Business Daily from THE HINDU group of publications
Thursday, Mar 29, 2007
Industry & Economy - Economy
Rise of China and India Resetting the terms of world trade
Think-tanks world-over are agreed that China and India lead the league of performing economies. They foresee China and India emerging the growth engines of the global economy. While China has sustained a GDP growth rate of 10 per cent, India is just a step or two behind, averaging 8-9 per cent the past few years; the global average is 3-4 per cent.
According to the US National Intelligence Council forecasts, by 2020 China's GNP will exceed that of all Western economies except the US while India's national income will be very close to achieving that. Goldman Sachs predicts that China's GDP will race past Japan's in 2016 and the US's in 2041 while India will do that in 2032 and 2050 respectively.
The growing economic clout of China and India and their impact on the global balance of power have raised the hackles of the global hawks.
They fear that these developments will unleash strong ripples on the world geopolitical realm. Already, the world trade pattern is changing and the Eastward drift of the world trade can only become stronger.
The inter-dependence of the developed countries is projected to weaken and the trade shift is expected to be, first, between developed and developing countries and, then, among the developing nations.
In 2004, the world trade grew 21.2 per cent the highest since 1979. Major contributors to this growth were the increased trade between China and the US and the recovery of international trade in ASEAN (Association of South-East Asian Nations) and Asian NIEs (newly industrialising economies).
Despite criticism over China's enormous trade surplus with the US and the mounting pressure on Beijing to revaluate the yuan, it is ironic that it is China's growth that bolstered the US consumerism.
It exported cheaper goods, revived the sagging demand and contained inflation. But, then, the exporters from China are none other than American and Japanese investors in China.
Similarly, India reinvigorated the information technology industry in the US with supply of low-cost knowledge services. China and India have changed the rules of the world trade.
While Chinadominated the goods trade, India played a pivotal role in services. In 1995, the US and Japan were the top trading partners. Today, China is the biggest trade partner for both, the US and Japan.
Similarly, since the mid-1990s India has emerged the biggest outsourcing trade partner for the IT services industry in the US and European countries. Over 60 per cent of the American IT services are outsourced to India.
Thus, even if China and India have changed the global trade patterns, they have also proved to be god-send for the developed countries. The concerns over China and India's growing economic muscle and their impact on global realm appear misplaced.
Concerns have also been raised over the growing trade between China and India the two most populous countries that presages a high demand scenario. China is seeking out India especially for its abundant iron ore and IT skills even as Indian MNCs tap China for cheaper materials, component and parts.
Many global watchers fear the US and Japan getting impacted by the economic development of China and India and also to the growing economic interaction between the two. However, these apprehensions are negated by the dependence of China and India on the US for trade and investments.
China's high growth in economy is led by exports. Export growth was engineered by foreign-funded firms in China. Over half of China's export is generated by these foreign funded firms. The US is the second biggest destination for China's exports. About one-third of China's exports go to the US. Therefore, the US is a catalyst for China's high economic growth.
China is not solely responsible for the US's trade deficit, as is alleged. Much of the increase in China's exports to the US was due to a displacement of exports from Asian countries.
The substantial imports from China pushed down prices in the US. The US-China Business Council estimates that these impacted favourably on the priceline and the growth in demand, pushing the US economy up by 0.4 per cent in 2005 besides creating about 50,000 jobs.
India accounts for 65 per cent of the global IT-BPO services market; the US is the key customer, absorbing 60 per cent of work. India's BPO industry has galloped at 45 per cent a year, thanks to a large, skilled and English-speaking workforce.
The Indian Diaspora provides a key underpinning to the development of IT industry in the US. Many of those who have returned are either working in the India support-centres of the MNCs or are providing services much of which goes to the US.
A recent development is India coming back strongly on the Japanese investment radar. Till now China has been the main destination for Japanese overseas investments.
A JETRO survey of Japanese corporates having business operations overseas, confirms the shift to India, and the waning interest in China.
This is notwithstanding India being ranked lower in infrastructure and having a complicated bureaucracy.
Japan is fast turning the country of the aged. A serious demographic problem looms over that country. This could give India the leverage in Japan. India has a large workforce, technical as well as managerial.
According to Nasscom, the country turns out every year some five lakh engineering graduates, diploma and MCA holders. Another 2-3 million graduate in arts, commerce and general science streams every year.
If India has not already taken advantage of the situation, the problem lies with the language. Knowledge of Japanese language is indispensable for working in Japan or for outsourcing. Very few Indians know the language.
However, with the growth of Japanese investments in India, the pool of those knowing that language is increasing. About 13,000 Indians are enrolled with various institutions teaching the Japanese language.
Inclusion of movement of persons in the ongoing negotiations for India-Japan Economic Partnership Agreement should come as a boon to the high labour cost Japanese industry, and also to India, with its large workforce.
Clearly, India and China are the world's platforms of growth. Developing nations such as China and India have not only proven potential to supply goods cheap , they are also massive markets generating demand in the world economy.
(The author is Adviser, Japan External Trade Organization (Jetro), New Delhi. The views are personal )
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