It is now official! China has emerged as India's largest trade partner, a position that was monopolized by the United States so far. This was revealed by the Economic Survey for 2007-2008, which said that'China's trade share during April-October 2007 was even higher than that of the US by Rs.600 crore.' As and when India's final trade statistics are released for the year 2007-08, China will be shown as India's No. 1 trade partner. The development marks the culmination of a trend that has been picking up momentum in recent years. Only six years ago, the volume of trade between India and China was barely one-fourth of the trade between US and India. In fact, the UK, Belgium, Germany, UAE and Switzerland were all larger trading partners than China at that stage.

China's emergence as India's largest trading partner was not unexpected. All studies of Sino-Indian bilateral trade had indicated this trend. At the end of 2007, the bilateral trade stood at US$38.6 billion. Given the growth trajectory, even the target of US$60 billion by 2010 should be achieved much earlier. This makes one wonder, as Prime Minister Dr. Manmohan Singh said during his January trip to China, if "India and China have been underestimating the capabilities of their respective industries and their strong urge to do business with each other." Surely then, more ambitious targets are required.

The upsurge in Sino-Indian trade and the consequent rise of China as India's largest trading partner has been on account of numerous factors. China's hunger for raw materials, intermediates and components saw big leaps in Indian supplies of the same. China, on the other hand, has been exporting value added items, especially machinery to India. At the same time, there was plenty of space to cover given that trade relations between the two countries were negligible two decades back when Rajiv Gandhi's historic visit to Beijing provided a new impetus to the trade and political relationship. Sustained political patronage of the leaderships of the two countries also helped in the phenomenal growth of trade relations.

China's emergence as the largest trading partner should not, however, induce a sense of complacency. For the record, China's export growth has always outpaced import growth, allowing it modest trade surpluses on a year-to-year basis. Also, the share of exports in China's GDP rose from 13.9 per cent in 1985 to more than 30 per cent at present. Focus on labour-intensive goods and aggressive trade policy has enabled China higher trade figures of more than US$200 billion each with US and Japan and healthy figures with South Korea and ASEAN. India comes very low in China's trade partnership hierarchy. Further complicating things is a widening trade deficit for India, currently around US$10 billion, coupled with the narrow range of products in India's basket of exports that has left Indian industry somewhat nervous. Until recently, India was one of the few economies enjoying a trade surplus with China. That having disappeared, India needs to seriously ponder over the slow growth of exports to China.

The immediate challenge for India, therefore, is to diversify the export basket to China through focus on expanding non-traditional items of export. Such efforts, when matched by greater market access for Indian goods in China, will help to bridge the rising trade deficit between the two countries. However, if the bilateral trade has to reach figures comparable to what China has with its other neighbours, both countries will have to negotiate a regional trade agreement (RTA) as a long-term solution. Presently, the Indian industrial associations feel it is bit premature for India to enter into any such agreement when the country exports mainly primary commodities to China and its services sector is also fragile vis-a-vis China. The good thing is that both countries have studied the issue through a joint study group and are willing to further discuss mutual concerns through an institutionalised dialogue.

As evident in the last one decade, trade and economic relations have emerged as the fastest growing element in the bilateral relationship of the two countries. China's emergence as India's largest trade partner will only consolidate the process. In the process, India should however, not forget that China has become the largest trade partner for many countries, marking the decisive shift in international trade relations where US had this privilege till now. With close to 11 per cent of share in world trade (if Hong Kong is also included), China has emerged as the new trade muscleman. The strategic consequences of ignoring China's rising trade profile may not augur well for countries like India that has only a one per cent share of global trade. It is time India learned some lessons from the Chinese experience and provided a new impetus to its trade policy.

Note: The views expressed herein are those of the author and do not necessarily represent those of the Government of India.