American trade relations: the strange case of India versus China

In 1993 in Arlington, the Indian economist Dr Subroto Roy completed a study of real-trade relations between India and the USA titled Economic Assessment of India-USA Merchandise Trade 1962-1992. A key point made in this paper is that since 1947 India “drastically declined from moderate to insignificant size as a trading power in the world economy”; Dr Roy surveyed how government policy in both the subcontinent and the West was a significant contributing factor to this decline.

An important question is why since 1993 the People’s Republic of China has soared to be the second largest trade partner of the USA based on massive manufacturing sector growth while India’s goods trade with the USA is roughly one tenth that of China.  India and the USA share a common language, similar political structures and some similar cultural structures based on their status as former British colonies, and ethnic diversity.  During the period 1962-1992 India chose a “non-aligned”  status with respect to the USSR-led Communist and Western political blocs, while leaning toward the USSR in economic ties.

China’s political structure has been largely the opposite of the constitutional democratic systems in place in the USA and India.  The Chinese language is relatively difficult for native English speakers, enough to be considered a barrier to trade. During the period 1962-1992 China’s relations with the USA ranged from hostility to moderate engagement.  China’s political clamp down on its population culminating with the incidents at Tiananmen Square was considered to be a serious diplomatic problem by the US.

An observer in 1993 would likely have considered the actual course of the history of US trade with India and China since then to be highly unlikely.  A more probable outcome would have been expected to have seen India increase its trade with the US much more than China.

Given the explosive growth in manufacturing exports from China to the USA since 1993; one wonders how much consideration India’s government has given to re-thinking its trade policy with regard to the USA.  Wages in China have risen to the point where manufacturers have moved or are seeking to move operations from China to lower cost locations. Yet the US business press scarcely mentions India as a prospective site for low-end manufacturing relocation. It seems that there likely exists a sizeable fraction of India’s population for whom wages slightly less than those currently prevailing in the PRC would be an improvement in standard of living.

Since the normalization of US-India diplomatic relations achieved by the administration of George W. Bush where the US lifted nuclear sanctions and agreed to cooperation on nuclear power issues; it is not unreasonable to describe the US-India relationship as “friendly”.  Because of this, one would expect that trade between the US and India will increase.

US trade with China, on the other hand, has probably seen its peak.  China’s economic policy has been described by Michael Pettis as roughly “stomp on the gas pedal, jam on the brakes” with respect to growth; as China’s government attempts to balance internal problems with the foreign pressures resulting from unremitting mercantilist policy toward the rest of the world.  At some point, China is likely to suffer a major, if not catastrophic, economic downturn.

The US should make improving economic and political relations with India a top priority; as we share interests in democratic government, handling pressures due to internal ethnic diversity, and political stability in Asia.

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