India

India-China Trade Tensions Rise


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India and China are gearing up for a showdown, one that might go all the way to the World Trade Organization, over India's increasing reluctance to allow Chinese imports to flood the Indian market. The seemingly incongruous export item that raised hackles this time around? Chinese plastic toys, which have captured anywhere between 60% and 90% of its $2.5 billion toy market, depending on whose numbers you trust. On Jan. 23 the Indian government imposed a six-month ban on the imports of Chinese-made toys. In retaliation, on Feb. 4 the official Chinese government newspaper, the China Daily, reported that Beijing is considering appealing to the World Trade Organization to overturn the measure as an unfair trade restriction.

But underneath what seems like a traditional and simple trade dispute—India protecting its growing toy market from cheap foreign imports—lies nearly a decade of Indian and Chinese mistrust, envy, and even complex geopolitics, say experts. Although India and China are still growing, both economies are hurting badly from the global recession. Sino-Indian trade grew as much as 33% in 2008, to nearly $52 billion, according to data maintained by China's General Administration of Customs, but that's tiny compared with the $425 billion bilateral trade between China and the European Union, or the $333 billion trade between China and the U.S. As both countries experience growth rates of 7% or less, compared with 9% for India and over 10% for China before the financial crisis hit, there is an increased rivalry between them, especially when it comes to sectors where both have strong domestic manufacturers, such as steel, petrochemicals, and textiles.

The toy business is another such industry. The Indian government has advertised its ban on Chinese plastic toys as a safety measure. For nearly two years, Indian officials and nonprofit consumer groups have collected data showing many of the toys in the Indian market—and especially those from China—have high levels of lead and cadmium. Although the same study showed that many Indian toys had exactly the same unacceptably high levels of dangerous chemicals, New Delhi officials say they had to act against Chinese imports. "People are confusing trade issues with safety issues," says India's minister of state for health, Panabaka Lakshmi, through a spokesperson. "Our concern is merely the safety of India's children."

From Steel to Penicillin

Toys may be just the beginning. Officials in India's Ministry of Trade confirm the Indian government has been collecting data and passing them to Chinese counterparts in several sectors where New Delhi plans either to ban or restrict Chinese imports. Whether India proceeds with such restrictions depends in part on its success at the WTO dispute settlement hearing that China threatens against the toy ban. India already has 10 anti-dumping investigations under way into Chinese-made products as varied as penicillin, steel used for car manufacturing, and even linen.

In other words, the toy ban is the proverbial shot across the bow. "There is a serious problem on the Chinese side in terms of security and safety of the products that get shipped here," says professor Madhav Das Nalapat, director of the school of geopolitics at Manipal University in South India. "And the idea is to get them to look seriously at this, and a whole gamut of issues."

If the intent was to get China's attention, it worked. Following the announcement of the toy ban, China's vice-minister for commerce met with India's ambassador to China and, according to a statement on the ministry's Web site, asked that India "show care and restraint in using trade-remedy measures during this unusual period of severe challenges in the world economy." Making things more complicated is the fact that India has 17 ongoing investigations into Chinese exports, which has led to a curtailment of sales in Chinese steel, textiles, petrochemicals, and now toys, according to Chinese Commerce Ministry spokesman Yao Jian. "The Chinese government is extremely concerned that India, in such a short space of time, has frequently carried out trade investigations on Chinese goods and limited imports," said Yao in a statement.

Sinking Demand

The timing of the ban is especially bad for China. It announced on Feb. 11 that its January exports had fallen 17.5% from the year before, as demand dried up in most of the world for the kind of products Chinese companies excel at—cheaper electronics, clothes, and steel. Its toy exports, according to the customs bureau, fell by more than 14%.

From the perspective of India's politicians and toy-making companies, though, the timing of the ban could hardly have been better. The move comes just a month or so before Hindus celebrate the festival of Holi, where children and adults alike splash colors on each other to mark the victory of good over evil in the epic Ramayana. In the past decade, Chinese toys like water pistols have managed to corner almost the entire market during Holi; now, those exports will sit unsold in warehouses.

China's muscular response to the toy ban has already gotten the diplomatic wheels rolling in India. In a short conversation outside his office, Trade Minister Kamal Nath said India was confident the ban would stand up in front of a dispute settlement body at the WTO. "I welcome any discussions on this matter," he said, adding that his office was happy to answer any queries from the Chinese government on the reasons behind the ban. But, he said, "Until [we] are satisfied, we simply cannot lift the ban."

Srivastava reports for BusinessWeek from New Delhi.

Srivastava is a reporter-at-large for Bloomberg News in London. He also reports for Bloomberg Businessweek.

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