Rising Indian imports of a range of Chinese goods have propelled the country to become India's largest trade partner. But a record trade imbalance has divided opinion on whether the relationship is sustainable.

Every month, India ships up to nine million tonnes of iron ore to China — by far, the country's biggest export. Much of the ore from the mines of Karnataka and Orissa eventually finds its way to China's southern manufacturing heartland, and to factories such as Su Jianguo's production units on the outskirts of the port city of Guangzhou. At the Guangzhou Sea Link Industrial Corporation, the ores from India are efficiently processed into myriad objects, from casters — a special kind of wheel that is used in shopping carts, wheelchairs, airport trolleys and even trucks — and locks, to door-closers and hand-railings for airport terminals.

The locks that roll off Su's assembly-line bear a familiar label for an Indian eye – the name “Godrej” is prominently etched into the steel. Every year, 10 million locks are compressed into 1,000 crates, which make their way from Guangzhou's sprawling state-of-the-art port, across the Indian Ocean, to Godrej's warehouses and eventually, Indian homes. Su's hand-railings, meanwhile, man the shiny escalators at the new Bangalore airport, while his door-closers ensure the airport terminals in Hyderabad stay climate-controlled.

Variety of goods

Every year, Guangzhou Sea Link ships out $4 million worth of goods to India. And it isn't just low-end locks and accessories that southern China makes for India, using Indian ores and natural resources. A few hours down the six-lane expressway from Su's factory lies Shenzhen, where telecom giant Huawei is based. Huawei sells millions of dollars of telecom equipment to India every year, equipment that has helped fuel India's telecom revolution. And, a hundred kilometres north is the base of one of China's biggest power companies, Shanghai Electric, which only last month signed a record $8.3 billion deal to sell 36 power generators to Reliance Power.

“Chinese companies are realising that India is perhaps our most important market in the next few decades,” Su says in an interview in his Guangzhou office, which is stacked with a range of goods he ships to India. On one shelf are paper weights with an image of goddess Saraswati, rendered perfectly. Another has glass idols of the god Ganesh. “Earlier, we were all focused on Europe and the United States. But the past year has shown, without a doubt, we need the Indian market,” he says.

Bilateral trade

For almost three decades, Su has closely watched the unfolding of China's remarkable manufacturing story. He was part of the first generation of entrepreneurs unleashed by Deng Xiaoping's opening up experiment in 1978. Sea Link opened its first factory in Guangdong province, where the reforms began, in 1981. Following the financial crisis, Su has begun to notice a gradual change in local factories' patterns of production — a focus less on the West, and more on emerging markets such as India and South-East Asia. It should come as no surprise, then, that Chinese Premier Wen Jiabao will arrive in New Delhi on December 15 with the biggest ever trade delegation from China. More than 400 representatives of 200 Chinese companies will accompany Mr. Wen, all with a single objective — to sell.

The rising Indian demand for Chinese goods propelled China to become India's largest trade partner in 2008, as trade reached $51.8 billion — an unthinkable feat at the turn of the last decade, when trade stood at a paltry few billion. This year, bilateral trade will cross $60 billion. China will again become India's biggest trading partner, after temporarily losing out that position during recession-hit 2009. The trade statistics are, no doubt, impressive. But as Indian and Chinese officials have noted, the trade relationship has become increasingly imbalanced. When the Chinese premier last visited India, in 2005, India's trade deficit with China was less than $4 billion. Last year, the trade deficit reached a record $16 billion. It is forecast to grow even wider.

The nature of the trade relationship has divided opinion. On the one hand, officials say, China enables India to build its infrastructure, develop its power sector and take forward its telecom expansion at prices the West could never offer. But on the other, officials on both sides acknowledge the trading balance-sheet looks increasingly sick, and that the deficit is unsustainable.

“The deficits with China are a microcosm of India's overall trade deficit,” says Zorawar Daulet Singh of the Centre for Policy Alternatives (CPA) in New Delhi, and the co-author of “Chasing the Dragon: Will India Catch up with China?” “Last year, China accounted for 20 per cent of India's deficits,” he says. “The relationship is not sustainable. India is only exporting raw resources like iron ore, and is unable to compete in selling to the China market.”

India has little success

Indian Information Technology, pharmaceutical and engineering companies have had little success so far in making an impact in China. Indian officials have called on the Chinese government to improve market access in these sectors. But as Mr. Singh says, the problems go beyond market access issues. “Most of the problems are at home,” he says. “To compete with Chinese manufacturing, the Indian government needs policies that help create a level playing-field. This means improving infrastructure, and as China does, providing the right subsidies in specific sectors.”

Liang Wentao, an official at China's Ministry of Commerce, adds that Indian companies, too, are not doing enough to push their products in China. Representatives from industry bodies like the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) acknowledge that an information gap, surprisingly, still persists. Liang cites the example of the pharmaceuticals sector. The sector is on the verge of an unprecedented expansion as a result of a $2 billion healthcare reform, and has attracted a growing number of foreign firms. Indian companies, however, have struggled to make a mark. “We hope Indian companies can learn from the experiences of others,” he said this week. “As long as Indian companies are active in exploring the China market and trying their best to go through the [registration] process as soon as possible, their products can enter the market.”

Trade tensions

Nevertheless, the widening imbalance remains a source of concern, particularly because trade has emerged as the one bright-spot in the bilateral relationship amid persisting political uncertainties. Trade tensions are on the rise. Last year, India filed more anti-dumping investigations than any other country against China at the World Trade Organisation (WTO). A number of those cases were, however, subsequently either withdrawn or resolved. Concerns have also been raised in specific sectors like power, where Indian companies say the development of local industry will likely be crippled by the inflow of Chinese imports. Calls for import duties are growing louder.

But perhaps the biggest factor likely to drive the future of India-China trade relations are changes unfolding here in China that are likely to fundamentally alter the country's growth model. At the Sea Link factory in Guangzhou, Su has raised workers' wages by 30 per cent in the past 12 months, in keeping with the rest of Guangdong province. Rising labour shortages, in part driven by demographic changes, and growing demand for higher wages among an increasingly assertive workforce have reduced Chinese competitiveness. “The export model is changing,” Su says. “This trend of China exporting to India, and the world, will not continue forever.” In fact, he adds, he is already considering shifting his production base out of Guangdong. His preferred destination — India.