China’s Accession to WTO:China’s Accession to WTO:Implications for IndiaImplications for India

ByByPami Pami DuaDua

Delhi School of Economics, IndiaDelhi School of Economics, India

Project LINK Spring MeetingProject LINK Spring MeetingApril 14April 14--16, 200416, 2004

United Nations HeadquartersUnited Nations HeadquartersNew YorkNew York

ContentsContents

!! Background informationBackground information"" GDPGDP"" First Ten Years of ReformsFirst Ten Years of Reforms"" Foreign TradeForeign Trade"" FDIFDI

!! China’s accession to WTOChina’s accession to WTO"" Impact on India’s Exports to ROWImpact on India’s Exports to ROW"" Impact on India’s Exports to ChinaImpact on India’s Exports to China

"" Impact on India’s ImportsImpact on India’s Imports"" Impact on India’s FDIImpact on India’s FDI

!! Business Processing OutsourcingBusiness Processing Outsourcing!! Way ForwardWay Forward

"" China vs. India: Next 50 YearsChina vs. India: Next 50 Years

Background Background InformationInformation

China vs. IndiaChina vs. India

!! China and India are the world’s future major China and India are the world’s future major powers.powers.

!!Can India overtake China?Can India overtake China?

!!Or, will China stay ahead?Or, will China stay ahead?

India India vsvs China:China: GDPGDP

!! In In 1965,1965, India’s GDP stood at India’s GDP stood at 125%125% of China’s. By of China’s. By 1978,1978, India’s lead had slipped to only India’s lead had slipped to only 106%106% of of China’s. By China’s. By 2000,2000, the value of India’s total the value of India’s total production had fallen to just production had fallen to just 45%45% of China’s. of China’s.

!! Real GDP rose by Real GDP rose by 2.5 times2.5 times in China between in China between 1980 1980 and 1990and 1990 while in India the corresponding figure while in India the corresponding figure was only was only 1.8 times1.8 times..

!! China's average growth rateChina's average growth rate was was 10.7 %10.7 % per year per year during 1990during 1990--99 while 99 while India's growth rateIndia's growth rate was was 6.0%6.0% per year for the same period. per year for the same period.

GDP: GDP: SectoralSectoral Decomposition Decomposition

!! In China the share of value added originating in In China the share of value added originating in agricultureagriculture fell from fell from 68%68% in in 1949 1949 to to 18%18% in in 19991999. In India the share of agriculture in GDP . In India the share of agriculture in GDP fell from fell from 52%52% in in 19501950--5151 to to 25%25% in in 19991999--20002000. .

!! In both countries the capital intensive nature of investment in In both countries the capital intensive nature of investment in industry meant that the industry meant that the share of agriculture in total employmentshare of agriculture in total employmentremained high, as much as remained high, as much as 60%60% in China, and nearly in China, and nearly twotwo--thirdsthirds in in India in India in 20002000. .

!! In In 19651965 the value of the value of industryindustry in GDP in China was in GDP in China was 35%35% compared to compared to 20%20% in India. By in India. By 19801980, China’s share of industry had increased to , China’s share of industry had increased to 48%48% and then to and then to 50%50% by by 20002000, compared to , compared to 24%24% in in 19801980 and and 27 %27 %in in 20002000 for India.for India.

!! By By 20002000 India’s share of India’s share of servicesservices was was 48%48% compared to only compared to only 33%33% in in China.China.

First Ten Years of Reforms:First Ten Years of Reforms:India and ChinaIndia and China

!! China : 1978China : 1978--87; India: 199187; India: 1991--20002000

!! Comparing the first ten years of reform in each country, Comparing the first ten years of reform in each country, India opened to the world economy faster than China India opened to the world economy faster than China (1991(1991--2000 vs. 19782000 vs. 1978--87)87). .

!! In terms of exports and imports as a percent of GDP, In terms of exports and imports as a percent of GDP, and total accumulated foreign direct investment, India and total accumulated foreign direct investment, India (1991(1991--2000)2000) surpassed Chinasurpassed China (1978(1978--87)87). .

!! Growth rates of GDP and GDP per capita in the first ten Growth rates of GDP and GDP per capita in the first ten years of reforms were faster in China. years of reforms were faster in China.

!! China started at half the GDP per capita when reforms China started at half the GDP per capita when reforms began as compared with India, which may have made began as compared with India, which may have made higher rates of growth easier to attainhigher rates of growth easier to attain. .

First Ten Years of Reforms:First Ten Years of Reforms:Geographic Location Geographic Location

!! Geographical location may have contributed towards Geographical location may have contributed towards explaining China’s relative success visexplaining China’s relative success vis--àà--vis India.vis India.

"" The east coast of China is situated in a highly dynamic and The east coast of China is situated in a highly dynamic and rich neighborhood. Neighbors like Japan, South Korea, rich neighborhood. Neighbors like Japan, South Korea, Taiwan, Hong Kong, Thailand, and Singapore provided Taiwan, Hong Kong, Thailand, and Singapore provided capital for investment, markets for Chinese exports, more capital for investment, markets for Chinese exports, more advanced technology, and expertise. advanced technology, and expertise.

"" The neighborhood of India was, in comparison, less The neighborhood of India was, in comparison, less dynamic: Pakistan, Myanmar, Sri Lanka, Bangladesh, and dynamic: Pakistan, Myanmar, Sri Lanka, Bangladesh, and Nepal. Very few such transfers took place between India Nepal. Very few such transfers took place between India and its neighbors to India’s advantage. and its neighbors to India’s advantage.

Foreign Trade:Foreign Trade:Last 2 DecadesLast 2 Decades

!! The opening up policy led to a marked acceleration of foreign trThe opening up policy led to a marked acceleration of foreign trade in ade in China, whose share in world trade quadrupled in twenty years (frChina, whose share in world trade quadrupled in twenty years (from 0.9% om 0.9% to 4.3%), whereas it was less pronounced in the case of India (fto 4.3%), whereas it was less pronounced in the case of India (from 0.4% rom 0.4% to 0.8%).to 0.8%).

Share in World TradeShare in World Trade(in % of exports and imports)(in % of exports and imports)

Foreign Trade Foreign Trade (cont’d..…)(cont’d..…)

1980 1985 1990 1995 2000

Exports of Goods & Services (constant 1995 $US, billion)

India 11.46 13.22 20.39 39.66 56.48

China 27.75 41.00 84.88 167.96 158.95

India as a % of China 41.3 32.2 24.0 23.6 31.9

Exports of Goods & Services (% of GDP)

India 6.1 5.6 7.3 11.2 14.0

China 7.6 10.0 17.5 24.0 25.9

India as a % of China 80.8 55.9 41.5 46.8 53.9

India and China: Exports

Foreign Direct Investment Foreign Direct Investment

!! China's territory has been more attractive for foreign investorChina's territory has been more attractive for foreign investors s than India.than India.

Foreign Direct Investment, 2001 (%)Foreign Direct Investment, 2001 (%)

3.24.6India

10.533.2China

FDI flows / GFCF

FDI stock / GDP

Foreign Direct Investment: Foreign Direct Investment: Last 2 decadesLast 2 decades

!! For the eighteen years between 1981 and 2000, China’s total net For the eighteen years between 1981 and 2000, China’s total net inflow of inflow of FDI was $336 billion compared with $18.3 billion in India (18 tiFDI was $336 billion compared with $18.3 billion in India (18 times that mes that of India).of India).

!! Although FDI in India increased in the late 1990s as a result ofAlthough FDI in India increased in the late 1990s as a result of reform reform policies, by 2000 China’s annual net FDI inflow was still 15 timpolicies, by 2000 China’s annual net FDI inflow was still 15 times that of es that of India. India.

