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Elephant in the room

2 November 2011 By Jeff Glekin

China and India rarely lock horns in public – but that might be about to change. Sick of a ballooning trade deficit, Indian trade negotiators are ramping up pressure on China with talk of duties on some goods, starting with power equipment. Tit-for-tat tariffs don’t help anyone, but if India took a more aggressive stance on its trade partner’s undervalued currency, it would add weight to the debate.

China and India have come a long way since they last went to war in 1962. While border disputes still linger, economic ties are booming. In 2008, China emerged as India’s largest trading partner, surpassing the United States. Last week, India’s former foreign affairs minister, Shashi Tharoor, argued that growing trade has reduced chances of a further military conflict.

Still, India is increasingly uneasy over the trade deficit which has emerged in China’s favour. Over the past 10 years, the deficit has grown from $1 billion to over $20 billion. Meanwhile the Chinese yuan has depreciated 16.7 percent against the rupee, according to a paper by India’s central bank. The bank argues that an undervalued yuan “invariably and distinctly” gives China a competitive advantage over trade partners.

Trade tariffs, now being discussed in Delhi, aren’t the solution. Proposed duties on imports of Chinese power equipment would do little more than reverse an earlier tax cut that made imports cheap when India faced supply shortages. Talk of higher tariffs on most goods and a complete ban on specific items would hit harder, but might just incur retaliation that isn’t in India’s economic interest.

Speaking up may be India’s best bet. Delhi’s rumblings suggest it may join the United States in pressing China over its currency. This would open an important new front. China has been able dismiss U.S. calls for a stronger yuan as sour grapes from a country that has borrowed and consumed too much. A clear message from the developing world would be harder to ignore.

 

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