Why China, like India, is now looking inwards for ‘atmanirbharta’

Both countries have seen a drop in external trade in relation to GDP. But while for China, it is a problem of success, in India, it points to failure.

Illustration by Soham Sen | ThePrint

So China is following India’s lead, and going for atmanirbharta. Its top decision-making body has decided to turn away from export markets as a growth driver, and to focus more on its domestic market. It also seeks to reduce vulnerability to trade sanctions by hosting critical technologies and strategic production facilities within its territory. India wants the same, at lower levels of sophistication and higher tariffs.

The two countries talk now of self-reliance when their external trade, in relation to GDP, has been falling for some years. China’s two-way trade was 36 per cent of GDP in 2019, a sharp fall from its peak of 64 per cent in 2006. India’s trade-GDP ratio peaked later, in 2011, at 56 per cent; that figure is down to 40 per cent. These are the biggest falls among large economies. The fall in the case of the US is much smaller, from a peak of 30 per cent in 2008 to 28 per cent in 2018. Japan has inched the other way, its share of trade in GDP crawling up in the course of a decade from 34 per cent to 37 per cent. The European Union has seen similar trends and levels for its extra-EU trade. World trade as a whole in relation to global GDP has shrunk only by 2 percentage points in the last decade. The sharp drop in China and India stands out as being among the primary causes. (All figures here are from www.macrotrends.net.)

China and India stand out, not just for the sharpness of the decline of the share of trade in GDP, but also because in both countries the share had reached levels not seen in other large economies. So it is possible that, in purely statistical terms and without reference to economic developments, a fall in the share of trade had to happen at some stage. The more important point is that similar trends in the two countries may be for quite different reasons.

In the case of China, it is at least in part a problem of success. There was a limit to which the rest of the world economy could absorb additional Chinese exports year after year, especially of manufactured goods, since they largely displaced or stunted domestic manufacturing in many economies. The resultant loss of quality jobs in those countries has been one cause of growing income inequality and the reason for political repercussions as well as incipient protectionism — as seen in India.

There was a limit for China too, since by 2006 its trade surplus had reached an astonishing 8 per cent of GDP, and foreign exchange reserves bulged ever bigger to reach $4 trillion by 2014 (40 per cent of GDP in that year). The reserves are now about $3.2 trillion, still the largest hoard in the world. Finally, given the rapid pace of overall growth, incomes in China had reached a point where the country was becoming less competitive as a sourcing centre for labour-intensive products, like garments and footwear. Hence the re-locating of factories to countries like Vietnam and Bangladesh in recent years. Beijing had no option but to shift its focus to the domestic market.

In India’s case, the decline in trade’s share of GDP points more to failure than success. Merchandise exports have hovered above or below the $300-billion mark since 2011-12. Imports peaked around the same time and went above that level only seven years later. Trade in services has been a different story, as it has continued to grow rapidly and reached a disproportionate size in relation to merchandise trade — twice the world average.

Services like education, medicare, and tourism are all labour-intensive. But it is merchandise trade that has more forward and backward linkages, since manufacturing needs raw materials, energy, transport, and much else. Its spread effects are therefore greater. Bangladesh and Vietnam have succeeded by going down this road. India in contrast has enjoyed success with services exports. The thing about many services businesses is that, because of better margins and the valuation game, they tend to create greater concentrations of wealth. Hence India’s impressive tally of unicorns and billionaires.

By Special Arrangement with Business Standard.