India and China:India and China:Cumulative Net Inflows of Foreign Direct Investment Cumulative Net Inflows of Foreign Direct Investment

(Current $US, millions) (Current $US, millions)

1970-80 1981-85 1986-90 1991-95 1996-00 1981-00 India 455 295 835 4018 13,122 18,270 China 0 3,983 14,263 112,673 205,320 336,239 China Vs India

-- 13.5X 17.1X 28.0X 15.6X 18.4X

China’s Accession to China’s Accession to WTOWTO

Implications for India’s Implications for India’s Exports, Imports and FDIExports, Imports and FDI

China’s Entry Into WTO: China’s Entry Into WTO: Impact on India’s Exports to ROWImpact on India’s Exports to ROW

!! Both India and China have comparative advantage in the exports oBoth India and China have comparative advantage in the exports of f laborlabor--intensive manufactured goods due to low costs of labor.intensive manufactured goods due to low costs of labor.

!! India competes with China in the export of many such goods, suchIndia competes with China in the export of many such goods, such as as textiles, garments, leather and leather products, and light machtextiles, garments, leather and leather products, and light machinery.inery.

!! Since the composition and direction of trade of China and India Since the composition and direction of trade of China and India are are similar, increase in Chinese exports as a result of its accessiosimilar, increase in Chinese exports as a result of its accession to n to WTO is likely to have a negative impact on India’s exports.WTO is likely to have a negative impact on India’s exports.

!! Chinese competition may also hurt India’s software exports. Chinese competition may also hurt India’s software exports. Software has long been one of India’s most successful exports.Software has long been one of India’s most successful exports.

!! In early 2002, the Chinese government designated expansion of In early 2002, the Chinese government designated expansion of China’s software industry as a key target. During the 10th Five China’s software industry as a key target. During the 10th Five Year Year Plan (2000Plan (2000--2005), the Ministry of Science and Technology was to 2005), the Ministry of Science and Technology was to spend about US$ 100 million for research and development of critspend about US$ 100 million for research and development of critical ical software technologies. The objective was “catching up with Indiasoftware technologies. The objective was “catching up with India in in two years.” two years.”

China’s Entry Into WTO: China’s Entry Into WTO: Impact on India’s Exports to ChinaImpact on India’s Exports to China

!! Increase in China’s imports can have a positive impact on India’Increase in China’s imports can have a positive impact on India’s s exports. exports.

!! Most of the commodities imported by China like machinery, Most of the commodities imported by China like machinery, minerals and mineral products, iron and steel, organic chemicalsminerals and mineral products, iron and steel, organic chemicals, , medical and surgical equipment, and agricultural products, are medical and surgical equipment, and agricultural products, are principal commodities in the Indian export basket.principal commodities in the Indian export basket.

!! Given that China has to lower tariffs on many of its imports andGiven that China has to lower tariffs on many of its imports andphase out many subsidies, there can be some gain in India’s phase out many subsidies, there can be some gain in India’s export to China.export to China.

!! Bilateral trade between India and China is quite limited since Bilateral trade between India and China is quite limited since India’s exports to China is about 2% of its total exports. India’s exports to China is about 2% of its total exports. Therefore,Therefore, the overall impact of China’s entry into WTO on India’s the overall impact of China’s entry into WTO on India’s exports to China is likely to be negligible.exports to China is likely to be negligible.

China’s Entry Into WTO: China’s Entry Into WTO: Impact on India’s ImportsImpact on India’s Imports

!! Impact on India’s imports from third countries is Impact on India’s imports from third countries is likely to be negligible since imports from third likely to be negligible since imports from third countries are unlikely to be affected by the Chinese countries are unlikely to be affected by the Chinese accession to WTO. accession to WTO.

!! Thus the main effect will come via the impact on Thus the main effect will come via the impact on IndoIndo--Chinese trade. Chinese trade.

!! India’s imports from China is about 3% of total India’s imports from China is about 3% of total imports (2000imports (2000--01) and therefore the impact on 01) and therefore the impact on India’s imports is expected to be negligible.India’s imports is expected to be negligible.

