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Besides being the world’s third-largest trader with a 6% share in world trade – comparedwith India’s 1% – China is gradually becoming a manufacturing hub in Asia. It is nowdeeply involved in regional production and distribution networks in East and Southeast

Asia (including ten ASEAN countries, plus Japan, China and South Korea). The share ofChina’s exports and imports to East Asian countries in its total trade is more than twice thatof India, showing China’s stronger connection to the region (see Table 2).

Table 2: Percentage share of trade to East Asia in total trade for China and IndiaExports Imports

1990–94 2000–04 1990–94 2000–04China 60.5 45.3 55.8 53.5India 22.3 23.0 16.6 21.7

Source: Urata (2007).

It is worth noting that the share of China’s imports from East Asia remains roughly thesame in terms of total imports between 1990–94 and 2000–04, but its share of exports toEast Asia as a percentage of total exports dropped considerably, from 60.5% to 45.3%,

between the same periods (see Table 2). This change reflects the fact that China isbecoming the ‘assembly factory’ for East Asia, importing parts and components from thatregion and selling finished products to the rest of world.

Table 3: Asia’s percentage in US import (by country)

2000 2004 ‘Swing’China 8.2 13.4 +5.2Taiwan 3.3 2.4 -0.9South Korea 3.3 3.1 -0.2Singapore 1.6 1.0 -0.6Hong Kong 0.9 0.6 -0.3

Japan 12.0 8.8 -3.2

Source: Rossi (2007).

While China has gained a larger share of both EU-25 imports (from 7.5% in 2000 to 12.3%in 2004) and US imports (from 8.2% in 2000 to 13.4% in 2004), other economies in East

Asia such as Taiwan, Hong Kong and Japan are losing their share (See Tables 3 and 4).This provides evidence that China is replacing other East Asian countries in the imports ofthe United States and Europe. Through China’s integration into Asian production chains,perhaps up to one-third of the recorded value of exports comes from imported inputs ofother East Asian countries rather than from local value added in China (Winters and Yusuf,2007). China imports machinery, plant equipment and components that contribute to the

upgrade of its industrial capacity. Elements of the global supply chain are recentlymigrating to China as multinational manufacturers in some sub-sectors such aselectronics and automobile industries look to move closer to markets and finalassemblers.

Table 4: Asia’s percentage in EU-25 imports (by country)

2000 2004 ‘Swing’China 7.5 12.3 +4.8

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Taiwan 2.8 2.3 -0.5South Korea 2.7 2.9 +0.2Singapore 1.7 1.7 0.0Hong Kong 1.2 1.0 -0.2Japan 9.2 7.2 -2.0US 20.6 15.3 -5.3Source: Rossi (2007).

In comparison, despite India’s increasing trade relations with East Asia, its exports andimports to East Asia account for only about one-quarter of its total trade (see Table 2). AlsoIndia has not yet proved to be a major force in international manufacturing, except intextiles and clothing, where, given its abundance of cheap labour, it has some competitiveadvantages – and it may continue to grow in these sectors.

India seems to be facing two options for future development. First, in order to takeadvantage of its large base of human capital and domestic market potential, it needs toproceed along the path opened by the East Asian economies. This model revolves aroundboosting manufacturing capacity. Second, India could decide to further expand the

IT-enabled services for global companies, such as call centre services, professionalservices and software maintenance activities – a fast-growing sector in terms of Indianexports. In overall commercial services, China’s share of global exports (2.9%) andimports (3.4%) is still greater than India’s (1.9% and 2.0% respectively). However,IT-related services and now pharmaceutical industries can be the key drivers of Indiantrade growth in the future. India’s National Association of Software and ServiceCompanies (NASSCOM) estimates that by 2020 India’s share of the offshore market forengineering services – of a projected value of more than US$1 trillion – could be 25–30%(more than double the current 12%), provided that the capacities, infrastructure andinternational reputation are in place (NASSCOM, 2006). Business services and softwarehave boosted Indian trade since the 1990s and now a few of the Indian firms in theseareas are among the largest in the world. The abundance of well-trained,

English-speaking cheap labour is a big asset for India and can be better employed.Services are by far the largest part of the Indian economy (50%), with some sub-sectorsperforming better than others. There is still much scope for improved productivity andincreased investment.

2.2 Foreign investment

Foreign direct investment (FDI) is also an area where India appears to lag behind China.In 2006, China attracted 10 times more FDI than India owing to its more liberalized policiesfor foreign investors. Moreover, the Chinese economy is growing faster and itsinfrastructure is better. Although strict protection policies remain in place in selectedsectors in China, such as automobiles, India’s restrictive labour laws and limits affecting

foreign shares in ownership restrain foreign investment in general (Urata, 2007). Inparticular, India’s inadequate infrastructure development makes it very difficult formultinational companies to ship products in and out of the country, and even within thecountry.

China is certainly a star performer in attracting FDI, but India did not performcommensurately badly, given the large disparity in performance. China accounts for 5% ofworld GDP and India for about 2%, at current exchange rates (World Bank, 2007a). Asbigger economies normally attract more investment, China currently tends to be the

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preferred destination for foreign investors. But in terms of FDI percentage of GDP, China’sfigure is less stunning – only two and a half times that of India (see Figure 1).

Figure 1: FDI in China and India as percentage of GDP

0

1

2

3

4

5

6

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

Year

P e r c e n t a g e %

India

Source: Thomsen (2007a).

In terms of business environment, the World Bank ranks India 134th in the 175-country list,whereas China is in 93rd position (World Bank, 2006). But in some areas such asbusiness start-up, acquiring credit, protecting investors and paying taxes, India still leadsChina.

