Economic Reforms, Regionalism, and Exports: Comparing China and India

Executive SummaryAgainst the backdrop of recovery from the global financial crisis, this paper attempts to reappraise the links between economic reforms and exports in China and India, the "giants. " Four questions are analyzed: (1) Have China's exports outpaced India's since the reforms? (2) What roles have initial conditions, as well as liberalization of trade and investment regimes, played in the giants' export records? (3) Is the giants' recent emphasis on free trade agreements (FTAs) detrimental to exports? (4) What are the emerging policy challenges in the postglobal financial crisis era? Beginning in the 1930s, the giants followed inward-oriented, state-controlled economic strategies. Various economic distortions, including high import protection and state-directed resource allocation, held back the private sector and exports. In a radical break with past economic policies, China and India adopted market-oriented economic reforms in the late 1970s to boost exports and the private sector. More recently, they have pursued FTA-led regionalism alongside multilateralism. Few foresaw the future impact the giants would collectively have on world trade patterns, or the magnitude of adjustment required in rest of the world.There is little doubt that the trade performance of China and India has been impressive by the standards of either developing countries or developed countries. Within a relatively short time span of about a generation, the two countries have emerged as major players in world trade, as well as notable outward investors. Following early entry into low-technology products, the giants have steadily upgraded into medium- and high-technology products, as well as skill-intensive services. While the two are often compared, China has roared ahead in world trade of manufactures and is on the verge of challenging the United States as the world's largest exporter. India's export expansion has been primarily driven by services, and it is attempting to play catch-up in a range of manufactured exports.The outcome of economic reforms on trade performance was shaped by initial conditions. These include China's proximity to Japan, which facilitated inward investment and a large, dynamic domestic market. Township and village enterprises (TVEs) also seem to have led labor-intensive rural industrialization in China in the 1980s and early 1990s. Both India and China had access to ample supplies of low-cost, productive manpower. India's relative success in information technology and business process outsourcing seems linked to exposure to English, world-class information technology (IT) professionals and engineers, and close links with an IT-oriented diaspora.Reforms of trade and investment, in particular, have played a significant role in the trade performance of China and India. China, of course, was swifter and introduced an open door policy toward export-oriented foreign direct investment (FDI) in the late 1970s, alongside controlled liberalization of imports. Further liberalization occurred in China during the process of World Trade Organization (WTO) accession. India introduced some reforms in the late 1970s, but the major reforms came after 1991. The difference in trade performance between China and India, however, is not simply a matter of the timing of changes in trade and investment policies. Closer examination suggests China adopted a more comprehensive and pro-active approach to trade and industrial policy than did India. In its efforts to attract export-oriented FDI, it actively facilitated technological upgrading of FDI and exports, reduced import tariffs and the dispersion of tariffs in a more systematic manner, managed a more predictable and transparent real effective exchange rate (REER), and provided for more comprehensive liberalization in goods and services provisions in its FTAs with Asian developing economies.India's 1991 economic reforms marked the end of the license raj and heralded the start of a more conducive investment climate for the private sector. …