China’s Entry Into WTO: China’s Entry Into WTO: Impact on India’s FDIImpact on India’s FDI

!! The impact on India is likely to be minor: The impact on India is likely to be minor: "" Domestically oriented FDI is often country specific and Domestically oriented FDI is often country specific and

increased inflows into China are unlikely to affect the increased inflows into China are unlikely to affect the availability of FDI for India.availability of FDI for India.

"" Inflows of FDI for domestic markets would be primarily Inflows of FDI for domestic markets would be primarily determined by the pace of macroeconomic reforms in determined by the pace of macroeconomic reforms in India. India.

"" India is not yet competitive in attracting exportIndia is not yet competitive in attracting export--oriented oriented FDI.FDI.

!! Issues facing India are much more broadIssues facing India are much more broad--based such as based such as improvement in infrastructural facilities, effective improvement in infrastructural facilities, effective administration, labor reforms etc. New initiatives are required administration, labor reforms etc. New initiatives are required to enable India to face the challenges posed by China’s to enable India to face the challenges posed by China’s accession to WTO. accession to WTO.

China vs. India: Other IssuesChina vs. India: Other IssuesBusiness Processing OutsourcingBusiness Processing Outsourcing

!! In the BPO field, China is perhaps the biggest challenge in the In the BPO field, China is perhaps the biggest challenge in the future and the largest threat to India. future and the largest threat to India.

!! Despite the emergence of China as competitor in BPO, India Despite the emergence of China as competitor in BPO, India is well placed in terms of parameters like cost savings, is well placed in terms of parameters like cost savings, competency, technical infrastructure, language and skill pool.competency, technical infrastructure, language and skill pool.

!! Main disadvantages of China:Main disadvantages of China:"" Lack of good quality record in software, whereas India has a Lack of good quality record in software, whereas India has a

better image as quality supplier.better image as quality supplier."" Low percentage of Chinese population speaking English and Low percentage of Chinese population speaking English and

a less mature and relatively new BPO industry. India has an a less mature and relatively new BPO industry. India has an advantage in both areas.advantage in both areas.

China vs. India: Other IssuesChina vs. India: Other IssuesBusiness Processing OutsourcingBusiness Processing Outsourcing

!! However, China is catching up. It has:However, China is catching up. It has:

"" Low manpower costsLow manpower costs

"" Low real estate costs and power costsLow real estate costs and power costs

"" Chinese government has invested $ 5.4 billion in nine Chinese government has invested $ 5.4 billion in nine universities in China to promote English language and universities in China to promote English language and other skill sets.other skill sets.

"" It can leverage its manufacturing image.It can leverage its manufacturing image.

"" Since it is close to Japan, its BPO market is also likely to Since it is close to Japan, its BPO market is also likely to grow through the Japanese outsourcing route. As India grow through the Japanese outsourcing route. As India currently offers almost no BPO services in Japan, China currently offers almost no BPO services in Japan, China can capitalize on its proximity to it. can capitalize on its proximity to it.

Way ForwardWay Forward

China vs. India: Next 50 YearsChina vs. India: Next 50 Years

!! A recent Goldman Sachs study concludes A recent Goldman Sachs study concludes the following:the following:

"" India has the potential for fastest growth over the next India has the potential for fastest growth over the next 3030--50years. Growth could be higher than 5% over the 50years. Growth could be higher than 5% over the next 30 years and close to 5% thereafter.next 30 years and close to 5% thereafter.

"" China’s GDP growth is expected to fall to 5% in 2020 from China’s GDP growth is expected to fall to 5% in 2020 from its current levels of over 8% growth rate. By the midits current levels of over 8% growth rate. By the mid--2040s, growth is expected to slow to 3.5%. Nevertheless, 2040s, growth is expected to slow to 3.5%. Nevertheless, China is expected to become the world’s largest economy China is expected to become the world’s largest economy (in terms of US $ GDP) by 2041.(in terms of US $ GDP) by 2041.

"" India’s economy is expected to be in third place, after India’s economy is expected to be in third place, after China and U.S. China and U.S.