A Study of Bilateral Trade Flows of China and India

Abstract

Background/Objectives: According to the World Trade Organization data for 2013, China became world’s largest trading nation and India became the 15th largest trading nation. Emerging economies gained a lot of momentum in world trade. This study analyses the trade flows of two of the emerging economies namely China and India with an objective to draw a comparison between the determinants of bilateral trade flows of the two nations using data for a period of 9 years (2004- 2013). Methods/Statistical Analysis: To achieve the objective, gravity model has been applied on a panel dataset for the two countries. The data has been collected from International Monetary Fund (IMF), CEPII’s Geodist database and United Nations Conference on Trade and Development (UNCTAD). The study employs random effects panel regression model to establish the relationship between trade flows and different variables including distance, gross domestic product, per capital income, contiguity, common language and common colonizer. It compares the determinants of trade for India with China. Findings: The findings of the empirical analysis are in accordance with past literature indicating that India and China trade flows are mostly with geographically closer countries. Additionally, India’s trade flows are with countries having higher GDP but with lower per capita income. China’s trade is influenced by higher per capita income of the trading partner and common language. When crisis is introduced in the analysis, post crisis, common colony became an important influencer of trade for India. Applications/Improvements: This study helps in identifying the key determinants of India and China’s trade flows. It also provides a pre and post crisis analysis of the trade partnerships which might have future implications for trade policy and trade relations for the two countries. Keywords: Bilateral Trade, China, Gravity Model, India

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