two countries.⁴¹ Similarly, India’s emergence as the competitively priced “back office” to the advanced countries for financial services, pharmaceuticals and information technology has heightened its profile as a target for U.S. industries, workers and politicians fearful of the domestic consequences of outsourcing and “offshoring.”

Trade linkages between the U.S. and China and the US and India are substantial and important to all three economies. The U.S. is both countries’ most important export market (already, the U.S. accounts for roughly one-quarter of all Chinese exports), and the Chinese economy is expected to overtake the U.S. economy as early as 2015.⁴² Therefore, both China and India have a common interest in diffusing protectionist threats in the U.S. At the end of the day this does not only mean both China and India have to abide by their WTO commitments (and advance the Doha Round of trade negotiations), but also open its markets to U.S. goods and services, including ensuring that imports and foreign firms can compete fairly with domestic products in the rapidly expanding Chinese and Indian markets. To risk stating the obvious: both China and India are already major players in the global economy and their growing prominence will further transform the world economic and strategic landscape in the coming decades.

Endnotes