Trade binds China and India

China and India both are developing countries, both have huge populations (largest two in the world) and both are fast growing economies. China has enjoyed an average annual growth of about 10 percent during the past three decades, while India's growth rate was 7 percent in the decade and half preceding the global financial crisis. The two countries' continuous economic growth, therefore, will not only benefit their 2.5 billion people, but also play a significant role in economic development across the globe.

The past decade was especially productive for bilateral ties thanks to the frequent exchange of leaders' visits and more people-to-people interactions. India has been a strategic trading partner of China for the past nine years, and China is now India's largest trading partner.

Three features stand out in the two countries' trade relations. The first is the deepening of Sino-Indian trade cooperation. According to China's customs data, Sino-Indian trade rose from $7.6 billion in 2003 to $66.47 billion in 2012, an average annual increase of 30 percent. And there is still plenty of room for deeper cooperation between the two sides.

Second, the drastic increase in Chinese exports to India has expanded the bilateral trade volume, although it has also expanded China's trade surplus with India. Until the early years of the last decade, China had a trade deficit with India - the deficit was close $1.75 billion in 2004 - mainly because it used to import huge amounts minerals, and base metals like steel and cotton from India, and exported only small quantities of electromechanical devices and chemical products. But a sharp increase in the export of China-made optical instruments, automobile parts, furniture and textile products to India because of the latter's booming economy dramatically tilted the trade surplus in China's favor.

Third, trade growth has slowed down over the past two years. Bilateral trade peaked in 2011, reaching $73.92 billion, and then fell by 10.1 percent in 2012 and another 1.5 percent last year, when it was about $65 billion. The major reason for the decline is the slowing down of the Indian economy because of shrinking domestic demand. Data published by the Indian government in May show that the country's real GDP growth rates in 2012 and 2013 were 4.5 percent and 4.7 percent, far below the 2010 growth rate of 10.5 percent.

According to official Indian figures, India's imports increased by 35.6 percent 2011, dropping dramatically to 4.2 percent in 2013. As a result, exports of Chinese products like chemicals and steel to India also dropped significantly. China, however, has managed to maintain a respectable trade volume with India by continuing to import jewelry, noble metals and copper products from India.

Of course, the two countries have been trying to boost bilateral trade. In March, they held the third India-China Strategic Economic Dialogue in Beijing, where they agreed to improve the investment and trade environment in each other's countries, encourage mutual investment between/among companies, and deepen cooperation in the fields of infrastructure, finance, energy and energy conservation.

The two countries can be optimistic about the future, because Narendra Modi, India's new prime minister, has promised to focus on reform and economic development. Also, the country's central bank has predicted a 5-6 percent growth for this year, saying it could rise to 7-8 percent in a few years. Among the major measures the Indian government is expected to take is restoration of deferred equipment investment, which can increase employment and stimulate consumption, and thus boost economic growth.

On its part, China can provide adequate supply of products for export to and a bigger market for imports from India if its economy can grow at the rate of 7.5 percent a year, and thus facilitate mutually beneficial cooperation in the long term.

Moreover, since Modi is said to have studied the Chinese economic model and visited Shanghai, and Guangdong and Sichuan provinces to get first-hand knowledge of China's investment promotion, it is likely that the two countries will enter a new age of cooperation. India could further open up its domestic market to China, making it possible for more Chinese companies to invest in India and for products made in India by Chinese companies to be redirected to the Chinese market.

By 2015, the two countries are expected to conclude their negotiations as members of the Regional Comprehensive Economic Partnership and thus lay the foundation for building a better trading environment and realizing balanced development in the long run.

The author Xu Changwen is a researcher at the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce.