A string of articles in the Chinese state-run Global Times (here and here) brings to the fore the very real dangers of rabble-rousing and a clear lack of appreciation of the integrated nature of the world economy. Putting down Indian media calls for boycott of Chinese products, the author states: “Let the Indian authorities bark about the growing trade deficit with China. The fact of the matter is they cannot do anything about it”. Is India really merely the barking dog or can the dog “bite”?
With its $10 trillion of gross domestic product (GDP), 13% share of global GDP and 10% share in global imports in 2015, China is the world’s second largest economy and a key player in global trade. Its footprint in the global commodity markets was particularly large, with more than 50% share of global consumption in each of the base metals: iron ore, copper, nickel and aluminium. In fact, its increasing share in global imports has made China a main source of export demand for over 100 economies that constitute 80% of world GDP.
The Chinese growth model since the 2000s and especially in the aftermath of the global financial crisis, was based on investments and exports—both of which are relatively import-intensive. The investments in infrastructure and housing fuelled the demand for base metals and led to a global boom, especially in commodity exporter nations. China’s current effort to transition to a more balanced, albeit less import-intensive consumption-led growth path, with a greater focus on services rather than manufacturing—termed “rebalancing”—has the potential for spillovers to all countries dependent on Chinese trade. Thus, the International Monetary Fund’s latest World Economic Outlook (WEO) has revised global growth projection in 2016 downwards to 3.1% and attributed it to such spillovers.
However, the network structure of international trade implies that the effects of such spillovers are not just restricted to the immediate trading partners, but have “higher round impacts which are generally less known and generally poorly understood…”. Such network effects of a reduction in import demand can be decomposed into spillover, spill-in and spill-back effects. Thus, the first-round impact on, say, commodity exporter nations’ export revenues due to a sharp decline in Chinese imports would classify as spillovers; the higher-round impacts on inter-country trade between countries affected by Chinese spillover shocks and propagating such secondary shocks would classify as spill-ins; while the reverse higher-round impacts from affected partner nations on Chinese exports would classify as spill-backs.
However, this is not all. Individual countries in China’s trade network, based on their size and openness, might augment, attenuate, or block the initial shock.
On the face of it, India, with its $2 trillion economy and its 3% share in the global GDP, as also its large and growing trade deficit with China, seems to be incapable of doing much to mighty China, its largest trading partner.
Thus, of its 15 largest trading partners, India had the largest trade deficit with China, worth $52.7 billion, in 2015-16, which had worsened compared to the $48.48 billion in FY 2014-15. This, compared to its trade surplus of $62.1 billion and $49.7 billion with its second and third largest trading partners in FY 2016—the US and UAE, respectively. Such a steady deterioration in India’s trade deficit with China in the last three years has been on account of a fall in our exports to China, coupled with an increase in imports from China.
However, how can we analyse the India-China relationship in terms of network effects?
One, China ranked as the fourth exporting and top importing partner for India in FY 2016, accounting for a mere 3.5% of India’s world exports and 16.2% of India’s overall imports. Thus, the probability of a spillover of reduced Chinese import demand may be lower than the probability of a spill-back in the form of reduced Indian demand for Chinese imports.
Two, from the Chinese point of view, while India accounted for only 2.55% of Chinese exports, it was among China’s top 10 export partners. With countries like the US, Hong Kong (China) and the UK featuring as top trading partners for both India and China, the spill-in effects of trade disruption due to the China rebalancing between such partner nations would significantly affect global trade, and by implication, China.
Three, India has been identified as a shock amplifier in the network structure of trade, with the ability to intensify an original shock by 30% or more. Thus, the potential of magnified spill-back on China through such amplifier nodes like India is likely to be very high.
Finally, India has benefited from the sharp fall in commodity and oil prices driven by the China rebalancing. With petroleum crude and products and base metals accounting for 21.8% and 6.5%, respectively, of overall imports, the softer prices have reflected in a 15.8% decline in overall imports in FY 2016, leading to a narrowing in India’s overall current account deficit to $300 million (0.1% of GDP) in September 2016.
Thus, China may learn to its chagrin that the barking dog does indeed bite, albeit through a complex maze of networks.
Tulsi Jayakumar is professor of economics at the SP Jain Institute of Management & Research, Mumbai.
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