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India-China trade barrier reductions

13 July 2018 David Li Deepa Kumar

On 2 July, India and China cumulatively reduced tariffs on about 11,000 goods in an effort to reduce bilateral trade barriers, to allow for increased investments by Chinese companies in India, and vice versa.

  • Indian technological start-ups are likely to receive more Chinese venture-capital funding, and China is likely to offer Indian pharmaceuticals greater market access.
  • Improved bilateral trade is unlikely to resolve other bilateral issues, including border disputes and India's rejection of China's Belt and Road Initiative.
  • Beyond bilateral avenues, a reduction in trade barriers in Asia is also likely to promote prospects for intra-regional trade, realized through a probable regional free trade agreement.

On 2 July, India's Ministry of Commerce stated that India would offer tariff concessions on about 3142 goods - including gems, electrical machinery, coal and iron and steel - to Asia Pacific Trade Agreement (APTA) members, including Bangladesh, China, Laos, South Korea and Sri Lanka. This followed China's decision on 1 July to reduce tariffs on about 8,500 goods from APTA members, including on metals, soybeans, aluminium and steel.

Reduction in tariffs probably triggered by US tariffs against China and likely US sanctions against India
The reduction in tariffs is probably triggered by seemingly strong US policy. For China, it is likely to be triggered by US tariffs on Chinese goods: on 6 July, tariffs on USD34-billion-worth of Chinese goods came into effect. China, then, levied similar tariffs on about 545 US-produced goods, amounting to an equivalent USD34 billion.

For India, while the value of reciprocal tariffs hitherto levied - currently about USD270 million in each direction - is unlikely to cripple Indian trade with the US or drastically hamper the Indian economy, it is likely to have reduced tariffs preemptively, in anticipation of probable US sanctions. On 27 June, US Ambassador to the United Nations Nikki Haley met with Indian Prime Minister Narendra Modi, and expressed the need for India to comply with US sanctions against Iran by drastically reducing its oil imports from Iran. While Indian refineries are expected to pursue minimal oil import cuts, India is unlikely to require them to abide by the US' "zero-import" policy; they will therefore seek a back-up for trade opportunities within Asia, if the US issues sanctions against India.

Reduced tariffs also signal intent to reduce India-China trade imbalance

India and China have been seeking increased bilateral trade, particularly following Indian Prime Minister Narendra Modi and Chinese President Xi Jinping's summit earlier in April 2018. A key motivation for India is to reduce its trade deficit of goods with China. In March 2018, the two countries agreed to introduce measures to accomplish that aim. The imbalance currently amounts to about USD62 billion of USD90 billion of their total two-way trade.

Chinese exports to India, however, remain small after decades of strategic rivalry and mutual suspicion. While China exported USD68 billion to India in 2017, it sent more than six times that to the US and more than double that to Japan. The escalating US tariffs on Chinese imports have forced China to re-consider India as a trading partner. The Chinese government has already moved to improve ties with Japan, South Korea, the European Union, and other South East Asian economies to that end in 2018 with a series of high-level meetings.

Outlook and implications

In the Indian market, the recent lowering of trade barriers is likely to result in increased investment in Indian technology start-ups from Chinese companies and venture-capital funds, and in financial services; on 4 July the Reserve Bank of India offered an operating license to the Bank of China to offer services in India. In the Chinese market, there is likely to be a proliferation of medicines manufactured by Indian pharmaceutical companies, particularly generic and anti-cancer drugs.

The current warming of bilateral relations is unlikely to resolve long-standing issues, including border disputes in the Himalayan region, India's staunch opposition to the BRI, and China's financial and likely military support for Pakistan. India is unlikely to encourage Chinese investment in large infrastructure and higher-skilled manufacturing, mainly to promote indigenous production via its "Make in India" policy: in India's Budget 2018, customs duty on mobile phones and phone parts was increased from 15% to 20%, primarily aimed at reducing the share of Chinese phones in the Indian market.

A reduction in trade barriers in Asia is also likely to promote intra-regional trade, probably allowing for increased market access in agriculture and e-commerce within the region. On 1 July, trade ministers of 16 Asian countries, which together reportedly account for 30% of global trade, held a meeting in Tokyo to negotiate the Regional Comprehensive Economic Partnership (RCEP), an Asian free trade agreement. Following the meeting, the bloc issued a joint statement suggesting that an agreement will be finalized by November 2018, which IHS Markit assesses to be likely. Separately, India and China are also likely to establish an oil buyers' club, aimed at balancing fluctuations in global crude prices caused by the Organization of the Petroleum Exporting Countries' (OPEC) influence over oil supply; in 2017, India and China together reportedly accounted for 17% of global oil consumption.

The Chinese government would be likely to reinstate trade restrictions only if strategically important firms, whether publicly or privately owned, are threatened by trade liberalization with India. A substantial and sustained loss of profitability for Shanghai Focsun, state-owned Sinopharm (China National Pharmaceutical Group Corporation) or other Chinese pharma majors would trigger some protective measures in the sector, where Indian firms like Ranbaxy are well-positioned to expand quickly. More generally, a slowdown in Chinese GDP growth - IHS Markit currently projects 6.7% in 2018, slowing gradually to 6.0% in 2021 - would likely increase public pressure to re-evaluate economic policy. Trade relations with India would also be scrutinized, however, if the growth slowdown was underpinned by rising employment in sectors in which Indian firms had developed a significant presence - unlikely in any sector in the coming year.

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