Trade theories in support of rising of China and India globally essay

Tradetheories in support of rising of China and India globally


Thetrading partners of China and India have experienced numerousopportunities for the growth in trade as well as strong competitionboth domestically and internationally. Trade theories, businessstrategies, and policies put in place explain how countries emergehistorically to trade giants in the world (Kluget al., 2012). The theoriesexplain how the size of the markets, their location, and theiropenness affect their development pace. Some of the theoriesexplaining the growth behind China and India globally include themercantilism theory, comparative advantage theory, and the absoluteadvantage theory.

Themercantilism theory postulated by the mercantilists had a belief thatcountries should increase their silver and gold holdings through thepromotion of exports and discouragement of imports. Each country wasto aim at having a trade surplus. Financial repression and a closedcapital account have made China sustain the mercantilist policy ofundervalued exchange rates (Kluget al., 2012). This hasreciprocated high economic growth and increased domestic consumption.China has also over-invested, which causes the capital use to beinefficient but promises a high economic growth in the future. Theheavy capital use has made the economic allocations to labor reduceby 10% implying low current investments. However, India hasconstantly been running current account deficits and has not fullyembraced foreign capital investment hence has had to borrow (Hill,2012). Foreign capital togetherwith competitive rates of exchange leads to the generation of largesavings domestically as in the case of India. India has triedfinancing its infrastructure development, but insufficient fundsconstrain the projects. Companies like Bechtel are mainly involved ininfrastructure development. Power and road projects are mainlyinhibited from growth by poor governance as a result ofmisappropriation of funds. Despite the challenges experienced, Indiahas stood out in the global map and has experienced economic growthdue to its better performance than most developing countries.

Comparativeadvantage theory views that countries cannot produce goodsefficiently than other countries but can give forth the goodsefficiently than it does other products. From the perspective ofChina and India, it follows that their labor intensiveness makes themproduce and export labor-intensive products. Developed countries, onthe other hand, venture into skill and capital intensive products.The developed economies are, however, not troubled about the growthof China and India as upcoming economic powers, but this worriesother labor dependent developing economies, as they will lose a lotdue to their dependence on the existing products as the sole sourceof export(Hill, 2012). China has a uniquelabor force of both skilled and unskilled labor source. The unskilledlowers the costs while the skilled, especially in the technologyfield, has increased technological products exportation.

Absoluteadvantage theory put forth by Adam Smith concentrated on a country’scapability of producing goods proficiently than others. It called forthe non-intervention of government policies, and that trade should beleft to flow naturally as the market forces dictate. China iswell-endowed with good infrastructure as the Chinese legislators haveinvested in the facilities more than the Indian infrastructure(Eichengreen et al., 2010). Thecapital spending of China in transport, construction, telecom, andelectricity is higher than that of India. China’s road network isabout 1.5 million kilometers unlike India with only 0.2 millionkilometers. China has allocated about 2.5 percent of its GDP onhighways whereas India has only 0.3 percent. In absolute terms, Chinais doing better than India, but when India is compared to otherdeveloping countries regarding their infrastructure development, itis doing better. Due to this, it has gained a global reputation andgrowth due to its openness to the world markets in absolute terms.

Inconclusion, China and India have had their markets develop fasterthan others because of factors such as high capital investments ininfrastructure like roads and power projects, competitive exchangerates, and export of high labor-intensive technological products.These factors are in line with trade theories set forth to explainhow countries grow and develop in the global market. Some of thetheories include the mercantilism theory, the absolute advantagetheory, and the comparative advantage theory.


Eichengreen,B., Gupta, P., &amp Kumar, R. (2010).&nbspEmerginggiants. Oxford: Oxford UniversityPress.

Hill,C. (2012).&nbspInternationalbusiness. Oxford: Oxford UniversityPress.

Klug,A., Young, W., Bordo, M., &amp Schiffman, D. (2012).&nbspTheoriesof international trade. London:Routledge.