Table 5: Business climate rankings, 2007*

China India

Overall 93 134Starting a business 128 88Dealing with licenses 153 155Employing workers 78 112Registering property 21 110Getting credit 101 65Protecting investors 83 33Paying taxes 168 158Trading across borders 38 139Enforcing contracts 63 173Closing a business 75 133

* Based on a survey of 175 developed and developing countries.Source: World Bank (2006).

It may have been assumed that OECD countries took the lead in investing in China, butactually they only started to look at China from 2002 onwards. A large proportion of FDIinto China comes from its diasporas abroad, from Hong Kong and Taiwan, and fromdomestic companies which go to Hong Kong and reinvest in China.

The fact that China has invested three times as much in infrastructure than India, whose

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footwear and clothing, with few trade disputes with OECD countries because China doesnot compete directly with Europe and US in this category – but with East Asia.

Table 6: Industry exports as a percentage of total exports, China and India

Industry export 1995 2000 2004

China Pharmaceuticalproducts

1.1 0.7 0.6

Iron and steel 3.5 1.8 2.3Electrical equipment 5.9 9.7 10.0White goods 0.7 1.1 1.3Road vehicles 1.8 2.6 2.8Textiles 26.0 21.4 16.2India Pharmaceuticalproducts

2.3 2.8 2.9

Iron and steel 3.0 2.9 6.0Electrical equipment 1.3 1.8 1.9White goods 0.0 0.0 0.1Road vehicles 2.8 2.0 2.8Textiles 27.0 27.2 17.4

Source: United Nations Commodity Trade Statistics Database accessed via the World Bank’s WorldIntegrated Trade Solution (WITS) software. http://comtrade.un.org/db/. Note: Textiles is defined as the combination of 26, 65, and 84 of Standard International Trade Classification(SITC), Rev. 3. White goods is defined as the combination of 7751, 7752, 7753, and 7758 of SITC, Rev. 3.Pharmaceutical products, iron and steel, electrical equipment, and road vehicles are defined, respectively, as54, 67, 77, and 78 of SITC, Rev. 3.

The Indian economy is also expanding, but so far the process of transferring cheap labourfrom low-value agriculture to higher-value manufacturing industry has been slow. This ismainly due to relatively weak industrial growth and unfavourable labour laws, which havecreated a strong incentive for firms to use more machinery and hire fewer workers. Indiamay choose to follow the East Asia model to attract foreign investment and beef up itsmanufacturing industry. At the same time, it will continue to expand its strong servicesector in business and engineering services that has drawn major global firms tooutsource their operations to India and has the potential to continually drive India’s foreigntrade.

The fast pace of urbanization and industrialization in China and India leads to more socialproblems and severe environmental degradation. More attention is being focused onChina than India in this regard. Clearly, these are difficult issues, and attempts atresolution, understandably, always result in disagreement. Nevertheless, China hasperformed reasonably well despite such concerns, and this provides reasons to beoptimistic about the future. It is a big country, with considerable room for future growth.

China and India have achieved relatively successful outcomes, following their own growthtracks. However, one of the current distinctions between China as the ‘factory of the world’and India as the ‘world’s back office’ in international trade may be changing in the comingdecade, since China is aiming to develop its service sectors whereas India hopes to

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strengthen its manufacturing industry.

References

Conference Board (2006), ‘US Productivity Growth Slowing Sharply as Emerging Markets

Catch Up’,http://www.conference-board.org/utilities/pressDetail.cfm?press_ID=2799.

NASSCOM (2006), Globalization of Engineering Services – The next frontier for India,Delhi.

Rossi, V. (2007), ‘China and India – why should growth not be sustainable?’, Powerpointpresentation for Chatham House- Japan Economic Foundation workshop ‘ TheExpansion of China and India: Impact and Consequences for Japan, UK and theWorld Economy’, 2 March, London.

Srinivasan, T. N. (2006), ‘China, India, and the World Economy’ Working Paper No. 286

(Stanford, CA: Stanford Center for International Development, July 2006).http://siteresources.worldbank.org/INTCHIINDGLOECO/Resources/Srinivasan-China_India_and_the_WE_03-15-06.doc .

Thomsen, S. (2007a), ‘India and China: Investment and Development Strategies’,Powerpoint presentation for Chatham House - Japan Economic Foundation workshop‘The Expansion of China and India: Impact and Consequences for Japan, UK and theWorld Economy’, 2 March London,http://www.chathamhouse.org.uk/pdf/research/ie/020307thomsen.pdf.

Thomsen, S. (2007b), ‘Infrastructure and Indian Development; Reform First, Invest Later’IEP Briefing Paper , London, January,

http://www.chathamhouse.org.uk/pdf/research/ie/BPindiaeconomy.pdf.

Urata S. (2007), ‘India and China: Trade, Investment and Development Strategies’,Powerpoint presentation for Chatham House - Japan Economic Foundation workshop‘The Expansion of China and India: Impact and Consequences for Japan, UK and theWorld Economy’, 2 March, London,http://www.chathamhouse.org.uk/pdf/research/ie/020307urata.pdf.

Winters, L. A. and S. Yusuf (2007), Dancing with the Giants: China, India and the WorldEconomy (Washington, DC: World Bank and Institute of Policy Studies).

World Bank (2006), Doing Business 2007: How to Reform, Washington, DC, September.

Renfeng Zhao is a London-based business journalist. He specializes in China's economyand evolving role in world affairs.

We are grateful to the Japan Economic Foundation (JEF) for supporting this project.

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