China and India in international trade: from laggards to leaders?

The economic rise of China and India has generated a great interest in terms of the consequences for the world economy. Among large emerging economies, China and India are the largest in terms of population, the poorest and the fastest growing ones. Given these characteristics, their emergence will have an impact on the world economy. This paper addresses this issue by investigating the following points:

• What are the specific features of China and India in comparison with other large emerging economies such as Brazil, Mexico, Russia?
•  What are the similarities and differences between India and China in the way they are integrating with the world economy?
• How have they, up to now, impacted world trade both as exporters and importers?
• What are the prospects for their catching-up?

The key points highlighted are:

• China and India are demographic giants which have become big economic powers before getting rich
• They have a lower income per capita than Brazil, Mexico or Russia, but have registered higher and steadier growth rates, which put them on a on a clear catch-up trajectory.
• Beyond the common features, China and India show sharp contrasts in economic structures which can be ascribed to different strategies adopted.
• India is much less open and less present in international trade but the gap is partly, a question of time lag
• Their rise in international trade has created two symmetric shocks, on the supply and the demand sides.
• Over the last decade, the two countries taken together trebled their share in world exports of manufactured products as well as their share in world imports of primary products.
• China’s supply of manufactured goods at low prices combined with China’s and India’s demand of raw material and energy have contributed to a change in relative world prices which has had an adverse effect on both countries
• China and India have kept similar traditional specialisation (textiles) and both have developed new outward-oriented sectors linked to new technology.
• Foreign firms, through their offshoring and outsourcing strategy, have played a critical part in turning China into a global export platform for electronic products, and India into a global centre for computer and IT services.
• As low-cost suppliers of manufactured products and services, they now epitomise the threat of globalisation for rich countries.
• Their growing merchandise trade is associated with widening deficits in related services (i.e. transport, insurance and royalties)

The paper argues that despite their rapid progress, they still stand far behind developed economies, and that closing the gap will take time. Moreover, beyond the question of technological catch-up, the challenge is now also the quality upgrading of exports, especially for China. China has acquired a comparative advantage in high-tech products but records an increasing disadvantage in high-price/quality products and its terms of trade